Re Torchlight Fund LP

• Jurisdiction: Cayman Islands
• Judge: (Martin, Newman and Morrison, JJ.A.)
• Judgment Date: 27 April 2018
• Court: Court of Appeal (Cayman Islands)
• Date: 27 April 2018

Court of Appeal (Cayman Islands)

(Martin, Newman and Morrison, JJ.A.)

IN THE MATTER OF TORCHLIGHT FUND LP

AURORA FUNDS MANAGEMENT LIMITED (as trustee for Bear Real Opportunities Fund), CROWN ASSET MANAGEMENT LIMITED and ACCIDENT COMPENSATION CORPORATION OF NEW ZEALAND

and

TORCHLIGHT GP LIMITED (as general partner for Torchlight Fund LP)

T. Lowe, Q.C. and H. Stonefrost, instructed by J. Williams for the appellants;

J. Wardell, Q.C. and A. Mold, instructed by B. Hobden for the respondent.

Cases cited:

(1)Burton & Deakin Ltd., In re, [1977] 1 W.L.R. 390; [1977] 1 All E.R. 631, considered.

(2)Columbraria Ltd. v. Beteta, 2000 CILR N–2, referred to.

(3)Crinion v. IG Markets Ltd., [2013] EWCA Civ 587, referred to.

(4)Cybervest Fund, In re, 2006 CILR 80, referred to.

(5)English v. Emery Reimbold & Strick Ltd., [2002] EWCA Civ 605; [2002] 1 W.L.R. 2409; [2002] 3 All E.R. 385; [2002] CPLR 520; [2003] IRLR 710; [2002] UKHRR 957, referred to.

(6)Fortuna Dev. Corp., In re, 2004–05 CILR 197, referred to.

(7)Hadmor Prods. Ltd. v. Hamilton, [1983] 1 A.C. 191; [1982] 2 W.L.R. 322; [1982] 1 All E.R. 1042; [1982] I.C.R. 114; [1982] IRLR 102, applied.

(8)Henderson v. Foxworth Invs. Ltd., [2014] UKSC 41; [2014] 1 W.L.R. 2600; 2014 S.C.L.R. 692; 2014 SLT 775; 2014 SC (UKSC) 203, applied.

(9)South Bucks. D.C. v. Porter (No. 2), [2004] UKHL 33; [2004] 1 W.L.R. 1953; [2004] 4 All E.R. 775; [2005] 1 P. & C.R. 6; [2004] 4 P.L.R. 50, referred to.

Legislation construed:

Companies Law (2013 Revision), s.99: The relevant terms of this section are set out at para. 1.

Court of Appeal Rules (2014 Revision), r.13(4):

“Any notice given under this rule (in this Part referred to as a ‘respondent’s notice’) shall be filed and a copy shall be served on the appellant, and upon all parties to the proceedings in the court below who are directly affected by the contentions of the respondent, and shall be served within fourteen days after the service of the memorandum of grounds of appeal on the respondent.”

Companies — compulsory winding up — dispositions and transfers during winding up — validation by court — if company solvent, judge inclined to make validation order under Companies Law (2013 Revision), s.99, if evidence shows directors consider proposed disposition to fall within their powers; to be necessary or expedient in interests of company; and reasons for disposition such that intelligent and honest director could hold

The respondent sought a validation order under s.99 of the Companies Law (2013 Revision).

The petitioners were limited partners of an exempted limited partnership registered in the Cayman Islands of which the respondent was the general partner. In June 2015, the petitioners issued a petition for the winding up of the partnership on just and equitable grounds. They claimed inter alia to have lost trust and confidence in the respondent and its management and that the respondent had not conducted the partnership in the best interests of the partnership and was acting with a lack of probity. The partnership filed a defence in response, denying that the petitioners were entitled to relief. The respondent denied all allegations against it.

Section 99 of the Companies Law provided that “when a winding up order has been made, any disposition of the company’s property and any transfer of shares or alteration in the status of the company’s members made after the commencement of the winding up is, unless the Court otherwise orders, void.”

The proceedings for winding up having been instituted, the respondent sought orders under s.99 sanctioning various dispositions. The first and second such applications were refused by Clifford, J. in the Grand Court on the ground that the evidence in support of them was insufficient. It was open to the respondent to apply for a validation order in the future,supported by adequate evidence. Clifford, J. granted an injunction, on the petitioners’ application, restraining the partnership from making any disposition of the assets of the partnership to persons related to the respondent without the consent of the petitioners or order of the court. The third application, which sought the validation of a specific payment, was not opposed and was granted in April 2016.

The summons in respect of which this appeal was concerned was the fourth application for a validation order, issued in September 2016. It sought orders that payments made to or from the bank accounts of the partnership in the ordinary course of business of the partnership and dispositions of the property of the partnership made in the ordinary course of business should not be void under s.99 if an order for the winding up of the partnership were to be made; alternatively, that dispositions of the partnership property specified in an affidavit of the respondent’s director should not be void under s.99. The affidavit by the respondent’s director stated, inter alia, that the partnership was solvent and that the injunction preventing payments to related parties was causing serious financial prejudice. At the time of hearing the second application, the partnership’s 2015 audited accounts had not been available, but those accounts, signed off by its auditors, confirmed that it was solvent.

The petitioners opposed validation orders in respect of payments to certain entities, some of which were parties related to the respondent. They contended that if the orders sought were made, it might limit a liquidator’s ability to investigate and recover payments for the benefit of all limited partners. They submitted, further, that the fourth validation application was largely unsupported by documentary evidence; that the limited evidentiary picture before the court was incomplete or misleading; and that there was a concern that assets of the partnership had been dissipated or mismanaged.

The Grand Court (McMillan, J.) granted the fourth application. The judge set out the test to be met and reminded himself that these were interlocutory proceedings. The judge considered the ruling of Clifford, J. refusing the second application (“the Clifford ruling”), the criticisms of the lack of material in support and the specific indication that it remained open to the respondent to apply in the future for a validation order. The judge noted that a large body of evidence had been supplied. He considered the evidence in detail. The fact that in material and important respects the evidence was supported by the unqualified audit reports was a persuasive factor. The judge accepted that the proposed dispositions appeared to be within the respondent’s powers; the evidence showed that the respondent believed the dispositions to be necessary or expedient in the interests of the partnership; in reaching its decision the respondent had acted in good faith; and the reasons for the dispositions had been shown to be ones which an intelligent and honest general partner could reasonably hold. The judge made the validation order in the alternative form sought in the summons, namely that dispositions of the partnership property for thepurposes and of the kind described in the director’s affidavit would not be void under s.99.

The appellants appealed, submitting that (a) the judge had erred in law in failing to give any or any adequate reasons for his decision; (b) they objected to certain of the validation payments on the grounds that they had been inadequately explained, were not legally due and/or amounted to related party payments; and (c) the judge had failed to consider the relevant evidence and reached a decision that no reasonable judge could have reached.

The respondent submitted that the judge had adopted the correct legal test, addressed all the petitioners’ objections, considered all the evidence, applied the appropriate principles and made a rational decision.

Held, dismissing the appeal:

(1) The parties were agreed as to the correct legal test to be applied by the judge on a validation application. In the case of a solvent company, a judge would normally be inclined to make a validation order once evidence was placed before him to show that the directors considered a particular disposition to fall within their powers and to be necessary or expedient in the interests of the company, and the reasons given for the opinion were ones which an intelligent and honest director could reasonably hold. Even in the case of a solvent company, a judge considering an application for a validation order must still consider whether irregularities in the conduct of the affairs of the company and their relation to the grounds of the petition for winding up could be shown. There was no real dispute that the judge had stated these principles correctly. The only question was whether, in his application of the principles to the facts of the case, the judge exercised his discretion under s.99 in a demonstrably rational manner. If he did so, the court would not ordinarily second-guess his exercise of discretion (paras. 76–77).

(2) The petitioners’ challenge based on the alleged inadequacy of the judge’s reasons would be dismissed. Judges were, in general, required to give reasons for their decisions. The reasons should enable the parties to understand why one had won and the other had lost. A trial judge should also support the appellate process by enabling the Court of Appeal to understand the basis of the decision appealed against. The adequacy of the reasons provided would depend on the nature of, and the issues involved in, a particular case. While in the formulation of his reasons a judge might naturally derive assistance, in many cases significant assistance, from the skeleton arguments and other material placed before the court by the parties, it was the judge’s core responsibility to evaluate the evidence and the arguments and to come to a reasoned conclusion of his or her own. However, it did not necessarily follow that a departure from this general standard by a trial judge would lead...