RMF Market Neutral Strategies (Master) Ltd v DD Growth Premium 2X Fund

• Jurisdiction: Cayman Islands
• Court: Grand Court (Cayman Islands)
• Judge: (Smellie, C.J.)
• Judgment Date: 17 November 2014
• Date: 17 November 2014

Grand Court, Financial Services Division

(Smellie, C.J.)

RMF MARKET NEUTRAL STRATEGIES (MASTER) LIMITED

and

DD GROWTH PREMIUM 2X FUND

N.K. Meeson, Q.C., B. Hobden and E. Bodden for RMF Market Neutral Strategies (Master) Ltd.;

P. McMaster, Q.C., J. Walton and J. Snead for DD Growth Premium 2X Fund.

Cases cited:

(1) Amar Singh v. Kulubya, [1964] A.C. 142; [1963] 3 W.L.R. 513; [1963] 3 All E.R. 499, referred to.

(2) Barclays Bank v. Simms, [1980] Q.B. 677; [1980] 2 W.L.R. 218; [1979] 3 All E.R. 522; [1980] 1 Lloyd”s Rep. 225, referred to.

(3) Belmont Fin. v. Williams Furniture Ltd. (No. 2), [1980] 1 All E.R. 393, referred to.

(4) Culross Global SPC Ltd. v. Strategic Turnaround Master Partnership Ltd., 2010 (2) CILR 364; [2010] UKPC 33, applied.

(5) Cutts, In re, ex p. Bognor Mut. Bldg. Socy. v. Trustees of T.W. Cutts, [1956] 1 W.L.R. 728; [1956] 2 All E.R. 537, applied.

(6) FP & CH Matthews Ltd., In re, [1982] Ch. 257; [1982] 2 W.L.R. 495; [1982] 1 All E.R. 338, applied.

(7) Fairfield Sentry Ltd. v. Migani, [2014] 1 CLC 611; [2014] UKPC 9, applied.

(8) JP Morgan Multi-Strategy Fund v. Macro Fund Ltd., 2002 CILR 569, applied.

(9) Kiriri Cotton Co. Ltd. v. Dewani, [1960] A.C. 192; [1960] 2 W.L.R. 127; [1960] 1 All E.R. 177, referred to.

(10) Kleinwort Benson Ltd. v. Lincoln City Council, [1999] 2 A.C. 349; [1998] 3 W.L.R. 1095; [1998] 4 All E.R. 513; [1999] CLC 332, referred to.

(11) Lipkin Gorman v. Karpnale Ltd., [1991] 2 A.C. 548; [1991] 3 W.L.R. 10; [1992] 4 All E.R. 512, referred to.

(12) M. Kushler Ltd., In re, [1943] Ch. 248; [1943] 2 All E.R. 22, applied.

(13) MC Bacon Ltd. (No. 1), Re, [1990] BCLC 324; [1990] BCC 78, distinguished.

(14) Pepper v. Hart, [1993] A.C. 593; [1992] 3 W.L.R. 1032; [1993] 1 All E.R. 42; [1992] STC 898, applied.

(15) Pitt v. Holt, [2013] 2 A.C. 108; [2013] 2 W.L.R. 1200; [2013] 3 All E.R. 429; [2013] STC 1148; [2013] BTC 126; [2013] W.T.L.R. 977; [2013] UKSC 26, referred to.

(16) Progress Property Co. Ltd. v. Moore, [2011] 1 W.L.R. 1; [2011] 2 All E.R. 432; [2011] Bus. L.R. 260; [2011] 2 BCLC 332; [2011] BCC 196; [2011] BPIR 500; [2010] UKSC 55, applied.

(17) Rolled Steel Prods. (Holdings) Ltd. v. British Steel Corp., [1982] Ch. 478; [1982] 3 W.L.R. 715; [1982] 3 All E.R. 1057; further proceedings, [1986] Ch. 246; [1985] 2 W.L.R. 908; [1985] 3 All E.R. 52; (1984), 1 BCC 99158, applied.

(18) Scottish Equitable PLC v. Derby, [2001] 3 All E.R. 818; [2001] All E.R. (Comm) 274; [2001] OPLR 181; [2001] Pens. L.R. 163; [2001] EWCA Civ 369, referred to.

(19) Segoes Servs. Ltd. v. Ueoka, 2006 CILR N[1], applied.

Legislation construed:

Companies Law (2007 Revision), s.34: The relevant terms of this section are set out at paras. 68 and 71.

s.37(5): The relevant terms of this sub-section are set out at paras. 47–48.

s.37(6)(a): The relevant terms of this paragraph are set out at para. 33.

s.168(1): The relevant terms of this sub-section are set out at para. 122.

Companies Law (2010 Revision), s.37(5) as amended by the Companies (Amendment) Law 2011, s.8: The relevant terms of this sub-section are set out at paras. 81 and 88.

Companies-capital-distribution of capital-under Companies Law (2007 Revision), s.37(5)(b), definition of ‘payment out of capital’ in s.37(6)–(9) as ‘any payment so made’ not to refer to payment to redeem or purchase company”s own shares other than out of profits or proceeds of fresh shares under s.37(5)(a)-clear that, under 2007 Law and 2010 Law (as amended by Companies (Amendment) Law 2011), redemption or purchase of company”s own shares using share premiums not capital payment

Companies-compulsory winding up-creditors-fraudulent preference-payment only recoverable under Companies Law (2007 Revision), s.168(1) if debtor”s motive for transaction to prefer particular creditor-insufficient that knew payment would result in preferential payment if not primary reason for making payment-unnecessary to show that transferor intended to avoid equal distribution of assets but must be aware that insolvent at time of transfer

The plaintiff company (‘RMF’) applied for a negative declaration that it was not liable to repay sums paid to it by the defendant company (‘2X’).

2X was established as an investment company with M as its director. It was described in the offering memorandum as a company which invested ‘substantially all of its capital’ in the master fund, of which M was also a director. The money was not invested by purchasing shares, however, and 2X merely had a contractual right against the master fund for a return on its investments, which was its sole income. The available shares in 2X were described as ‘ordinary shares’ and held a nominal value of either US$0.001 or €0.001, but they were initially sold for either $100 or €100 and later for a value determined according to the NAV. The shares could be redeemed every month at a valuation made by 2X”s administrator (as determined by 2X”s net asset value on the last business day of the month preceding redemption day). Article 91 of 2X”s articles of association also stated that the company was entitled to make payments in respect of the redemption or repurchase of shares in any matter permitted by statute, including out of capital. RMF purchased a large number of shares in 2X.

In October 2008, the master fund suffered substantial losses such that its liabilities greatly outstripped its assets. In an attempt to hide this fact, the master fund purchased several bonds which had a high face value but which were actually worthless. During October, RMF (in addition to six other investors) made redemption requests, with the valuation day set for the end of November. 2X, in an attempt to hide the fact that it did not have any available assets, informed RMF, inter alia, that a number of difficulties were preventing it from valuing the funds, that full repayment would be made soon and that it would pay interest on the debts owed. RMF, however, applied substantial pressure to 2X by making several unscheduled visits to its offices, sending several requests for further information, and threatening full redemption of its shares in 2X and legal action to enforce the debts. After the master fund received money from other investors, it paid US$12m. to 2X. 2X subsequently made payments to RMF and three other creditors-RMF received the largest amount, but this only came to 36.89% of its total redemption requests; three creditors received 100% of their redemption requests, but at much lower amounts; and three creditors received no payments. 2X further claimed that RMF would be fully repaid as soon as possible and described two of these payments as ‘good faith’ payments.

2X submitted that it should have properly been regarded as insolvent as of October 2008. Its income was solely based on returns from the master fund and, as the master fund was properly regarded as insolvent at that time, 2X must fail the balance sheet test. Further, as it had no assets to meet the obligations under the redemption requests, it must also be considered as cash-flow insolvent. 2X therefore alleged, inter alia, that (a) the payments to RMF were unlawful payments of capital contrary to s.37(6)(a) of the Companies Law (2007 Revision) and should be reversed (either through a claim in restitution or on the basis that RMF should be held to be a constructive trustee of the money); or (b) the payments were fraudulent preferences which were invalid under s.168 of the Companies Law (2007 Revision).

RMF submitted in reply that 2X should not be regarded as being insolvent as of October 2008 as it was unaware that the master fund did not have any assets.

Were the payments to RMF unlawful payments of capital?

2X submitted that, under the articles of association, the money paid should be regarded as capital. The offering memorandum described the investment money as capital and it was treated as such by 2X”s internal accounts. Further, under the Companies Law (2007 Revision), the money paid must be regarded as capital. Section 37(5)(a) stated that a company may make a payment to redeem or purchase its own shares otherwise than out of profits or the proceeds of a fresh issue of shares if authorized by its articles of association. This sub-section should be read with s.37(5)(b), which stated that, in s.37(6)–(9), any reference to a ‘payment out of capital’ was a reference to ‘any payment so made’ whether or not it would be regarded as such apart from ‘this subsection.’ It would be

tautological for ‘any payments made’ to refer to capital payments and it must therefore refer to any payment to redeem or purchase a company”s own shares under s.37(5)(a) other than out of profits or the proceeds of a fresh issue of shares. As the payments were for the redemption of shares, they must be considered as payments of capital under s.37(5) and, as they were not out of profits or from the proceeds of a fresh issue of shares, they could not be lawful under s.37(5)(a). Moreover, s.37(6)(b) stated that it was not lawful to make payments out of capital if the company was cash-flow insolvent. As 2X was cash-flow insolvent, the payment must therefore be unlawful.

RMF submitted in reply that the payments received from 2X were not out of capital and s.37(6)(b) could not, therefore, apply. Further, as 2X”s funds were largely derived from the money paid for shares over the par value, the payments must largely be regarded as a return of share premium. Under s.34(2), a company, where authorized by its memorandum or articles of association, was entitled to use share premiums to redeem or purchase any of its shares. The transaction was therefore permitted under statute and could not be said to be unlawful. Moreover, even if the payments were a return of capital, this was authorized under the 2007 Law as, since 2X”s only liabilities were towards those shareholders who had redeemed their shares, 2X should not be regarded as...