The Companies Law (2018 Revision) and Oakrun Precious Metals Fund, Ltd in Court

• Jurisdiction: Cayman Islands
• Court: Grand Court (Cayman Islands)
• Judge: Justice Kawaley
• Judgment Date: 30 April 2019
• Docket Number: CAUSE NO: FSD 9 OF 2019(IKJ)

IN THE MATTER OF THE COMPANIES LAW (2018 REVISION)

AND

IN THE MATTER OF OAKRUN PRECIOUS METALS FUND, LTD

IN COURT

Before:

The Hon. Justice Kawaley

CAUSE NO: FSD 9 OF 2019(IKJ)

IN THE GRAND COURT OF THE CAYMAN ISLANDS

FINANCIAL SERVICES DIVISION

Petition presented as creditor and shareholder to wind-up Fund on insolvency and/or just and equitable grounds — principal of the Manager appearing in person to seek adjournment of petition in order for Fund to obtain legal advice-custodian of Fund's assets seeking validation order to enable Company to pay for legal advice-principles governing applications for validation order-principles applicable to costs of an unsuccessful application for a validation order

Appearances:

Mr Guy Cowan, Campbells, on behalf of the Petitioner, Bejoy International Ltd. (“Bejoy” and/or “Petitioner”)

Mr Scott Rhodenizer, a former director of the Company and the principal of Oakrun Capital LLC (the “Manager”) appeared in person on behalf of the Company

The Company (the “Fund”) did not formally appear

Mr Jeremy Snead and Mr David Jin, Appleby, on behalf of Echelon Wealth Partners Inc (“Echelon”)

REASONS FOR MAKING WINDING-UP ORDER AND DISMISSING APPLICATION FOR VALIDATION ORDER AND RULING ON COSTS

Background

1 The Petitioner, legally domiciled in the British Virgin Islands and commercially based in Malaysia, is the sole participating shareholder of the locally incorporated Fund. The Fund was incorporated on April 25, 2008 and was registered as a regulated mutual fund under the Mutual Funds Law on October 20, 2010. On November 1, 2010, Bejoy subscribed for 5000 Class A Participating Shares for $1,000 per share, investing a total of $5 million in the Fund. It is unaware of any other subscriptions before or since. The Manager is the sole holder of the voting Management Shares.

2 The Fund's Articles conferred redemption rights which were exercised by Bejoy on June 30, 2016. The Fund admitted an obligation to pay $5million. $1 million was paid as of July 31, 2016. The balance was never paid. Before the present proceedings were commenced, Bejoy agreed to postpone payment until August and then December 2018. The Independent Directors (provided by International Management Services Ltd.) notified Bejoy on December 11, 2018 that the Manager had withdrawn funds in respect of expenses which the Independent Directors had been unwilling to approve. The Manager reportedly removed the Independent Directors on January 1, 2019 with effect from December 31, 2018.

3 It was against this background that the Petition was presented on January 24, 2019. The principal grounds for winding — up were:

• (a) the Petitioner was an unpaid creditor in the amount of $4 million;

• (b) it was just and equitable that the Fund be wound-up in light of:

  • (i) the Manager's improper expenses claim,

  • (ii) the improper removal of the Independent Directors,

  • (iii) the loss of substratum flowing from the redemption of the sole investor's shares,

• (iv) breaches of the Directors Registration and Licensing Law and the Articles flowing from the removal of the Independent Directors.

4 The Petition was verified by the First Affidavit of Sherrine Hart, Bejoy's attorney-in — fact pursuant to Powers of Attorney dated June 30, 2016 and January 17, 2019. This Affidavit also exhibited various supporting documents including correspondence from the Independent Directors expressing concerns about, inter alia, the regulatory implications of their removal. The Petition and the Verifying Affidavit were served on the Fund at its registered office on January 25, 2019, just short of two months before the Petition was listed for hearing. At this juncture, the Manager as the controlling voting shareholder of the Fund had just over 8 weeks to appoint new directors to consider how the Fund should respond to the Petition. In the event, the Fund did not appear in opposition of the Petition on March 22, 2019 and the Petitioner's strong prima facie case for a winding-up Order was not challenged by any contrary evidence.

The Hearing of the Petition

5 Order 5 rule 6 of the Grand Court Rules provides as follows:

“(2) Except as expressly provided by or under any Law, a body corporate may not begin or carry on or defend any such proceedings otherwise than by an attorney.”

6 The spectre of Mr Rhodenizer, principal of the Manager, appearing in person to seek an adjournment on behalf of the Company provided vivid support for the Petitioner's case that the Fund was insolvent and, inter alia, had lost its substratum. I heard him to ensure that there were no unusual extenuating circumstances which might justify the Court granting the adjournment he sought to enable the Fund to obtain legal representation deploying funds held by Echelon for the Fund's account. Echelon was unwilling to release the funds without a Validation Order from the Court.

7 Mr Rhodenizer claimed to be oblivious of the Fund's legal position in light of the Petition and had seemingly, notwithstanding his apparently undisputed pivotal position as the directing mind of the Manager, studiously avoided educating himself on the position. He was unable to identify any arguable basis on which the Petition might successfully be opposed. Nor could he satisfactorily explain why the Manager had not been willing to obtain legal advice for the Fund at its own expense. When he was pressed by the Court, Mr Rhodenizer's main concerns appeared to be, unsurprisingly, his own personal commercial position. He had devoted years to the Fund and had seemingly spent most of the time after the Petition was served seeking to find a lastditch commercial solution to the underlying liquidity problems. This apparently involved making an in specie distribution of the underlying investments and winding — up the Fund in any event. He was convinced of the justness of the Manager's disputed expense claims and wished to ensure that they would be fairly adjudicated. I assured him that Official Liquidators would guarantee a fair adjudication of the Manager's claims.

8 The appearance of Echelon, represented by counsel, added to the other-worldly air of the hearing. Echelon was a custodian of certain of the Fund's cash assets. Its position was, quite properly, neutral on whether or not an adjournment should be granted. If an adjournment was granted it sought a Validation Order blessing the release of $25,000 from monies it held for the Fund for its proposed legal defence costs in relation to the Petition. Late on March 21, 2019, on the eve of the hearing of the Petition, Echelon filed a Summons seeking a validation Order under section 99 of the Companies Law (“Validation Summons” and “Validation Order”) 1. This application raised a number of obvious questions. Why was Echelon taking such an active step in the proceedings? Why did Echelon not leave it to the Fund to seek an adjournment, postponing any application to Court for a Validation Order until it was clearly necessary? What understandably enraged the Petitioner was that the main substantive position adopted by Echelon, supported by a Skeleton Argument and authorities, was to advance a positive case that it should be awarded its costs of participating in the hearing of the Petition in any event, on a priority basis. To rub salt in the Petitioner's wounds (as the sole economic stakeholder in the insolvent Fund), Echelon implied that it would ultimately rely upon contractual rights of indemnity against the Fund in respect of its costs.

9 The case for an immediate winding-up Order was compelling and the case for an adjournment was wholly insubstantial. I accordingly granted the relief the Petitioner sought. In the final analysis no need to consider the March 21, 2019 Echelon Summons for a Validation Order arose. The costs application made by Echelon in relation to its Summons arose in an unusual factual context. The competing written submissions and authorities were only filed shortly before the hearing. I accordingly reserved judgment on the costs of the Validation Summons.

10 I set out below my reasons for making the winding-up Order and dismissing the Validation Summons. As the Petition was not opposed and the need to consider the Validation Summons on its merits fell away once the winding-up Order was granted, the reasons for that decision are in large part articulated as part of my reserved judgment on the costs of Echelon's application for a validation Order.

The Validation Summons and the related costs

The factual context

11 The Summons was supported by the First Affidavit of Carmen Diges, a Director of Legal Affairs for the Toronto-based Echelon. She deposed that Echelon provided broker-dealer services to the Fund as a successor to a prior service provider. However, it is clear that at all material times Echelon received directions from the Manager. The

implication is that the Fund had authorised Echelon to act on the instructions of the Manager

12 From correspondence the deponent exhibits, it appears that Echelon initially approached the Petitioner in February 2019 having been instructed to arrange to transfer the shares Echelon held in the Fund's account to the Petitioner. The Petitioner's attorneys responded by email dated February 11, 2019 advising that the Petition had been presented, supplying a copy of the Petition and warning Echelon not to transfer any of the Fund's assets without a Validation Order by this Court. Far from inviting Echelon to make an application for a Validation Order, Campbells' response clearly disavowed any interest of receiving the proposed distribution.

13 It is deposed that Echelon subsequently received instructions from the Manager to release funds in respect of (a) management fees, and (b) legal advice in relation to the Petition. Echelon took the view that it was “appropriate for the Fund” to expend funds on legal advice and instructed Appleby to seek to...