Frontera Resources Corporation v Mr Stephen Hope

• Jurisdiction: Cayman Islands
• Judge: Justice Kawaley
• Judgment Date: 22 January 2019
• Year: 2019
• Court: Grand Court (Cayman Islands)
• Docket Number: CAUSE NO: FSD 193 OF 2018 (IKJ)

Between:

(1) Frontera Resources Corporation

(2) Frontera International Corporation

Plaintiffs

and

(1) Mr Stephen Hope

(2) Outrider Master Fund, L. P.

Defendants

Before:

The Hon. Justice Kawaley

CAUSE NO: FSD 193 OF 2018 (IKJ)

IN THE GRAND COURT OF THE CAYMAN ISLANDS

FINANCIAL SERVICES DIVISION

HEADNOTE

Application to discharge ex parte interlocutory injunction restraining secured creditor from enforcing its security-alleged breach of fiduciary duty by director exercising veto power to prevent Board from raising debt financing out which secured creditor's claim could be satisfied-whether serious issue to be tried

Appearances:

Mr Jeremy Goldring QC of counsel and Mr Peter Hayden, Ms Sarah Lewis and Mr Nicholas Fox, Mourant Ozannes, on behalf of the Plaintiff

Mr Fraser Hughes and Ms Roisin Liddy Murphy, Conyers Dill & Pearman, on behalf of the Defendants

IN CHAMBERS

Introductory

1 On October 11, 2018, following an ex parte hearing, I ordered that:

“7. The Defendants be restrained from taking any steps to enforce against property which is the subject of the Equitable Mortgage dated 20 December 2016 between the Second Plaintiff and the Third Defendant, whether pursuant to rights under that agreement or otherwise.”

2 The Defendants applied ex parte to vary paragraph 1 of the October 11, 2018 ex parte Order (“Interim Injunction”) on December 7, 2018. I granted that application by inserting the following new paragraph in the Interim Injunction:

“1A. The Plaintiffs shall not cause Frontera Resources Caucusus Corporation to incur any further indebtedness or obligations in excess of US $500,000 until 18 December 2018, or such other time as the return date in respect of the Injunction can be heard.”

3 Having decided to reserve judgment at the end of the inter partes hearing at which the Defendants sought to discharge the Interim Injunction, and over the Plaintiffs' objections, I extended paragraph 1A until December 21, 2018.1 indicated at the end of the December 18, 2018 hearing that I regarded the issue of whether the Interim Injunction should be continued to be a finely balanced one. The Plaintiffs' case can be summarised as follows:

• (a) the 1 ^st Plaintiff (“FRC”) is listed on the London Stock Exchange and is the holding company for the Frontera Group (the Plaintiffs are both incorporated in the Cayman Islands);

• (b) the Group's main asset is the oil and gas exploration rights indirectly held by Frontera Resources Caucusus Corporation (“FRCC”) in Georgia under a Production Sharing Contract (“PSC”) to which the Government of Georgia is a party and a Mineral Use License (“License”) granted by the Government of Georgia;

• (c) there is a risk that the Group will suffer irreparable harm if the Defendants enforce their security over the shares of FRCC because this may trigger a default under the PSC and the License may be revoked;

• (d) the 2 ^nd Defendant (“Outrider”) is a company also incorporated in the Cayman Islands which promotes itself as specializing in investing in distressed companies. Following the settlement of a dispute with another Frontera entity in the US Bankruptcy Court in 2016, Outrider acquired the 2016 Notes issued by the 2 ^nd Plaintiff (“FIC”). Outrider also acquired the right to have its nominee on the FRC Board of Directors and to have all material decisions approved on a unanimous basis. The 1 ^st Defendant (“Mr Hope”, a California resident, who controls Outrider) has at all material times been Outrider's nominee director on FRC's Board;

• (e) the other FRC directors are Steve Nicandros, Zaza Mamulaishvili and Luis Giusti;

• (f) the FRC Board's attempts to raise debt financing out of which the Company would be able to meet its financial obligations under the 2016 Notes to Outrider could be settled have been blocked by Mr Hope. His motivations have been said to be, very broadly, to enable Outrider to take control of the Group and to further the collateral interests of Outrider rather than the interests of FRC.

4 At the end of the inter partes hearing, as at the end of the ex parte hearing, it appeared clear that the Plaintiffs had established that (a) damages would be an inadequate remedy for the loss which would potentially be sustained if its main asset was lost and (b) that the balance of convenience favoured granting the Interim Injunction. The Defendants would suffer no comparable irreparable prejudice if their security enforcement rights were suspended until trial, even if the Plaintiffs ability to compensate them for any damage suffered was subject to some doubt. As will be seen below, however, the cogency of the risk on careful analysis is less compelling than it initially seemed. The most controversial and finely balanced question, nonetheless, was whether the Plaintiffs' substantive claims raised, as Lord Diplock famously framed the merits test in American Cyanamid v Ethicon [1975] AC 396 at 407G, a “serious question to be tried”. It is never enough to justify restraining a defendant from exercising his own legal rights merely to show that such exercise will indirectly cause the plaintiff serious harm.

5 The Defendants' sought to discharge the Interim Injunction on two main grounds: (1) material non-disclosure and (2) the Plaintiffs had failed to establish a sufficiently serious claim to justify interfering with Outrider's rights as a secured creditor.

The commercial relationship between the parties

6 The First Affidavit of Steve Nicandros describes the uncontroversial background facts. Frontera Resource Holdings, LLC (“FRH”) entered Chapter 7 bankruptcy proceedings in 2016. There was a dispute in those proceedings between FRC and Outrider (which held notes issued by FRH) in which FRC alleged that Outrider had facilitated a hostile takeover of the Group. A mediated settlement of this dispute resulted in a December 20, 2016 Note Exchange Agreement pursuant to which Outrider acquired FIC 2020 Notes in place of FRH 2016 Notes. The settlement also entitled Outrider's management company to designate a member of FRC's Board of Directors.

7 Outrider's Global Note is for the principal amount of US$22.9 million plus interest at the rate of 10%. Events of Default include failure to pay interest. Through a Third Amendment to the Note dated March 30, 2018, FIC and Outrider agreed to defer interest until September 30, 2018. In excess of $2 million was due on September 30, 2018 which has not been paid. The parties also executed a Collateral Agency Agreement and a Security Agreement which Outrider is entitled to enforce because an Event of Default has occurred.

8 Exhibited to the First Nicandros Affidavit was the Note Agreement dated December 20, 2018 in relation to the FIC 2020 Notes. Mr Goldring QC referred to the following clauses which shed light on Outrider's nominee's veto power under the Notes:

“7.2 … (b) so long as no Default has occurred and is continuing, the Company and its Company Subsidiaries shall be entitled to Incur all Permitted Indebtedness or Permitted Noteholder Indebtedness….

SCHEDULE I

… ‘Permitted Indebtedness’ means any or all of the following:

(1) Indebtedness of up to $200 million Incurred pursuant to a Credit Facility, with interest not to exceed LIBOR plus 1500 basis points, provided that any such indebtedness may only be incurred with the unanimous written consent of the members of the board of directors of FRC, and further provided that, absent such unanimous consent of the board of directors of FRC, any transaction incurring such indebtedness shall be void…”

9 Failure of the Company (i.e. FIC) to pay interest under the Note Agreement is an “Event of Default” under Section 8.1 of the Note Agreement. It is clear from the Structure Chart at page 1 of Exhibit “SN-1”, however, that these provisions operate as regards FIC, a wholly-owned subsidiary of FRC, and its subsidiaries, which include FRCC and its subsidiaries including Frontera Resources Georgia Corporation (“FRGC”). Nonetheless these provisions demonstrate that the settlement which resulted in Outrider acquiring the right to be represented on FRC's Board of Directors and for its representative to have a right of veto was accompanied by the issuance of a Note to Outrider by FIC on terms that any further indebtedness at the level of FIC and below could only validly be incurred with unanimous Board approval. Accordingly, Outrider had as of December 20, 2016 the ability to veto any further debt financing at the FIC level and below through its representative on the FRC Board. This representation and veto power was also apparently grounded in a side letter of the same date.

10 Another document which appears in the same Exhibit (at pages 24–28) is FRC's mediation memorandum dated October 2016. That memorandum submitted that Outrider's asserted counterclaims would cause the Georgian Government to take action which would “destroy all value in Frontera for the company's shareholders and other creditors, and also ensure that Outrider itself loses the entire value of its Notes.” I do not recall this document being directly referred to at either hearing, but Mr Hayden at the ex parte hearing expressly referred to FRC's Complaint which preceded the mediated settlement. The Plaintiffs case is that the allegations made by FRC in the settled US proceedings were similar to and supported the present allegations against the Defendants.

11 The FRC Complaint alleged that Outrider was guilty of misappropriating trade secrets (Count II), tortious interference with contract (Count III) and fraud (Count IV). However, Count I merely sought declaratory relief in relation to FRH Notes which certain Noteholders and the estate of FRH itself contended were guaranteed by FRC. The mediated settlement does not appear to have given any or any material recognition to FRC's misconduct allegations against Outrider, because it placed Outrider in the position of being...