Re Heriot Fund

• Jurisdiction: Cayman Islands
• Judge: (Jones, J.)
• Judgment Date: 04 January 2011
• Court: Grand Court (Cayman Islands)
• Date: 04 January 2011

Grand Court, Financial Services Division

(Jones, J.)

IN THE MATTER OF HERIOT AFRICAN TRADE FINANCE FUND LIMITED

J.R. McDonough and J.G. Manning for the petitioner;

K.J. Farrow, Q.C. and T. Richards for the fund.

Cases cited:

(1) Aris Multi-Strategy Lendings Fund Ltd. v. Quantek Opportunity Fund Ltd., Eastern Carribean Sup. Ct. (BVI High Ct.), December 15th, 2010, unreported, not followed.

(2) Baku Consol. Oilfields Ltd., Re, [1944] 1 All E.R. 24, followed.

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

(4) Blériot Mfg. Aircraft Co. Ltd., In reUNK(1916), 32 T.L.R. 253, followed.

(5) Diamond Fuel Co., In reELR(1879), 13 Ch. D. 400, followed.

(6) Ebrahimi v. Westbourne Galleries Ltd., [1973] A.C. 360; [1972] 2 W.L.R. 1289; [1972] 2 All E.R. 492, considered.

(7) Haven Gold Mining Co., In reELR(1882), 20 Ch. D. 151; [1881–5] All E.R. Rep. 585, followed.

(8) Perfectair Holdings Ltd., Re, [1990] BCLC 423; (1989), 5 BCC 837, dictum of Scott J. applied.

(9) Suburban Hotel Co., In reELR(1867), L.R. 2 Ch. App. 737, referred to.

(10) Vujnovich v. Vujnovich, [1990] BCLC 227; (1989), 5 BCC 740, applied.

(11) Wyser-Pratte Eurovalue Fund Ltd., In re, 2010 (2) CILR 194, applied.

Legislation construed:

Companies Law (2010 Revision), s.92(e): ‘A company may be wound up by the Court if the Court is of opinion that it is just and equitable that the company should be wound up.’

Insolvency Practitioners” Regulations 2008, reg. 6:

‘(1) A qualified insolvency practitioner shall not be appointed by the Court as official liquidator of a company unless he can be properly regarded as independent as regards that company.

(2) A qualified insolvency practitioner shall not be regarded as independent if, within a period of 3 years immediately preceding the commencement of the liquidation, he, or the firm of which his is a partner or employee, has acted in relation to the company as its auditor.’

Mutual Funds Law (2009 Revision), s.4(8): ‘A mutual fund does not, for the purpose of compliance with subsection (1) or (3)(b), have filed with the Authority a current offering document or the prescribed details in respect of its current offering document if there is a continuing offering of equity interests and any promoter or operator of the mutual fund-

(a) is aware of any change that materially affects any information in the offering document filed with the Authority or in the prescribed details of the offering document filed with the Authority; and

(b) has not, within twenty-one days of becoming so aware, filed with the Authority an amended offering document or amended prescribed details, as the case may be, incorporating that change.’

s.8(2): ‘A regulated mutual fund shall, in such manner as the Authority may from time to time direct, send its audited accounts in respect of a financial year of the fund to the Authority within six months of the end of that financial year or within such extension of that period as the Authority may allow.’

s.8(3): ‘The operator of a regulated mutual fund shall ensure that the mutual fund complies with subsections (1) and (2), and whoever contravenes this provision is guilty of an offence and liable on conviction to a fine of twenty thousand dollars.’

Companies-compulsory winding up-grounds for winding up-‘just and equitable’-winding up of open-ended mutual fund ‘just and equitable,’ notwithstanding opposition of majority of shareholders, if substratum lost-lost if impractical to carry on business for which established within reasonable expectations of shareholders based on offering document-reasonable to expect realization of assets and distributions by official liquidators rather than fund”s management unless offering document provides otherwise

The petitioner sought the winding up of a Cayman open-ended mutual fund on the just and equitable ground.

The fund was incorporated and registered under the Companies Law and with CIMA. Its private placement memorandum (‘the PPM’), which constituted its offering document, provided inter alia that (a) the fund would pursue its investment objective indefinitely; (b) the shareholders would be provided with copies of audited financial statements within six months of the financial year-end, and also with unaudited half-yearly statements; and (c) no single investment of the fund would exceed 25% of its asset base. It did not indicate what would happen in the event that it became necessary to liquidate the fund. The only statements ever produced by the fund were for the year ended June 2008, which were not delivered until May 2010. The fund described the delay in issuing audited statements as the result of difficulties valuing assets in the aftermath of the 2008 financial crisis, and their accountants” delay in issuing their opinion, which was qualified in respect of certain receivables.

A proportion in excess of 25% of the fund”s asset base was invested in each of two companies, Chambua and Black Rock, but the investors were not informed of this. The fund also entered into transactions with two further companies, Liberation and Webster. Companies in which a high proportion of the fund”s capital was invested defaulted as a result of the 2008 financial collapse, and the fund received redemption requests from investors representing at least 60% of its equity. The fund suspended redemptions, and indicated its intention permanently to cease its investment operations, to liquidate its assets and to repay its investors. It then began an informal liquidation process, whereby its management liquidated

assets and repaid investors in an ad hoc manner. The petitioner, one of the fund”s five largest participating shareholders, circulated allegations of misconduct against the fund”s management.

The petitioner presented a winding-up petition on the just and equitable ground. The petition came on for hearing in the Grand Court (Henderson, J.), after which the petitioner chose to adjourn and amend its petition.

Loss of substratum

On its amended petition, the petitioner sought a winding-up order on the just and equitable ground, submitting that (a) it was just and equitable to wind up a company on the basis that it had lost its substratum, in that it was no longer practical to carry on the business for which it was established in accordance with its shareholders” reasonable expectations; (b) the fund had permanently ceased its investment operations, which were the purpose for which it was formed; (c) the shareholders were entitled to expect that the fund”s liquidation would be carried out by qualified insolvency practitioners and not the fund”s management, given that the PPM did not provide for what would happen if liquidation became necessary; (d) a winding-up order would be of benefit to the majority shareholders, despite their opposition, since they would be reconstituted as a liquidation committee with a formal role in the liquidation; and (e) nothing the petitioner or its directors had done meant that they did not come to court with ‘clean hands’ in relation to the petition.

The fund submitted in reply that the court should not make a winding-up order, since (a) the shareholders should reasonably have expected that an informal liquidation by the fund”s management would take place, this being an inherent aspect of every mutual fund”s business; (b) the court should only appoint official liquidators to manage the fund”s ‘final moments,’ after the management had realized its assets and distributed the proceeds to shareholders, as in BVI law; (c) the informal liquidation enjoyed majority shareholder support; (d) were a winding-up order to be made, the petitioner would seek to have the liquidators investigate unmeritorious complaints, and commence derivative actions against the adviser in the fund”s name, which would be a waste of money; and (e) the petitioner did not come to the court with ‘clean hands,’ in that its director had circulated unsupported allegations of misconduct against the fund”s management.

The court considered the circumstances in which it would order the winding up of a fund on the basis that it had lost its substratum.

Loss of confidence

The petitioner further sought the winding up of the fund on the just and equitable ground, and the appointment of inspectors, submitting that (a) in the circumstances, it had justifiably lost confidence in the management of the fund; (b) the fund”s directors were in breach of the duty under s.8(2) of the Mutual Funds Law (2009 Revision) to file audited accounts; (c) the fund had failed to produce half-yearly unaudited accounts, as required by the PPM; (d) the fund was in breach of restrictions in the PPM requiring it

not to invest more than 25% of its asset base in any particular company; and (e) the affidavit evidence disclosed that the fund”s management had acted in breach of its fiduciary duties in its dealings with Liberation and Webster.

The fund submitted in reply that (a) their failure to file accounts on time was the result of difficulties in obtaining a financial opinion from their accountants as a result of the 2008 financial crisis; (b) the restrictions in the PPM were guidelines rather than rigid rules, and departing from them had been commercially sensible; and (c) the fund”s dealings with Liberation and Webster were undertaken in good faith and at arm”s length.

Independence of the proposed liquidators

The fund submitted that the proposed liquidators did not meet the independence requirement in reg. 6 of the Insolvency Practitioners” Regulations 2008, since (a) the proposed liquidators were employed by the Cayman firm branch of the KPMG group; and (b) the South African branch of the group had been engaged to audit statements of the fund”s subsidiaries.

The petitioner submitted in reply that the proposed liquidators were sufficiently independent, since (a) the South African branch of the group had never completed its...