Re Herald Fund SPC (in official liquidation)

• Jurisdiction: Cayman Islands
• Judge: (Martin, Field and Morrison, JJ.A.)
• Judgment Date: 19 July 2016
• Court: Court of Appeal (Cayman Islands)
• Date: 19 July 2016

Court of Appeal

(Martin, Field and Morrison, JJ.A.)

IN THE MATTER OF HERALD FUND SPC (in official liquidation)

PEARSON (as additional liquidator of HERALD FUND SPC)

and

PRIMEO FUND (in official liquidation)

Attorneys: Walkers for the appellant; Mourant Ozannes for the respondent.

Cases cited:

(1)Belmont Asset Based Lending Ltd., In re, 2011 (2) CILR 484, referred to.referred to.

(2)Culross Global SPC Ltd. v. Strategic Turnaround Master Partnership Ltd., 2010 (2) CILR 364, applied.applied.

(3) Dynamics Corp. of America, In re, [1976] 1 W.L.R. 757; [1976] 2 All E.R. 669, applied.

(4) Founding Partners Global Fund Ltd., In re, Grand Ct., Cause No. FSD 29/2009, September 21st, 2010, unreported, distinguished.

(5) Somers Dublin Ltd. v. Monarch Pointe Fund Ltd., Eastern Caribbean Supreme Ct. (BVI C.A.), Case No. HCVAP 2011/040, March 11th, 2013, unreported, applied.

(6) Trevor v. Whitworth (1887), 12 App. Cas. 409; [1896-90] All E.R. Rep. 46, referred to.

(7) Western Union Intl. Ltd. v. Reserve Intl. Liquidity Fund Ltd., Eastern Caribbean Supreme Ct. (BVI High Ct.), Case No. BVIHCV 2009/322, January 26th, 2010, unreported, distinguished.

Legislation construed:

Companies Law (2013 Revision), s.37: The relevant terms of this section are set out at para. 19.

s.49(g): The relevant terms of this paragraph are set out at para. 25.

s.99: The relevant terms of this section are set out at para. 57.

s.139(1): The relevant terms of this sub-section are set out at para. 51.

s.140(1): The relevant terms of this sub-section are set out at para. 35.

Companies Act 1981 (c.62), s.59: The relevant terms of this section are set out at para. 59.

Lord Goldsmith, Q.C., F. Tregear, Q.C., M. Goucke and C. Keefe for the appellant;

M. Crystal, Q.C., T. Smith, Q.C., P. Hayden, R. Cecere and C. Levers for the respondent.

Companies — shares — redemption — shares “redeemed” under Companies Law (2013 Revision), s.37 as prescribed in company's articles of association, even if proceeds of redemption not paid to redeemer

The respondent had sought an order in the Grand Court that a number of investors who had sought to redeem shares from the company were not subordinated to its creditors on winding up by virtue of s.37(7)(a) of the Companies Law (2013 Revision).

Herald Fund was an open-ended investment fund which had placed all of its assets with Bernard L. Madoff Investment Securities (“BLMIS”). Investors in Herald received participating non-voting redeemable shares in exchange for moneys invested, with a right to redeem their shares for a sum based on Herald's NAV, as established at a specific date close to the date of the applicable redemption day. Herald's articles of association stipulated that a redeeming shareholder was entitled to receive the redemption proceeds as soon as reasonably practicable. They also provided that upon redemption a shareholder would cease to be entitled to any rights in respect of the company, his name would be removed from the register of shareholders and the shares would be available for re-issue.

On December 1st, 2008, a number of redemption requests were received from two groups of Herald shareholders (“the redeemers”), all of which were accepted. The relevant valuation date was November 28th, which gave valuations of US$1,386.20 per USD share and ââہ¡¬1,328.74 per EUR share. The shares were removed from Herald's share register, notwithstanding that no redemption proceeds had been paid.

On December 11th, 2008, it became apparent that BLMIS was an elaborate fraudulent scheme. On the following day, Herald's board resolved to suspend the issue, redemption and conversion of participating non-voting shares with immediate effect. The redeemers were not paid their redemption proceeds. On July 16th, 2013, Herald was ordered to bewound up. The redeemers claimed that they were entitled to claim in Herald's liquidation as creditors for the redemption proceeds and that such claims ranked pari passu with Herald's other creditors and in preference to any claims by Herald's shareholders. Herald's liquidators disputed the claims. They contended that the claims were caught by s.37(7)(a) of the Companies Law, with the result that the redeemers were not entitled to present claims for the redemption proceeds.

The Grand Court directed the respondent (an open-ended investment fund which had placed funds with Herald) to represent the redeemers and the appellant, Herald's additional liquidator, to represent investors in Herald who had not served redemption notices on December 1st, 2008.

Section 37(7)(a) provided:

“Where a company is being wound up and, at the commencement of the winding up, any of its shares which are or are liable to be redeemed have not been redeemed or which the company has agreed to purchase have not been purchased, the terms of redemption or purchase may be enforced against the company, and when shares are redeemed or purchased under this subsection they shall be treated as cancelled:

Provided that this paragraph shall not apply if-

(i) the terms of redemption or purchase provided for the redemption or purchase to take place at a date later than the date of the commencement of the winding up; or

(ii) during the period beginning with the date on which the redemption or purchase was to have taken place and ending with the commencement of the winding up the company could not, at any time, have lawfully made a distribution equal in value to the price at which the shares were to have been redeemed or purchased.”

The Grand Court (Jones, J.) held that (i) the December redeemer shares had been redeemed in accordance with the company's articles before the commencement of Herald's winding up, notwithstanding that the redemption proceeds had not been paid; (ii) s.37(7)(a) only applied where shares were liable to be redeemed but had not been redeemed in accordance with the company's articles; and (iii) the claims of the redeemers were not caught by s.37(7)(a) (that decision is reported at 2015 (1) CILR 482).

On appeal, the appellant submitted that the words “shares which ... are liable to be redeemed have not been redeemed” in s.37(7)(a) meant “shares in respect of which the company's prospective liability to pay redemption proceeds has arisen but has not been discharged.” The respondent's interpretation of s.37(7)(a) deprived the provision of any substantial effect and was fundamentally at odds with well established company law principles, including the principle enshrined in s.49(g) whereby “outside creditors” had priority over “inside creditors.” As a matter of ordinary understanding, it was only once redemption proceeds had been received that shares would be regarded as “redeemed.” Redemption was a process culminating in payment.

The respondent submitted that when construed in light of the whole of s.37 and against the background of the statutory scheme for the winding up of companies, s.37(7)(a) could be seen as intended to deal with those situations where, before the commencement of the winding up, a shareholder had acquired a right to be paid redemption proceeds but there remained outstanding steps required under the articles before his shares were redeemed and he ceased to be a member of the company. Where, however, before the commencement of the winding up, the shares in question had been redeemed in accordance with the articles so that the shareholder had divested himself of his rights as shareholder and ceased to be a member, the unpaid former shareholder had a provable claim for the redemption proceeds under s.139(1). Such a claim would rank pari passu with the company's creditors. Section 49(g) of the Law did not operate so as to postpone the claim behind the claims of creditors but even if the claim were subordinated to the claims of creditors it would still rank ahead of the members in respect of distributions on their shares. The ordinary meaning of “redeemed” in the context of shares was synonymous with a shareholder ceasing to be a shareholder in a company.

Held, dismissing the appeal:

(1) The Grand Court had correctly held that s.37(7)(a) of the Companies Law did not apply to the redeemers. Section 37(7)(a) did not apply where, as in the present case, at the commencement of the winding up, the redeemable shares in question had been redeemed in accordance with a company's articles of association, notwithstanding that redemption proceeds were yet to be received. Section 37(7)(a) applied where, at the commencement of a company's winding up, a holder of redeemable shares had an accrued right to the redemption thereof under the articles of association, but there had been no redemption because the steps required by the articles had not been completed. The right conferred by s.37(7)(a) was the right to “enforce the terms of redemption,” which would be set out in a company's articles of association. The words “have not been redeemed” in s.37(7)(a) meant “have not been redeemed in accordance with the articles,” not “have not been redeemed because the redemptions proceeds remained unpaid.” The wording of other sections of the Law supported this interpretation. An unpaid former shareholder whose shares had been redeemed before the commencement of winding up would have a provable claim for redemption proceeds under s.139(1) of the Law and it was difficult to see why s.37(7)(a) should have been intended to apply to such a case. In proving their claims under s.139(1), the redeemers would be acting as creditors- they ceased to be members of Herald when their shares were redeemed under the articles. The reasonable expectation of an investor in a fund with articles such as Herald's would be that, having served a redemption notice, his shares would be redeemed on the redemption day and from that moment he would have a claim for redemption proceeds (paras. 43-52; para. 65).

(2) The redeemers had provable contingent claims in Herald's liquidation which ranked behind Herald's unsecured creditors but ahead...