Allied Leasing & Fin Corporation v Banco Economico SA

• Jurisdiction: Cayman Islands
• Judge: (Zacca, P., Georges and Collett, JJ.A.)
• Judgment Date: 05 May 2000
• Court: Court of Appeal (Cayman Islands)
• Date: 05 May 2000

Court of Appeal

(Zacca, P., Georges and Collett, JJ.A.)

ALLIED LEASING AND FINANCE CORPORATION

and

BANCO ECONOMICO S.A.

J.V. Martin, Q.C., T.W.G. Lowe and Mrs. L.D. DaCosta for the appellant;

R.H. Hildyard, Q.C., G.A. Locke and Ms. S.J. Collins for the respondent;

J.R. McDonough for the liquidators.

Cases cited:

(1) Claybridge Shipping Co. S.A., Re, [1997] 1 BCLC 572; [1981] Com. L.R. 107n, dicta of Oliver, L.J. applied.

(2) Tay Bok Choon v. Tahansan Sdn. Bhd., [1987] 1 W.L.R. 413; [1987] BCLC 472.

(3) Welsh Brick Indus. Ltd., Re, [1946] 2 All E.R. 197; (1946), 90 Sol. Jo. 430, dicta of Lord Greene, M.R. applied.

Companies-compulsory winding up-grounds for winding up-inability to pay debts-petitioner has locus standi if shows debt prima facie owing-burden on debtor to show debt disputed on substantial grounds-since dismissal of petition is mere rule of practice, may nevertheless proceed if desirable in exceptional circumstances

Companies-compulsory winding up-grounds for winding up-inability to pay debts-abuse of process to use winding-up process to force payment of disputed debt-coercion unlikely if debtor is petitioner”s wholly-owned subsidiary

The respondent applied for an order for the winding up of the appellant company.

The appellant, a Cayman company, was formed as a vehicle for acquiring, on behalf of the respondent Brazilian bank, an aircraft for the use of the bank”s staff. The plane was then leased to a company owned by the respondent”s CEO and moneys from its hire by other companies were used to repay an unsecured loan from the respondent. The appellant also purchased the respondent”s premises with the aid of a secured loan from another subsidiary bank, and leased them to the respondent. The appellant had no assets of its own other than those purchased with the aid of loans from the respondent.

The appellant was later used as an off-shore investment vehicle for the purpose of purchasing, through an institution controlled by the respondent, certain Brazilian securities which were available only to non-residents of Brazil. The appellant”s shares were transferred to a British Virgin Islands company to this end. In return for moneys loaned to the appellant for the purchase of these securities, the appellant issued certificates representing shares in Brazilian assets held by it and managed by the Brazilian institution. The appellant guaranteed repayment of the value of each certificate plus interest on its maturity date.

The respondent, itself having been placed in liquidation, petitioned for the appellant”s winding up, alleging that the appellant was indebted to it in respect of, inter alia, the various loans described above.

The appellant challenged the respondent”s locus standi to bring the winding-up petition on the basis that the debt was disputed on bona fide

and substantial grounds. Its defence to the matters pleaded rested largely on the affidavit evidence of its directors and an investment agreement between the parties under which the respondent had allegedly agreed to accept, in full repayment of the appellant”s debts, the face value of the certificates representing the Brazilian securities acquired by the appellant with the aid of loans from it.

The Grand Court (Graham, J.) held that the appellant had failed to establish that the debt was disputed on substantial grounds. The appellant had not taken the opportunity to call witnesses or cross-examine those tendered by the respondent, and it was clear from the affidavit evidence that its interpretation of the investment agreement was no more than a fiction designed to stall the winding-up process. An order was made for the winding up of the appellant. The proceedings in the Grand Court are reported at 1998 CILR 292.

On appeal, the appellant submitted that (a) since the parties” conflicting affidavit evidence raised a bona fide dispute as to the existence of the debts, the respondent lacked locus standi to petition and the Grand Court had erred in making findings of fact on such evidence; and (b) it was an abuse of process to use the winding-up procedure to coerce a company into settling a disputed debt.

The respondent submitted in reply that (a) the court was entitled to examine the facts of the case to the extent necessary to determine whether the debt was disputed on substantial grounds; and (b) the petition was not an abuse of process since the debts pleaded were clearly owing, and it was natural that a company established solely for the convenience of the respondent should be wound up following the respondent”s own liquidation.

Held, dismissing the appeal:

(1) The respondent had shown that, prima facie, the debts alleged in its petition were outstanding, and therefore it had locus standi to petition for the appellant”s winding up. Although the court would dismiss as an abuse of process a petition presented for the purpose of coercing a company into paying a disputed debt, this was not such a case. Since the appellant had been established as a wholly-owned subsidiary solely for the purpose of facilitating the respondent”s business, there was no question of coercion of the appellant by a threat to its future operations. It had no independent business to conduct once the respondent had gone into liquidation. The appellant”s beneficial ownership had only come into question following the transfer of its shares to the British Virgin Islands company-itself a transaction effected ultimately for the respondent”s benefit. In any event, dismissal of a petition on the ground of a dispute was a rule of practice only, which could be waived in exceptional circumstances when it was desirable for the petition to proceed. The relationship between these parties was exceptional (page 124, lines 13–29; page 126, line 1 – page 127, line 20; page 129, lines 25–30).

(2) The appellant had failed to satisfy the Grand Court that the debts pleaded in the petition were disputed on substantial grounds. The court had properly examined the evidence to determine whether such a dispute existed and concluded that the terms of the investment agreement (the crux of the appellant”s defence) did not relate to the debts. The agreement post-dated the relevant transactions and was probably signed after the respondent was placed in receivership. Its wording was irreconcilable with the proven documentation evidencing the debts. The learned judge concurred in his assessment of the evidence with the opinions expressed earlier in the proceedings by the Grand Court. The appeal would be dismissed (page 125, lines 1–15; page 127, line 41 – page 129, line 20; page 129, line 42 – page 130, line 14).

25	GEORGES, J.A.: This is an appeal from a judgment of Graham, J.
in which he ordered that the appellant, Allied Leasing and Finance
Corporation (‘the company’), be wound up subject to the provisions of
the Companies Law (1995 Revision). The basis of the petition for the
winding up was that the company was substantially indebted to Banco
30	Economico S.A. (‘the bank’) and was unable to pay its debts. The
bank, at the date of the filing of the petition, was itself in liquidation. It
was a large Brazilian bank-the seventh largest in Brazil-and had
been put into liquidation on the application of the Central Bank of
Brazil in which were vested regulatory powers in relation to banks in
35	that country.
The company was incorporated on March 14th, 1989 as an exempt
company under the Companies Law. It appears undisputed that it was
formed for a particular purpose. The bank wished to own a plane to
facilitate the travel of its personnel in Brazil. Brazilian entities could not
40	lawfully purchase aircraft. The company was formed to purchase an
aircraft. The money to purchase it was provided by the bank. The
company leased the aircraft to Aratu Taxi Aereo S.A. (‘Aratu’), a firm
owned by Angelo Calmon de Sa, who was employed by the bank as
Superintendent-the equivalent of Chief Executive Officer. Aratu would
45	lease the aircraft to the bank and possibly to other companies. Sums

received as rent would be deposited at the bank and be credited towards
the payment of the loan.
In 1992 the bank”s lease of its corporate headquarters in Bahia expired.
The building was a modern, well-appointed building on 11 floors. The
5	bank did not want to move. The bank was unwilling to purchase the
building directly. The company purchased the building with a loan made
available by Transworld Bank, a bank incorporated and effectively
controlled by the bank. The company granted the bank a lease of the
building. Subsequently, the bank took over the loan originally granted by
10	Transworld. Rental payments falling due under the lease were deposited
at the bank and credited to the servicing of the loan.
These facts established that the company undertook no investments
with entities other than the bank. It was a central contention of the
company”s case that those transactions were performed on the basis that
15	the bank made all the decisions relating to the risks of any investment.
The company was merely used to facilitate the transaction. Accordingly,
losses would be borne by the bank, which could have no recourse against
the company but only against the asset in which the investment had been
made. It was, in the language of Mr. Azevedo, a former director of the
20	bank who opposed the winding-up order, ‘a vehicle to be used for
specific transactions . . . a foreign company in a lightly regulated
jurisdiction . . . In a place without a tax regime. It was a totally passive
partner in transactions with Economico.’
It seems also indisputable that the relationship between the bank and
25	the company was always that of creditor and debtor and that the

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