Pearson (as Additional Liquidator of Herald Fund Spc) v Primeo Fund (in Official Liquidation) (Reichmuth and Company and Natixis S.A. Intervening)

• Jurisdiction: Cayman Islands
• Judge: (Lord Neuberger, Lord Mance, Lord Clarke, Lord Sumption and Lord Carnwath)
• Judgment Date: 06 July 2017
• Court: Court of Appeal (Cayman Islands)
• Date: 06 July 2017

Judicial Committee of the Privy Council

(Lord Neuberger, Lord Mance, Lord Clarke, Lord Sumption and Lord Carnwath)

PEARSON (as additional liquidator of HERALD FUND SPC)

and

PRIMEO FUND (in official liquidation) (REICHMUTH AND COMPANY and NATIXIS S.A. intervening)

Lord Goldsmith, Q.C. and F. Tregear, Q.C. for the appellant;

T. Smith, Q.C. for the respondent;

L. Rabinowitz, Q.C. and M. Schlote for the first intervenor;

S. Atherton, Q.C. and J. Allcock for the second intervenor.

Cases cited:

(1) Anglesey Colliery Co., In re (1866), L.R. 1 Ch. App. 555, referred to.

(2) Compania de Electricidad de Buenos Aires Ltd., In re, [1980] Ch. 146; [1979] 2 W.L.R. 316; [1978] 3 All E.R. 668, followed.

(3) Consolidated Goldfields of New Zealand, In re, [1953] Ch. 689; [1953] 2 W.L.R. 584; [1953] 1 All E.R. 791, followed.

(4) Culross Global SPC Ltd. v. Strategic Turnaround Master Partnership Ltd., 2010 (2) CILR 364, considered.

(5) Dynamics Corp. of America, In re, [1976] 1 W.L.R. 757; [1976] 2 All E.R. 669, referred to.

(6) Fairfield Sentry Ltd. v. Migani, [2014] UKPC 9; [2014] 1 CLC 611, distinguished.

(7) Humber Ironworks & Shipbuilding Co., In re, Warrant Fin. Co.’s Case (1869), L.R. 4 Ch. App. 643; 38 L.J. Ch. 712; 17 W.R. 780; 20 L.T. 859, referred to.

Legislation construed:

Companies Law [2013 Revision], s.37: The relevant terms of this section are set out at para. 4.

s.38: The relevant terms of this section are set out at para. 4.

s.49: The relevant terms of this section are set out at para. 4.

s.125: The relevant terms of this section are set out at para. 4.

s.139: The relevant terms of this section are set out at para. 4.

s.140: The relevant terms of this section are set out at para. 4.

Companies Act 1981 (c.62), s.45(4): The relevant terms of this sub-section are set out at para. 12.

s.59(2): “A company shall not be liable in damages in respect of any failure on its part to redeem or purchase any of the shares.”

Companies — shares — redemption — shares “redeemed” under Companies Law, s.37 as prescribed in company’s articles of association, even if proceeds of redemption not paid to redeemer

The respondent had sought an order in the Grand Court that a number of investors who had sought to redeem shares from the company were not subordinated to its creditors on winding up by virtue of s.37(7)(a) of the Companies Law.

Herald Fund was an open-ended investment fund which had placed all of its assets with Bernard L. Madoff Investment Securities (“BLMIS”). Investors in Herald received participating non-voting redeemable shares in exchange for moneys invested, with a right to redeem their shares for a sum based on Herald’s NAV, as established at a specific date close to the date of the applicable redemption day. Herald’s articles of association stipulated that a redeeming shareholder was entitled to receive the redemption proceeds as soon as reasonably practicable. They also provided that upon redemption a shareholder would cease to be entitled to any rights in respect of the company, his name would be removed from the register of shareholders and the shares would be available for re-issue. The articles provided that redemption would occur on surrender of the status of shareholder, rather than on payment.

A number of shareholders had their shares redeemed on December 1st, 2008 (“the December redeemers”) or at an earlier date (“the KYC redeemers”) but were not paid the redemption proceeds.

On December 11th, 2008, it became apparent that BLMIS was a Ponzi scheme. On the following day, Herald’s board resolved to suspend the calculation of its NAV and, inter alia, all further payments to those who had invested in its redeemable shares. On July 16th, 2013, the Grand Court made a winding up order in respect of Herald.

Primeo Fund represented the December and KYC redeemers. It contended that they were entitled to claim in Herald’s liquidation as creditors and in preference to any claims by its shareholders. Herald, represented by its additional liquidator, disputed the claims and contended that all investors who were unpaid on December 12th, 2008 (and so also unpaid at the commencement of the liquidation) ranked as ordinary members. It contended that the claims were caught by s.37(7)(a) of the Companies Law, which provided:

“Where a company is being wound up and, at the commencement of the winding up, any of its shares which are or are liable to be redeemed have not been redeemed or which the company has agreed to purchase have not been purchased, the terms of redemption or purchase may be enforced against the company, and when shares are redeemed or purchased under this subsection they shall be treated as cancelled:

Provided that this paragraph shall not apply if—

(i) the terms of redemption or purchase provided for the redemption or purchase to take place at a date later than the date of the commencement of the winding up; or

(ii) during the period beginning with the date on which the redemption or purchase was to have taken place and ending with the commencement of the winding up the company could not, at any time, have lawfully made a distribution equal in value to the price at which the shares were to have been redeemed or purchased.”

The Grand Court (Jones, J.) held that (i) the redeemers’ shares had been redeemed in accordance with the company’s articles before the commencement of Herald’s winding up, notwithstanding that the redemption proceeds had not been paid; (ii) s.37(7)(a) only applied where shares were liable to be redeemed but had not been redeemed in accordance with the company’s articles; and (iii) the claims of the redeemers were not caught by s.37(7)(a) (that decision is reported at 2015 (1) CILR 482). That decision was upheld by the Court of Appeal (reported at 2016 (2) CILR 330).

Herald’s additional liquidator appealed to the Board, submitting inter alia that “redemption” in s.37(7) of the Companies Law bore a different meaning from its meaning in the articles and should be understood as embracing a whole process including payment of the redemption proceeds. The proviso in (i) of s.37(7)(a) therefore applied because redemption had been postponed to a date later than the commencement of the winding up. The December and KYC redeemers were not entitled to the priority contemplated by s.37(7)(b) and had the status of ordinary members within the concluding words of s.140(1).

Primeo’s primary submission was that, as the courts below had accepted, s.37(7) did not apply because the December and KYC redeemers’ shares had actually been redeemed prior to the suspension. The mere fact that payment of the proceeds had been postponed was irrelevant. Alternatively, even if they fell within the opening part of s.37(7)(a), the proviso in (i) did not apply because, pursuant to their notices to redeem, their terms of redemption provided for redemption to take place before the suspension on December 12th, 2008.

The interveners appeared with the leave of the Board. Reichmuth & Co. represented the interests of investors who, prior to December 12th, 2008, had given at least 35 days’ notice of their intention to redeem on a subsequent date (“the late redeemers”). Natixis S.A. represented the interests of investors who made requests to redeem after December 12th, 2008 (“the later redeemers”). It joined with Herald in submitting that neither Primeo nor the late redeemers should enjoy any special priority and that both ranked alongside the later redeemers as ordinary members.

Held, dismissing the appeal:

(1) The appeal by Pearson, as additional liquidator of Herald, should be dismissed as against Primeo, representing the December and KYC redeemers. The Grand Court and the Court of Appeal had correctly determined that the December and KYC redeemers did not fall within s.37(7)(a) of the Companies Law. Herald’s articles provided that redemption occurred on the surrender of the status of shareholder, rather than on payment of redemption proceeds. Redemption did not have an autonomous statutory meaning that prevailed over the meaning in a company’s articles. On the contrary, s.37(3)(c) provided that redemption of shares could be effected in such manner as was authorized by a company’s articles. In the Board’s opinion, as a matter of general principle, payment was not an inherent element of the redemption of shares. The essence of redemption was the surrender by the redeemer of the status of shareholder, with all attendant rights. Where that occurred, the deferral of the payment of the price for the shares was no more than a grant of a short period of credit to the company, without any reservation of property or interest. Section 37(7) addressed situations in which redemption or purchase should have, but had not, been effected by a company before the commencement of winding up, and allowed the relevant shareholder to enforce the terms of redemption or purchase notwithstanding the winding up. In that respect, it elevated the shareholder to a priority it would not otherwise enjoy. Section 37(7) was not designed to lower or reverse the status of a shareholder who had already become a creditor owed redemption proceeds. Primeo and the December and KYC redeemers had redeemed and were entitled to prove in respect of their claims to the redemption proceeds under s.139(1), although as former members they were subject to having their claims deferred under s.49(g) to the claims of other ordinary creditors (paras. 13–22).

(2) Declarations should be made that Reichmuth, representing the late redeemers, and Natixis, representing the later redeemers, had no claims under s.37(7) of the Companies Law and ranked as ordinary members in Herald’s winding up. The effect of the articles was that once there was a suspension under art. 19, the right to redemption was suspended and only revived if and when the suspension was lifted. The terms of redemption could not be regarded as providing for redemption to take place on a date when...