Re Strategic Turnaround Ltd

• Jurisdiction: Cayman Islands
• Judge: (Forte, Ag. P., Mottley and Vos, JJ.A.)
• Judgment Date: 12 December 2008
• Court: Court of Appeal (Cayman Islands)
• Date: 12 December 2008

Court of Appeal

(Forte, Ag. P., Mottley and Vos, JJ.A.)

IN THE MATTER OF STRATEGIC TURNAROUND MASTER PARTNERSHIP LIMITED

STRATEGIC TURNAROUND MASTER PARTNERSHIP LIMITED

and

CULROSS GLOBAL LIMITED

A. Akiwumi for the appellant;

J.R. McDonough and G. Manning for the respondent.

Cases cited:

(1) Australian Joint Stock Bank, Re, [1897] W.N. 48; (1897), 41 Sol. Jo. 469, considered.

(2) Brac Construction Ltd. v. Broome, 2006 CILR 185, considered.

(3) CVC/Opportunity Equity Partners Ltd. v. Demarco Almeida, 2002 CILR 77; [2002] 2 BCLC 108; [2002] BCC 684; [2002] UKPC 16, followed.

(4) Charles Forte Invs. Ltd. v. Amanda, [1964] Ch. 240; [1963] 3 W.L.R. 662; [1963] 2 All E.R. 940, followed.

(5) Debtor, In re a, ex p. The Debtor v. Allen, [1967] Ch. 590; [1967] 2 W.L.R. 1528; [1967] 1 All E.R. 668, considered.

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

(7) European Life Assur. Socy., In reELR(1869), L.R. 9 Eq. 122; 39 L.J. Ch. 324, considered.

(8) Gamlestaden Fastigheter AB v. Baltic Partners Ltd., 2007 JLR 393; [2007] 4 All E.R. 164; [2008] 1 BCLC 468; [2007] BCC 272; [2007] UKPC 26, referred to.

(9) Melbourne Brewery & Distillery, In re, [1901] 1 Ch. 453; (1901), 70 L.J. Ch. 198, considered.

(10) North Bucks. Furniture Depositories Ltd., In re, [1939] Ch. 690; [1939] 2 All E.R. 549, considered.

(11) O”Neill v. Phillips, [1999] 1 W.L.R. 1092; [1999] 2 All E.R. 961; [1999] 2 BCLC 1; [1999] BCC 600, dicta of Lord Hoffmann followed.

(12) Parmalat Capital Fin. Ltd. v. Food Holdings Ltd., 2008 CILR 202; [2009] 1 BCLC 274; [2008] BCC 371; [2008] BPIR 641; [2008] UKPC 23, dicta of Lord Hoffmann referred to.

(13) Rica Gold Washing Co., In reELR(1897), 11 Ch. D. 36; 40 L.T. 531; [1874–80] All E.R. Rep. Ext. 1570, referred to.

(14) Tottenham Hotspur Plc v. Edennote Plc, [1995] 1 BCLC 65; [1994] BCC 681, considered.

(15) Walker v. Gen. Mutual Bldg. Socy.ELR(1887), 36 Ch. D. 777, dicta of Cotton and Fry L.JJ. referred to.

(16) Walton v. EdgeELR(1884), 10 App. Cas. 33, referred to.

Legislation construed:

Insolvency Act 1986, s.123(2): The relevant terms of this sub-section are set out at para. 38.

Insolvency Rules 1986 (S.I. 1986/1952), r.12.3: The relevant terms of this sub-rule are set out at para. 24.

Companies-compulsory winding up-grounds for winding up-inability to pay debts-‘unable to pay debts’ claim by prospective creditor not ground for winding up-company not deemed unable to pay debts and liable to winding up simply because assets less than liabilities-in any case, future debt not ground for winding up until presently due and payable-future debt provable in liquidation but cannot be basis of winding-up petition

Companies-compulsory winding up-grounds for winding up-‘just and equitable’-specific Cayman absence of protection for minority shareholders from unfair prejudice (as in English law) necessitates use of ‘just and equitable’ ground-strict legal rules may be subjected to equitable considerations in order to protect shareholders

Companies-shares-redemption-if, according to articles, company becomes liable to redeeming shareholder on redemption day, shareholder becomes creditor-liability falls within types of debt provable in winding-up-shareholder remains member of company until payment received and name removed from register, therefore ranks behind third party unsecured creditors

The respondent petitioned in the Grand Court to wind up a company.

The company, Strategic Turnaround Master Partnership Ltd. (‘the company’), was a Cayman company and a regulated mutual investment fund. In May 2007, the respondent, Culross Global Ltd., subscribed US$1,840,000 for shares in the company, on the basis that they were redeemable at any time by the giving of a redemption notice, subject to certain rights of suspension, in accordance with the company”s articles of association and a confidential explanatory memorandum (‘CEM’). On October 31st, 2007, the respondent gave such notice, and the redemption date was set as March 31st, 2008 (the date at which the value of the shares

to be redeemed would be taken). Payment of 90% of the value of the shares, with the balance to follow upon completion of the company”s annual audit, was agreed by the company, to be made by the end of April 2008. The redemption was then confirmed by the company”s administrator on April 11th, and payment was arranged within 30 days of that confirmation.

On April 17th, however, the directors of the company suspended all redemptions due to the volatility of its primary investment sector; they believed that any disposal of a substantial part of the company”s investments would not be reasonably practicable and would seriously prejudice the other shareholders. On May 1st, the respondent contacted the company, reminding it that its administrator had confirmed the redemption, and it was therefore in breach of that commitment. The respondent then filed the present petition to wind up the company, which applied to strike it out.

The Grand Court (Smellie, C.J.) dismissed the company”s application, holding that the respondent had effectively redeemed its shares at the redemption date of March 31st, 2008, at which point the company became liable to make the appropriate payment to the respondent. Until that payment was made, however, the respondent remained a shareholder, bound by the rules of the company. However, on March 31st, the respondent became a creditor, in its capacity as a member, ranking ahead of all other shareholders (but not third-party creditors). The respondent therefore had standing to petition, as there was no substantial dispute as to the debt itself (and therefore the petition did not represent an abuse of process) and the suspension of the redemption had been ultra vires the company”s articles of association and CEM. Alternatively, the respondent could also petition on the ‘just and equitable’ ground; the directors of the company had exercised their powers unfairly, so as to prejudice the respondent, which had a legitimate expectation of the redemption of its shares, and/or the company was estopped from denying the respondent”s right to assert that it had already redeemed its shares.

On appeal, the company submitted that the respondent had no standing to petition for its winding up, as (a) the suspension of the redemption had been valid and effective, in accordance with both the CEM and its articles of association; (b) the respondent did not therefore become a creditor on the redemption date, and there was no ‘debt’ that could be proved in winding-up proceedings; (c) in any case, the respondent had remained a member of the company, even after the redemption date, as redeeming shareholders remained members until they had received payment, their shares were available for re-issue and their names had been removed from the register; if the respondents were creditors, they would therefore rank behind third party, unsecured creditors; (d) the respondent could not petition on the grounds of the company being ‘unable to pay its debts,’ as a future creditor, as there was no principle in Cayman law that a company was deemed unable to pay its debts merely because it was proved that its assets were less than its liabilities, including contingent and prospective

liabilities; (e) in any case, as the court had to assume that the company”s actions were bona fide and the suspension was therefore valid and effective, the redemption payment could not be treated as a presently due and payable debt; (f) similarly, the respondent could not petition for winding up on the ground of the non-payment of that ‘debt,’ as it had alleged that the company was insolvent, and the respondent could not possibly, therefore, have any financial interest in the winding up; (g) nor could the respondent petition on ‘just and equitable’ grounds, as the company had done nothing unfair or prejudicial to the respondent-it had merely validly suspended the redemption due to the volatility of the markets, in order to protect both itself and its other shareholders, in accordance with the CEM and the articles of association; and (h) the respondent”s amended petition went further than was pleaded in the Grand Court and should not, therefore, be allowed to stand.

The respondent submitted in reply that it had standing to petition for the company”s winding up as (a) the suspension of the redemption had been ultra vires the company”s articles of association; (b) it was therefore a creditor of the company, and had become so on the redemption date (March 31st), ranking ahead of all other shareholders; (c) the company was unable to meet its debts and it was well established that if a company”s assets were less than its liabilities, including contingent and prospective liabilities (as was the case here), then there was a ground for winding up; (d) alternatively, it could also petition simply on the grounds of non-payment of the debt; and (e) it could petition on ‘just and equitable’ grounds, if all else failed, as it had been unfairly prejudiced by being kept locked into the company, exposing it to the risk that the value of its shares would fall further.

Held, granting the company leave to appeal and allowing the appeal in part:

(1) Although the respondent did have standing to petition for the winding up of the company on ‘just and equitable’ grounds, the Grand Court had been wrong to hold that the company had no power to suspend the respondent”s redemption payment. Such power was contained within the CEM, the relevant provisions of which had been incorporated in the company”s articles of association as an important part of the terms upon which the shares were issued, exercisable in the circumstances stated therein, which included periods of extreme market volatility, as was the case here. The indication in the CEM that 90% of the...