Strategic Turnaround Master Partnership Ltd Applicant v Culross Global Ltd Respondent
| Jurisdiction | Cayman Islands |
| Judge | The Honourable Chief Justice Smellie |
| Judgment Date | 29 October 2008 |
| Judgment citation (vLex) | [2008] CIGC J1128-1 |
| Docket Number | CAUSE NO: 276 OF 2008 |
| Court | Grand Court (Cayman Islands) |
| Date | 29 October 2008 |
In the Matter of the Companies Law (2007 Revision) and in the Matter of Strategic Turnaround Master Partnership Ltd.
The Honourable Chief Justice Smellie
This is an application by Strategic Turnaround Master Partnership Ltd. (‘the Company’) for the striking out of a petition filed by Culross Global Limited (‘Culross’) for its winding up.
Culross filed its petition as an investor who claims to have redeemed its investments in the Company and now claims to stand in the position of a creditor of the Company.
The Company is an exempted limited liability company incorporated under the Companies Law of the Cayman Islands (now the 2007 Revision and hereinafter the ‘Companies Law’).
The Company is also a regulated mutual fund pursuant to the Mutual Funds Law and as such is registered with the Monetary Authority of the Cayman Islands (‘CIMA’) under section 4(3) of that Law.
A requirement of its registration is that investments in the Company are made available only to experienced and sophisticated investors and pursuant to the Mutual Funds Law, there is a prescribed minimum equity investment of 50,000 United States dollars.
The Company's assets are substantially invested in a ‘master-feeder’ fund structure in Strategic Turnaround Equity Partners L.P. (Cayman) (‘the Master Fund’); an exempted limited liability partnership also formed under the laws of the Cayman Islands.
In addition, Strategic Turnaround Equity Partners L.P. (the ‘On-Shore feeder’), a limited partnership organised under the laws of the State of Delaware, the United States, also invests substantially all of its assets in the Master Fund and acts as the On-shore feeder for the Master Fund. Investors subscribe for shares in either the Company or the Onshore Feeder.
Culross as an investor in the Company, is thus indirectly an investor in the Master Fund as well.
The Feeder structure comprises an open-ended investment vehicle in which investors subscribe for shares and from which investments are redeemable at any time, by redemption notices being given to the respective feeder fund. This in the case of the Company, is effected by notice being given in keeping with the Articles and subject to the rights of the Company under the Articles and other constitutional documents, to suspend redemptions.
As a matter of Cayman Islands law, redemptions are permissible by virtue of section 37 of the Companies Law by which companies are allowed, in certain circumstances, to redeem or buy back their shares.
This case has arisen because Culross having given notice of redemption, but not having been paid for its redemption proceeds in circumstances to be described below, has filed its petition to wind up the Company claiming as a creditor on grounds under section 94 of the Companies Law, that the Company is unable to pay its debts as they fall due. The alternative ground for the petition under the same section of the Companies Law, is that it is just and equitable that the Company be wound up.
The Company now applies to strike out the petition on grounds that Culross has no standing to bring it and that it is an abuse of the process of the Court.
That change in its status from shareholder to creditor that Culross claims, is said to have come about in the following way which is disputed by the Company and which, as a matter of the construction of the constitutional documents of the Company, arises for assessment now in the context of this strike out application.
In May 2007, Culross through it custodian's nominee, Banco Nominees (Isle of Man) Limited (‘Banco’), completed subscription for shares in the Company for which it paid a total sum ofUSD 1,840,000.00. By virtue of section 38 of the Companies Law, Culross was then deemed to have agreed to become a member bound by the Memorandum and Articles of Association, having subscribed to those constitutional documents of the Company.
On 31st October 2007, Culross in keeping with Article 31, gave notice of its intention to redeem all its shares in the Company. This notice was expressed as being due to the negative view Culross had taken of the United States markets in which the Master Fund was selectively invested in the ‘micro-cap’ sector (traded companies with a market capitalisation of between USD50 million and USD250 million) and in the ‘small-cap’ sector (those traded companies with capitalisation between USD250 million and USD 1 billion).
Pursuant to Article 31, the redemption notice was required to be served at least sixty (60) business days prior to the effective redemption date.
This would have resulted in a redemption date of 1st February 2008 but, as such dates are set to be at the end of each quarter, the next redemption date was identified as 31 March 2008. This was confirmed to be the effective redemption date by an additional notice sent on behalf of Culross on 11th March 2008.
Further, as the Company needed time to ascertain the net asset values (‘NAV's’) or price at which shares were to be redeemed, thepayment date was provided to be 30 days after the redemption date.
In this regard the Confidential Explanatory Memorandum (ie: the offering memorandum) of the Company (‘the CEM’) provides (at page 18):
‘Payments upon Redemption. Payment of the Redemption Price will be made as soon as practicable but,except in cases otherwise described herein, a shareholder who is making a redemption will receive at least 90% of the Redemption Price no later than 30 days following the date of redemption’ (emphasis supplied).
Accordingly, 90% of the redemption price was due to be paid no later than 30 days following the redemption date; that is: no later than 30 April 2008 except in cases where payment may be denied in keeping with the Articles and CEM itself (as the words in emphasis suggest).
Mr. Gary Herman, a director of the Company and managing member of its investment advisor GCM Administrative Services, LLC, confirmed that payment would be made no later than 30th April 2008 in an e-mail sent on 24th March 2008 to Mr. Nigel Blanshard, a director of Culross, in which Herman stated:
‘We confirm your email below that we are in receipt of your redemption request for March 31, 2008. You will receive at least 90% of the cash by the end of April 2008 as per the offering memorandum. In addition, we have agreed to waive the early redemption penalties for this redemption.
Thanks for your patience’.
Further, on 11th April 2008, the Company's Administrator — Citi Hedge Fund Services (Cayman) Ltd. (‘Citi’) — sent an e-mail to Banco stating that:
‘Dear Investor
Please find attached your initial confirmation for the full redemptions from the … fund….
Kindly also be advised that these full redemptions are approved for March 31, 2008 and the fund [ie: the Company] also confirms the following:
• That these redemptions are free of fees
• 90% of the redemption proceeds will be paid within 30 days
• Balance to follow upon completion of the annual audit.’
Events then took a different course and that which ultimately led to the filing of this petition without further warning by Culross.
It is most convenient that I describe the events by adoption of the chronology which was helpfully prepared and agreed by both counsel in this matter.
On 17th April 2008, the directors of the Company held a meeting at which they resolved (among other things) to ‘suspend all redemptions at this time and that such action is in the best interests of the Company’.
The directors expressly relied on the powers stipulated in Articles 55 and 56 of the Company's Articles of Association and which will be examined below.
The minutes of that meeting, which set out the discussion among the directors, seek to address any concerns that the decision to suspend redemptions was not taken in the best interests of the members of the Company as a whole. Indeed, no express allegation to the contrary as to the bona fides of the directors at that moment in time has been raised by Culross in these proceedings. Concerns have however, been raised about the validity of the powers exercised by the directorsas they purport to have suspended, not only redemptions, but payments as well. The minutes reveal as follows:
‘Discussion
The directors reviewed the current holdings of the Fund in detail and each position was discussed and reviewed. All of the directors had the opportunity to ask questions regarding the company's portfolio of investments. It was discussed and unanimously concluded that the U.S. micro-cap turnaround sector, which is the primary investment sector for the Fund, is extremely volatile and illiquid at this time.
The directors discussed the high likelihood of negative ramifications if any redemption by shareholders of the company were permitted.
The directors confirmed that they each reviewed or informed themselves of the contents of all the relevant documents and that they had each satisfied themselves that there was a clear corporate benefit and in the best interests of the company and its shareholders to suspend redemptions’.
On 22 April 2008, the directors of the Company passed the further following written resolutions:
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1. It is in the best interests of the company and all the shareholders in the company that, in accordance with the Articles the calculation of the net asset value of shares be suspended (‘the suspension’).
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2. No shares in the company be redeemed nor new shares issued until such time as the directors have lifted the suspension;
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3. All notices of redemption received by the company be suspended until such time as the directors have lifted the suspension….’
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