Re SPhinX Group

• Jurisdiction: Cayman Islands
• Judge: (Smellie, C.J.)
• Judgment Date: 21 December 2012
• Court: Grand Court (Cayman Islands)
• Date: 21 December 2012

Grand Court, Financial Services Division

(Smellie, C.J.)

IN THE MATTER OF THE SPHINX GROUP OF COMPANIES

T.W.G. Lowe, Q.C., Ms. C. Bryant, Q.C., Ms. C.J. Bridges and T. Williams for the joint official liquidators;

M. Phillips, Q.C., A. Turner and Ms. A. Dunsby for the liquidation committee;

Miss F. Toube, Q.C., G.F. Ritchie, Q.C. and D.W. Collier for Deutsche Bank;

Ms. S.E. Dobbyn and A. Akiwumi for hfc Ltd.;

R. Sheldon, Q.C., G. Cowan and J.G. Manning for DPM and Mr. Aaron;

J. Harris for PricewaterhouseCoopers Cayman;

N.R.F.C. Timms, Q.C. and R.L. Nelson for PricewaterhouseCoopers LLP;

M.A. Kish for Refco Public Fund;

B. Hobden for Bank für Arbeit & Wirtschaft.

Cases cited:

(1) Adams Intl. Food Traders, ReUNK(1988), 13 ACLR 586, followed.

(2) Altitude Scaffolding Ltd., Re, [2006] BCC 904; [2007] 1 BCLC 199; [2006] EWHC 1401, referred to.

(3) Cadbury Schweppes plc v. Somji, [2001] 1 W.L.R 615; [2001] 1 BCLC 498, distinguished.

(4) English, Scottish & Australian Chartered Bank, In re, [1893] 3 Ch. 385, followed.

(5) Equitable Life Assur., Re, [2002] BCC 319; [2002] 2 BCLC 510; [2001] BPIR 172; [2002] EWHC 140 (Ch), followed.

(6) Jessel Trust Ltd., Re, [1985] BCLC 119, followed.

(7) Kapoor v. National Westminster Bank Plc, [2012] 1 All E.R. 1201; [2011] BPIR 1680; [2012] Bus. L.R. D25; [2011] EWCA Civ 1083, followed.

(8) Minster Assets Plc, In reUNK(1984), 1 BCC 99299; 1985 PCC 105, applied.

(9) Oceanrose Inv. Ltd., Re, [2009] Bus. L.R. 947; [2008] EWHC 3475 (Ch), followed.

(10) Telewest Communications, Re, [2005] BCC 36; [2005] 1 BCLC 772; [2004] EWHC 1466 (Ch), referred to.

(11) Telford Inns Pty. Ltd., ReUNK(1985), 10 ACLR 312, followed.

Companies-arrangements and reconstructions-confirmation by court-no need to reconvene shareholder meetings to hold second vote on accepting scheme of arrangement unless material change of circumstances makes information at first vote inadequate-purchase of blocking investor”s shares after vote not material change if arms-length, publicly known transaction with no effect on terms of scheme or reasons for voting

The liquidators applied for an order to reconvene court meetings to hold a vote to accept a scheme of arrangement.

Prior to the liquidation of the SPhinX group, money was transferred from a member of the group to a member of a different group of companies which served as brokers for SPhinX. The brokers collapsed as a result of systematic fraud and the loss of the money caused SPhinX to enter liquidation. The liquidators began proceedings in New York against the brokers, as well as against certain officers and contractors of SPhinX. Deutsche Bank was later added as a defendant for alleged breaches of its duties as an investment manager and adviser to SPhinX. The contractors and officers sought to rely on the indemnity clauses in their contracts in respect of liability and the costs of successfully defending their claims.

SPhinX”s assets and liabilities were spread between many companies, with some having substantial assets and no liabilities and some vice versa. Because it was argued that these were ‘hopelessly intermingled,’ a scheme of arrangement was proposed (by Deutsche Bank and others) which pooled the assets and liabilities for all investors rather than forcing investors to gain or lose depending on the part of SPhinX in which they held shares. This scheme also released Deutsche Bank as defendants from the New York litigation. The liquidators” New York attorneys claimed that the scheme would be a breach of their contract with the liquidators, since releasing Deutsche Bank would reduce their fees in the New York litigation. The scheme therefore also set up a fund to cover the costs of this prospective breach of contract and of the indemnified claimants.

The scheme was voted on in court meetings by each class of shareholder, although since the scheme gave Deutsche Bank the unique benefit of being released from the New York litigation, it was not able to vote its shares with the class that it would normally belong to and was instead

treated in a unique class of its own. The scheme had been accepted by all classes of shareholders except one, in which an investor with a blocking position voted against it. Deutsche Bank then purchased that investor”s shares so as to remove the blocking vote.

The liquidators sought a ruling as to whether any material change of circumstances brought about by Deutsche Bank”s purchase of the shares meant that they would be obliged by the court to reconvene the court meetings before the scheme could be sanctioned.

Held, declining to make an order:

(1) There was no reason for the court meetings to be reconvened. The court would only require another vote if there were some material oversight or miscarriage which would preclude the court from sanctioning the scheme. The purchase had not changed any of the terms of the scheme and all the participants had been aware of its terms (including the fact that it would release Deutsche Bank as a defendant from the New York litigation) and, later, of the purchase itself. There was therefore nothing to indicate that the information known to the shareholders when voting was inadequate, nor any reasonable basis for a shareholder to change its vote. Additionally, since the purchase of the shares was an arm”s-length, publicly announced transaction which could not have affected the scheme or the voting in any way, there was nothing unusual about it, despite the fact that it occurred after the court meetings. Even had it been unusual, the fact that the scheme participants were aware of the transaction and none objected to it would have enabled the court to sanction the scheme. Although some investors may have wished to change their votes to try to persuade Deutsche Bank to purchase their shares at a premium, the court would not reconvene the meetings simply to create that opportunity (paras. 45–59).

(2) There was no need to hold a meeting for a class made up of only one member if it could be shown that the member supported the scheme. As Deutsche Bank was a proponent of the scheme and its support was clear, it did not need to vote its newly acquired shares in a court meeting. However, the court would not sanction the scheme before determining the reserves required to meet the attorneys” claim and the indemnification, since it could not sanction the scheme if this amount exceeded the available assets (paras. 6–10; para. 33).

1 SMELLIE, C.J.: On November 10th, 2011, I directed the convening of meetings at which the respective classes of shareholders interested in the SPhinX liquidation estate would vote on whether to approve a scheme of arrangement. The scheme was in terms proposed by Deutsche Bank (‘DB’), a member of the liquidation committee (‘LC’), and hfc Ltd., each the holder of very significant interests in SPhinX and, together, ‘the scheme proponents.’ The scheme was presented by the joint official liquidators (‘JOLs’) to shareholders under directions from this court, although the JOLs felt unable to recommend its terms. The scheme was therefore presented on the basis that it was for the shareholders themselves-all of them sophisticated investors-to decide whether or not the scheme was in their own best interests. It was understood that ultimately, if approved at the court meetings, the test for whether the scheme should be sanctioned by the court would be whether it is one that ‘an intelligent and honest man, a member of the class [of investors] concerned and acting in respect of his interest, might reasonably approve’ (Re Telewest Communications (10) ([2005] BCC 36, at para. 20)). The details of the scheme, and the information needed for its consideration by

shareholders, were contained in explanatory memoranda approved by the court for those purposes.

2 At the court meetings held on December 13th, 2011, the necessary statutory majorities in number and value were attained in all but two classes. At reconvened meetings, subsequently directed by the court in those two classes on the basis that there was good reason to think that the voting might change, and held on October...