Re Freerider

• Jurisdiction: Cayman Islands
• Judge: (Chadwick, P., Mottley and Conteh, JJ.A.)
• Judgment Date: 04 August 2011
• Court: Court of Appeal (Cayman Islands)
• Date: 04 August 2011

Court of Appeal

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

IN THE MATTER OF FREERIDER LIMITED

LE COMTE

and

HEINEN

A. Turner and Ms. R. Lawrence for the appellant;

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

Cases cited:

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

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

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

(4) 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 referred to.

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

(6) RCB v. Thai Asia Fund Ltd., 1996 CILR 9, dicta of Smellie J. referred to.

(7) Saul D. Harrison & Sons Plc, In re, [1995] 1 BCLC 14; [1994] BCC 490, 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 the opinion that it is just and equitable that the company should be wound up.’

s.95(3): The relevant terms of this sub-section are set out at para. 32.

Companies-compulsory winding up-grounds for winding up-‘just and equitable’-may wind up quasi-partnership if irretrievable breakdown of mutual trust and confidence caused by respondent

Companies-compulsory winding up-grounds for winding up-‘just and equitable’-may wind up quasi-partnership if lost its substratum, e.g. if primary tax-saving purpose of company no longer achievable

The respondent sought the winding up of Freerider, a Cayman company, by the Grand Court on the just and equitable ground.

The appellant and the respondent, long-term friends from the Netherlands, entered into a business venture for the commercial exploitation of an invention of the respondent. Their working relationship was based on the respondent developing the invention and the appellant providing finance and corporate expertise. The appellant devised a corporate structure, which included the incorporation of Freerider in the Cayman Islands to preserve royalty payments from Dutch tax. The appellant and the respondent each held 50% of the voting shares in Freerider. They entered into the first shareholders” agreement, which provided that the respondent would have sole discretion over technical matters, whereas the appellant would have sole discretion over business and legal issues. Nonetheless, at least initially, the respondent was fully involved in the management of the business. 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 appellant and respondent were both directors. Further funding was provided by an investment group, who were also members of Freerider. The relationship between the appellant and the respondent began to deteriorate, and they disagreed over business strategy. The appellant threatened to cease Freerider”s funding of EEU, and as a result the respondent sought and received further funding from the investor group. Eventually there was an impasse between the appellant and the respondent, and the appellant informed the respondent that Freerider would no longer provide funding to EEU, and that EEU”s problems were now for the respondent to resolve. In response, and in

order to avoid EEU becoming bankrupt, the respondent informed the appellant that he was taking control of EEU, whilst the appellant excluded the respondent from the management of Freerider. Legal proceedings were commenced in the Amsterdam Court of Appeal in respect of EEU, which was by this time close to bankruptcy, which held that the appellant was guilty of mismanagement and removed him as a director of EEU. The appellant subsequently brought proceedings against the respondent in New York, and EEU brought proceedings against a Dutch law firm instructed by Freerider. The appellant also wrote to the respondent 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 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 appellant”s application for security for costs (in proceedings reported at 2010 (1) CILR 286).

The Grand Court (Foster, J.) then ordered (in proceedings reported at 2010 (1) CILR 486) that Freerider be wound up on the just and equitable ground. An order was made reserving the costs of the petition and, at a further hearing, the appellant was ordered to pay the respondent”s costs on the standard basis. The respondent subsequently obtained an order for the enforcement of that costs order.

On appeal, the appellant submitted that (a) the winding up should not have been ordered because the appellant was not responsible for the breakdown in the working relationship and the judge had wrongly preferred the respondent”s evidence to his own; (b) the breakdown had, in fact, been caused by the respondent”s breach of the first shareholders” agreement in seeking to take over EEU, over which the appellant was to have commercial and legal control; (c) the appellant was also to have control over all litigation relating to the company, such that it should not have been wound up at the behest of the respondent, whose petition had thereby breached the first shareholder”s agreement; (d) the judge had wrongly concluded that it would be just and equitable to wind up the company on the grounds that it had lost its substratum in being deemed by the Dutch authorities to be resident in the Netherlands for tax purposes, as the company still had intellectual property rights and the tax benefits of being domiciled in the Cayman Islands; (e) the court should have ordered an alternative to winding up, such as appointing a third director to break the impasse, or ordering the respondent to sell shares to the appellant; (f) the respondent”s cross-appeal on costs should be dismissed; and (g) the order that the appellant repay moneys taken from Freerider to defend the petition should be set off against moneys due from the company to him as a pre-liquidation creditor.

The respondent replied and cross-appealed, submitting that (a) the winding-up order had been properly made, given the breakdown in the working relationship between the appellant and respondent, and the judge had been entitled to prefer the respondent”s evidence to that of the appellant; (b) the respondent had not breached the first shareholders” agreement or sought to take over EEU-rather, the appellant”s control had been removed by the Amsterdam Court of Appeal and abandoned by him in a telephone conversation with the respondent; (c) the first shareholders” agreement had been made on the basis of mutual trust and confidence between the appellant and respondent, and the appellant had been given control only over litigation against third parties, and not over disputes within the corporate structure established by the parties; (d) the judge had rightly concluded that it would be just and equitable to wind up the company on the grounds that it had lost its main tax-saving purpose, once it was found by the Dutch authorities to be resident in the Netherlands for tax purposes; (e) the court had correctly rejected alternatives to winding up as impracticable and unfair; (f) the cross-appeal on costs should be allowed because the appellant had deliberately concealed a loan transaction that he had caused Freerider to make with a third party until after the costs order had been made; and (g) the order that the appellant repay moneys taken from Freerider to defend the petition should not be set off against moneys due from the company to him as a pre-liquidation creditor without the company being party to the proceedings, or in the absence of a formal appeal notice.

Held, dismissing the appeal and allowing the cross-appeal:

(1) The Grand Court had properly ordered the winding up of Freerider on the just and equitable ground. The relationship of trust and confidence, upon which the company had been established, had irretrievably broken down and the respondent had been excluded by the appellant from any directorship role. There was no basis for challenging the judge”s finding of fact that the respondent”s evidence was preferable to the appellant”s (para. 78; para. 80; para. 88).

(2) Further, it could not be argued that the breakdown was caused by any breach of the first shareholders” agreement by the respondent taking control of EEU, so as to preclude the winding up. First, the Enterprise Chamber of the Amsterdam Court of Appeal had found the appellant responsible for the mismanagement of EEU, had removed him permanently from office as a director, and the Cayman courts had no jurisdiction to decide otherwise. The appellant had, therefore, lost his right to override the views of the respondent as to the development and commercial exploitation of TheWheel and its associated technology. Secondly, the judge had properly concluded that the respondent was entitled to treat the appellant as having abandoned his management of EEU by the telephone conversation of August 15th, 2006, and thereafter take control (para. 84).

(3) Further, the control given to the appellant over legal issues under the first shareholders” agreement did not preclude the winding up. The decision whether the company should pursue litigation to recover payments due from third parties or challenge the termination of agreements by third...