Re Freerider

• Jurisdiction: Cayman Islands
• Judge: (Foster, J.)
• Judgment Date: 13 May 2010
• Court: Grand Court (Cayman Islands)
• Date: 13 May 2010

Grand Court, Financial Services Division

(Foster, J.)

IN THE MATTER OF FREERIDER LIMITED

HEINEN

and

LE COMTE

J. Crow, Q.C. and Ms. K. Brown for the petitioner;

A. Turner and Ms. R. Lawrence for the respondent.

Cases cited:

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

(2) CVC/Opportunity Equity Partners Ltd. v. Demarco Almeida, 2002 CILR 77; [2002] 2 BCLC 108; [2002] BCC 684; [2002] UKPC 16, dicta of Lord Millett applied.

(3) Camulos Partners Offshore Ltd. v. Kathrein & Co, 2010 (1) CILR 303, referred to.

(4) Copeland & Craddock Ltd., Re, [1997] BCC 294, referred to.

(5) Ebrahimi v. Westbourne Galleries Ltd., [1973] A.C. 360; [1972] 2 W.L.R. 1289; [1972] 2 All E.R. 492, dicta of Lord Wilberforce applied.

(6) German Date Coffee Co., ReELR(1882), 20 Ch. D. 169; 51 L.J. Ch. 564; [1881–85] All E.R. Rep. 372, referred to.

(7) Loch v. John Blackwood Ltd., [1924] A.C. 783; [1924] All E.R. Rep. 200, referred to.

(8) RCB v. Thai Asia Fund Ltd., 1996 CILR 9, dicta of Smellie J. considered.

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

Legislation construed:

Companies Law (2009 Revision), 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.95(3): The relevant terms of this subsection are set out at para. 73.

Companies-compulsory winding up-grounds for winding up-‘just and equitable’-may wind up quasi-partnership if irretrievable breakdown of mutual trust and confidence provided not caused by petitioner-director cannot enforce contractual right to carry on in contravention of legitimate expectation of another director

The petitioner sought the winding up of Freerider, a Cayman company, on the just and equitable ground.

The petitioner and the respondent, long-term friends from the Netherlands, entered into a business venture in order to exploit commercially an invention of the petitioner. Their working relationship was based on the petitioner”s developing the invention and the respondent”s providing finance and corporate expertise. The respondent devised a corporate structure, which included the incorporation of Freerider in the Cayman Islands in order that royalty payments could be made to it without attracting Dutch tax. The petitioner and the respondent each held 50% of the voting shares in Freerider. They entered into a shareholder agreement which provided that the petitioner would have sole discretion over technical matters, whereas the respondent would have sole discretion over business and legal issues. Nonetheless, at least initially, the petitioner was fully involved and interested in the management of the business. Also part of the corporate structure was EEU, a company responsible for the development and marketing of the invention, which received funding from Freerider, and of which the petitioner and respondent were both directors. Further funding was provided by a group of investors, who were also members of Freerider. The relationship between the petitioner and the respondent began to deteriorate, with strong disagreements over business strategy. The respondent threatened to cease Freerider”s funding of EEU, and as a result the petitioner sought and received extra funding from the investor group. Eventually there was effectively a deadlock between the petitioner and the respondent. The respondent informed the petitioner that Freerider would no longer provide funding to EEU, and that EEU”s problems were now for the petitioner to resolve. In response, and in order to avoid EEU going bankrupt, the petitioner informed the respondent that

he was taking control of EEU, whilst the respondent excluded the petitioner from the management of Freerider. Legal proceedings were commenced in the Dutch Court of Appeal in respect of EEU, which was by this time close to bankruptcy, in which it was held that the respondent was guilty of mismanagement. The respondent subsequently brought proceedings against the petitioner in New York, and EEU brought proceedings against a Dutch law firm instructed by Freerider. The respondent also wrote to the petitioner demanding that he resign as a director of Freerider, claiming that he was entitled to so demand under the shareholder agreement. The Dutch tax authorities determined that Freerider was to be considered by them as resident in the Netherlands, and therefore subject to Dutch tax.

The Grand Court (Foster, Ag. J.) directed (in proceedings reported at 2009 CILR 604) that, since this was in reality a dispute between the shareholders, the petition be heard inter partes with Freerider not able to participate and incur costs. Subsequently, the Grand Court (Foster, J.) refused the respondent”s application for security for costs (in proceedings reported at 2010 (1) CILR 286).

The petitioner applied to wind up Freerider on the just and equitable ground, submitting that (a) Freerider was a quasi-partnership based on mutual trust and confidence between the parties; (b) the parties” relationship had broken down irretrievably, making it just and equitable to wind up Freerider; (c) the petitioner had a legitimate expectation that the respondent would not be able to force an entirely new business strategy on Freerider or EEU; (d) the respondent was seeking to act in contravention of this legitimate expectation; and (e) the winding up of the company was therefore just and equitable. He submitted that his claim should not be struck out, since (f) the petitioner was not the cause, or at least not the sole cause, of the breakdown, and his attempt to take over EEU was merely a symptom of the loss of mutual trust and confidence between the parties; and (g) it therefore had a reasonable prospect of success. He further submitted, with the support of the investor group, that it was just and equitable to wind up Freerider as they had justifiably lost confidence in the respondent”s management on the basis of a lack of probity in his conduct of Freerider”s and EEU”s affairs. This was because the respondent (h) refused to continue funding EEU, which was in trouble as a result; (i) was only interested in obtaining a financial return for himself; and (j) had been found guilty of mismanaging EEU by the Dutch Court of Appeal. He further contended that Freerider should be wound up on the just and equitable ground on the basis of a loss of substratum, since (k) Freerider had been incorporated in the Cayman Islands in order to avoid Dutch tax on royalty payments; (l) the decision of the Dutch tax authorities made it impossible to fulfil this purpose; and (m) it was impossible to carry on Freerider in accordance with the reasonable expectations of the shareholders that Dutch tax would thereby be avoided. He also submitted that (n) appointing a third director in order to resolve the deadlock between the parties as an alternative to

winding up would be inappropriate given the breakdown in relations; and (o) requiring the petitioner to sell his shares in Freerider to the respondent as an alternative to winding up would be unfair to him as the inventor of the subject-matter of the business, and would also not resolve the problems between them.

The respondent submitted in reply that it was not just and equitable to wind up Freerider, since (a) the relationship between the parties could be restored if the petitioner were to comply with the shareholder agreement; (b) the shareholder agreement provided that the respondent had control over the management of Freerider and EEU; (c) the petitioner therefore had no legitimate expectation of any say in the management of the companies; and (d) there was therefore no basis on which to apply equitable principles to wind up Freerider. He applied to strike out the petitioner”s claim on the basis that (e) the petitioner had caused the breakdown of mutual trust and confidence in attempting to effectively take over EEU; (f) he therefore had not come to the court with ‘clean hands’ and was not entitled to the equitable order sought; and (g) his claim therefore had no reasonable prospect of success. He also submitted that the finding of mismanagement against him by the Dutch Court of Appeal related to EEU and was therefore irrelevant for present purposes. He proposed, as alternatives to a winding up on the just and equitable ground, that (h) a third director should be appointed in order to break the deadlock between the parties; or (i) the petitioner should be ordered to sell his shares in Freerider to the respondent at a price determined by an expert.

Held, ordering the winding up of Freerider:

(1) Freerider would be wound up on the ground that it was just and equitable to do so. The company was a quasi-partnership based on mutual trust and confidence between the petitioner and the respondent, which had irretrievably broken down, as evidenced by the fact that they were involved in hostile litigation against each other in several jurisdictions. Moreover, the suggestion was flawed that the relationship could be restored if the petitioner were to comply with the respondent”s claimed legal rights under the shareholder agreement, since the court would not uphold these rights. This was because, although the respondent was responsible for the corporate complexities of the business, the petitioner expected that he would be closely involved in all aspects of the business-as indeed he had been before their relationship broke down. He therefore had a legitimate expectation that the respondent would not be able to impose a new business strategy on Freerider or EEU without his agreement, and this was not being met. This was therefore a case in which it would be appropriate to superimpose equitable considerations upon the respondent”s purported strict legal rights. In any event, it was not clear that the shareholder agreement on which the respondent relied provided that the...