The Companies Law v Heriot African Trade Finance Fund Ltd Section 64(b) of the Companies Law v Heriot African Trade Finance Fund Ltd
| Jurisdiction | Cayman Islands |
| Judge | The Hon, Mr Justice Andrew J. Jones |
| Judgment Date | 04 January 2011 |
| Court | Grand Court (Cayman Islands) |
| Docket Number | FSD 87 of 2010 |
| Date | 04 January 2011 |
The Hon, Mr Justice Andrew J. Jones QC
Mr Ross McDonough Mr Guy Manning of Campbells for the Petitioner/Applicant
Mr Kenneth Farrow QC and Mr Tim Richards of Mourant Ozan the Fund
Heriot African Trade Finance Fund Limited (‘the Fund’) was incorporated ana registered as an exempted company under the Companies Law on 17 th April 2007. The Fund was established as an open ended mutual fund and was duly registered under section 4(3) of the Mutual Funds Law, thereby imposing important statutory duties upon its directors. The person principally responsible for promoting the Fund was Mr Gianfranco Cicogna, acting in his capacity as chief executive officer of Heriot Commodity and Trade Finance (Pty) Ltd, a South African company which is part of the Heriot Group of Companies, of which Mr Cicogna has been chairman since 1996.
The Fund's investment manager is Heriot Investment Management (Cayman) Ltd (‘the Investment Manager’), a special purpose company incorporated under the Companies Law on 23 rd May 2007, which delegated most of its functions to Heriot Commodity and Trade Finance (Pty) Ltd (‘the Investment Adviser’) pursuant to an investment advisory agreement, a copy of which has not been put in evidence, The Investment Manager does not appeal, to have played any role in the events giving rise to these proceedings but it is relevant to bear in mind that it owns 100% of the Fund's voting shares for which it subscribed a nominal $10. The redeemable participating shares issued to the Fund's investors do not carry the right to vote.
The Fund's investment objective is described in its Private Placement Memorandum dated June 2007 (‘the PPM’) which constitutes the Fund's offering document for the purposes of section 4(6) of the Mutual Funds Law. It follows that the PPM must be filed with CIMA; it must describe the equity interests, in this case the rights attaching to the Fund's participating shares, in all material respects; and it must contain such other information as is necessary to enable a prospective investor in the Fund to make an informed decision as to whether or not to subscribe for shares, This statutory duty is a continuing one, at least so long as the Fund is open to new subscriptions. If the Fund's promoter (which in this case includes the Investment Adviser and Mr Cicogna) or its operator (which means the directors) become aware of any change that materially affects the accuracy of any information contained in the PPM, section 4(8) imposes an obligation to file an amended offering document with CIMA within 21 days.
Section 3 of the PPM describes the Fund's Investment Objective in these terms. ‘The primary object of the Fund is to invest in commodities and act as a provider of trade finance through its trading company named Heriot Trading Limited (the ‘Trading Company”)’, which is a wholly owned subsidiary, In the event, it appears from the Fund's audited financial statements for the year ended 30 th June 2008 that all the business was actually conducted by the Fund itself and not through its wholly owned subsidiary, but nothing turns on this point. Section 3 of the PPM goes on to describe the Investment Strategy and Process in the following terms. ‘The Fund [acting through the Trading Company] will act as a principal trader in commodities and a provider of trade finance.’ It described the Investment Adviser's experience in African trade finance and banking and went on to state that ‘The subscription proceeds will be utilized as collateral security to secure banking facilities in the form of Documentary Credits and short term collateralized loans and other financial instruments related to securing and execution of trade related transactions, These facilities will be used to purchase commodities against orders from qualifying African commodities traders and to assist in the provision of trade finance for import and export related transactions’. This is the Fund's business and investment objective as described in its offering document. The final part of Section 3 of the PPM sets out a series of investment restrictions under the heading Prudential Risk Management, the meaning and effect of which is directly relevant to one of the issues raised in these proceedings. Its full terms are recited in paragraph 16 below.
The Fund's register of members has not been put in evidence and the Court has not been provided with any comprehensive statement about the shareholder profile. However, it is agreed that the Petitioner/Applicant holds a total of 23.47% of the issued participating shares in its capacity as custodian for Aris Multi-Strategy Lending Fund Limited and Aris Africa Fund Limited, both of which are themselves carrying on business as collective investment funds. For simplicity's sake, I shall refer to the Petitioner/Applicant as ‘Aris’. The evidence is that Aris is one of the five largest participating shareholders who, collectively, hold about 80% of the equity. These five shareholders constitute an Investor Committee which was established in June 2009 as a channel of communication between the Fund's management and its principal investors. This Investor Committee has performed an important role and affidavits have been sworn on behalf of its four other members for the purposes of these proceedings, in which they oppose the positions adopted by Aris
Aris presented a winding up petition on the just and equitable ground on 5 th June 2009. As originally pleaded, it was said to be just and equitable to make a winding up order because the Fund's directors and Investment Adviser have breached their duties in such a way that Aris has justifiably lost confidence in their management of the Fund. The breaches of duty relied upon were (i) the failure to file audited financial statements with CIMA in compliance with section 8(2) of the Mutual Funds Law and (ii) the failure to comply with the investment restrictions contained in the PPM under the heading Prudential Risk Management. Aris did not pursue its winding up petition in a diligent way. Three hearings were adjourned on 21 st August 2009, 30 th October 2009 and 29 th January 2010.
Directions for trial were given on 14 th April 2010 and the winding up petition eventually came on for trial before Henderson J. on 16 th June 2010. What happened at that hearing has been related to me by Mi- Farrow who appeared for the Fund. Aris was then represented by a different firm of attorneys. I am told that Henderson J. expressed misgivings about the merits of the winding up petition (as then pleaded) and that he refused to allow Aris to rely upon un-pleaded allegations of breach of fiduciary duty on the part of the Fund's management. He apparently gave Aris a choice. It could either proceed on the basis of the petition without any allegations of breach of fiduciary duty or, alternatively, he would adjourn the hearing and give Aris leave to amend its petition. Aris chose to have an adjournment, but did not file its amended pleading until 26 th November 2010 (although a draft had been served earlier). By this time Aris had changed its attorneys.
The appointment of new attorneys led to a different approach on the part of Aris. On 4 th October 2010 Aris issued an originating notice of motion by which it sought an order for the appointment of inspectors pursuant to section 64(b) of the Companies Law. The grounds and evidence relied upon in support of the notice of motion are the same as those now relied upon in support of the winding up petition, including the allegations of breach of fiduciary duty,
In the meantime Henderson J. decided that it was no longer appropriate for him to deal with the matter and an order was made by the Registrar that both proceedings be reassigned to me. I convened a Case Management Conference, which took place on 10 th November 2010, for the purpose of informing myself about the issues and giving appropriate directions for trial. I made orders for directions, including an order that the winding up petition and the notice of motion be tried together on 17 th December 2010,1 also gave Aris leave to make a significant amendment to its petition so as to seek a winding up order on the additional ground that the Fund has lost its substratum, in that it is now impractical or impossible to carry on its investment objectives as described in its PPM and that its management are engaged in an ad hoc liquidation which ought to be brought under the control of official liquidators. The re-re-amended petition filed on 26 th November 2010 includes both the allegation of breach of fiduciary duty (for which Henderson J. gave leave on 16 th June) and the loss of substratum allegation (for which I gave leave on 10 th November 2010).
The winding up petition and notice of motion, in their final amended form, give rise to the following issues, The first issue concerns the reasons why the Fund's management have (i) failed to produce any financial statements and/or disclose them to its shareholders for any period after 30 th June 2008 and (ii) failed to have those financial statements audited in a timely manner. The second issue is whether or not the Fund's management have acted in breach of the investment restrictions contained in Section 3 the PPM under the heading Prudential Risk Management. The third issue is whether or not the affidavit evidence relating to the alleged breach of fiduciary duty discloses a real issue to be tried which is sufficient to justify, or at least support, an order for the appointment of inspectors or a...
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