The Companies Law (as Revised) and Midland Acres Ltd (in Official Liquidation)
| Jurisdiction | Cayman Islands |
| Judge | Parker |
| Judgment Date | 19 January 2022 |
| Court | Grand Court (Cayman Islands) |
| Docket Number | Cause No.: FSD 88 of 2017 (RPJ) |
The Hon. Justice Parker
Cause No.: FSD 88 of 2017 (RPJ)
IN THE GRAND COURT OF THE CAYMAN ISLANDS
FINANCIAL SERVICES DIVISION
Appeals against rejection of proofs of debt by JOLs-burden and standard of proof-approach to evidence in absence of contemporary documentation-CWR 2018 O.16-de novo hearing-assignment and novation
Mr. Ben Tonner QC and Ms Sally Bowler of McGrath Tonner on behalf of the Appellants
Mr. Alex Potts QC, Mr Erik Bodden and Mr Jordan McErlean of Conyers Dill and Pearman LLP on behalf of the Joint Official Liquidators
By a summons dated 6 October 2021 Suresh Prasad (“Prasad”) and Antonio Rossano (“Rossano”) (together the Appellants) appeal the rejection of their proofs of debt by David Griffin and Andrew Morrison, the Joint Official Liquidators (“JOLs”) of Midland Acres Limited (“the Company”). Midland Mining Limited (“Midland Mining”) was joined as an Appellant by consent in its capacity as assignee of the debts referred to in Prasad and Rossano's proofs of debt. 1 On 28 September 2020, Prasad and Rossano had submitted proofs of debt in the respective sums of US $12,524,398 and US $1,567,313.
Prasad and Rossano's case is that they loaned significant sums of their own money to Stratford Lakes & Gardens C.I. Ltd (“Stratford Lakes”), in order to fund its acquisition of the shares in the Company. They assert that the liability under those loans was later assigned to the Company. Prasad also alleges that he advanced significant sums of his own money to assist the Company with its ongoing expenses.
The JOLs are not satisfied that these advances ever took place, nor that the liability was transferred to the Company, and accordingly the JOLs oppose the application.
Ben Tonner QC appeared for the Appellants. Alex Potts QC appeared for the JOLs.
–2008
Much of the factual background is set out in the affidavits of Prasad 6, 7 and 8. At all material times, Prasad has been the director and shareholder of Winfair Ltd (“Winfair”). 2 At all material times, Mr Ben Torchinsky who passed away in 2013, was a director of Brasco Limited (“Brasco”) and Rabsco Inc (“Rabsco”). Both of these companies invested in other companies.
One of these companies, Stratford Lakes, was incorporated in the BVI on 30 January 1998. Prasad's evidence is that Stratford Lakes was a special purpose vehicle incorporated in order to acquire a shareholding in the Company, now in liquidation. 3 At all material times, Prasad was a director of Stratford Lakes and he later became a director of the Company.
On 2 March 1998, soon after it was incorporated Rossano asserts that he paid the sum of US $225,000 to Stratford Lakes by two cheques 4. Prasad's evidence is that Rossano paid a further US $25,000, but the appellants are unable to locate this third cheque. 5
On or around this date, Eric Bosch also loaned the sum of US$100,000 to Stratford Lakes. Prasad's evidence is that Winfair repaid this loan on behalf of Stratford Lakes on 28 June 2002 through transferring a property to Mr Bosch. 6 In that way Stratford Lakes took on the debt to Winfair and therefore to Prasad.
Prior to this date, Stratford Lakes contracted with two of the (then) shareholders of the Company to purchase their shares, agreeing to pay interest on the sums due at the rate of 11.25% per annum. 7
At around the same time, Prasad made a number of payments to the (then) shareholders of the Company (the Woods family) on behalf of Stratford Lakes, as well as a number of payments to Stratford Lakes itself. 8 Prasad's case is that these payments were in relation both to the acquisition by Stratford Lakes of shares in the Company and in relation to the ongoing operational expenses of Stratford Lakes. 9
Prasad's evidence is that all of the payments to, or on behalf of, Stratford Lakes by himself, Winfair, Rossano, and Mr Bosch were loans to Stratford Lakes by those respective persons, rather than as payment for equity in Stratford Lakes, and that it was agreed and understood that the sums loaned to Stratford Lakes would be repayable with interest at the rate of 12% per annum, compounding annually.
In May 2000, Stratford Lakes required further funding. A different funder became involved. It is common ground that Mr Torchinsky agreed for Brasco to advance sums to Stratford Lakes, with Brasco then acquiring a shareholding in Stratford Lakes. These advances were recorded in promissory notes and later in an assignment agreement. Mr Torchinsky was a more prudent commercial operator than the appellants and properly documented the loans he was making.
On 31 May 2000, Stratford Lakes completed its purchase of 50% of the shares in the Company. At all material times since then, Prasad has been a director of the Company, together with Mr Eric Bosch.
Some years later, in or around June 2007, Mr T orchinsky agreed that Brasco would loan further sums to Stratford Lakes in order for Stratford Lakes to purchase the remaining 50% of the shares in the Company. 10 This advance was also recorded in a promissory note. On 14 and 15 September 2007, Stratford Lakes purchased the remaining shares in the Company. 11
Prasad's evidence is that in the latter half of 2008 there was a consensus amongst the shareholders of Stratford Lakes (which had become the effectively the holding vehicle for the Company) that the debts to Prasad, Rossano and Mr Torchinsky (including for contractual interest) ought to be transferred to the Company, given that it was the trading vehicle. Prasad's evidence is that this was done for reasons of simplicity and that an oral agreement was made between the relevant parties to this effect on or around 20 August 2008. 12
Pausing there in the narrative, the relevant details of this alleged oral agreement, which is said to amount to a novation are not set out. No particulars of the alleged conversation are provided. No consideration is detailed nor any explanation given as to why a subsidiary would assume the debt obligation of its parent. The operating company was according to Prasad prepared to assume the debt, but no commercial reasons are given. It was not formally documented, but is recorded in the financial statements of the Company at the time.
Another initial observation to make is that the financial statements, which are provided by way of excerpts, do not reflect the totality of documentation that should be available to a company having regard not only to common law and good practice, but the provisions of the Companies Act 13 to give a true and fair view.
It is unsatisfactory for Prasad to simply record in these documents that an unaudited balance sheet has been restated to include loans from directors and does not prove this is permissible or effective. Any interest accrued from any loans from directors would likewise require proof by way of underlying contracts and documents.
As I have said, Mr Torchinsky took a more prudent course by documenting the arrangements he made. By an assignment agreement dated 1 January 2009 between the Company, Stratford Lakes, Brasco, Rabsco, and Prasad, Brasco assigned the benefit of its loans to Rabsco and the Company agreed that it would assume the corresponding liabilities of Stratford Lakes (“the Assignment Agreement”).
Importantly, the Assignment Agreement contained representations by the Company, Stratford Lakes, and Prasad to the effect that the Company's only “Private Borrowing” was from Brasco as at the date of the Assignment Agreement. The Assignment Agreement also records that interest is payable on the relevant loans at the rate of 12% per annum, compounding annually. The Assignment Agreement is not executed as a deed.
Prasad's case is that he and Winfair then made a number of further ad hoc advances to the Company to assist it in meeting its operational expenses, such advances being made on the same terms as the Company's existing indebtedness to Prasad, Winfair, Rossano, and Brasco/Rabsco (that is, with interest payable at the rate of 12%, compounding annually). 14
Some years later on 1 May 2017, Rabsco which was then controlled by the trustees of Mr Torchinsky's trust 15, petitioned for the compulsory winding up of the Company. The Company initially opposed the petition, with Prasad filing evidence on behalf of the Company in the apparent belief that the Company could be sold at a price which would pay off Mr Torchinsky's debt and leave a surplus. In that evidence, Prasad admitted that the Company owed sums to Rabsco pursuant to the Assignment Agreement. 16
Joint Provisional Liquidators were appointed over the Company by consent. In June 2020 Rabsco renewed its petition to wind up the Company and the JOLs were appointed on 7 September 2020.
On 28 September 2020, Prasad and Rossano submitted proofs of debt in the respective sums of US $12,524,398 and US $1,567,313. On the same date, there was a (purported) assignment of these debts by Prasad and Rossano to Midland Mining.
On 1 September 2021, the JOLs gave notice to Prasad and Rossano that each proof of debt was rejected. Following agreements to extend the time for doing so, Prasad and Rossano then issued the summons on 6 October 2021.
On 19 November 2021, there was a (further) assignment by Prasad and Winfair to Midland Mining of debts owing to them by the Company. 17 As stated above, Midland Mining has now been joined as an applicant for Prasad and Rossano by consent.
Directions were subsequently made by consent, and Prasad and Rossano filed Prasad 6 and Prasad 7 in support of the summons. The JOLs then filed Griffin 5 in response. Prasad and Rossano...
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