Silk Road Funds Ltd
| Jurisdiction | Cayman Islands |
| Judge | Anthony Smellie |
| Judgment Date | 08 February 2018 |
| Court | Grand Court (Cayman Islands) |
| Docket Number | FSD CAUSE NO: 234 of 2017 (ASCJ) |
BEFORE: The Hon. Anthony Smellie, Chief Justice
FSD CAUSE NO: 234 of 2017 (ASCJ)
IN THE GRAND COURT OF THE CAYMAN ISLANDS
FINANCIAL SERVICES DIVISION
Receivers appointed by Bermuda Supreme Court over segregated account within a segregated account fund company — application by receivers for recognition of their appointment and enforcement of the terms of their order of appointment — jurisdiction of the Grand Court for the grant of recognition — how jurisdiction to be appropriately exercised — distinction between receivership and winding up proceedings — applicability of the principles of “modified universalism”.
Mr. Tom Wright of Solomon Harris, Attorney-at-Law for the Applicant
The Joint Receivers (“the Receivers”) of the Silk Road M3 Fund (“the M3 Fund”) by their Ex Parte Originating Summons dated 8 November 2017 (“the Recognition Summons”) seek this Court's recognition of the order made by the Supreme Court of Bermuda (“the Bermuda Court”) appointing the Receivers (“the Appointment Order”). The Receivers also seek orders granting the recognition and enforcement of the functions and powers of the Receivers granted by the Bermuda Court. For reasons to be explained below, once recognized, the Receivers will also seek this Court's assistance by way of directions permitting them to bring an action for Norwich Pharmacal 1 relief against the Joint Official Liquidators (“the JOLs”) of Caledonian Bank Limited (“CBL”) and Caledonian Securities Limited (“CSL”).
The Receivers explain that at this early stage of the Receivership of the M3 Fund, they must obtain orders that the JOLs disclose certain documents in their possession without which the Receivers are being impeded from complying with their duties to investigate the whereabouts of the M3 Fund's assets and to take steps to recover those assets, for the benefit of the M3 Fund's stakeholder. The Receivers have therefore also filed an Ex Parte Originating Summons (“NP Summons”) seeking such orders pursuant to the Norwich Pharmacal principles. The Recognition Summons was heard on 11 December 2017 and these are the reasons for the grant of recognition.
The Receivers also filed an Ex Parte Summons (“Gagging Summons”) seeking an order preventing the JOLs from informing anyone of the existence of the NP Summons and the evidence in support thereof, which, if the Recognition Summons and Gagging Summons were successful, would be served on the JOLs immediately / after the hearing on 11 December 2017. In the event, having been satisfied that pre
mature disclosure of the Receivers' actions to those involved with the M3 Fund could result in prejudice to the Receivers' actions, I also granted the Gagging OrdersThe orders granted in respect of recognition are as follows:
4.1. that the Appointment Order be recognized by this Court, including recognition of the Receivers as having all the functions and powers of the directors and managers of the Silk Road Fund Ltd (“Silk Road”) in respect of the business and assets linked to the M3 Fund, including the powers and functions set out in the Appointment Order;
4.2. that in recognition of the above powers and functions, the Receivers are authorised to bring an application for Norwich Pharmcical type orders for disclosure against the JOLs of CBL and CSL; and
4.3. that the Receivers shall have liberty to apply to this Court in respect of any matter concerning the M3 Fund and/or Silk Road and arising during the period of the appointment of the Receivers as Receivers of the M3 Fund and to do all such things as may be necessary to assist the Receivers, in connection with their appointment as the Receivers of the M3 Fund.
To ground their applications, the affidavit of Matthew Clingerman, one of the Receivers, was relied upon. He explains the following necessary background. John Wasty, a Bermudian attorney also files an affidavit in support and in which he sets out and explains the applicable Bermudian law. His evidence on that subject was accepted for the purposes of my decision and is reflected in my findings which follow.
The M3 Fund is what is known in Bermuda, its place of incorporation, as a “segregated account”.
Silk Road is a “segregated accounts company” incorporated in Bermuda on 19 October 2011. It is permitted by Bermudian legislation to carry on the business of a mutual fund and to offer shares in one or more classes of one or more segregated accounts. The M3 Fund is a segregated account of Silk Road. In a manner identical to that in which Cayman Islands segregated portfolio companies and their segregated portfolios operate, a Bermudian segregated account such as the M3 Fund is not a separate legal entity to its segregated accounts company. Its establishment and nature is explained in section 17(1) of the Bermuda Segregated Accounts Companies Act 2000 (“SACA”) which provides as follows:
“Nature of segregated accounts, application of assets and liabilities
17. (1) Notwithstanding any other provision of this Act, the establishment of a segregated account does not create a legal person distinct from the segregated account company.
(2) Notwithstanding any enactment or rule of law to the contrary, but subject to this Act, any liability linked to a segregated account shall be a liability only of that account and not the liability of any other account and the rights of creditors in respect of such liabilities shall be rights only in respect of the relevant account and not of any other account, and, for the avoidance of doubt, any asset which is linked by a segregated accounts company to a segregated account-
(a) shall be held by the segregated accounts company as a separate fund which is-
(i) not part of the general account and shall be held exclusively for the benefit of the account owners of the segregated account and any counterparty to a transaction linked to that segregated account, and
(ii) available only to meet liabilities to the account owners and creditors of that segregated account; and
(b) shall not be available or used to meet liabilities to, and shall be absolutely and for all purposes protected from, the general shareholders and from the creditors of the company who are not creditors with claims linked to segregated accounts.
(3) For the purposes of this Act, the Companies Act 1981 and otherwise at law, the assets recorded in the general account shall be the only assets of a segregated accounts company available to meet liabilities of the segregated accounts company that are not linked to a segregated account.”
The segregated accounts company, Silk Road in the instant scenario, holds assets separately on behalf of the M3 Fund segregated account, with the assets being segregated from those of other segregated accounts within Silk Road, and being available only to meet the liabilities of the M3 Fund segregated account. The question whether this kind of arrangement should be regarded as a kind of statutory trust or simply as giving rise to strict accounting obligations was raised but not determined in Re SPhinX, 2009 CILR 28, (at 36). There the view was expressed obiter, that the latter is, at minimum, the nature of the obligation imposed in the context of a similar Cayman Island segregated portfolio company.
On 20 January 2013, Goodwill PTC Limited (as Trustee of the Prosperity Trust) (“Goodwill”) subscribed for 10,000 Participating Class A Shares in the M3 Fund for a consideration of US$10 million. Two years later, on 19 January 2015, Goodwill served a redemption notice in respect of its entire shareholding, which was accepted by the administrator of Silk Road.
Notwithstanding, as the Clingerman affidavit avers, that Goodwill explored ways in which its investment might be repaid, including by way of a share purchase agreement with the investment advisor of the M3 Fund; as at 10 April 2017 no redemption monies had been repaid. On that date Goodwill filed an originating summons in the Bermuda Court seeking the appointment of the Receivers. The grounds on which the appointment was sought were that it was just and equitable that the Receivers be appointed and that the appointment of the Receivers was likely to achieve the orderly management, sale, rehabilitation, run-off or termination of the business of or attributable to the M3 Fund, or the distribution of the assets linked to the M3 Fund, to those entitled to them.
On 21 April 2017, the Bermuda Court appointed Mr. Clingerman and Mr. Sven Michael Schultz as Receivers. By Court Order dated 6 October 2017, Mr. Christopher Smith replaced Mr. Schulz.
The full range of powers granted to the Receivers is set out in the Appointment Order. For the purpose of the instant application, it is submitted by the Receivers that the following powers are pertinent:
“13.1 That the Receivers may do all such things as may be necessary for the purposes of:
(a) The orderly management, sale, rehabilitation, run-off or termination of the business of, or attributable to, the M3 Fund;
(b) The distribution of the assets linked to the M3 Fund to those entitled thereto.
13.2. That the Receivers shall have all of the functions and powers of the directors and managers of Silk Road in respect of the business and assets linked to the M3 Fund.
13.3. That Receivers shall have the powers:
(a) to ascertain the assets of the M3 Fund and their status and take all steps necessary including Court actions where appropriate to obtain possession of such assets and to bring the same under their control and further, where appropriate, bring the same into the...
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