The Companies Law (2013 Revision) and Herald Fund SPC

• Jurisdiction: Cayman Islands
• Judge: Mr Justice Andrew J. Jones
• Judgment Date: 28 January 2014
• Court: Grand Court (Cayman Islands)
• Docket Number: Cause NO. FSD 27 OF 2013 — AJJ

In the Matter of the Companies Law (2013 Revision)

And in the Matter of Herald Fund SPC

The Hon Mr Justice Andrew J. Jones QC

Cause NO. FSD 27 OF 2013 — AJJ

IN THE GRAND COURT OF THE CAYMAN ISLANDS

FINANCIAL SERVICES DIVISION

Appearances:

Mr Matthew Goucke of Walkers on behalf of the Principal Liquidators

RULING

1 Herald Fund SPC (“Herald”) was incorporated as a segregated portfolio company in 2004 and carried on business as an open ended investment fund. It was promoted by Bank Medici AG, which is a small Austrian bank, 75% owned by Mrs Sonja Kohn and 25% owned by UniCredit Bank Austria AG, a subsidiary of the Italian banking and financial services group, UniCredit SpA. Practically all of Herald's assets were placed under management with Bernard L. Madoff Investment Securities LLC (“BLMIS”) which turned out to be an enormous “Ponzi scheme”. BLMIS was put into liquidation in the United States in December 2008 and continues to be under the control of a court appointed trustee (“the Trustee”). Herald's business collapsed overnight as a result of the discovery of the Madoff fraud, but it continued to be managed under the supervision of its independent directors until 16 July 2013 when it was put into compulsory liquidation by order of this Court. The winding up order was made on a contributory's petition on the uncontested assumption that Herald is solvent. Following further lengthy argument, the Court made an order on 23 July 2013 by which two firms of professional insolvency practitioners were appointed as joint official liquidators. Mr Michael Pearson of Fund Solutions Services Limited (“the Additional Liquidator”) was appointed to carry out the limited role of settling the list of contributories and determining various related issues, including the question whether Herald's share register should be rectified. 1 Messrs

Russell Smith and Niall Goodsir-Cullen of BDO CRI (Cayman) Ltd (“the Principal Liquidators”) were appointed to perform all the other duties and responsibilities relating to the liquidation

2 This is an application by the Principal Liquidators, made by a letter to the Court dated 23 December 2013, for an order sanctioning the establishment of a liquidation committee in a manner which does not comply with the requirements of CWR Order 9, rule 1(6). They are also seeking a consequential direction that rule 5(8) be dis-applied. The Principal Liquidators have made a certification of “doubtful solvency” for the purposes of CWR Order 9, which means that the liquidation committee (if any) must be composed of not less than three nor more than six members, of whom a majority shall be creditors elected at a meeting of creditors and at least one of whom shall be a contributory (shareholder) elected at a meeting of contributories. The Principal Liquidators now seek a direction sanctioning the establishment of a non-compliant committee composed of one creditor and four contributories. I have come to the conclusion that the Court has no jurisdiction to dis-apply the mandatory requirements of CWR Order 9 and so this application must be dismissed, with the result that the Court should go on to consider whether or not to make a direction pursuant to rule 1(1) dispensing with the need to establish any liquidation committee at all.

3 For obvious reasons, the composition of liquidation committees is driven by the financial status of the liquidation at the time when the committee is established. CWR Order 9, rule 1 provides that when a company is certified as solvent its committee must be comprised of contributories (shareholders) and when it is certified as insolvent its committee must be comprised of creditors. CWR Order 8, rule 1 provides that the official liquidator shall summarily determine whether or not a company should be treated as solvent, insolvent or of doubtful solvency for the limited purpose of determining the composition of the liquidation committee and the composition of the meeting(s) by which the committee is elected. Inevitably, liquidators are called upon to make such determinations at a veiy early stage when it may well be apparent that the final outcome of the liquidation will turn upon the resolution of a myriad of different contingencies. The Rules make allowance for this situation in the following way. First, the liquidator may make a determination of “doubtful solvency” which is, in effect, a provisional determination which will hold good so long as the circumstances prevent a liquidator from expressing a firm opinion about the most likely final outcome. Second, the liquidator must keep his initial determination under review. Rule 1(2) provides that “If and when the official liquidator considers that his initial determination about the company's solvency may no longer be justified, he shall re-consider the matter and may change his determination if he considers that it is appropriate to do so.” When an official liquidator does change his determination, the consequence is that the composition of the company's liquidation committee must be changed accordingly. So long as a liquidator's certification of “doubtful solvency” remains in effect, CWR Order 9, rule 1(6) requires that its liquidation committee shall comprise not less than three nor more than six members, of whom a majority shall be creditors elected at a meeting of creditors and at least one shall be a contributory (shareholder) elected at a meeting of contributories.

4 The policy underlying these rules is clear. If, and so long as, a company in liquidation is properly considered to be insolvent in the sense that the amount of its liabilities is thought to be greater than the realizable value of its assets, its shareholders have no financial interest and therefore should not be allowed to influence the conduct of the company's liquidation as members of its liquidation committee. Conversely, ordinary creditors should be excluded from participation when a company is properly considered to be solvent in the sense that they will be paid in full in any event (though not necessarily on the date when their debts fall due) because the realizable value of the company's assets is properly considered to be greater than the amount of its liabilities. A company in liquidation will be considered to be of “doubtful solvency” for the purposes of CWR Order 9 if, at any given time, its official liquidator is of the opinion that the final outcome is no more or less likely to be solvent or insolvent, having regard to the likely resolution of some particular contingency or the likely outcome of a combination of different unrelated contingencies. In these circumstances the rules require that both creditors and contributories (shareholders) should be represented on the liquidation committee, with the...