Banco Economico v Allied Leasing

• Jurisdiction: Cayman Islands
• Judge: (Smellie, J.)
• Judgment Date: 27 February 1998
• Court: Grand Court (Cayman Islands)
• Date: 27 February 1998

Grand Court

(Smellie, J.)

BANCO ECONOMICO S.A.

and

ALLIED LEASING AND FINANCE CORPORATION

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

J. Martin, Q.C., T. Lowe, M. Alberga and Ms. L. DaCosta for the respondent.

Cases cited:

(1) -A.B.C. Coupler & Engr. Co. Ltd., In re, [1962] 1 W.L.R. 1236; [1962] 3 All E.R. 68, applied.

(2) -Armvent Ltd., In re, [1975] 1 W.L.R. 1679; [1975] 3 All E.R. 441, dicta of Templeman J. applied.

(3) -BSB Holdings Ltd. (No. 2), Re, [1996] 1 BCLC 155; [1995] T.L.R. 452, applied.

(4) -Bank of Credit & Commerce Intl. S.A. (No. 6), Re, Morris v. Mahfouz, [1994] 1 BCLC 450, followed.

(5) -Canton Trust & Comm. Bank Ltd. (No. 2), In re, [1965] HKLR 591, applied.

(6) -Claybridge Shipping Co. S.A., Re, [1997] 1 BCLC 572, considered.

(7) -Fildes Bros. Ltd., In re, [1970] 1 W.L.R. 592; [1970] 1 All E.R. 923, applied.

(8) -Lundie Bros. Ltd., In re, [1965] 1 W.L.R. 1051; [1965] 2 All E.R. 692, dicta of Plowman J. applied.

(9) -Tay Bok Choon v. Tahansan Sdn. Bhd., [1987] 1 W.L.R. 413; [1987] BCLC 472, dicta of Lord Templeman applied.

(10) -Tecnion Invs. Ltd., Re, [1985] BCLC 434, dicta of Dillon, L.J. applied.

Companies-compulsory winding up-affidavit evidence-cross-examina-tion allowed on affidavit in support of winding-up petition only if necessary to dispose of issues before court, e.g. if contains allegations of fraud not pleaded in petition-court may advise on format of evidence for speedy resolution of issues

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

The petition alleged that the respondent was indebted to the petitioner, a large bank itself in liquidation, in respect of securities beneficially owned by the petitioner, promissory notes issued by the respondent, an unsecured loan advanced by the petitioner to it, and an overdraft facility. The petition was supported by an affidavit sworn by the petitioner”s liquidator containing further allegations of systematic fraud by the respondent against the petitioner, by which sums far in excess of those mentioned in the petition had been misappropriated by the respondent.

The respondent, which denied the allegations of fraud, claimed that its assets were held on behalf of the petitioner, that they exceeded the debts outlined in the petition and that it should be permitted to realize the surplus rather than being wound up. It applied for an order that the liquida-tor be required to attend for cross-examination on his affidavit.

The respondent submitted that since the petition itself raised no allegations of fraud, the cross-examination of the deponent making those allegations was necessary to dispose of a significant issue of fact in the proceedings, and the court should require the liquidator”s attendance.

The petitioner conceded in reply that since the matters alleged in the petition itself could be proved by reference to documentary evidence, it would not seek to rely on the liquidator”s affidavit in support of the petition and, accordingly, cross-examination on the contents of that affidavit was unnecessary properly to dispose of the petition.

Held, dismissing the application:

(1) Since the petitioner was restricted to proving matters pleaded in its petition and since it had to decide for itself what evidence to adduce to prove the indebtedness alleged therein, the court would allow the petitioner to abandon its reliance on the liquidator”s affidavit. Had it continued to seek to rely on evidence of fraud and misappropriation of funds the court would have ordered that cross-examination take place, but

this would now no longer be necessary to dispose of the issues before the court (page 98, lines 37–40; page 98, line 45 – page 99, line 22; page 99, lines 28–37; page 100, lines 27–43).

(2) None the less, in view of the complexity of the case, and because the nature of the financial relationship between the parties would be relevant to the respondent”s defence, the court would advise that oral evidence explaining the assertions made by each party would assist in the speedy resolution of the proceedings (page 101, lines 7–24).

SMELLIE, J.: The issue is whether Mr. Flavio Cunha, the liquidator
of the petitioner, should be required to attend for cross-examination upon
his affidavits which were filed in support of the petition to wind up the
35	respondent company. The petitioner is a Brazilian bank now in liquida-
tion at the instance of the Central Bank of Brazil. The respondent
company is a Cayman company which the petitioner alleges is indebted
to the petitioner for very large sums-in the order of magnitude of
$250m.
40	Mr. Cunha”s affidavit will be the primary source of evidence in support
of the allegations in the petition. These allegations arise from an extra-
ordinary relationship which is said to have developed between the
petitioner and the company, and by which it is said that the indebtedness
arose and continues to exist. Mr. Cunha has alleged that those who
45	had control of the company perpetrated ‘systematic fraud’ against the

petitioner by using the company as a cipher for diverting away the very
large sums. The alleged modus operandi is, as yet, unclear. There is,
however, some evidence about the relationship between the company and
the petitioner.
5	It seems that those responsible for the management of the petitioner-
which before it went into liquidation was described as the oldest and
seventh largest bank in Brazil-decided to invest in certain types of
Brazilian securities which were accessible, as a matter of Brazilian law,
on preferential terms available only to non-residents of Brazil. To meet
10	those requirements of Brazilian law it appears that the company (and, it
seems, its subsidiaries) were utilized as entities off shore and foreign to
Brazil. Initially established as an offshore entity for the specific purpose
of purchasing and operating aircraft (also a necessary prerequisite of
Brazilian regulations), the company and its subsidiaries became invest-
15	ment vehicles for the petitioner.
That, it seems from the evidence available so far, is as much as will not
be in dispute. The company, for its part, will be saying that while it served
as a conduit for the acquisitions of investments on behalf of the petitioner,
it never actually received funds from the petitioner, which instead
20	remained responsible throughout for payments and for the control and
management of the assets acquired. So it is said, then, that the company
simply became the legal owner of record of the securities, with beneficial
ownership and control vesting in the petitioner.
This outline of the company”s case is to be gleaned from the affidavit
25	of Mr. Jose Azevedo, a former director of the petitioner. As such, he
claims to have knowledge of the relationship between the petitioner and
the company. This arrangement between the petitioner and the company
is said to have been known to the Brazilian Government and approved as
a matter of the prudential regulation of the petitioner and as a matter of
30	the requirements of Brazilian law mentioned earlier.
Mr. Azevedo asserted-and most importantly from the company”s
point of view-that an investment agreement was entered into with the
petitioner by which it was agreed that, having regard to the true nature of
the company”s relationship with the petitioner, the petitioner”s only
35	recourse against the company in respect of those investments which it
held on the petitioner”s behalf and in respect of the funds used to acquire
them, would be as against those investments themselves. A copy of this
agreement was exhibited to Mr. Azevedo”s affidavit but Mr. Hildyard,
Q.C. has expressed concerns about the lateness of its disclosure. None
40	the less, Mr. Martin, Q.C. has indicated the company”s intention to rely
upon it.
Loans to the company appearing in the books of the petitioner and
which form the basis of the alleged indebtedness are said by the company
to be attributable only to the investment arrangements. Unusual as it
45	might seem, the arrangements become even more remarkable in that the

company asserts that any losses resulting from the investments were to be

for the account of the petitioner but any surplus would be for the

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