The Companies Act (2022 Revision) and Direct Lending Income Feeder Fund, Ltd (in Official Liquidation)

JurisdictionCayman Islands
JudgeMr Justice Segal
Judgment Date13 March 2024
CourtGrand Court (Cayman Islands)
Docket NumberCAUSE NO FSD 108 of 2019 (NSJ)
In the Matter of the Companies Act (2022 Revision)
And in the Matter of Direct Lending Income Feeder Fund, Ltd. (In Official Liquidation)

The Hon. Mr Justice Segal

CAUSE NO FSD 108 of 2019 (NSJ)




Whether original holders of redeemable preference shares who claim damages for deceit but who are unable to rescind their subscription agreements are entitled to prove in the winding up and if they are the ranking in the winding up of such claims and the comparative ranking claims by holders of redeemable preference shares who completed the redemption process before the winding up or who have rights to prove in the winding up under section 37(7) of the Companies Act – the basis for the decision of the House of Lords in Houldsworth and of subsequent English cases including Soden v British & Commonwealth and whether the common law rule derived from these cases is or should be good law in the Cayman Islands – the capital maintenance rule in Cayman company law


Richard Millett KC with Simon Dickson, Jessica Vickers, Laura Stone and David Ramsaran of Mourant Ozannes (Cayman) LLP for Eiffel eCapital US Fund

Tom Smith KC with Mathew Dors and Rupert Stanning of Collas Crill for the JOLs


This judgment deals with a significant point of principle and authority in Cayman Islands' insolvency law, namely whether a shareholder who was induced to subscribe for their shares by a misrepresentation made by or on behalf of the company can after the commencement of the company's winding up rescind their subscription contract and prove for damages in competition with non-shareholder creditors and ahead of other shareholders' rights to a distribution. In order to determine this point it is necessary, inter alia, to consider what was decided by the House of Lords in Houldsworth v City of Glasgow Bank (1880) 5 App Cas 317 ( Houldsworth), what proposition of law that case and the cases that followed or referred to it stand for and whether Houldsworth and that proposition of law is good law, and should continue to be applied, in this jurisdiction.


The background to the applications with which this judgment deals are set out in my judgment dated 10 November 2022 (the Judgment). The joint official liquidators ( JOLs) of Direct Lending Income Feeder Fund, Ltd (in official liquidation) ( DLIFF) had applied (by summons) for directions concerning various matters. First, the treatment in the liquidation of (and the exercise of their powers as official liquidators in relation to) claims made or to be made by investors against DLIFF based upon alleged misrepresentations by DLIFF in connection with the investors' subscription for their shares. Secondly, the treatment of claims by investors who had sought unsuccessfully to redeem their shares in DLIFF with effective redemption dates prior to 8 February 2019 (the Redemption Claims). The tenth affidavit of Christopher Johnson ( Johnson 10), one of the JOLs, set out the background and gave details of the investors (see [20.2]).


Following the filing of a further summons by Eiffel eCapital US Fund ( Eiffel) a hearing was held to determine the appropriate procedural directions to be given to allow the Court to adjudicate on the JOLs' application for directions. The Judgment and the order made to give effect to it set out the directions which I gave for this purpose and provided for a hearing to be listed at which:

  • (a). the JOLs would advocate for the grant of the following orders (the Misrepresentation Orders):

    • (i) an order that the JOLs be directed to exercise their function of adjudicating claims on the basis that any claims from investors of DLIFF based upon asserted misrepresentations by DLIFF in relation to their subscriptions for shares in DLIFF were not barred as a matter of law solely due to the fact that DLIFF was in liquidation; and

    • (ii) an order that, in the event that any claims from investors of DLIFF based upon asserted misrepresentations by DLIFF in relation to their subscriptions for shares in DLIFF were admitted, the JOLs be directed to pay such claims either (i) pari passu with any admitted Redemption Claims, or, in the alternative, (ii) in priority to any admitted Redemption Claims.

  • (b). Eiffel would advocate against the grant of the Misrepresentation Orders. Eiffel, Prêtons Ensemble 2 and Eiffel eCapital Global Fund (the Eiffel Funds) were shareholders of DLIFF who gave notice to redeem their shareholding on 21 November 2018 but who had not been paid the redemption proceeds (parties in the position of the Eiffel Funds have been referred to as Late Redeemers). The Eiffel Funds have filed proofs of debt in the liquidation (on 27 September 2019) but the JOLs have not yet adjudicated the proofs.


The hearing (the Hearing) took place on 25 and 26 May 2023. At the Hearing, Richard Millett KC appeared for Eiffel and Tom Smith KC appeared for the JOLs.


Shortly before the Hearing, upon receipt of the parties' skeleton arguments, I found out that the same issue arising on the JOLs' summons had been raised and was to be dealt with by Mr Justice Doyle in another liquidation and proceeding in this Court. This is the official liquidation of HQP Corporation ( HQP). A hearing before Justice Doyle had been listed on 17 and 18 May 2023, very shortly in advance of the Hearing. At the Hearing, I raised this issue with Mr Millett KC and Mr Smith KC (both of whom were counsel in HQP and had appeared before Justice Doyle). I noted that in my view it would have been more cost-effective for the common issue of principle arising in both liquidations (even if the underlying facts were different) to have been listed before one Grand Court Judge (or at least for that possibility to have been raised with the Court in advance of the listing of two separate hearings). That would have avoided a duplication of expense and effort and the risk of inconsistent judgments. I was told that consideration had been given to this approach but that the liquidation committees wished there to be a separate adjudication of the issue in each liquidation. I said that in the circumstances, since the hearing before Justice Doyle had now taken place and all parties in these proceedings were ready and wished to go ahead, it seemed to me that the best way to proceed was for me to hear the parties' submissions but then to wait until Mr Justice Doyle had handed down his decision before finalising and deciding what approach to take in my judgment. Mr Millett KC and Mr Smith KC were content with this although they both requested that I consider the issues raised and prepare a separate judgment since, they submitted, the arguments before me had developed differently from the arguments presented to Mr Justice Doyle and the context in which the issues arose in DLIFF's liquidation was different from that of HQP.


Mr Justice Doyle (with his usual promptness and efficiency) delivered his judgment on 7 July 2023 ( Justice Doyle's Judgment) and I received a copy of the decision shortly thereafter. At that point, I asked the parties whether they wished to have the opportunity to make further submissions based on and by reference to Justice Doyle's Judgment, but they declined the invitation as they considered further submissions to be unnecessary.


I have now had an opportunity to study Mr Justice Doyle's elegant and clearly reasoned judgment (unfortunately because of the summer break shortly after the handing down of Justice Doyle's Judgment and a number of other heavy cases that I have had to deal with it has taken me some time to finalise this judgment). I am aware that Mr Justice Doyle has granted permission to appeal and therefore, that the issues he has dealt with and which arise in this case will be considered by the Court of Appeal. I considered whether the right approach was simply to follow his reasoning and decisions and then to leave it to the Court of Appeal to decide whether to affirm Mr Justice Doyle's ruling. I must confess to finding this an appealing option (no pun intended) but in view of the firm request not to do so made by Mr Millett KC and Mr Smith KC and since, as will become apparent, I take a different view from Mr Justice Doyle on the key issues arising, I concluded that I should set out my own analysis and decisions.

The core issues and the parties' submissions in outline

In deciding whether to make the Misrepresentation Orders it is necessary to determine whether claims for unliquidated damages for misrepresentation made by members who were induced to subscribe for their shares by DLIFF's misrepresentations ( Misrepresentation Claimants) are entitled to be admitted to proof in DLIFF's liquidation at all (the Proof Point) and then if such claims are admissible where they rank in the order of priorities in the liquidation (the Priority Point), in particular whether they rank (a) in priority to Redemption Claims (by investors such as the Eiffel Funds) (b) pari passu with Redemption Claims or (c) subordinate to such Redemption Claims.


Eiffel contends that:

  • (a). the Misrepresentation Claimants' claims are barred from admission to proof by the principle of law (the Houldsworth Principle) established by the House of Lords in Houldsworth v City of Glasgow Bank (1880) 5 App Cas 317 ( Houldsworth) and the subsequent cases that have explained and followed it. This Court should follow and apply that principle.

  • (b). if, contrary to Eiffel's primary contention, the Misrepresentation Claimants' claims are admissible and admitted to proof then nonetheless Eiffel's claims (and all Redemption Claims) rank in priority to the Misrepresentation Claimants' claims and are neither pari passu with nor subordinate to them.

  • (c). the question of admissibility and ranking are to some extent linked not only because many of the relevant...

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