Lansdowne v Matador

• Jurisdiction: Cayman Islands
• Judge: (Quin, J.)
• Judgment Date: 23 August 2012
• Court: Grand Court (Cayman Islands)
• Date: 23 August 2012

Grand Court, Financial Services Division

(Quin, J.)

LANSDOWNE LIMITED and SILEX TRUST COMPANY LIMITED

and

MATADOR INVESTMENTS LIMITED, ENGLEFIELD HOLDINGS CORPORATION and GUERRAND-HERMÈS

F. Tregear, Q.C. and M. Goucke for the appellants;

N.K. Meeson, Q.C. and F. Hughes for the official liquidator;

M. Collings, Q.C. and J. Wood for the second and third respondents.

Cases cited:

(1) Bratton Seymour Service Co. Ltd. v. Oxborough, [1992] BCLC 693; [1992] BCC 471, dicta of Steyn, L.J. considered.

(2) Criterion Properties PLC v. Stratford UK Properties LLC, [2004] 1 W.L.R. 1846; [2006] 1 BCLC 729; [2004] BCC 570; [2004] UKHL 28, referred to.

(3) Culross Global SPC Ltd. v. Strategic Turnaround Master Partnership Ltd., 2010 (2) CILR 364; [2010] UKPC 33, applied.

(4) Medley Opportunity Fund Ltd. v. Fintan Master Fund Ltd., 2012 (1) CILR 360, applied.

(5) Progress Property Co. Ltd. v. Moore, [2011] 1 W.L.R. 1; [2011] 2 All E.R. 432; [2011] Bus. L.R. 260; [2011] 2 BCLC 332; [2011] BCC 196; [2010] UKSC 55, dicta of Lord Walker considered.

(6) Svanstrom v. Jonasson, 1997 CILR 192, considered.

(7) TNT Australia Pty. Ltd. v. Normandy Resources NL(1989), 53 SASR 156, applied.

Legislation construed:

Companies Law (2007 Revision), s.25(3): The relevant terms of this sub-section are set out at para. 107.

s.37: The relevant terms of this section are set out at para. 60.

Companies-shares-redemption-personal agreement to vary gating provisions in articles invalid-Companies Law, s.37(3)(c) requires terms and manner of redemption to be sufficiently set out in the articles-mandatory requirement cannot be overridden by collateral contract or estoppel-articles create collective rights and obligations between company and shareholders, and shareholders inter se, so essential that third parties can rely on their terms

Matador Investments Ltd. was in liquidation in the Grand Court.

The fund was a Cayman hedge fund, incorporated as part of a joint venture between PW and EGH. The appellants were PW”s investment vehicles into the fund: Lansdowne Ltd., a company incorporated in Nevis, and Silex Trust Co. Ltd., a company incorporated in Switzerland on behalf of the Bronze Trust of Tortola, BVI.

In 1999, PW met EGH, who was involved in the financial investment industry as a money manager, and they became close friends. PW had significant investments in the United States, which EGH advised her to redeem and re-invest in a more lucrative joint venture together. Although PW was inexperienced in financial matters, she agreed to the joint venture as she trusted EGH to look after her interests. EGH arranged, on PW”s behalf, for Lansdowne to be incorporated and for the Bronze Trust to be set up.

In 2005, PW and EGH regularly discussed the terms of the joint venture. In particular, PW told EGH that she wanted to be able to make regular redemptions as she would be investing virtually all her liquid assets in the fund, and EGH confirmed that she should be able to withdraw as much money as she needed every quarter. The fund was subsequently incorporated and EGH and her husband were appointed as its directors. When PW received the fund”s draft articles and private placement memorandum (‘PPM’)-containing gating and suspension provisions-EGH told her that they were intended to apply to future third party investments only, and that PW”s investment would not be governed by their terms. Accordingly, PW effectively ignored these provisions. PW and EGH later

signed an ‘agreement in principle’ which stated, inter alia, that (i) the parties would agree to a separate shareholder agreement; and (ii) the PPM would be amended as agreed between them, including amendments to the sections regarding redemption rights. Although no shareholder agreement or amendments to the PPM were ever executed, PW proceeded with the joint venture and the appellants subscribed for shares in the fund.

In 2007, after PW”s and EGH”s relationship deteriorated, PW sought to redeem the entirety of her investment, and the appellants submitted redemption requests for an effective redemption date of June 30th, 2008. On June 27th, however, in accordance with the fund”s documents, its directors imposed a 10% gate on redemptions at June 30th and for all following redemption days until further notice; accordingly, on June 30th, it paid the appellants only 10% of the overall value of their shares.

In 2009, the appellants presented a winding-up petition under the Companies Law (2007 Revision), s.92(d) in respect of the fund, and the Grand Court ordered it to be wound up. They later submitted proofs of debt to its liquidator, based on a full redemption of their shares as at June 30th, 2008. The liquidator, however, rejected these claims, relying on the 10% gate as effective. The appellants appealed against the liquidator”s determination.

They submitted, inter alia, that (i) they were entitled to redeem their entire investments in the fund, pursuant to the oral side agreement with EGH that there would be no restriction on PW”s ability to redeem; (ii) the agreement was binding on the fund as the parties had intended EGH to contract in her capacity as its director, and she had authority-actual or ostensible-to do so; (iii) it was a term of the agreement that the fund”s articles and the PPM would not apply to the appellants, but were intended to apply to third party investors only; and (iv) alternatively, they would not apply to the extent that they were inconsistent with the agreement-the provisions permitting redemption gates clearly being inconsistent.

The respondents submitted, inter alia, that (i) the representations made by EGH did not support the existence of the alleged side agreement; (ii) in any event, the PPM made it clear that no one was authorized to make any representations inconsistent with its terms and that any purchase made on the basis of such representations would be at the purchaser”s own risk; (iii) a company”s articles were a statutory contract under the Companies Law (2007 Revision), s.25(3), and could not be overridden by a contrary secret agreement or an estoppel; (iv) further, s.37(3)(c) required the terms of redemption to be sufficiently set out in the company”s articles and strictly followed; and (v) insofar as the alleged side agreement was contrary to the gating and suspension provisions in the fund”s articles and PPM, it was unlawful and of no effect.

Held, dismissing the appeals:

(1) The side agreement between EGH and PW was not binding. There was no evidence that EGH was authorized by the fund to enter into it, and it was further made with the wrong party. It was a fundamental

principle-set out in the fund”s articles-that only registered shareholders would be recognized, not underlying beneficial owners such as PW. As the registered shareholders, the appellants were therefore the only parties who could have varied the terms of their investments (para. 102; para. 106; para. 121).

(2) In any event, the appellants could not have secretly varied the gating provisions in the articles. The Companies Law, s.37(3)(c) required the terms and manner of redemption to be sufficiently set out in, and authorized by, the articles, and this was a mandatory requirement which could not be overridden by a collateral contract or an estoppel. Articles of association were not a simple two-party contract, but created collective rights and obligations between a company and its shareholders, and its shareholders inter se; it was therefore essential that third parties could rely on their terms (paras. 108–115; para. 121).

1 QUIN, J.:

Introduction

The appellants are Lansdowne Ltd. (‘Lansdowne’), a company incorporated in Nevis, and Silex Trust Co. Ltd. (‘Silex’), a company incorporated

in Switzerland on behalf of the Bronze Trust of Tortola, British Virgin Islands. The company, Matador Investments Ltd., otherwise known as ‘the fund,’ was incorporated on April 18th, 2005 as an exempted company under the laws of the Cayman Islands, to operate as a private investment fund, and its registered office is located in George Town, Grand Cayman, Cayman Islands.

2 On May 15th, 2009, the appellants presented their petition to the Grand Court of the Cayman Islands, seeking the winding up of Matador, pursuant to s.92(d) of the Companies Law (2007 Revision) (as amended). On August 27th, 2009, the court acceded to the petition and the company was wound up in accordance with the Companies Law and Hugh Dickson of Grant Thornton Specialist Services (Cayman) Ltd. was appointed as the official liquidator of the company. On February 26th, 2010, the appellants lodged their proofs of debt with the official liquidator. On February 2nd, 2011, the official liquidator rejected the appellants” proofs of debt.

3 On February 23rd, 2011, the appellants filed appeals and sought the following orders:

(a) both appellants ask that the rejection of their respective proofs of debt be set aside;

(b) Silex asks that its claim be admitted to proof in the sum of £1,170,915.39, plus post-liquidation interest at the rate of 7.75% per annum, in accordance with s.149 of the Companies Law, O.16, r.12 of the Companies Winding Up Rules 2008 and the Schedule to the Judgment Debts (Rates of Interest) Rules 2010;

(c) Lansdowne seeks an order that its claim be admitted to proof in the sum of US$1,397,446.40 and £1,673,577.75-with post-liquidation interest at the same rate as in the appeal submitted by Silex, set out in (b) above; and

(d) both appellants seek an order that their costs be paid out of the assets of Matador.

4 On March 16th, 2012, all the parties entered into a consent order which stated as follows:

‘1. That the appeals be listed for the hearing of a preliminary issue with a time estimate of one day on the first available date convenient to counsel for the appellants, the official liquidator and the other shareholders (together, “the parties”) after 42...