2  The company is solvent. This is a contributory’s petition. There is no provisional liquidator in place. Applications for a validation order in these precise circumstances are not common. A similar application was made to Slade, J. in In re Burton & Deakin Ltd. (2). Slade, J. noted ([1977] 1 W.L.R. at 396) that where a validation application is made following the presentation of a petition based on the alleged insolvency of the company:

“[I]t seems to me natural and right to conduct a careful scrutiny of the disposition or proposed disposition in question before granting relief under the section.”

3  He contrasted that with the position of an admittedly solvent company, and used these words to describe the appropriate approach ([1977] 1 W.L.R. at 397):

“Taking all these considerations into account and in the absence of any authority demonstrating the contrary, I thus reach these conclusions on the question of principle raised by the present application. If on an application under section 227 [the analogous English section] relating to a solvent company, (a) evidence is placed before the court showing that the directors consider that a particular disposition, falling within their powers under the company’s constitution, is necessary or expedient in the interests of the company, and (b) the reasons given for this opinion are reasons which the court considers that an intelligent and honest man could reasonably hold, it will in the exercise of its discretion normally sanction the disposition, notwithstanding the opposition of a contributory, unless the contributory adduces compelling evidence proving that the disposition is in fact likely to injure the company. A fortiori in my judgment the court will be inclined to exercise its discretion in this manner in a case such as the present, where the primary relief sought by the petition is an order under section 210 that the other shareholders be ordered to purchase the shares at a stated price.

While I have attempted to formulate these statements of principle so as to explain the basis on which I decide this particular case, I should nevertheless make it clear that they are intended merely as broad guidelines. No limits are placed by the sections on the court’s discretion to grant or refuse an application under section 227, and such a discretion will of course be exercised in every instance having regard to the particular circumstances of the particular case.”

4  That judgment was cited and agreed with by Brightman, J. in In re J.N. 2 Ltd. (3) and mentioned with approval by the Court of Appeal in Alipour v. Ary (1). In my view the passage summarizes accurately the state of the law in the Cayman Islands.

5  Thus, there are four elements which must be established before an applicant is entitled to a validation order. First, the proposed disposition must appear to be within the powers of the directors. There is no dispute about that here. Secondly, the evidence must show that the directors believe the disposition is necessary or expedient in the interests of the company. There is no dispute here that the directors do have that belief. Thirdly, it must appear that in reaching the decision the directors have acted in good faith. The burden of establishing bad faith is on the party opposing the application. Fourthly, the reasons for the disposition must be shown to be ones which an intelligent and honest director could reasonably hold.

6  The argument of the petitioner here addresses Item 4. The petitioner says the evidence is simply too sparse and conclusory to permit the court to decide this question today. What sort of evidence should a court expect before it can say with conviction: “This disposition is one which an intelligent and honest director acting reasonably might consider to be in the best interests of the company?” Specifically, what sort of evidence should the court expect on a validation application concerning a major refinancing?

7  The petitioner has provided in argument a shopping list of documents, not in evidence, which it says are necessary. These include financial statements, cash flow projections, documents evidencing the amounts outstanding on the present facilities, and all of the loan documentation and correspondence leading up to the agreement or agreements for the proposed new facility.

8  The primary reasons advanced by this company in its affidavit evidence for the refinancing are as follows. It says that the principal of the petitioner, Mr. Chen, has wanted to be relieved of his personal guarantee obligations for some time and this will accomplish that. He has written to some of the lenders alleging acts of default under the security instrument. The lenders have become understandably nervous. That feeling has only been heightened by the present litigation. The lenders have asked that the facility be renegotiated. In any event, Mr. Chen needs to be relieved of his personal guarantee if one party to this litigation is to buy out the other, as is proposed.

9  In this setting I must be concerned with two questions: First, is the decision to arrange a refinancing within the realm of reasonableness? Is it necessary to refinance to release Dr. Chen, or should the debt (or some part of it) just be paid off? Secondly, are the terms of the proposed refinancing also within the realm of reasonableness? The test the applicant must satisfy is not high. Nevertheless, there must be a body of evidence which, viewed objectively, establishes that the decision is one which a reasonable director, having only the best interests of the company in mind, might endorse.

10  The evidence of Ms. Tsien and Mr. Driscoll is too conclusory and abbreviated to permit such a finding. I think the applicant must produce and file the following documents in support of its application: first, the consolidated financial statements, which I gather have been prepared (albeit in draft form and without the notes); secondly, the cash flow projection or projections done in support of the proposed refinancing; thirdly, particulars of the amounts owing under the present facility (as there appears to be some ambiguity in the affidavit of Ms. Tsien on that point); fourthly, a description of any approaches made by the company to the existing lenders for continuation of the present agreement, and the answers received; and fifthly, details of the proposed refinancing, including interest rates, repayment dates, proposed security-taking, commitment fees, arrangement fees and estimated legal costs.

11  That is far from the list requested by the petitioner. Much of the balance which I am not directing be produced goes beyond what a court might reasonably expect in an application of this sort, given the limited nature of the question placed before me. I will adjourn this application for a short period of time to enable the company to make immediate disclosure of these documents. The company will have to file a brief supplementary affidavit to address some of the points I have mentioned.

12  On this continuation of an application commenced some days ago, the company seeks a validation order permitting it to engage in a refinancing and give certain security for the purpose. On the first hearing, I was not satisfied that sufficient disclosure had been made by the company to permit the court to address the real questions in issue. I directed some disclosure to be made and all of that is now before me.

13  In my earlier ruling, I considered at some length the decision of Slade, J. in In re Burton & Deakin Ltd. (2) and concluded that it contained an accurate statement of the law of the Cayman Islands. I considered that the decision could be reduced to four propositions. I said (at paras. 5–6):

“Thus, there are four elements which must be established before an applicant is entitled to a validation order. First, the proposed disposition must appear to be within the powers of the directors. There is no dispute about that here. Secondly, the evidence must show that the directors believe the disposition is necessary or expedient in the interests of the company. There is no dispute here that the directors do have that belief. Thirdly, it must appear that in reaching the decision the directors have acted in good faith. The burden of establishing bad faith is on the party opposing the application. Fourthly, the reasons for the disposition must be shown

Later I said this (at para. 9):

“The test the applicant must satisfy is not high. Nevertheless, there must be a body of evidence which, viewed objectively, establishes that the decision is one which a reasonable director, having only the best interests of the company in mind, might endorse.”

14  Could a reasonable director support the view that Dr. Chen should be relieved of his personal guarantees? Undoubtedly yes. I need say little about this element. The procedural history of this case alone, particularly when considered together with Dr. Chen’s approaches to the current lenders and the restiveness which they have engendered, demonstrates that this is a reasonable goal for this company to pursue.

15  Are the terms of the proposed refinancing ones which a director might reasonably agree to? There is evidence that the terms (which are summarized in the 16th affidavit of Gail Tsien) are in line with current market standards. There is nothing in evidence to contradict that. The applicant has satisfied me on this point. The real question is whether a refinancing is in the best interests of the company given that its cash flow might permit it to pay off the current lenders without borrowing. Mr. Driscoll, a director of the company, has, in his brief affidavit supporting the application, made no reference to this element. However, Ms. Tsien (in her 16th affidavit) says this:

“The cash flow projections demonstrate that the operating companies of the group are expected to continue to generate considerable amounts of cash for the next five years. It is integral to the operations of the group that there is a large amount of cash generated by the operating subsidiaries in Vietnam. It is not possible, however, to guarantee a regular cash flow out of the operations in Vietnam and into the holding companies which have the obligations under the group’s existing and proposed financing arrangements. This is because it is necessary to obtain approvals from the Vietnam authorities, both as to the ability to make remittances and also before purchasing foreign exchange. The company’s experience in Vietnam with respect to such processes is that circumstances arise that cause a level of unpredictability and which can result in delays, often considerable delays. As a matter of prudence, it is therefore considered beneficial for the group to have in place a refinancing facility. I also note that cash retained in Vietnam from time to time is invested and earns interest for the group. Currently the three-month deposit rate is over 7%, which is higher than the anticipated interest rate under the refinancing.”

I have no other evidence on the motives of the directors in wanting a refinancing as an alternative to simply paying out the present lenders.

16  I am not called upon here to answer the question “Is this in the best interests of the company?” or even “Is this a reasonable decision?” The question is a narrow one. Might an intelligent and honest director acting reasonably come to such a conclusion? I find for the reasons given in Ms. Tsien’s affidavit that he or she might. The decision has been demonstrated to fall within the realm of reasonableness. The applicant will therefore be granted a validation order.

17  In opposing the application, Mr. Jones argued that, if the order should go, I should require the company to keep roughly 90% of its cash on hand in a collateral account tied up until further order of the court. In effect, this is a request for a Mareva injunction. Made in the course of a validation proceeding, which throws up entirely different issues for consideration, I must find that it is inappropriate. It would not be right, in my view, to grant what amounts to a Mareva injunction without Dr. Chen having put the company on notice of his application and satisfied the criteria necessary to obtaining that relief. The validation order will issue without any conditions.