The Companies Act (2021 Revision) and Baf Latam Credit Fund

• Jurisdiction: Cayman Islands
• Judge: Justice Parker
• Judgment Date: 10 December 2021
• Court: Grand Court (Cayman Islands)
• Docket Number: CAUSE NO.: FSD 24 OF 2021 (RPJ)

In the Matter of the Companies Act (2021 Revision)

And in the Matter of Baf Latam Credit Fund

Before:

The Hon. Justice Parker

CAUSE NO.: FSD 24 OF 2021 (RPJ)

IN THE GRAND COURT OF THE CAYMAN ISLANDS

FINANCIAL SERVICES DIVISION

HEADNOTE

Winding up petition presented by contributory-ss 94(1) (c) and 94(3) Companies Act (2021 Revision)-petitioner's subjective loss of trust and confidence in management-custodian of shares beneficially owned by investment vehicles- jurisdiction — third party loss of trust and confidence — section 92 (e) Companies Act just and equitable ground-discretion-serious mismanagement-breach of constitutional documents — probity — loss of trust and confidence objectively justified-alternative remedy.

Appearances:

Mr Tom Smith QC, Mr Neil Lupton, Mr Niall Hanna and Ms Siobhan Sheridan of Walkers on behalf of the Petitioner

Mr Guy Manning, Mr Hamid Khanbhai and Ms Katie Logan of Campbells on behalf of the Fund

IN OPEN COURT

Introduction

1 BNP Paribas Securities Services, Luxembourg (the “Petitioner”) presents a Petition as a contributory of BAF Latam Credit Fund (the “Fund”) within the meanings of sections 94 (1) (c) and 94 (3) of the Companies Act (2021 Revision).

2 The Petitioner, as custodian, holds legal title to shares in the Fund amounting to 58.61% of its issued share capital. Those shares are beneficially owned by four investment vehicles (the “Apollo Vehicles”) and the Apollo Vehicles are managed by Apollo Management International LLP (“AMI”). For convenience and where relevant, the Petitioner, the Apollo Vehicles and AMI are referred to as (“Apollo”).

3 The Petition seeks a winding up order in respect of the Fund pursuant to section 92(e) of the Companies Act. Section 92 (e) provides that a company may be wound up if the Court is of the opinion that it is just and equitable that the company should be wound up.

The Petitioner's case

4 Tom Smith QC appeared for the Petitioner. In summary, he submitted that:

• a. There had been serious mismanagement of the Fund and its assets by the Investment Manager. The Board of Directors and the Fund, rather than taking steps to rectify the mismanagement, has steadfastly supported the poor conduct and the ongoing engagement of the Investment Manager, putting the interests of the Investment Manager ahead of the interests of the Fund.

• b. There are also concerns that the Investment Manager has caused the Fund to enter into transactions in which the interests of another Fund affiliated to the Investment Manager have been improperly prioritised to the detriment of the interests of the Fund.

• c. As a result of this, a significant majority of the investors in the Fund have, according to Mr Smith QC, justifiably and irretrievably lost trust and confidence in the conduct and management of the affairs of the Fund and require that it be wound up by independent liquidators.

5 More specifically, he submits that the Investment Manager has improperly frustrated the purposes and function of the ‘Advisory Board’. The Advisory Board was set up, he submits, as an essential condition of Apollo's decision to remain invested in the Fund following its conversion from an open-ended fund to a closed — ended fund in 2019. The functions of the Advisory Board include considering and providing or withholding approval for various categories of transaction before they are entered into by the Fund 1.

6 The Advisory Board Charter (as defined at paragraph 41 below) identifies the specific categories of transactions which require prior approval from the Advisory Board before they can be entered into by the Fund.

7 However, the Petitioner argues that since its establishment the Investment Manager and the Board of the Fund have frustrated and impeded the Advisory Board's operation, most significantly by disregarding the requirement to obtain its approval for transactions, notwithstanding that that was an express requirement under the Advisory Board Charter and the Fund's other constitutional documents. The Fund's Offering Memorandum and Investment Management Services Agreement contain the same requirements as the Advisory Board Charter so that those documents are likewise breached each time the Advisory Board Charter is breached 2.

8 In summary, Mr Smith QC submitted that despite having agreed to the creation of the Advisory Board, because it was expedient to do so at the time in order to secure Apollo's agreement for the conversion of the Fund from open-ended to closed ended, the Investment Manager and the Fund have subsequently come to regard the Advisory Board as an irritation, annoyance and a hindrance to their activities. They have, where Mr Smith QC says it suits them, simply ignored the need to obtain Advisory Board consent for transactions.

9 The Board of Directors and the Fund, rather than taking steps to intervene and ensure that the Investment Manager complies, in line with the Board's duties to the Fund, instead continues to support the conduct and retention of the Investment Manager.

10 Mr Smith QC points out that the Fund's responsive evidence to the Petition was prepared during a period when the Board was controlled by the Investment Manager. This is because two of the

Fund's Cayman Islands-based independent directors, Mr. Roney and Mr. Ackerley, (the “Cayman Independents”) resigned on or around 30 March 2021, leaving the Fund to be directed by two employees of the Investment Manager and Mr Valladares (a member of the Board of Directors of the Fund). New directors were not appointed until 17 May 2021

11 In addition to Apollo's 58.61% interest in the Fund, the relief sought by the Petition has the support of a further 16.9% of investors in the Fund such that, according to the Petitioner, 74.8% of the Fund's investors by value support a winding up order being made.

12 Mr Smith QC emphasised that the usual response of a trading company to a just and equitable winding up petition is to say that a winding up order is a draconian remedy and to talk up the allegedly dire consequences this would have on the company's business. However, in this case, the Fund is already in its divestment period and is therefore not supposed to be making further investments.

13 The practical issue raised by the Petition he says, is simply who should manage that divestment — the Investment Manager or professional independent liquidators. Mr Smith QC submits that the substantial majority of the Fund's investors believe that it should be independent liquidators who should manage the divestment as there is an objectively justified lack of confidence in the current management to do so.

The Fund's case

14 Guy Manning appeared for the Fund. In summary, he submitted that:

• a. The Fund is solvent and had shareholder capital of c.US $550 million as at the end of March 2021, of which around US $228 million is attributable to investors other than Apollo.

• b. The Petition is flawed because the Petitioner alleges no subjective loss of confidence and does not allege that it has been personally affected. Instead, it relies entirely on the loss of confidence asserted by a third party (the Apollo Vehicles / AMI) which are not the registered shareholders and not entitled present a winding up petition.

• c. There is no objective justification for Apollo's alleged loss of confidence. The complaints in the Petition do not come close to the necessary legal threshold. That is consistent with there being a majority of investors (by number) who oppose the making of a winding up order.

• d. No loss of confidence can be tied to any lack of probity on the part of those in control of the company.

• e. The Petitioner has presented no evidence of having no alternative remedy. Shares in the Fund are not publicly listed, however in circumstances where there is no allegation that the conduct complained of has resulted in any loss or diminution in the value of shares in the Fund and where the Fund's evidence shows that it is solvent and has outperformed, or performed in line with, certain benchmarks, existing or third-party investors may be interested in purchasing Apollo's shares in the Fund. There is no evidence of Apollo having explored such a possibility and it is no stranger to private equity sales. There is no reason to suppose the Directors of the Fund would refuse to register a transfer of Apollo's shares to a third party.

• f. Apollo could at any time have sought declaratory relief in relation to the meaning of the disputed terms in the Charter (and specific performance in relation to the entitlement to information), but failed to do so. The construction of those terms can be determined by the Court. That will eliminate or greatly reduce the likelihood of dispute over whether the prior approval of the Advisory Board is required, in relation to future transactions.

• g. As a matter of discretion, the Court should not wind up the Fund in circumstances where eleven investors have positively indicated that they oppose a winding up order. The Petitioner, with a majority of shares in the Fund, seeks a winding up order and has obtained letters of support from only four further investors. Apollo also seeks to rely on the support of TAPL investments Ltd and TAPL LP Interest Ltd (together, “TAPL”) but the question of ownership of TAPL's shares in the Fund (15.58%) is the subject of an arbitration with a third party which also claims to own those shares. TAPL's support is in breach of an express undertaking to the Court pending resolution of that dispute.

• h. For a contributory's petition put on the ground of there being an objectively justifiable loss of confidence in those in control of the company, this is a highly unusual case. The Petitioner has not advanced any case of loss of confidence by Apollo based on the performance of the Fund in general, or the economic outcome of any of the transactions complained of in the Petition. The...