Re FIA Leveraged Fund

• Jurisdiction: Cayman Islands
• Judge: (Smellie, C.J.)
• Judgment Date: 23 April 2012
• Court: Grand Court (Cayman Islands)
• Date: 23 April 2012

Grand Court, Financial Services Division

(Smellie, C.J.)

IN THE MATTER OF FIA LEVERAGED FUND

J.R. McDonough and G. Cowan for the petitioners;

S. Atherton, Q.C. and B. Gowrie for the company;

Mrs. G. Johnson-Goring for CIMA.

Cases cited:

(1) Aris Multi-Strategy Lending Fund Ltd. v. Quantek Opportunity Fund Ltd., Eastern Caribbean Supreme Ct. (BVI High Ct.), Case No. BVI HCOM 2010/0129 December 15th, 2010, unreported, considered.

(2) BankAmerica Trust & Banking Corp. (Cayman) Ltd. v. Trans-World Telecom Holdings Ltd, 1999 CILR 110, referred to.

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

(4) Bristol Fund Ltd., In re, 2008 CILR 317, applied.

(5) Company (No. 0010656 of 1990), Re a, [1991] BCLC 464, dictum of Harman J. applied.

(6) Company (No. 006685 of 1996), In re a, [1997] 1 BCLC 639; [1997] BCC 830, dicta of Chadwick J. applied.

(7) GFN Corp Ltd., In re, 2009 CILR 650, referred to.

(8) Investors” Compensation Scheme Ltd. v. West Bromwich Bldg. Socy., [1998] 1 W.L.R. 896; [1998] 1 All E.R. 98; [1998] 1 BCLC 531; [1997] CLC 1243, applied.

(9) Mann v. Goldstein, [1968] 1 W.L.R. 1091; [1968] 2 All E.R. 769, dictum of Ungoed-Thomas J. applied.

(10) Mannai Inv. Co. Ltd. v. Eagle Star Life Assur. Co. Ltd., [1997] A.C. 749; [1997] 3 All E.R. 352, applied.

(11) Moorcock, TheELR(1884), 14 P.D. 64; [1886–90] All E.R. Rep. 530, applied.

(12) Parmalat Capital Fin. Ltd. v. Food Holdings Ltd., 2008 CILR 202; [2009] 1 BCLC 274; [2008] BCC 371; [2008] UKPC 23, referred to.

(13) Pritchard, In re, [1963] Ch. 502; [1963] 2 W.L.R. 685; [1963] 1 All E.R. 873, referred to.

(14) Strategic Turnaround Partnership Ltd., In re, 2008 CILR 447, referred to.

(15) Suburban Hotel Co., In reELR(1867), L.R. 2 Ch. App. 737, considered.

(16) Western of Canada Oil, Lands & Works Co, In reELR(1877), 6 Ch. D. 109, referred to.

Legislation construed:

Companies Law (2011 Revision), s.92(d): The relevant terms of this sub-section are set out at para. 70.

s.92: ‘A company may be wound up by the Court if . . . (e) the Court is of opinion that it is just and equitable that the company should be wound up.’

s.93: The relevant terms of this section are set out at para. 70.

Companies-compulsory winding up-grounds for winding up-inability to pay debts-may be wound up if patently fails to discharge debt-court to consider whether purported distribution in specie actually provides value sufficient to discharge debt-company”s contracts and constitutional documents construed to promote commercial efficacy and directors not allowed to exercise discretion to discharge debt by making distributions of substantially lesser value than debt in breach of duty of good faith

The petitioners sought the winding up of the company on the ground that it was unable to pay its debts and/or on the just and equitable ground.

The petitioners had subscribed for shares in the company, a Cayman open-ended investment fund, part of a larger fund structure. The confidential offering memorandum for the shares (‘the COM’) provided that after a shareholder had held the shares for 2 years, they would be redeemable at the end of any calendar month on 30 days” notice, after which the shareholder would cease to be a shareholder; redemption would be at a per-share price based on the fund”s net asset valuation (‘NAV’); the company was entitled to redeem the shares in specie, rather than in cash; and that valuations of assets other than cash were to be determined by the directors in their sole discretion, such valuations to be binding on all persons. The petitioners submitted redemption requests, with the effect that their investment was effectively redeemed, and they were no longer to be shareholders. However, the company failed to provide any calculations of NAV, and had not filed audited accounts since 2008. Nonetheless, based on monthly statements of the company, the petitioners calculated that their collective investments had been worth approximately US$144.5m., and sought this sum from the company as a debt. The company claimed that the amount owed was approximately US$136m.

The company initially sought to meet some of the redemption requests in specie by assigning to the petitioners the benefit of promissory notes issued in favour of the company by its master fund, which the petitioners rejected. The company maintained that they were not entitled to do so, and nonetheless sought to meet the redemption requests in specie by the alternative means of registering the shares of FILB Co-Investments LLC (‘FILBCI’)-a specially-incorporated Delaware company-in the names of the petitioners. The only asset held by FILBCI was a stock option over

shares and common stock of United Community Banks Inc. (‘UCBI’), a publicly-traded company on the NASDAQ exchange, and a debt of US$606,667 owed by UCBI. A payment of US$65m. was required to exercise the stock option, with a deadline of May 26th, 2012. The company”s master fund was in dispute with UCBI following a reverse stock split undertaken by UCBI which did not appear adequately to protect the value of the stock option. The master fund was seeking to challenge the reverse stock split in US litigation, and undertook to see the litigation through to completion.

An independent valuer was asked to prepare two valuations of the assets held by FILBCI. The first valuation assumed that no reverse stock split had taken place, and valued the shares and stock attainable by exercising the stock option, plus the debt, at approximately US$136m. The second valuation assumed that the reverse stock split had taken place, and valued the same assets at approximately US$42m. Further, UCBI itself valued the stock option at approximately US$22m. None of the valuations took into account the US$65m. payment required to exercise the stock option.

The petitioners submitted that the company should be wound up, since (a) the debt owed to them pursuant to their redemption requests had not been paid; (b) the stock option was unlikely to be worth exercising and would fall away after May 26th if not exercised; (c) even on the most optimistic valuation, the assets held by FILBCI were not worth as much as the debt owed because of the US$65m. needed to exercise the stock option; (d) the distribution in specie of the FILBCI shares had not provided them with value equivalent to the debt owed and the debt therefore remained unsatisfied; (e) there could be no genuine and substantial dispute in relation to the debt or whether it had been paid; (f) the company”s failure to pay the debts and to provide confirmation of the amounts owed demonstrated that it was unable to pay its debts within the meaning of s.92(d) and should be wound up; and (g) further and/or alternatively, it was just and equitable that the company be wound up.

The company submitted in reply that it should not be wound up, since (a) the distribution in specie of the shares in FILBCI had provided the petitioners with value equivalent to approximately US$136m., which was sufficient to discharge the debt; (b) the COM provided that the value of the assets to be distributed was to be determined in the sole discretion of the company”s directors, and it was not therefore open to the petitioners to dispute the value of the assets; (c) there was no contractual provision allowing the petitioners to reject a distribution in specie; (d) the petitioners, in arguing both that a major asset of the company was near-worthless and that they were entitled to a highly valuable distribution from the assets of the company, were improperly attempting to ‘have it both ways’; (e) in any event, there was a genuine dispute as to whether or not the company remained in debt to the petitioners, and the court should in consequence refuse to consider a winding-up petition; and (f) it would not be appropriate to wind up the company, a solvent entity which had the necessary assets to meet the redemption requests.

The court considered (a) the basis on which the question of whether a company was able to pay its debts would be determined; (b) whether there was a genuine dispute about the existence of the debt; (c) the need for commercial efficacy when construing contracts; and (d) whether it would be just and equitable to wind up the company on the basis that it had lost its substratum.

Held, granting the petition:

(1) The court would order that the company be wound up on the ground that it was unable to pay its debts, pursuant to s.92(d) of the Companies Law (2011 Revision). Pursuant to s.93(a), the question of whether this was the case was to be determined on a ‘cash-flow’ basis (i.e. with reference to its present ability to pay its debts when due), and not on a ‘balance-sheet’ basis (i.e. by reference to the overall state of its assets). Moreover, there was no genuine dispute about the existence of the debt. If a company genuinely disputed the existence of a debt on substantial grounds, the court could refuse to consider a winding-up petition. However, in these circumstances it was clear that the petitioners were creditors in respect of a substantial amount. The question was therefore whether the purported in specie distribution had satisfied the debt (paras. 70–73).

(2) The petitioners had not been provided with sufficient value to discharge the debt. The FILBCI shares were commercially worthless when compared with the value of the debt they purported to redeem: on the most optimistic view, whilst the value of the assets attainable by FILBCI may have been equivalent to US$136m., after deducting the US$65m. needed to exercise the stock option, the FILBCI shares would be worth approximately US$61m.; on the most pessimistic, the stock option had no value as exercising it would yield assets worth less than US$65m. If it were held that the debt owed to the petitioners had been discharged, they would be likely to suffer substantial losses (para. 57; paras...