Re Herald Fund SPC (in official liquidation)

• Jurisdiction: Cayman Islands
• Judge: (Goldring, P., Martin and Newman, JJ.A.)
• Judgment Date: 27 February 2018
• Court: Court of Appeal (Cayman Islands)
• Date: 27 February 2018

Court of Appeal (Cayman Islands)

(Goldring, P., Martin and Newman, JJ.A.)

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

PRIMEO FUND (in official liquidation)

and

PEARSON (as official liquidator of HERALD FUND SPC)

PEARSON (as official liquidator of HERALD FUND SPC)

and

PRIMEO FUND (in official liquidation)

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

T. Smith, Q.C. instructed by P. Hayden, R. Cecere and C. Levers for the appellant/respondent.

Cases cited:

(1)Bernard L. Madoff Inv. Secs. LLC, In re, 654 F.3d 229 (2d. Cir. 2011), considered.

(2)Fairfield Sentry Ltd. v. Migani, [2014] UKPC 9; [2014] 1 CLC 611, referred to.

(3)National Assistance Bd. v. Wilkinson, [1952] 2 Q.B. 648; [1952] 2 All E.R. 255; [1952] 2 T.L.R. 11; (1952), 50 L.G.R. 454; 116 J.P. 428; 96 Sol. Jo. 414, dictum of Lord Devlin applied.

(4)Nilon Ltd. v. Royal Westminster Invs. S.A., [2015] UKPC 2; [2015] 3 All E.R. 372; [2015] 2 BCLC 1; [2015] BCC 521, referred to.

(5)Weavering Macro Fixed Income Fund Ltd., In re, 2016 (2) CILR 514, considered.

Legislation construed:

Companies Law (2013 Revision), s.112: The relevant terms of this section are set out at para. 15.

Companies Winding Up Rules 2008, O.12, r.2: The relevant terms of this rule are set out at para. 16.

Companies — register of shareholders — rectification — no rectification pursuant to Companies Law (2013 Revision), s.112 or Companies Winding Up Rules, O.12, r.2 if affects accrued contractual rights of shareholders — no substitution of correct NAV if would affect shareholder’s proprietary rights and incorrect NAV calculated according to company’s articles of association

The court considered whether a register of shareholders should be rectified.

Herald Fund SPC (“Herald”) had been established as an open-ended investment fund which placed its funds with Bernard L. Madoff Investment Securities LLC (“BLMIS”). During the initial offer period, Herald had offered shares at US$1,000 or €1,000 per share. Thereafter, shares had been issued and redeemed on each subscription or redemption day at the NAV determined in respect of the portfolio. The relevant NAV was, according to art. 18(f) of the articles of association, to be determined by Herald’s directors, in good faith, in which case it would be binding on all members. Calculation of the NAV was delegated to Herald’s administrator, HSBC Securities Services (Luxembourg) SA (“HSSL”).

Unknown to Herald, BLMIS had been an elaborate Ponzi scheme and the NAVs reported during Herald’s trading life had all been misstated by reason of BLMIS’s fraud.

Primeo Fund was an open-ended investment fund which had initially invested directly with BLMIS (it invested approximately US$150m.). In May 2007, the balance standing to Primeo’s credit with BLMIS, namely US$463,353,186.26, which was adjusted to US$465,418,349.08, had been assigned to Herald in consideration for 373,260.3648 shares at the then NAV of US$1,246.90 per share (“the Primeo in specie subscription”).Thereafter, Primeo became, in effect, a feeder fund for Herald, which in turn was a feeder fund for BLMIS.

When BLMIS collapsed in 2008, Primeo was placed into immediate liquidation. A winding-up order was subsequently made in respect of Herald. Joint official liquidators were appointed. An additional liquidator was appointed whose task was to settle the list of contributories pursuant to s.112 of the Companies Law (2013 Revision) and determine related issues, including whether Herald’s register of members should be restated pursuant to s.112(2) and whether Primeo’s shareholding in Herald should be adjusted on the ground that the consideration for the issue of its shares had been the transfer of the portfolio with BLMIS, the value of which had been fraudulently overstated. Primeo was a member of Herald’s liquidation committee.

Section 112(2) provided:

“In the case of a solvent liquidation of a company which has issued redeemable shares at prices based upon its net asset value from time to time, the liquidator shall have power to settle and, if necessary rectify the company’s register of members, thereby adjusting the rights of members amongst themselves.”

In June 2015, the Grand Court (Jones, J.) held that the misstated NAVs were binding as a matter of contract between Herald and its shareholders, with the result that unpaid redeemed shareholders were entitled to prove in the liquidation as creditors (that decision is reported at 2015 (1) CILR 482). In addition, the court held that although O.12, r.2 of the Companies Winding Up Rules 2008 did not permit rectification of the register of members as it only applied to fraud or default within a contractual relationship not to fraud by non-parties, s.112(2) of the Companies Law (2013 Revision) did allow rectification due to fraud by a non-party. The court left open, however, the question whether the register of members should be restated and rectified in the present case pursuant to s.112(2).

In September 2016, the Grand Court (Jones, J.) held that the share register should be rectified. The additional liquidator was directed to restate each subscription and redemption throughout Herald’s active life at a NAV of US$1,000 or €1,000 per share and rectify the register of members accordingly as at the commencement of the liquidation. The additional liquidator had no power, however, to vary the terms of the Primeo in specie subscription by adjusting the value of the consideration or reducing the number of shares issued for the agreed consideration (that decision is reported at 2016 (2) CILR 44).

Both Primeo and Herald appealed, Primeo submitting that the judge had gone too far; Herald that he had been too cautious. Primeo submitted inter alia that it could not have been the intention of the legislature to confer a discretionary power on a liquidator to deprive a person of his or her accrued legal rights, such as the appellant’s contractual rights arising from art. 18(f) of Herald’s articles of association. The additional liquidator submitted that CWR, O.12, r.2 rendered any NAV affected by fraud or default not binding.

Held, allowing Primeo’s appeal:

(1) The court would allow Primeo’s appeal against the judge’s ruling in connection with the meaning of s.112(2) and the effect of O.12, r.2 of the CWR. The additional liquidator’s appeal against the judge’s ruling on the in specie subscription issue would be dismissed (para. 47).

(2) The court was satisfied that the intention of the legislature could not have been to create in s.112(2) a power to calculate a correct NAV and substitute it for the incorrect NAV which had, despite its incorrectness, been calculated in accordance with a member’s contractual rights (in the present case, art. 18(f) of Herald’s articles of association provided that a NAV calculation, in good faith, was intended to be definitive). It could not have been the intention of the legislature to confer a discretionary power on a liquidator to deprive a person of his or her accrued legal rights. The meaning and purpose of the section was to provide a mechanism for a calculation to be made where members’ rights according to the general law required some determination to be made. The adjustment of members’ rights “amongst themselves” was an adjustment that achieved the purpose of correcting an incorrect NAV in accordance with the rights of the shareholders. The liquidator had no wider power to act than was conferred by the word “rectify” which was to be understood and take its meaning from the statutory context of the Companies Law in which it appeared. The judge had fallen into error and reached the wrong conclusion in his first ruling when he concluded that s.112(2) empowered the court, acting through its official liquidator, to override the contractual rights of the shareholders when necessary to achieve substantial justice amongst the members. It was a well-established principle of construction that a statute would not be construed so as to effect a fundamental alteration in the general law unless its wording pointed unmistakably to that conclusion. To deprive shareholders of a company of the benefits they had received pursuant to their rights under a valid and subsisting contract with the company was a substantial interference with their legal rights. A power to adjust the rights of members did not unmistakably point to the creation of a power to take away accrued rights. The register could be rectified in order to declare the rights which had accrued to a member in accordance with his contract and the general law governing that contract. The purpose was not to restore the register of members to a position that reflected the substitution of a true NAV or a nearly true NAV or a NAV which did not reflect fictitious profits or which achieved substantial justice. Whether a misstated NAV could be rectified depended on what the contract between the shareholder and the company stipulated should be binding between them and what measures had been authorized by statute to give effect to the rights of the members (paras. 36–40).

(3) The judge’s conclusion that the purpose and effect of CWR O.12, r.2 was to provide for a set of circumstances in which the liquidator was bound to act and rectify the register in accordance with his determination of the true asset value as at each relevant redemption date or failing thatbeing cost effective and practical, to be “fair and equitable,” was plainly correct. However r.2 only contemplated the power being exercisable when the contract between the shareholder and the company was not binding “by reason of fraud or default.” This prescribed method for implementation of s.112(2) was intra vires the power conferred because it did not override the contractual rights of the shareholders and the company. If the NAV was not correct and was not binding on the company or the shareholders, the rule gave effect to the power in the...