Re Parmalat Capital Fin Ltd

• Jurisdiction: Cayman Islands
• Court: Court of Appeal (Cayman Islands)
• Judge: (Zacca, P., Forte and Mottley, JJ.A.)
• Judgment Date: 05 December 2006
• Date: 05 December 2006

IN THE MATTER OF PARMALAT CAPITAL FINANCE LIMITED

(Zacca, P., Forte and Mottley, JJ.A.)

Court of Appeal

Companies-compulsory winding up-creditors-‘creditor’ need not show substantial interest in relief sought (e.g. right to receive funds from liquidation) if charge placed on debt in favour of third party, so long as retains legal title and right to receive surplus-when beneficial interest assigned to third party, both are ‘creditors’ and either can petition for winding up without joining other

Companies-compulsory winding up-creditors-creditor”s petition based on disputed debt normally dismissed-court has discretion to allow creditor with disputed claim to succeed, if otherwise deprived of remedy, and company needs winding up and investigation

Held, dismissing the appeal and affirming the orders of the Grand Court:

(1) The Grand Court had been right to conclude that Food and Dairy had standing to petition for the winding up, as they were ‘creditors’ of PCFL within the requirements of s.96 of the Companies Law (2004 Revision). As the category of persons who could petition for winding up was stated by the statute to be ‘creditors,’ it was sufficient that the petitioners had retained legal title to the debt, and were entitled to receive any surplus once the security trustees had realized their security, even if there was unlikely to be any surplus and they therefore lacked a substantial interest in the winding up. Although they had assigned the beneficial interest in the debt to the security trustees, if only creditors who could expect to receive payment out of the assets of the liquidation were able bring a winding-up petition, companies with no assets would be protected from any creditor”s petition for winding up, which was clearly not the intention of the law. It was possible for there to be more than one creditor for any given debt, and as with all charged property, the interest of the security trustees in the property was limited to the amount secured; the interests of Food and Dairy were not extinguished, even if limited to the equity of redemption. As this petition was for winding up, rather than payment of the debt, it was not necessary that the beneficial holders of the debt be joined as a party to the suit (para. 30; paras. 33–35; paras. 79–80; para. 83; para. 87).

(2) Usually, PCFL”s allegation that the debts to Food and Dairy were brought about through fraud and therefore might not legally amount to debts owing at all would cause the court to dismiss the winding-up petition, as such a substantial dispute would mean they had not proved they were ‘creditors’ under the law. However, the court had a discretion to allow creditors whose claims had been disputed on substantial grounds to petition for winding up where the effect of dismissing the petition

would be to deprive the petitioners of a remedy, or there was another reason why the petition should proceed. It was willing to exercise the discretion in favour of Food and Dairy because the US proceedings by PCFL were based on the assumption that the debts under the put agreements were valid, casting doubt on the merit in their argument that the debts were not due, and because PCFL was clearly insolvent in circumstances which required investigation (paras. 41–42; para. 50).

(3) The appointment of Messrs. Cleaver and MacRae as joint official liquidators of PCFL was valid. The court would not interfere with the assessment of the Grand Court that less weight should be given to the views of those creditors related to PCFL than unrelated creditors, even though related creditors held around 78% of PCFL”s debts, as it had not erred in principle or law in coming to that decision. It had followed the accepted legal position that the potential of a conflict of interest for liquidators appointed for related entities did not disqualify them from being appointed so long as they had put in place a mechanism for dealing with any conflicts that might arise (paras. 57–58; paras. 61–63).

Cases cited:

(1) Alipour v. Ary, [1997] 1 W.L.R. 534; [1997] BCC 377, applied.

(2) Arrows Ltd., Re, [1992] BCC 121, followed.

(3) Bateman Television Ltd. v. Coleridge Fin. Co. Ltd., [1971] NZLR 929, followed.

(4) Bayoil S.A., Re, [1999] 1 All E.R. 374; [1998] BCC 988; [1999] 1 BCLC 62, not followed.

(5) Bell Group Fin. (Pty.) Ltd. v. Bell Group (U.K.) Holdings Ltd., [1996] BCC 505; [1996] 1 BCLC 304, applied.

(6) Brinds Ltd. v. Offshore Oil N.L.UNK(1986), 2 BCC 98, 916, followed.

(7) Buchler v. Talbot, [2004] 2 A.C. 298; [2004] 1 All E.R. 1289; [2004] UKHL 9, followed.

(8) Claybridge Shipping Co., Re, [1997] 1 BCLC 572; [1981] Com. L.R. 107, referred to.

(9) Deloitte & Touche A.G. v. Johnson, 1999 CILR 297; [1999] 1 W.L.R. 1605, distinguished.

(10) Great Britain Mutual Life Assur. Socy., ReELR(1880), 16 Ch. D. 246; 51 L.J. Ch. 10, considered.

(11) Lowestoft Traffic Servs. Co. Ltd., ReUNK(1986), 2 BCC 98, 196, applied.

(12) Lympne Invs. Ltd., In re, [1972] 1 W.L.R. 523; [1972] 2 All E.R. 385, not followed.

(13) Mann v. Goldstein, [1968] 1 W.L.R. 1091; [1968] 2 All E.R. 769, considered.

(14) Maxwell Communs. Corp., Re, [1992] BCC 372; [1992] BCLC 465, followed.

(15) Pantmaenog Timber Co. Ltd., In re, [2004] 1 A.C. 158; [2003] 4 All E.R. 18; [2003] UKHL 49, considered.

(16) Performing Right Socy. Ltd. v. London Theatre of Varieties Ltd., [1924] A.C. 1; (1923), 93 L.J. K.B. 33, distinguished.

(17) Russian & English Bank, In re, [1932] 1 Ch. 663, referred to.

(18) Southard & Co. Ltd., In re, [1979] 1 W.L.R. 546; [1979] 1 All E.R. 582, applied.

(19) Stonegate Secs. Ltd. v. Gregory, [1980] Ch. 576; [1980] 1 All E.R. 241, not followed.

(20) Three Rivers District Council v. Bank of England, [1996] Q.B. 292; [1995] 4 All E.R. 312, distinguished.

(21) Walter & Sullivan Ltd. v. J. Murphy & Sons Ltd., [1955] 2 Q.B. 584; [1955] 1 All E.R. 843, distinguished.

Legislation construed:

Companies Law (2004 Revision), s.96: The relevant terms of this section are set out at para. 72.

Food Holdings Ltd. (‘Food’) and Dairy Holdings Ltd. (‘Dairy’) brought a petition in the Grand Court for the winding up of Parmalat Capital Finance Ltd. (‘PCFL’) (a subsidiary of the Parmalat Group), and confirmation of the joint provisional liquidators (‘JPLs’) as joint official liquidators of the company.

Food and Dairy were incorporated in the Cayman Islands as special purpose vehicles to raise money for Parmalat”s Brazilian operations by issuing loan notes, which were governed by the laws of New York. Food and Dairy acquired 18.18% of the shares in the Brazilian subsidiary, which were later made the subject of a put agreement with PCFL under which PCFL would purchase the shares from Food and Dairy if a put event occurred. Put events occurred in November 2003, and subsequently PCFL became liable to pay a base option price of around US$270m. to Food and US$245m. to Dairy.

Whilst Food and Dairy retained legal title to these debts, as part of a security agreement the right to receive payment from PCFL was transferred to certain security trustees who would pay out the money in accordance with priorities set out in the agreement. Any remaining surplus would be paid to Food and Dairy, although at the time of the proceedings it appeared unlikely that any such surplus would exist. The right to demand payment of the debts was reserved to Food and Dairy.

It was clear that PCFL was hopelessly insolvent, and in December 2003 the current JPLs were appointed ex parte, and those appointments

were affirmed in a contested inter partes hearing in March 2004. Various creditors from the Parmalat Group and one other unrelated creditor (‘the opposing parties’), owed a collective debt of around US$1bn., opposed the appointment of the JPLs as joint official liquidators and proposed that their own choice of liquidators be appointed instead. They additionally argued that Food and Dairy had no standing to petition for the winding up of PCFL as the debt, and consequent right to be treated as creditors, had been transferred to the security trustees and, furthermore, claimed no debt existed at all as consideration had not been given for the put agreements. The Grand Court (Henderson, J.) granted Food and Dairy”s application, declaring that PCFL was hopelessly insolvent and its affairs required investigation, and appointed the provisional liquidators as official liquidators. The proceedings are reported at 2006 CILR 171.

The opposing parties appealed to the Court of Appeal, submitting that (a) a ‘creditor’ required both ‘technical standing’ and ‘substantial standing,’ in order to petition for winding up; (b) Food and Dairy lacked substantial standing because they would not receive any money from the winding up, and therefore lacked a proper interest in the relief sought and were not ‘creditors’; (c) alternatively, even if only one type of standing were required to be a ‘creditor,’ the respondents also lacked technical standing, as they had no right to receive the proceeds of the petition debt, and even if they were to receive payment, it would have to be held on trust for the security trustees; (d) as Food and Dairy were likely to have no beneficial interest in the debt, it was the security trustees, and not Food and Dairy, that should be treated as creditors; (e) the respondents had given no consideration for the put agreements, which had in fact been obtained through fraud, and therefore the debts did not exist; as this was a bona fide dispute of the debt on substantial grounds, the respondents had failed to prove they were creditors, and therefore did not have standing to petition for winding up; (f) as they were owed approximately 78% of PCFL”s debts, the Grand Court should have appointed their own choice of liquidators, and in not doing so, it had failed to give appropriate weight to their views as the majority creditors; and (g) the JPLs were also the joint official...