Re Freerider Ltd

• Jurisdiction: Cayman Islands
• Judge: (Foster, J.)
• Judgment Date: 16 September 2010
• Date: 16 September 2010
• Court: Grand Court (Cayman Islands)

Grand Court, Financial Services Division

(Foster, J.)

IN THE MATTER OF FREERIDER LIMITED

A.A. Galatopoulos and Ms. R.A. Collins for the liquidators;

J.G. Manning and A.J. Walters for the GCF Group;

G. Halkerston and Ms. K. Brown for Mr. Heinen;

A. Turner and Ms. R. Lawrence for Mr. Le Comte.

Cases cited:

(1) Ashborder BV v. Green Gas Power Ltd., [2005] 1 BCLC 623; [2005] BCC 634; [2004] EWHC 1517 (Ch), applied.

(2) Burton & Deakin Ltd., In re, [1977] 1 W.L.R. 390; [1977] 1 All E.R. 631, referred to.

(3) Countrywide Banking Corp. Ltd. v. Dean, [1998] A.C. 338; [1998] 2 W.L.R. 441; [1998] 3 LRC 107; [1998] 1 BCLC 306; [1998] BCC 105, applied.

(4) Crossmore Elec. & Civil Engr. Ltd., In reUNK(1988), 5 BCC 37; [1989] BCLC 137, referred to.

(5) Cybervest Fund, In re, 2006 CILR 80, dicta of Smellie, C.J. applied.

(6) Denney v. John Hudson & Co. Ltd., [1992] BCLC 901; [1992] BCC 503, referred to.

(7) Fairway Graphics Ltd., Re, [1991] BCLC 468, referred to.

(8) Fortuna Dev. Corp., In re, 2004–05 CILR 533, dicta of Henderson J. applied.

(9) Gray”s Inn Constr. Co. Ltd., In re, [1980] 1 W.L.R. 711; [1980] 1 All E.R. 814, dictum of Buckley, L.J. applied.

(10) Mal Bower”s Macquarie Elec. Centre Pty. Ltd., Re, [1974] 1 N.S.W.L.R. 254, referred to.

(11) Scotiabank (C.I.) Ltd. v. Treasure Island Resort (Cayman) Ltd., 2004–05 CILR 423, referred to.

(12) Steane”s (Bournemouth) Ltd., Re, [1950] 1 All E.R. 21, applied.

(13) Tellsa Furniture Pty. Ltd., ReFLR(1985), 81 FLR 185; 9 ACLR 869, applied.

Legislation construed:

Companies Law (2010 Revision), s.99: The relevant terms of this section are set out at para. 4.

s.100(2): The relevant terms of this sub-section are set out at para. 4.

s.142(1): The relevant terms of this sub-section are set out at para. 37.

Companies-compulsory winding up-dispositions and transfers during winding up-validation by court-grant of security over all company”s assets may be within ‘ordinary course of company”s business’ for purpose of consent validation order but depends on context-relevant considerations include but not limited to (a) circumstances of case; (b) how objective observer would regard; and (c) prior practices, focusing on businesses in ordinary operation and not abnormal financial difficulties-not to qualify if for purpose of funding one shareholder”s litigation against another or merely because non-fraudulent and within company”s objects

Companies-compulsory winding up-dispositions and transfers during winding up-validation by court-grant of security over all company”s assets usually to be prospectively validated by court, though may retrospectively validate-relevant considerations include but not limited to whether (a) within directors” powers; (b) directors believed it necessary; (c) in good faith; (d) backed by good reasons; and (e) irregularities in company”s affairs-court to avoid prejudice to unsecured creditors

The company was in official liquidation in the Grand Court.

The company was a part of a corporate structure for the exploitation of an invention of Mr. Heinen, and was a quasi-partnership between himself and Mr. Le Comte with each of them holding 50% of the voting shares. Its principal assets were intellectual property rights in the invention. Mr. Le Comte was of the view that the company”s assets were highly valuable, and had good commercial prospects. They entered into a shareholder agreement, one of the terms of which was that ‘All votes [are] to be carried in favour of, and/or all actions to be taken and documents and instruments [are] to be executed in accordance with, the recommendation with regard thereto made by Mr. Le Comte in his sole discretion.’ Over time, the relationship between the two broke down, and the company experienced significant financial difficulties. Legal proceedings between them were commenced in New York and the Netherlands, and, in March 2009, Mr. Heinen applied to the Grand Court to wind up the company. Subsequently, in June 2009, Mr. Le Comte proposed that the company obtain a validation order to enable it to carry on its general business, notwithstanding the existence of the winding-up petition. Mr. Heinen

formally consented to the validation order, the terms of which permitted ‘payments and other dispositions of property made by the company in the ordinary course of its business for proper value,’ and requested details of the transactions that Mr. Le Comte sought to validate. No such details were ever provided. In August and December 2009, Mr. Le Comte, purporting to act on behalf of the company, entered into two promissory notes with 733 Properties, a company which was part of the Durst Organization in New York. One of the heads of the Durst Organization was Mr. Durst, a personal friend of Mr. Le Comte”s. In entering into the notes, both 733 Properties and the Durst Organization relied on Mr. Le Comte”s attorneys” opinion, some of the assumptions underlying which Mr. Durst knew to be under challenge. The notes, which were in substantially identical terms, each provided (a) for a credit line of up to US$1m., to be repaid with interest, to be made available to the company; (b) for the grant by the company of security over all of its assets; and (c) that the institution against the company of any liquidation proceeding, which remained undismissed for 90 days, would amount to default, rendering the note immediately due and payable and allowing 733 Properties to exercise its rights pursuant to the security. Correspondence between Mr. Durst and Mr. Le Comte indicated that they had previously discussed the proposal to grant the security, with the aim of preventing Mr. Heinen from gaining control over the company”s assets, and that the proposal and subsequent grant had been concealed from Mr. Heinen. Nonetheless, Mr. Le Comte and his wife provided to the Durst Organization personal guarantees of the company”s obligations under the notes. Mr. Le Comte and Mr. Heinen both agreed that the company was solvent on a balance sheet test at this time, although the reason Mr. Le Comte gave for entering into the notes was that the company was unable to pay its debts as they fell due.

The Grand Court (Foster, Ag. J.) directed (in proceedings reported at 2009 CILR 604) that, since the winding-up petition was in reality a dispute between Mr. Le Comte and Mr. Heinen, the petition be heard inter partes between them, with the company not able to participate. In May 2010, the Grand Court (Foster, J.) ordered the winding up of the company on the just and equitable ground (in proceedings reported at 2010 (1) CILR 486), finding that Mr. Le Comte had been guilty of a lack of probity in his management of the company”s affairs. This had the effect, pursuant to s.99 of the Companies Law (2010 Revision), that any disposition of the company”s property made after the presentation of the winding-up petition in March 2009 would be void unless validated by the court. Liquidators were appointed in respect of the company. The company”s bank statements showed that a significant amount of the sums drawn down under the notes were used by Mr. Le Comte to settle the accounts of the attorneys acting on his instructions in the winding-up proceedings. Shortly thereafter, 733 Properties gave notice that the winding-up order constituted a default, that all sums and obligations to it had become due, and that it intended to exercise its rights pursuant to the security. 733 Properties subsequently assigned its rights to its subsidiary, the GCF Group.

The liquidators applied for a declaration that the purported grant of the security over all the company”s assets was void under s.99 of the Companies Law (2010 Revision). They submitted that the grant of the security was not within the terms of the validation order, since it (a) had been for the inappropriate purpose of funding Mr. Le Comte”s litigation against Mr. Heinen; (b) was not part of the ordinary operation of the business, but rather a response to abnormal financial difficulties, with major consequences; (c) was not analogous to the loans that the company had previously taken from Mr. Le Comte himself or the proposed third-party financing he had discussed with Mr. Heinen; (d) was concealed from Mr. Heinen, when, under the terms of the shareholders” agreement between himself and Mr. Le Comte, he should have been consulted and the matter put to a vote; (e) was disproportionate to the amount of borrowing enabled by the notes, given Mr. Le Comte”s high valuation of the company; (f) inappropriately provided for an immediate default upon the execution of the notes; (g) had the collateral purpose of giving the Durst Organization a priority claim over the assets and thereby preventing Mr. Heinen from gaining control; and (h) was therefore not in the ordinary course of the company”s business. They further submitted that it should not now be retrospectively validated, since (i) granting the security was not in the interests of the company, nor could a reasonable and honest director have believed it to be; (j) there had been irregularities in the company”s affairs in that Mr. Le Comte was guilty of a lack of probity; (k) retrospective validation at this time would frustrate the official liquidators” taking control of the assets; and (l) declaring the grant of the security void would not be unfair to 733 Properties or the Durst Organization, since it was their decision to rely on Mr. Le Comte”s attorneys” opinion, some of the assumptions underlying which Mr. Durst knew to be under challenge.

The GCF Group submitted in reply that the grant of the security was within the terms of the validation order and should not be declared void under s.99 of the Companies Law, since (a) the company”s articles of association provided that the company”s objects were unrestricted; (b) the company had relied on loans from Mr. Le Comte in the past; (c) Mr. Heinen and Mr. Le Comte had previously...