Primeo Fund (in Official Liquidation) Plaintiff v Michael Pearson as Additional Liquidator of Herald Fund SPC (in Official Liquidation) Defendant
| Jurisdiction | Cayman Islands |
| Judge | The Hon. Justice Andrew J. Jones |
| Judgment Date | 04 June 2015 |
| Court | Grand Court (Cayman Islands) |
| Docket Number | Cause NO. FSD 27 OF 2013 – AJJ |
| Date | 04 June 2015 |
In the Matter of the Companies Law (2013 Revision)
And in the Matter of Herald Fund SPC (In Official Liquidation)
The Hon. Justice Andrew J. Jones QC
By an order made on 24 November 2014 the Court directed, pursuant to Order 11, rule 3 of the Companies Winding Up Rules, that certain issues arising in the liquidation of Herald Fund SPC (In Official Liquidation) (‘Herald’) beadjudicated by means of an inter partes proceeding between Primeo Fund (In Official Liquidation) (‘Primeo’) and the Additional Liquidator of Herald, both acting in representative capacities. The general factual background giving rise to these issues is well known can be briefly summarized as follows.
Herald was incorporated as an open ended investment fund on 24 March 2004. From its inception, the whole of its funds (apart from a relatively small amount of cash retained for liquidity purposes) were placed with Bernard L. Madoff Investment Securities LLC (‘BLMIS’) for investment in a portfolio of securities. In fact, BLMIS was the world's largest Ponzi scheme. This came to light on 11 December 2008 when Mr. Bernard L. Madoff (‘Madoff”) confessed that BLMIS was an elaborate fraud and he subsequently pleaded guilty to 11 counts of fraud for when he was sentenced to 150 years in prison.
Primeo was incorporated on 18th November 1993 and also carried on business as an open ended investment fund. It had placed funds for investment directly with BLMIS since 1993 but, from 2004 onwards, it invested in Herald with the result that it became an indirect victim of the Madoff Ponzi scheme. Primeo was put into voluntary liquidation on 23 January 2009 and its liquidation was brought under the supervision of the Court on 8 April 2009. Herald had suspended the calculation of NAV and the issue and redemption of shares on 12 December 2008 (the day after the revelation of the Madoff fraud) but remained under the control of its directors until 23 July 2013 when a winding up order was made on the petition of Primeo.
The first issue to be determined in Herald's liquidation is whether section 37(7)(a) of the Companies Law (2013 Revision) applies in relation to the Participating Non-Voting Shares which form the subject of redemption requests submitted to Herald by shareholders for the Redemption Day 1 December 2008 but in respect of which the redemption moneys were not paid to the relevant shareholders (‘the December Redeemers’). This is referred to as ‘the December Redeemer Issue’. For the purposes of determining this issue the Court appointed Primeo as representative of (a) those holders of Participating Non-Voting Shares which form the subject of redemption requests for the 1 December 2008 Redemption Day and which shares were redeemed on 1 December 2008 but in respect of which redemption moneys were not paid to the relevant December Redeemers and (b) those holders of shares in Herald who submitted redemption requests to Herald for a Redemption Day prior to 1 December 2008 and whichshares were redeemed but in respect of which redemption moneys were not paid due to outstanding ‘Know your client’ and/or other documentation (‘the KYC Redeemers’).
The December Redeemer Issue is to be decided upon the basis of agreed facts but it is not necessary for the purposes of this Ruling that I should recite the Statement of Agreed Facts. I set out below a summary of the most salient points. The use of capitalized words and phrases indicates that they are defined in Herald's articles of association and/or offering memorandum or in the Statement of Agreed Facts and that I am using them as so defined.
Redemption requests were received by HSBC Securities Services (Luxembourg) SA (‘HSSL’), acting on behalf of Herald in its capacity as administrator, from the December Redeemers requesting the redemption of Participating Non-Voting Shares (the ‘December Redeemer Shares’) for a Redemption Day of 1 December 2008 (being the first Business Day in December 2008). All, or substantially all, of the December Redeemer Redemption Requests were accepted by Herald (including the requests made by Primeo).
In accordance with the Articles and Offering Memorandum, the relevant Valuation Point for the Redemption Day of 1 December 2008 was 28 November 2008. In accordance with the Articles and Offering Memorandum, HSSL acting for and on behalf of Herald calculated, and provided the December Redeemers with a NAV per Share for the Valuation Point of 28 November 2008 of US$1,386.20 per USD class Share and €1,328.74 per EUR class Share. As required by and in accordance with the Articles, the December Redeemer Shares were redeemed on 1 December 2008 and removed from Herald's share register by HSSL acting for and on behalf of Herald prior to the commencement of Herald's winding up.
In or about June 2011, HSSL acting for and on behalf of Herald subsequently issued documents to all, or substantially all, of the December Redeemers (including Primeo) headedConfirmation of Redemption, in respect of each December Redeemer Redemption Request which stated: ‘In accordance with your instructions we confirm having REDEEMED the following Shares from HERALD USA SEGREGATED PORTFOLIO ONE …’ Details of the transactions were set out, including the number of shares redeemed and the amount payable.
Upon the redemption of the December Redeemer Shares and the KYC Shares, under Article 22(1) of the Articles, the December Redeemers and the KYC Redeemers were entitled to have the relevant Redemption Proceeds paid to them as soon as reasonablypracticable subject to Herald's ability to suspend payment of such proceeds pursuant to Article 22(1). The Offering Memorandum provides that the payment of redemption proceeds shall generally be made within twenty Business Days of the relevant Redemption Day.
On 10 December 2008, prior to the date of suspension, the sum of approximately US$31 million was paid by Herald to one December Redeemer, and this represented the full amount of the December Redemption Proceeds due to that December Redeemer. Herald did not pay any December Redemption Proceeds to the other December Redeemers in respect of their December Redemption Requests.
On 11 December 200,8 Madoff confessed that BLMIS was an elaborate fraud. On the following day, 12 December 2008, the directors of Herald resolved to suspend the calculation of the Net Asset Value per Participating Non-Voting Share and the issue, redemption and conversion of Participating non-Voting Shares with immediate effect and until further notice (‘the Suspension’). On 24 December 2008, the Directors passed a further circular resolution which stated that —
‘…to the extent not expressly contemplated by the Suspension, the payment of redemption proceeds to investors in respect of redemption requests in Herald USA for value 26 November 2008 (but in respect of which [Herald] is not ordinarily obliged to pay redemption proceeds until or about 28 December 2008) is hereby suspended with immediate effect and until further notice.’
The KYC Redeemers are in the same position as the December Redeemers except that HSSL considered that it should withhold payment of the redemption proceeds, which would otherwise have been payable, pending receipt of information thought necessary to comply with the applicable anti-money laundering procedures. For the purposes of determining the December Redeemers Issue, this is not a material distinction.
Section 37 of the Companies Law (2013 Revision) sets out a comprehensive code relating to the issue and redemption of redeemable shares and the purchase by a company of its own shares (including redeemable shares). As Mr Tregear rightly says, section 37 is intended to be a code of general application to all companies. A company cannot contract out of section 37 or adopt articles of association which would have the effect of dis-applying the statutory provisions.
Section 37(1) provides that the issue of shares which are to be redeemed or are liable to be redeemed, either at the option of the company or the shareholder, is permitted provided that it is authorized by the company's articles of association.
‘37. (1) Subject to this section, a company limited by shares or limited by guarantee and having a share capital may, if authorised to do so by its articles of association, issue shares which are to be redeemed or are liable to be redeemed at the option of the company or the shareholder and, for the avoidance of doubt, it shall be lawful for the rights attaching to any shares to be varied, subject to the provisions of the company's articles of association, so as to provide that such shares are to be or are liable to be so redeemed.
(2) Subject to this section, a company limited by shares or limited by guarantee and having a share capital may, if authorised to do so by its articles of association, purchase its own shares, including any redeemable shares.’
As can be seen from the provisions of section 37 as a whole, there is no real distinction between a redemption of redeemable shares and the purchase by a company of its own shares, whether or not issued as redeemable shares. In this case, the Court is not concerned with a purchase by the company of its own shares.
Section 37(3) provides that shares may not be redeemed unless they are fully paid or if to do so would result in there no longer being any member of the company. By section 37(3)(c) redemptions or purchases may be effected in such manner and upon such terms as may be...
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