Heriot Fund v Deutsche Bank

• Jurisdiction: Cayman Islands
• Judge: (Cresswell, J.)
• Judgment Date: 14 January 2011
• Court: Grand Court (Cayman Islands)
• Date: 14 January 2011

Grand Court, Financial Services Division

(Cresswell, J.)

HERIOT AFRICAN TRADE FINANCE FUND LIMITED

and

DEUTSCHE BANK (CAYMAN) LIMITED

K.J. Farrow, Q.C. for the fund;

J.R. McDonough for Aris.

Cases cited:

(1) A. & B.C. Chewing Gum Ltd., In re, [1975] 1 W.L.R. 579; [1975] 1 All E.R. 1017, referred to.

(2) Aris Multi-Strategy Lendings Fund Ltd. v. Quantek Opportunity Fund Ltd., Eastern Caribbean Sup. Ct. (BVI High Ct.), December 15th, 2010, unreported, referred to.

(3) Belmont Asset Based Lending Ltd., In re, 2010 (1) CILR 83, referred to.

(4) Blériot Mfg. Aircraft Co. Ltd., In reUNK(1916), 32 T.L.R. 253, referred to.

(5) Davis & Collett Ltd., In re, [1935] Ch. 693; [1935] All E.R. Rep. 315, referred to.

(6) Lancelot Investors Fund Ltd., In re, 2009 CILR 7, referred to.

(7) Parmalat Capital Fin. Ltd., In re, 2007 CILR 1, applied.

(8) Photographic Artists” Co-op. Supply Assn., In reELR(1883), 23 Ch. D. 370, applied.

(9) Quintin v. Phillips Petroleum Co., 1997 CILR N–4, applied.

(10) St. Piran Ltd., In re, [1981] 1 W.L.R. 1300; [1981] 3 All E.R. 270, referred to.

(11) Tricorp Pty. Ltd. v. Deputy Commr. of Taxation (WA)(1992), 6 ACSR 706; 10 ACLC 474, referred to.

(12) Wahr-Hansen v. Bridge Trust Co. Ltd., 1994–95 CILR 435, referred to.

(13) Wilson v. Church (No. 2)ELR(1879), 12 Ch. D. 454; 41 L.T. 296, applied.

(14) Wilson (E.K.) & Sons Ltd., In re, [1972] 1 W.L.R. 791; [1972] 2 All E.R. 160, applied.

Legislation construed:

Court of Appeal Law (2006 Revision), s.19(2): The relevant terms of this sub-section are set out at para. 35.

s.19(3): The relevant terms of this sub-section are set out at para. 22.

Companies-compulsory winding up-stay of winding up-stay pending appeal refused if refusal will not render appeal nugatory, prejudice shareholders or reduce value of company”s assets-pursuant to Court of Appeal Law (2006 Revision), s.19(3), stay only granted if court in discretion considers good cause shown-factors for consideration listed-usually refused if stay would make liquidator”s task more difficult

Companies-compulsory winding up-costs-security for costs-on appeal against winding-up order, security for respondent”s costs usually ordered pursuant to Court of Appeal Law (2006 Revision), s.19(2)-if no party joined as responsible for respondent”s costs, security to be provided by appeal”s promoters

Aris sought the winding up of a Cayman mutual fund.

Aris held 23.47% of the participating shares in the fund, and petitioned to wind up the fund, but did not proceed diligently at first. The fund began an informal liquidation process, whereby its management would liquidate assets and repay investors in an ad hoc manner. It entered into a contract to sell certain assets to a third party, which would remain binding in the event of a winding-up order being made in respect of the fund.

The Grand Court (Jones, J.) made a winding-up order (in proceedings reported at 2011 (1) CILR 1) on the basis that the fund was no longer viable and it was appropriate that it be liquidated officially by court-appointed liquidators, and not informally by its management. The fund indicated its intention to appeal and sought a stay of execution of the winding-up order pending the disposal of the appeal, which it was anticipated would be heard in April 2011. The Grand Court (Jones, J.) refused a stay on the basis that the fund”s shareholders would not be prejudiced by the continuation of the official liquidation pending the appeal.

The fund applied for a stay of execution of the winding-up order pending the disposal of its appeal, submitting that (a) a stay of proceedings until the disposal of the appeal would not make the official liquidators” task more difficult; (b) any extra difficulty posed by a stay would stem from Aris”s failure diligently to prosecute its petition; (c) without a stay, the fund”s appeal might be rendered nugatory; (d) unless a stay were granted, there was a risk that the purchaser of the assets would pull out or seek to re-negotiate, or that the sale would otherwise be obstructed, having a negative impact on the value of the fund”s assets; (e) granting a stay would cause no prejudice to Aris; and (f) there was therefore good cause to grant a stay of execution pursuant to s.19(3) of the Court of Appeal Law (2006 Revision).

Aris submitted in reply that a stay should not be granted, since (a) the fund”s appeal would not be rendered nugatory by a refusal to grant a stay; (b) it doubted whether the appeal was being promoted for a proper purpose; (c) Jones, J.”s decision to make a winding-up order and not to grant a stay was correct, or at least not plainly wrong; (d) the balance of convenience favoured refusing to grant a stay; and (e) there was therefore no good cause for granting a stay under s.19(3) of the Court of Appeal Law.

Aris applied for security for its costs of the appeal in the sum of US$82,052.50, submitting that a company appealing from a winding-up order should generally be ordered to provide security for costs.

The fund submitted in reply that (a) given that the fund was solvent and would agree that the burden of any costs order made in favour of Aris on appeal would not impinge on Aris”s entitlement to a distribution in the winding up, the court should not order the fund to post security; (b) an order for security of US$82,052.50 sought was excessive and might stifle a bona fide appeal; and (c) alternatively, the amount of security ordered should reflect the proportionate shareholding of Aris, i.e. 23.47% of whatever would otherwise be an appropriate amount.

Held, refusing a stay and ordering security for costs:

(1) The court would not grant the fund a stay of execution of the winding-up order pending the disposal of its appeal. Pursuant to s.19(3) of the Court of Appeal Law (2006 Revision), the court would only grant such a stay if good cause (i.e. good reasons) had been shown. Moreover, the

decision on whether to grant a stay was entirely within the court”s discretion, and was not fettered by indications in past cases. In considering whether good cause had been shown, the court would have regard to (a) whether the appeal would be rendered nugatory if a stay were refused; (b) whether the appellant had a good arguable case on appeal; (c) the purposes for which the appeal was brought; (d) the balance of convenience; and (e) any reasons given by the first-instance judge for refusing a stay. In the context of companies, a stay would usually be refused if it would be likely to make it difficult for the liquidator to fulfil its duties (para. 22).

(2) In these circumstances, the fund had not shown good cause, and the court would refuse to grant a stay. The fund”s appeal would not be rendered nugatory if a stay were not granted, and, further, Jones, J. had been correct to refuse a stay on the basis that the fund”s shareholders would not be prejudiced by an official liquidation rather than an informal, ad hoc liquidation by the fund”s management. Moreover, refusing to grant a stay would not of itself result in the obstruction of the proposed sale, thereby negatively impacting on the value of the fund”s assets. The evidence suggested that the purchaser was contractually bound to proceed with the transaction, regardless of the fund”s liquidation. Furthermore, all relevant parties would be aware of, and would base their future actions on, the fact that a winding-up order had been made, irrespective of whether or not a stay was granted. The court would therefore refuse to grant a stay (paras. 23–29).

(3) The fund would be ordered to provide Aris with security for its costs of the appeal pursuant to s.19(2) of the Court of Appeal Law. The general rule was that when a company appealed from a winding-up order, security for the respondent”s costs needed to be given, in order to discourage frivolous appeals. In circumstances such as these, in which the fund appealed against a winding-up order without joining anyone as personally responsible for the respondent”s costs, it would be appropriate to ensure that security was provided by those promoting the appeal. Further, none of the reasons advanced by the fund justified departing from this approach. The court would exercise its discretion and order that the fund provide security in the sum of US$75,000 (para. 30; paras. 35–37).

1 CRESSWELL, J.: There are two summonses before the court. By the first summons, Heriot African Trade Finance Fund Ltd. (‘the fund’) applies for a stay of execution of the winding-up order of Jones, J., made on January 4th, 2011, in FSD Cause No. 87 of 2010, pending the determination of the fund”s appeal against that order. By the second summons, the respondent (in its capacity as the nominee of Aris Multi-Strategy Lending Fund Ltd. and Aris Africa Fund Ltd.) (‘Aris’) applies for an...