Re FIA Leveraged Fund

• Jurisdiction: Cayman Islands
• Judge: (Chadwick, P., Mottley and Conteh, JJ.A.)
• Judgment Date: 18 February 2013
• Court: Court of Appeal (Cayman Islands)
• Date: 18 February 2013

Court of Appeal

(Chadwick, P., Mottley and Conteh, JJ.A.)

IN THE MATTER OF FIA LEVERAGED FUND

FIA LEVERAGED FUND

and

FIREFIGHTERS” RETIREMENT SYSTEM, NEW ORLEANS FIREFIGHTERS” PENSION & RELIEF FUND AND MUNICIPAL EMPLOYEES” RETIREMENT SYSTEM OF LOUISIANA

D. Chivers, Q.C. and B. Gowrie for the appellant;

M. Crystal, Q.C. and G. Cowan for the respondents.

Cases cited:

(1) Westel AG v. Ameuro Bank Intl., [2012] EWCA Civ 495, applied.

(2) Zuckerman Intl. Bank v. Standard Bank (London) Ltd., [2008] EWCA Civ 116, applied.

Companies-shares-redemption-if company entitled to satisfy redemption in specie in lieu of cash, not entitled to transfer property in which investor cannot have had interest-to include property obtained/created after redemption request made and held by related company-not entitled to transfer assets at irrational value, despite director”s discretion to set value-valuation not rational if simply adopted from third party or if reflects higher of two potential valuations without considering reasons for difference, e.g. dispute as to value

The respondents petitioned the Grand Court for the appellant to be wound up on the ground that it could not pay its debts.

The respondent had subscribed for a particular type of share in the appellant (‘the company’), a Cayman open-ended investment fund which operated as part of a master fund. The confidential offering memorandum for these shares (‘the COM’) provided that a shareholder would receive an interest in the company, which in turn invested in the master fund; after a shareholder had held the shares for 2 years, they could be redeemed at the end of any calendar month on 30 days” notice; redemption would be at a per-share price based on the fund”s net asset value (‘NAV’); the company was entitled to redeem the shares with a ‘payment in kind’ 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 respondents submitted redemption requests, which were accepted by the company. However, the company failed to provide any calculations of the NAV and had not filed audited accounts since 2008. Based on monthly statements of the company, the respondents calculated that their collective investments had been worth approximately US$144.5m., and sought this sum from the company.

The company claimed that the amount owed was approximately US$136m. and initially sought to meet some of the redemption requests by assigning to the respondents the benefit of promissory notes issued in favour of the company by its master fund. The respondents rejected these and the company resolved to meet the redemption requests in specie by registering the shares of FILB Co-Investments LLC (‘FILBCI’)-a specially-incorporated company-in the respondent”s names. The only assets held by FILBCI came from a third company in the investment structure and were a stock option over shares and common stock of United Community Banks Inc. (‘UCBI’), a publicly-traded company (which required a payment of US$65m. to exercise the option), and a debt owed by UCBI. The 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 and was seeking to challenge the reverse stock split in US litigation. As the assets had not been valued before being transferred, 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 assets at approximately US$136m. The second valuation assumed that the reverse stock split had taken place, and valued them at approximately US$42m.

The respondents applied for the company to be wound up on the grounds that it was just and equitable to do so and/or that the company could not pay its debts, since the debt owed to them had not been paid, the stock option was not worth exercising, and even the most optimistic valuation had found that the assets were not worth as much as the debt and so could not satisfy it. The company submitted in reply that it was solvent and so should not be wound up, since the respondents were not entitled to reject the promissory notes; that the shares in FILBCI had provided them with value equivalent to approximately US$136m., which was the value at which the company had calculated the debt; and that 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 so it was not open to the petitioners to dispute the value of the assets.

The Grand Court (Smellie, C.J.) (in proceedings reported at 2012 (1) CILR 248) found that the company should be wound up, as it was unable to meet its debt and that it was just and reasonable to do so.

On appeal, the company submitted that the Grand Court should not have reached this decision because it was entitled to satisfy its obligations to the respondent through the transfer of the FILBCI shares and that, based on the company”s valuation, they were of sufficient value to discharge the debt. Although it would not have been entitled to transfer assets which it did not own at the time of the redemption request, this did not apply to the FILBCI shares as, although FILBCI did not come into existence until after the redemption requests were made, the actual transfer was of the underlying rights, i.e. the UCBI shares and loan, which the fund had held at that time.

The respondents submitted in reply that the company had not been entitled to discharge its debt through the transfer of the FILBCI shares as neither these shares nor the assets which FILBCI held were owned by the master fund at the time of the redemption request. Further, even if the company had been entitled to do so, the shares were effectively valueless and it was not entitled to value them at US$136m.

Held, dismissing the appeal:

(1) The company had not been entitled to discharge its debt through a transfer of the FILBCI shares. As FILBCI had not existed before the redemption date, its shares could not have been assets available to be transferred when the redemption request was made. It was clear that the purpose of the power to satisfy redemptions in specie was to allow the company to transfer an asset from the fund to an investor; the investor would be receiving an asset in which it had invested and would then liquidate the asset itself, rather than the company liquidating it and then transferring the proceeds to the investor. It was therefore not open to the fund to transfer, as a payment in specie, an asset in which the investor could not have invested. As the respondents could not have had an interest in a company which had not been in existence at the time of the request for redemption, the shares could not constitute a payment in specie. Further, it could not be said that the respondent had invested in the assets themselves as, although they had been held by a third company which itself fed into the master fund, the respondent”s interest in the fund had not extended beyond the master fund itself (paras. 17–20).

(2) Even if the company had been entitled to transfer the shares under the COM, it was not entitled to rely on the...