DD Growth Premium 2X Fund (in official liquidation) v RMF Market Neutral Strategies (master) Ltd

• Jurisdiction: Cayman Islands
• Judge: (Martin, Field and Moses, JJ.A.)
• Judgment Date: 20 November 2015
• Court: Court of Appeal (Cayman Islands)
• Date: 20 November 2015

Court of Appeal

(Martin, Field and Moses, JJ.A.)

DD GROWTH PREMIUM 2X FUND (IN OFFICIAL LIQUIDATION)

and

RMF MARKET NEUTRAL STRATEGIES (MASTER) LIMITED

P. McMaster, Q.C. and J. Snead for the appellant;

P. Smith and B. Hobden for the respondent.

Legislation construed:

Companies Law (2007 Revision), s.34: The relevant terms of this section are set out at para. 20.

s.37(3): The relevant terms of this sub-section are set out at para. 33.

s.37(5): The relevant terms of this sub-section are set out at para. 15.

s.37(6)(a): The relevant terms of this paragraph are set out at para. 13.

Companies—shares—redemption—payments out of share premium in order to redeem company”s own shares not ‘payment out of capital’ under Companies Law (2007 Revision), s.37(5)(b)—company therefore not required to be solvent prior to making such payments (as required by s.37(6)(a))—s.34 strongly indicates that such payments not to be considered as ‘out of capital,’ and no express wording to contrary in s.37

The respondent applied to the Grand Court for a declaration that it was not liable to repay sums made by it to 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 were 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,’ as confirmed by the Hansard report of the Bill which amended the 2007 Revision. 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.

On appeal, the appellant submitted that (a) reliance on later amendments to the Companies Law and Hansard in order to interpret the 2007 Revision was illegitimate as the court should solely have considered the unamended legislation; (b) s.37(5)(b) referred to payments out of capital as being payments ‘so made,’ alluding to s.37(5)(a), which referred to payments ‘otherwise than out of . . . profits or the proceeds of a fresh issue of shares,’ and therefore payments out of share premium were payments out of capital; and (c) s.37(5)(c) indicated that payments from share premium were made out of capital as the formula within it for calculating the amount that a company is able to pay out of capital would otherwise be unworkable.

Held, dismissing the appeal:

(1) Payments by a company out of its share premium in order to redeem its shares were not payments ‘out of capital’ for the purposes of s.37(5)(b) of the Companies Law (2007 Revision) and, therefore, were not subject to the solvency requirement contained in s.37(6)(a). Section 34 indicated that payments out of share premium were not to be treated as payments out of capital as (a) s.34(1) stated that consideration received for shares without nominal value was to be treated as capital, which suggested that share premium was not capital; and (b) s.34(2)(f) permitted share premium (but not capital) to be used to redeem shares. Further, s.34(2) only required a company to be solvent when making payments from share premium in order to pay distributions or dividends, which indicated that use of share

premium to redeem shares was not intended to be treated as payment out of capital pursuant to s.37(5)(b) and thereby subjected to the solvency requirement in s.37(6)(a). As s.34(2) strongly indicated that payments from share premium could be used in order to redeem shares when a company was insolvent, express wording to the contrary would have been expected in s.37 (paras. 29–32; para. 36).

(2) Section 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. Further, s.37(5)(c) did not suggest the contrary as the sub-section only applied to payments out of capital, and therefore was of no assistance when considering the prior question of whether payments out of share premium were payments out of capital (para. 34; paras. 38–39).

(3) In construing ss. 34 and 37 of the Law, it was important to bear in mind that investors in Cayman open-ended investment companies were usually issued with redeemable shares. However, it was not clear that, as the Grand Court had stated, investors would expect to be able to redeem their shares when the company was experiencing cash-flow difficulties, particularly when its articles of association stipulated that the company”s directors could suspend the redemption of shares in the event of such difficulties (para. 40).

(4) The Grand Court”s reliance on later amendments to the Companies Law in order to interpret the 2007 Revision was improper, as it should solely have considered the unamended legislation; similarly, the court should not have consulted Hansard as it referred to the amended legislation and was also not addressed by counsel in their submissions (para. 24).

1 FIELD, J.A.: This appeal raises a difficult question of statutory construction: Is a payment by a company out of share premium to redeem its own redeemable shares a payment out of ‘capital’ for the purposes of s.37(6)(a) of the Companies Law (2007 Revision)?

2 This issue came before the Grand Court in an action in which (i) the respondent (‘RMF’) sought a negative declaration that sums it had

received from the appellant (‘2X Fund’) for the redemption of redeemable shares held in 2X Fund had been lawfully paid and received; and (ii) 2X Fund, by its joint official liquidators (‘the JOLs’), sought to recover the said sums paid to RMF on the basis, inter alia, that they had been unlawfully paid contrary to s.37(6)(a).

3 The action was tried in the Financial Services Division of the Grand Court (in proceedings reported at 2014 (2) CILR 316) by the learned Chief Justice (hereinafter ‘the judge’) on the basis of a set of agreed facts and facts specified by each of the parties that were not agreed.

4 2X Fund was ordered to be wound up on March 20th, 2009, and two official liquidators of the company were appointed on May 29th, 2009. The company remains in official liquidation.

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