Dd Growth Premium 2X Fund (in Official Liquidation) v Rmf Market Neutral Strategies (Master) Ltd

• Jurisdiction: Cayman Islands
• Judge: (Lord Mance, Lord Sumption, Lord Carnwath, Lord Hodge and Lord Briggs)
• Judgment Date: 23 November 2017
• Court: Court of Appeal (Cayman Islands)
• Date: 23 November 2017

Judicial Committee of the Privy Council

(Lord Mance, Lord Sumption, Lord Carnwath, Lord Hodge and Lord Briggs)

DD GROWTH PREMIUM 2X FUND (in official liquidation)

and

RMF MARKET NEUTRAL STRATEGIES (MASTER) LIMITED

T. Smith, Q.C., A. Al-Attar, J. Snead and P. McMaster, Q.C. for the appellant;

D. Chivers, Q.C., P. Smith and B. Hobden for the respondent.

Cases cited:

(1) Aiken v. Short (1856), 1 H. & N. 210; 25 L.J. Ex. 321; 4 W.R. 645; 156 E.R. 1180; 27 L.T.O.S. 188; [1843–60] All E.R. Rep. 425, referred to.

(2) Barclays Bank Ltd. v. W.J. Simms Son & Cooke (Southern) Ltd., [1980] Q.B. 677; [1980] 2 W.L.R. 218; [1979] 3 All E.R. 522; [1980] 1 Lloyd’s Rep. 225, referred to.

(3) Browning v. Morris (1778), 2 Cowp. 790; 98 E.R. 1364, referred to.

(4) Drown v. Gaumont-British Picture Corp. Ltd., [1937] Ch. 402; [1937] 2 All E.R. 609; (1937), 106 L.J. Ch. 241; 157 L.T. 543, referred to.

(5) Fairfield Sentry Ltd. v. Migani, [2014] UKPC 9; [2014] 1 CLC 611, applied.

(6) Guinness Mahon & Co. Ltd. v. Kensington & Chelsea Royal L.B.C., [1999] Q.B. 215; [1998] 3 W.L.R. 829; [1998] 2 All E.R. 272; [1998] Lloyd’s Rep. Bank. 109; [1998] CLC 662, referred to.

(7) Hoare & Co. Ltd., In re, [1904] 2 Ch 208; (1904), 73 L.J. Ch. 601; 11 Mans. 307; 53 W.R. 51; 91 L.T. 111; 20 T.L.R. 581; [1904–7] All E.R. Rep. 635, referred to.

(8) Kiriri Cotton Co. Ltd. v. Dewani, [1960] A.C. 192; [1960] 2 W.L.R. 127; [1960] 1 All E.R. 177, referred to.

(9) Kleinwort Benson Ltd. v. Lincoln City Council, [1999] 2 A.C. 349; [1998] 3 W.L.R. 1095; [1998] 4 All E.R. 513; [1998] Lloyd’s Rep. Bank. 387; [1999] CLC 332; [1998] R.V.R. 315; (1999), 1 L.G.L.R. 148; 11 Admin. L.R. 130, referred to.

(10) Lipkin Gorman v. Karpnale Ltd., [1991] 2 A.C. 548; [1991] 3 W.L.R. 10; [1992] 4 All E.R. 512, referred to.

(11) Patel v. Mirza, [2016] UKSC 42; [2017] A.C. 467; [2016] 3 W.L.R. 399; [2017] 1 All E.R. 191; [2016] 2 Lloyd’s Rep. 300; [2016] Lloyd’s Rep. F.C. 435; (2016), 19 ITELR 627, referred to.

(12) Pearson v. Primeo Fund, [2017] UKPC 19; 2017 (2) CILR 75, referred to.

(13) Smith v. Bromley (1760), 2 Doug. K.B. 696; 99 E.R. 441, referred to.

(14) Trevor v. Whitworth (1887), 12 App. Cas. 409; 57 L.J. Ch. 28; 36 W.R. 145; 57 L.T. 457; 3 T.L.R. 745; [1886–90] All E.R. Rep. 46, referred to.

(15) Westdeutsche Landesbank Girozentrale v. Islington L.B.C., [1994] 1 W.L.R. 938; [1994] 4 All E.R. 890; [1994] CLC 96; (1994), 92 L.G.R. 405; further proceedings, [1996] A.C. 669; [1996] 2 W.L.R. 802; [1996] 2 All E.R. 961; [1996] 5 Bank. L.R. 341; [1996] CLC 990; 95 L.G.R. 1; (1996), 160 J.P. 1130, referred to.

Legislation construed:

Companies Law 1963 (Revised), s.32: The relevant terms of this section are set out at para. 68.

Companies Law 1989 (Revised) (as amended by Companies (Amendment) Law 1987, s.7), s.34: The relevant terms of this section are set out at para. 69.

Companies Law (2007 Revision), s.34: The relevant terms of this section are set out at para. 34.

s.37: The relevant terms of this section are set out at para. 34.

s.37(6): The relevant terms of this sub-section are set out at para. 4.

Companies — shares — redemption — payments out of share premium in order to redeem company’s own shares “payment out of capital” under Companies Law (2007 Revision), s.37(5)(b) — company therefore required to be solvent prior to making such payments (as required by s.37(6)(a)) — company not solvent if unable to pay debts, including debts due to former shareholders who had redeemed their shares and awaited payment

The respondent applied to the Grand Court for a declaration that it was not liable to repay sums paid to it by the appellant.

The appellant was a Cayman open-ended investment fund in which the respondent held redeemable shares. In 2008, the respondent made a number of redemption requests and in early 2009 received $23m. from the appellant (which represented 36.89% of its entitlement). At the time of the payments, the appellant was cash-flow insolvent and paid the redemptions from share premium.

In the Grand Court, the appellant submitted that the payments made to the respondent were contrary to s.37(6)(a) of the Companies Law (2007 Revision) as they constituted payments “out of capital” (as defined by s.37(5)(b)), which were prohibited unless the paying company was solvent at the time of payment. The respondent submitted in reply that the payments were not made “out of capital,” and were therefore not prohibited by s.37(6)(a).

The Grand Court (Smellie, C.J.) held that payments out of share premium which were made in order to redeem shares were not payments out of capital as (a) many investors were issued with redeemable shares, and if repayment of those shares was curtailed when a company suffered financial difficulties then investment in Cayman companies might be adversely affected; (b) s.34(1) stated that consideration given for shares without any nominal value was to be regarded as capital, which suggested that share premium (i.e. the amount paid for a share in excess of its par value) was not capital; (c) s.34(2) permitted share premium but not capital to be used to redeem shares, and only required the company to be solvent when paying dividends or distributions; and (d) amendments to the 2007 Revision of the Companies Law excluded payments from share premium from the definition of payments “out of capital.” The respondent was not, therefore, required to make any repayments to the appellant as the payments out of share premium had not been subject to the solvency requirement found in s.37(6)(a). The proceedings in the Grand Court are reported at 2014 (2) CILR 316.

The Court of Appeal (Martin, Field and Moses, JJ.A.) dismissed the company’s appeal. It agreed, in substance, with the Grand Court’s interpretation of ss. 34 and 37. It held, inter alia, that (a) payments by a company out of its share premium in order to redeem shares were not payments “out of capital” for the purposes of s.37(5)(b) of the Companies Law and were not, therefore, subject to the solvency requirement contained in s.37(6)(a); (b) s.34 indicated that payments out of share premium were not to be treated as payments out of capital; and (c) s.37(3)(e) stated that the premium payable on redemption of shares was to be paid out of the company’s profits or its share premium account, or out of capital pursuant to sub-s. (5), which indicated that use of share premium to redeem shares was not necessarily a payment out of capital. The proceedings in the Court of Appeal are reported at 2015 (2) CILR 141.

The respondent appealed to the Board, on the grounds that (a) “debts” in s.37(6)(a) (i.e. in the phrase “the company shall be able to pay its debts as they fall due in the ordinary course of business”) should be held, on a purposive construction, to exclude debts due to former shareholders; the test should be whether, after the proposed payment, the company would be able to pay its ordinary creditors, and as the appellant did not have any such creditors it could not be said to have failed the solvency test; and (b) a payment in respect of the redemption of shares out of the share premium account was not a payment out of capital and subject to the solvency test because (i) s.37(3)(e) permitted the use of a share premium account to pay the premium on redemption, regardless of the restriction in s.37(6); (ii) s.34(2) appeared to contemplate and indeed authorize the use of the share premium account for providing for the premium payable on redemption without any solvency requirement; and (iii) in the context of the progressive liberalization of the regime for the maintenance of capital, the Companies Law (2007 Revision) should not be construed so as to apply a solvency test to the use of the share premium account for this purpose.

The company’s liquidators submitted that if payment of the redemption proceeds was unlawful, the proceeds were recoverable at common law on the ground of unjust enrichment, alternatively in equity on the ground that the redeeming shareholder was accountable as a constructive trustee on the basis of knowing receipt.

Held, allowing the appeal (Lord Hodge and Lord Mance dissenting in part):

(1) The Grand Court had correctly found that the appellant could not satisfy the solvency test in s.37(6) of the Companies Law (2007 Revision) when it made the payments now claimed to have been unlawful. The respondent’s submission that the company could not be said to have failed the solvency test in s.37(6)(a) because “debts” should be held to exclude debts due to former shareholders would be rejected. First, although there was force in the proposition that the underlying purpose of any statutory or common law provisions or principles for the maintenance of capital was to protect ordinary creditors rather than shareholders or former shareholders, the protection afforded by s.37(6) would not be effective if debts still owing to former shareholders who had redeemed could not be paid after the proposed payment. Those creditors would, pending any liquidation, be competing for payment with the company’s ordinary creditors, and the existence of those competing debts would hamper the company’s ability to pay its ordinary creditors in full as and when their debts became due. It was irrelevant that s.49 of the Law postponed claims of members of a company to the claims of ordinary unsecured creditors because it only operated in the context of a liquidation. Until then, former shareholders with redemption debts were as entitled to exercise creditors’ remedies as any other creditors. Secondly, there was no textual basis in s.37(6) on which the respondent’s purposeful restriction could be founded. The words “in the ordinary course of business” in s.37(6)(a) did not disqualify some debts rather than others. The words amplified the meaning of the phrase “as they fall due.” The question whether a company was able “to pay its debts as they fall due” was a well-known test for...