Primeo Fund v Pearson

• Jurisdiction: Cayman Islands
• Judge: (Jones, J.)
• Judgment Date: 15 June 2015
• Court: Grand Court (Cayman Islands)
• Date: 15 June 2015

Grand Court, Financial Services Division

(Jones, J.)

IN THE MATTER OF HERALD FUND SPC (IN OFFICIAL LIQUIDATION)

PRIMEO FUND (IN OFFICIAL LIQUIDATION)

and

PEARSON (AS ADDITIONAL LIQUIDATOR OF HERALD FUND SPC)

M. Crystal, Q.C., T. Smith, Q.C., P. Hayden, R. Cecere and C. Levers for the plaintiff;

F. Tregear, Q.C., M. Goucke and C. Keefe for the defendant.

Cases cited:

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

(2) Fairfield Sentry Ltd. v. Migani, [2014] 1 C.L.C. 611; [2014] UKPC 9, applied.

(3) Founding Partners Global Fund Ltd., In re, Grand Ct., Cause No. 29 of 2009, September 21st, 2010, unreported, considered.

(4) IIG Capital LLC v. Van Der Merwe, [2008] 1 All E.R. (Comm) 435; [2007] EWHC 2631 (Ch); on appeal, [2008] 1 All E.R. (Comm) 1173; [2008] EWCA Civ 542, referred to.

(5) North Shore Ventures Ltd. v. Anstead Holdings Inc., [2012] Ch. 31; [2011] 3 W.L.R. 628; [2011] 2 All E.R. (Comm) 1024; [2011] Bus. L.R. 1036; [2011] 2 Lloyd”s Rep. 45; [2011] EWCA Civ 230, distinguished.

(6) RMF Market Neutral Strategies (Master) Ltd. v. DD Growth Premium 2X Fund, 2014 (2) CILR 316, considered.

(7) Western Union Intl. Ltd. v. Reserve Intl. Liquidity Fund Ltd., Eastern Caribbean Sup. Ct. (BVI High Ct.), Case No. BVIHCV 2009/322, January 26th, 2010, unreported, considered.

Legislation construed:

Companies Law (2013 Revision), s.37: The relevant terms of this section are set out at paras. 14–16.

s.112: The relevant terms of this section are set out at para. 30.

Companies Winding Up Rules 2008, O.12, r.2: The relevant terms of this rule are set out at para. 31.

Shares-redemption-shares ‘redeemed’ under Companies Law (2013 Revision), s.37 as prescribed in company”s articles of association, even if proceeds of redemption not paid to redeemer

Shares-redemption-NAV at time of redemption only rectified under Grand Court Rules, O.12, r.2(1)(c) (in conjunction with Companies Law (2013 Revision), s.112) due to fraud within contractual relationship-fraud on behalf of third party irrelevant-s.112 may however allow rectification beyond scope of GCR, O.12 when fraud committed by non-party to contract

The plaintiff sought an order 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 of the Companies Law (2013 Revision).

The defendant was an open-ended investment fund, which placed all of its assets with Bernard L. Madoff Invs. Secs. LLC (‘BLMIS’). A number of redemption requests were received by the defendant”s administrator on December 1st, 2008, all of which were accepted; the relevant valuation date was November 28th, which gave a valuation of approximately US$1400 per share. On December 11th, it became apparent that BLIMS was an elaborate fraudulent scheme, and as a result the defendant suspended the issue and redemption of shares and was wound up. The plaintiff was also an open-ended investment fund which had placed funds with the defendant. It was appointed by the court to represent the investors which had sought to redeem their shares prior to the suspension of redemptions but had not yet received the proceeds.

The plaintiff submitted that (a) the redeemers were not subordinated to the company”s creditors by virtue of s.37 of the Companies Law (2013 Revision) as that provision only applied where shares had not yet been redeemed; (b) ‘redemption’ was to be interpreted as defined by the

company”s articles of association, which indicated that the redemptions had taken place on December 1st, and did not require the redemption proceeds to have been paid, and therefore s.37 was not applicable; (c) the defendant could not rely on O.12, r.2 of the Companies Winding Up Rules to rectify the value of the redemptions made on the basis of fraud as the fraudulent behaviour was on the part of BLMIS, a non-party to the contract between the company and the redeemers; and (d) the share valuations at the time of redemption were not manifestly erroneous as BLMIS”s fraud had not been apparent at the time they were made.

The defendant, by its liquidator, submitted that (a) the redeemers were subordinated to its creditors by s.37 of the Law, which applied when shares had not been redeemed; (b) ‘redemption’ should be interpreted as requiring the payment of proceeds to the redeemers, and as no such payment had been made the shares had not been redeemed; (c) O.12, r.2 of the Rules required that the redemptions be rectified due to the fraud on part of BLMIS, which could be attributed to the company as BLMIS was its sub-custodian; and (d) the share valuations were manifest errors as they were grossly inflated by BLMIS”s fraudulent trading.

Held, granting the application:

(1) The redeemers were not subordinated to the company”s creditors. The shares had been ‘redeemed’ in December 2008 according to the company”s articles of association, despite the fact that the proceeds from the redemption had not been paid, and as s.37(7) of the Law only applied to outstanding redemptions the company”s creditors did not have priority over the redeemers in the winding up. Section 37 defined ‘redemption’ by reference to the company”s articles of association, and, in any event, case law had consistently held that shares were redeemed as stipulated by the company”s articles and had not required the proceeds of the redemption to have been paid (paras. 19–20; paras. 26–28).

(2) The defendant was bound by the NAV as it stood at the time of redemption. It could not rely on O.12, r.2 of the Rules in conjunction with s.112 of the Law in order to require the official liquidator to retrospectively rectify the redemptions made to the plaintiffs on the basis of ‘fraud or default’ resulting from the activities of BLIMS, as O.12 only applied within a contractual relationship, and therefore required fraudulent conduct on the part of the parties to the contract (i.e. the company or the redeemers). BLMIS was not a party to the contract between the company and its shareholders as the defendant remained explicitly responsible to the shareholders for any share valuations made, and its fraudulent behaviour therefore did not allow rectification of the redemptions made prior to the discovery of the fraud. Further, the share valuations should not be set aside as manifest errors as BLMIS”s fraudulent behaviour had not been apparent at the time they were made. Further, though s.112 of the Law applied beyond the scope of O.12 to allow rectification when fraud had been committed by a non-party to the contract, its application would be

considered at a future hearing (paras. 36–37; para. 42; paras. 45–46; para. 49).

1 JONES, J.: By an order made on November 24th, 2014 the court directed, pursuant to O.11, r.3 of the Companies Winding Up Rules, that certain issues arising in the liquidation of Herald Fund SPC (in official liquidation) (‘Herald’) be adjudicated 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 and can be briefly summarized as follows.

2 Herald was incorporated as an open-ended investment fund on March 24th, 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 Invs. Secs. LLC (‘BLMIS’) for investment in a portfolio of securities. In fact, BLMIS was the world”s largest Ponzi scheme. This came to light on December 11th, 2008 when Mr. Bernard L. Madoff (‘Madoff’) confessed that BLMIS was an elaborate fraud and subsequently pleaded guilty to 11 counts of fraud, for which he was sentenced to 150 years in prison.

3 Primeo was incorporated on November 18th, 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 January 23rd, 2009 and its liquidation was brought under the supervision of the court on April 8th, 2009. Herald had suspended the calculation of NAV and the issue and redemption of shares on December 12th, 2008 (the day after the revelation of the Madoff fraud) but remained under the control of its directors until July 23rd, 2013, when a winding-up order was made on the petition of Primeo.

The December redeemer issue

4 The first issue to be determined in Herald”s liquidation is whether s.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 December 1st, 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 December 1st, 2008 redemption day and were redeemed on December 1st, 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 December 1st, 2008, and which shares were redeemed, but in respect of which redemption moneys were not paid due to outstanding ‘know your client,’ and other, documentation (‘the KYC redeemers’).

Agreed statement of facts relating to the December Redeemer issue

5 The December Redeemer issue is to be decided upon the basis of agreed facts, but it is not...