Herald Fund Spc (in Official Liquidation)

• Jurisdiction: Cayman Islands
• Judge: (Kawaley, J.)
• Judgment Date: 27 August 2018
• Court: Grand Court (Cayman Islands)
• Date: 27 August 2018

IN THE MATTER OF HERALD FUND SPC (in official liquidation)

(Kawaley, J.)

Grand Court, Financial Services Division (Cayman Islands)

Companies — compulsory winding up — statutory interest — unpaid former shareholder who redeemed shares pursuant to company’s articles of association before winding up has provable claim for redemption proceeds — in solvent liquidation, entitled to statutory interest on claims pursuant to Companies Law (2018 Revision), s.149(2)

Held, ruling as follows:

(1) Interest was payable pursuant to s.149(2) of the Companies Law (2018 Revision) on the claims of the redemption creditors. The right to statutory interest out of a surplus available under s.149 in respect ofproved claims potentially applied to all creditor claims, including “shareholder claims” which would, in the event of competition, be postponed in favour of ordinary creditor claims by s.49(g) of the Companies Law. The redemption creditors’ claim to statutory interest was not defeated because the need to file proofs of debt had been dispensed with. The claims had in law been proved by virtue of their being admitted (paras. 97–98).

(2) It was common ground that the Cayman Islands statutory interest provisions were a complete code for the recovery of interest. There were two directly applicable statutory provisions, s.149 of the Companies Law and O.16, r.12 of the CWR. The right to statutory interest was defined in essentially unqualified terms in the core provisions of s.149. Order 16, r.12 of the CWR mirrored s.149 in terms of defining those eligible to claim statutory interest. Section 149 and O.16, r.12 appeared to contemplate a certain timeframe as regards when interest would be paid, with the principal amounts clearly expressed as preceding payment of interest, but did not mandate the actual payment of principal before interest. What was specified was that interest was only payable at all if there was a surplus left after the principal amounts payable to creditors who had proved their debts had been both quantified and identified as being available for distribution. It was difficult to see how these statutory provisions might fairly be read as imposing a mandatory requirement that debts must be proved by way of a formal proof of debt process. The purpose of statutory interest was to compensate creditors who could not claim interest after a winding-up order had been made on a contractual basis for the delay in gaining access to their money. The additional liquidator was unable to identify any clear-cut or coherent policy rationale as to why s.149 of the Companies Law should be construed as excluding deferred or postponed creditors. The court accepted the more important legislative policy imperative for which Primeo Fund contended, namely that a broad and inclusive approach should be adopted in relation to the question as to which debts might be proved. Cogent grounds were required to justify the conclusion that the claims of the redemption creditors were not provable claims for the purposes of statutory interest. Having regard to the policy underpinning s.149, a clear case must be made out for construing the provision as conferring statutory interest rights on some creditors but not others (paras. 44–53).

(3) The redemption creditors’ claims were potentially eligible for statutory interest under s.149 of the Companies Law, assuming that they satisfied the requirement in sub-s. (1) that claims should be “proved in the winding up.” Section 49(g) of the Law, in asserting the priority of ordinary creditors’ claims over shareholder claims (in the event of competition between them) reflected a fundamental principle. It formed one of the statutory terms on which shares were issued, transferred and/or redeemed in Cayman law. A closely connected and equally fundamental principle was the requirement that all debts be fully paid before shareholders received any distribution. Read in light of its wider statutory context, s.49of the Companies Law articulated the following legislative principles: (a) as a general rule, debts due to a member (or former member) in his character as such were debts like any other capable of being proved; and (b) in the event of competition between a member or former member and an ordinary creditor (e.g. in an insolvent liquidation), the debt due to the member or former member would (as between the shareholder claimant and the ordinary claimant) be deemed not to be a debt capable of being proved. In an insolvent liquidation, to the extent that ordinary creditors were not able to be paid their principal and interest in full, the claims of past or present members (regardless of whether they had in fact been admitted or proved) were not in law deemed to be debts upon which statutory interest could be paid or for any other purpose. Section 49(g) would operate so as to prevent shareholder creditors receiving any distribution in competition with ordinary unsecured creditors. In a solvent liquidation such as the present, the general rule that all proved debts qualified for statutory interest was not displaced because, in the absence of any actual competition between member (or shareholder) debts and ordinary debts, the deeming provisions of s.49(g) were not engaged. In the present case, there were only two categories of claimants competing for distribution, namely the redemption creditors and the shareholders. The additional liquidator’s contention that the redemption creditors should rank as ordinary members (and not as creditors) had already been rejected by the courts (paras. 56–78).

(4) The redemption creditors’ claims had been “proved in the winding up” for the purposes of s.149. Insolvency law had always adopted a practical approach. It would make no sense to construe s.149 as requiring formal proof of undisputed debts in order to qualify for statutory interest, where such proof would serve no useful commercial purpose. The Cayman statutory insolvency code was derived from old English insolvency law principles, which were recognized across the common law world. A fundamental goal of the statutory code was to minimize the costs of the liquidation process and maximize the returns to creditors and (if possible) shareholders. There was in substance no difference between an “admitted” debt and a “proved” debt. A debt might be proved or admitted in a variety of ways, only one of which was through a formal proof of debt. The CWR expressly contemplated that in a solvent liquidation the liquidator had a discretion as to whether to require formal proofs. Even in an insolvent liquidation, or in a solvent liquidation where debts were not paid in the ordinary course of business, it must be possible for the court to sanction the decision of liquidators to dispense with proofs of debt on the ground of economy. In the present case, the liquidators dispensed with the requirement for proofs of debt to be filed on the express basis that the debts had been sufficiently proved that formal proofs were not required. The narrow construction contended for by the additional liquidator of the words “proved in the winding up” was wholly unsustainable having regard to the policy function of s.149 and the technical meaning of the word “proved” in the statutory code as a whole. “Proved” essentially meantestablished through whatever legally recognized process the liquidator (subject to the court’s supervision in doubtful cases) deemed appropriate having regard to the nature and merits of the relevant claim, and the interests of the liquidation as a whole (paras. 81–87).

(5) If the court had been required by law to find that formal proofs were in fact necessary to enable the redemption creditors as a class to qualify for statutory interest under s.149, in the exercise of its discretionary case management powers the court would have afforded the redemption creditors an opportunity to file formal proofs of debt. It was difficult to imagine that any reasonable insolvency court properly directing itself would consciously deprive the redemption creditors of a statutory right by an accidental procedural side-wind (para. 92).

(6) If it had been required to decide the issue, the court would have summarily concluded that Primeo Fund had formally proved its claim. It filed a proof of debt which had not been rejected and which had been substantially admitted. It was standard liquidation practice for liquidators subsequently to rely on proofs of debt filed in the first instance for voting purposes only. On the facts of the present case it could not credibly be suggested that, if a formal proof were required to qualify for statutory interest, Primeo had not filed a formal proof. It would in any event be wholly at odds with the practical and commercially driven spirit of insolvency law to hold that a creditor who had filed a proof of debt which the liquidator had expressly admitted and paid (in whole or in part) had not “proved” the admitted debt (paras. 95–96).

Cases cited:

(1)Condon, In re, ex p. James (1874), L.R. 9 Ch. App. 609; [1874–80] All E.R. 388, considered.

(2)LB Holdings Intermediate 2 Ltd. (Joint Administrators) v. Lehman Brothers Intl. (Europe) (Joint Administrators), [2017] UKSC 38; [2018] A.C. 465; [2017] 2 W.L.R. 1497; [2017] 2 B.C.L.C. 149; [2017] BCC 235, followed.

(3)Lehman Bros. Intl. (Europe) (In Administration), Re, [2015] EWHC 2269 (Ch); [2016] BCC 239; [2016] Bus. L.R. 17; further proceedings, [2015] EWHC 2270 (Ch); [2015] B.P.I.R. 1162, considered.

(4)Nortel GmbH, In re, [2010] EWHC 3010 (Ch); [2011] Bus. L.R. 766; [2011] BCC 277; [2011] Pens. L.R. 37; on appeal, [2013] UKSC 52; [2014] A.C. 209; [2013] 3 W.L.R. 504; [2013] 4 All E.R. 887; [2013] Bus. L.R. 1056; [2013] 2 B.C.L.C. 135; [2013] BCC 624, considered.

(5)Soden v. British & Commonwealth Holdings plc, [1998] A.C. 298; [1997] 3 W.L.R. 840; [1997] 4 All E.R. 353; [1997] 2 B.C.L.C. 501; [1997] BCC 952, considered.

Legislation construed:

Companies Law (2018 Revision)...