Re Paradigm Holdings Ltd

• Jurisdiction: Cayman Islands
• Judge: (Henderson, J.)
• Judgment Date: 01 September 2005
• Court: Grand Court (Cayman Islands)
• Date: 01 September 2005

Grand Court

(Henderson, J.)

IN THE MATTER OF PARADIGM HOLDINGS LIMITED

P.A. Broadhurst for the petitioner and joint provisional liquidators;

A. Turner and Ms. A.J. Dunsby for the company.

Cases cited:

(1) Pacific Coast Coin Exchange of Canada Ltd. v. Ontario Secs. Commn., [1978] 2 S.C.R. 112; (1977), 80 D.L.R. (3d) 529, applied.

(2) Peruvian Amazon Co. Ltd., ReUNK(1913), 29 T.L.R. 384, applied.

Legislation construed:

Securities Investment Business Law (2004 Revision) (Law 44 of 2001, revised 2004), s.2: The relevant terms of this section are set out at para. 24.

s.5(1): The relevant terms of this sub-section are set out at para. 22.

First Schedule, para. 6: The relevant terms of this paragraph are set out at para. 24.

paras. 9–12: The relevant terms of these paragraphs are set out at para. 26.

Second Schedule, para. 2: The relevant terms of this paragraph are set out at para. 23.

Fourth Schedule (Excluded persons), para. 4(1):

‘A person carrying on securities investment business exclusively for one or more of the following classes of person-

(a) a sophisticated person;

(b) a high net worth person; or

(c) a company, partnership or trust (whether or not regulated as a mutual fund) of which the shareholders, unit holders or limited partners are one or more persons falling within (a) or (b).’

Financial Services-investor protection-securities-‘wine forward contract’ is security within Securities Investment Business Law (2004 Revision), First Schedule, para. 6-contract made at agreed price, delivery to be made at future date, purchaser to have right to dispose of commodity, contract for investment not commercial purpose-under Securities Investment Business Law, First Schedule, para. 9, contract is investment if seller not producer of wine and does not ‘use’ wine in its business, no delivery made at time of contract and taking delivery not intended-constitutes securities trading requiring registration under Securities Investment Business Law

A creditor applied for the winding up of a company on the grounds that it was unable to pay its debts and that it would be just and equitable to do so.

The creditor, a former landlord of the company, claimed that the company had not paid and was unable to pay its rent. The company was incorporated in the Cayman Islands; its wholly-owned subsidiaries, both incorporated and predominately conducting business at all material times in the Cayman Islands, included Architects of Wine Ltd. (‘AoW’) and AVE International Ltd. (‘AVE’). None of these entities was registered to carry on securities investment business under the Securities Investment Business Law.

AoW was in the business of selling ‘wine forward contracts’ to investors and wine lovers, primarily practising and retired doctors in the United States. Under the standard form long-term contracts, customers agreed to pay the purchase price by instalments over a period, for example, of nine years, and the wine, which for legal reasons could

neither be imported into nor consumed in the United States, would be delivered to a European warehouse facility. Although the customers were investors, the only thing of substance delivered to them, which was the real object of the transaction, was the wine forward contract itself, which they intended to resell at a later date. AoW advised on how such resales might be made, especially to AVE, who increasingly contracted to buy these wines, although it had no funds available to pay for them, and resold them. The quantities involved were far in excess of what a wine lover could be expected to consume, AoW was promoting the wine as an investment, and letters from purchasers indicated that the purchases were largely made for investment purposes. Several State Securities Commissions in the United States concluded that the wine forward contracts were investment contracts and therefore securities, which were unregistered, and issued cease and desist orders directed to AoW.

The petitioning creditor submitted that (a) the company should be wound up on the ground of insolvency; and (b) it would be just and equitable to do so, particularly as its business amounted to an unlawful selling of securities from the Cayman Islands without being registered under the Securities Investment Business Law.

Held, appointing official liquidators and ordering winding up of the company:

(1) The Securities Investment Business Law (2004 Revision) (‘the S.I.B. Law’) was essentially consumer protection legislation, designed to protect the investing public and was to be construed broadly. When determining whether a business activity was caught by the S.I.B. Law, therefore, the emphasis had to be on substance, not form. The customers were investors of capital and the company reinvested that capital with a view to making a profit for all. The only thing of substance delivered to the investor was the wine forward contract itself, which he intended to resell. Those were the hallmarks of securities trading and it was irrelevant that the wine forward contract evidenced title to wine stored in a European warehouse (para. 29; para. 32).

(2) The activities of the company were activities carried on in the course of securities investment business within the meaning of the S.I.B. Law, Second Schedule, para. 2, for which it was not registered. The wine forward contracts were securities within the meaning of the S.I.B. Law, First Schedule, para. 6 as futures, as the wine was a commodity which the wine forward contract gave the customer the right to dispose of and delivery was to be made at a future date but the price was agreed upon when the contract was made. The contracts were made for investment, and not commercial purposes according to the guidance in the S.I.B. Law, First Schedule, para. 9, as the company was not a producer of wine and did not ‘use’ the wine in its business in the sense intended by para. 9(a), no delivery of wine was made at the time the contracts were entered into, a large majority of the purchasers did not intend to take delivery of the wine and the company did not intend them to do so. The specific

exemptions provided in the Fourth Schedule, to persons who would otherwise have been caught by the terms of the S.I.B. Law, were not applicable (paras. 23–27).

(3) It would be just and equitable to wind up the company as two of the traditional justifications for invoking the just and equitable ground had been established: the main objects for which its subsidiaries had been formed had become impracticable so that the substratum of those companies and the parent company had gone; and there were other matters which required full investigation. These included the trading in securities in violation of Cayman law by the...