Freerider Ltd (Official Liquidation)

JurisdictionCayman Islands
JudgeMr. Justice Angus Foster
Judgment Date02 February 2010
CourtGrand Court (Cayman Islands)
Docket NumberFSD 48/2009 (AJEF)
Date02 February 2010
In The Matter of Freerider Ltd. (Official Liquidation)
Coram:

The Hon. Mr. Justice Angus Foster, QC

FSD 48/2009 (AJEF)

IN THE GRAND COURT OF THE CAYMAN ISLANDS

FINANCIAL SERVICES DIVISION

Appearances:

Joint Official Liquidators — Mr. Aristos Galatopoulos and Ms. Rebecca Collins of Maples and Calder

GC Funding Group LLC — Mr. Guy Manning and Mr. Alastair Walters of Campbells

Mr. A. J. Heinen — Mr. Graeme Halkerston and Ms. Katie Brown of Appleby

Mr. P. Le Comte — Mr. Alan Turner and Ms. Rowena Lawrence of Turner and Roulstone

RULING
1

This is the Ruling on the application of the Joint Official Liquidators (“the JOLs”) of Freerider Ltd. (In Official Liquidation) (“the Company”) by summons dated 30 th August 2010 (“the JOLs' summons”) seeking a declaration that the security over all the assets of the Company (“the Security”) purportedly granted under two Convertible Revolving Secured Promissory Notes and Security Agreements respectively dated 17 th August 2009 (“the First Note”) and 3 rd December 2009 (“the Second Note”) (together “the Notes”) in favour of 733 Properties Inc. (“733 Properties”) and subsequently assigned to its subsidiary, GC Funding Group LLC (“GCF”), is not within the terms of a validation order made by consent on 29 th June 2009 (“the Consent Validation Order”), not having been granted in the ordinary course of the Company's business for proper value and is therefore void under Section 99 of the Companies Law (2010 Revision) (“the Law”). The Ruling also relates to the summons of GCF, also dated 30 th August 2010, seeking an order that, if the Court finds that the Security is not within the terms of the Consent Validation Order, the grant of the Security should now be retrospectively validated and accordingly not void pursuant to Section 99 of the Law.

General Background
2

The Company was ordered to be wound up on just and equitable grounds on 13 th May 2010 on the petition of Mr. Heinen, who is one of the two voting shareholders, which was vigorously opposed by the only other voting shareholder, Mr. Le Comte. Mr. Le Comte subsequently appealed to the Court of Appeal against the winding up order but his appeal was refused on 24 th August 2010. In a previous Ruling dated 11 th November 2009 the Court had directed, pursuant to O.3, r.ll (2) of the Companies Winding Up Rules 2008, that the Company itself should not be able to participate in the winding-up proceedings as it was merely the subject matter of the proceedings, which should be treated as inter partes proceedings between Mr. Heinen and Mr. Le Comte.

3

The background to the dispute between Mr. Heinen and Mr. Le Comte concerning the Company is fully set out in the Reasons for Winding Up Order dated 13 th May 2010 and I do not consider it necessary to rehearse that background.

The Consent Validation Order
4

Section 99 of the Law provides that:

When a winding up order has been made, any disposition of the company's property and any transfer of shares or alteration in the status of the company's members made after the commencement of the winding up is, unless the court otherwise orders, void.

Section 100 (2) of the Law provides:

In any other circumstances not specified in sub-section (1) [none of the circumstances specified in sub-section (1) are applicable here], the winding up of a company by the Court is deemed to commence at the time of the presentation of the petition for winding up.

Both Section 99 and 100 (2) are intended to protect the unsecured creditors of the company once winding up proceedings have commenced. The companies law in the United Kingdom, Australia, Canada and most other Commonwealth common law jurisdictions has been to the same effect since the 19 th century.

5

On 22 nd June 2009 the attorneys then representing the Company on Mr. Le Comte's instructions, Turner & Roulstone (“T&R”), wrote to Mr. Heinen's attorneys, Appleby, proposing that the parties should agree to a validation order to enable the Company to carry on its general business notwithstanding the presentation of the winding up petition and thus avoid the consequences of Section 99 of the Law in doing so. T&R requested an urgent response. The following day, 23 rd June 2009, Appleby responded stating that they were taking instructions in relation to the proposed validation order and in the meantime requested details of the transactions which it was sought to validate. By reply email on 24 th June T&R responded, again requesting that Mr. Heinen's attorneys revert to them on the proposed orders without delay. Their email then said “the company needs to have the ability to conduct its general business and this type of order is given as of right where a just and equitable petition has been issued. There is no obligation on the company to provide specific details of the transactions which it wishes to conduct”. [My emphasis]. By reply letter dated 29 th June 2009 Appleby confirmed that their client, Mr. Heinen, was prepared to agree to the terms of the “draft Consent Order validating payments and other dispositions of property made by the Company in the ordinary course of its business for proper value pending the determination of the [winding up] Petition”. Appleby went on to contend that their client was entitled to details of all such transactions and requested confirmation by return that such details would be provided. It seems that no response to that request was ever received.

6

The Consent Validation Order, being a consent order, was dealt with administratively and signed by the Clerk of Court. There was no hearing by or involvement of the Court. The Consent Validation Order provided as follows:

IT IS HEREBY ORDERED BY CONSENT THAT notwithstanding the presentation of the petition against Freerider Ltd. (the “Company”):

  • 1. Payments made into or out of the bank accounts of the Company in the ordinary course of business of the Company; and

  • 2. Dispositions of the property of the Company made in the ordinary course of its business for proper value;

between the date of presentation of the petition and the date of judgment on the petition or further order in the meantime shall not be void by virtue of the provisions of Section 99 of the Companies (Amendment) Law, 2007 [now Section 99 of the Law] in the event of an order for the winding up of the Company being made on the said petition.

It is paragraph 2 of the Consent Validation Order which is now in issue.

Procedure
7

I should note that Mr. Heinen had previously issued a summons dated 16 fh June 2010, subsequently amended on 15 th July 2010, by which he himself sought a declaration that the Notes and the Security were both void pursuant to Section 99 of the Law. This summons as amended therefore predated the JOLs' summons, which is the subject of this Ruling. Both counsel for GCF and counsel for Mr. Le Comte raised an issue as to Mr. Heinen's locus to make such an application, contending that the JOLs were the only appropriate parties to seek a declaration under Section 99 of the Law. As the JOLs have since done that (albeit their application relates only to the grant of the Security and not to the Promissory Notes as such) I declined to hear Mr. Heinen's amended summons or the related arguments on the question of Mr. Heinen's locus in the course of hearing the JOLs' summons. However, I indicated that I would deal with any issues arising out of Mr. Heinen's amended summons, if necessary, at some future date. Nonetheless, since Mr. Heinen and Mr. Le Comte are both contributories and were respectively the petitioner and the respondent in the winding up proceedings I did agree to hear and did hear submissions on behalf of Mr. Heinen in support of the JOLs' summons and in opposition to GCF's summons and submission on behalf of Mr. Le Comte in opposition to the JOLs' summons and in support of GCF's summons.

8

I should also note that counsel for Mr. Heinen indicated that he wished to argue that the grant of the Security was not anyway a disposition of the property of the Company because, he contended, Mr. Le Comte had no authority to enter into the Notes and to grant the Security on behalf of the Company. Since, at a previous directions hearing on 27 th August 2010,1 had already directed that the sole issue for determination at the hearing before me in the event that the JOLs issued a summons would be whether the grant of the Security was made in the ordinary course of the Company's business in terms of the Consent Validation Order, I declined to allow Mr. Heinen's counsel to make his proposed argument at the hearing of the JOLs' summons. However, I accepted that Mr. Heinen's counsel was entitled to consider his position in light of this Ruling and, if he considered it necessary and appropriate, to make an application in that regard at some future date.

The Disposition in issue
9

The affidavit evidence establishes that Mr. Le Comte, purporting to act on behalf of the Company as the borrower, and 733 Properties as the Lender entered into the First Note on 17 !h August 2009, approximately two months after the date of the Consent Validation Order. 733 Properties is a company which is part of the Durst Organisation of New York, USA, which carries on business principally as an owner, builder and manager of commercial and residential real estate in New York. The Durst Organisation is headed by Mr. Douglas and Mr. Jonathan (“Jody”) Durst (“Mr. Durst”) who are cousins. Mr. Durst's wife is a close personal friend of Mr. Le Comte's wife. According to the affidavit of Mr. Durst, he has been a friend of Mr. Le Comte and his family for almost 20 years, principally through the friendship of their respective wives and children. Mr. Le Comte's evidence confirms this.

10

The First Note relates to a sum of up to US$lm together with interest. The Second Note relates to a further sum of up to US$lm together with interest. The Notes are...

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