Worldwide: Offshore Case Digest: Issue No. 11 – Bermuda, The British Virgin Islands And The Cayman Islands

BERMUDA

SUPREME COURT

SHARE TRANSFER - INJUNCTION TO RESTRAIN COMPANY FROM HOLDING SPECIAL GENERAL MEETING TO ADOPT AMENDED BYE-LAWS - PRE-EMPTION RIGHTS

M Pulido -v- UST Holdings Ltd et al [2015] SC (Bda) 67 Com (25 September 2015)

A transferee of shares who has not yet been registered on the share register of the company does not have standing to obtain interim relief prohibiting an impugned meeting. Hellman J found that a transfer of shares who contended that they were the legal owner of 50,000 shares in UST Holdings Ltd (the "Company"), but who had not yet been entered on the company register, did not have standing to seek injunctive relief to prevent a resolution being put to the members of the Company to adopt restated bye-laws in full substitution for the Company's existing bye-laws.

Under the new proposed bye-laws, the Company could refuse to register the Plaintiff as a shareholder without giving any reason. The Transferee strongly suspected one of the purposes of restating the bye-laws was to allow the Company to prevent him from becoming a member.

It was held that a company is not bound to recognise trusts of shares; the company can only look to the man whose name is upon the register. A company is not obliged to recognise a person claiming title to shares as transferee until an instrument of transfer in the prescribed form has been submitted for registration and has been registered. The Company could consider the restatement of the bye-laws without regard to the Transferee's beneficial interest. The material distinction was held to be not between legal and beneficial ownership, but between members and non-members. Only members have standing to challenge a proposed restatement of a company's bye-laws in the courts.

CONFIDENTIALITY IN TRUST PROCEEDINGS - SECTION 47 OF THE TRUSTEE ACT - PRIVACY OF BENEFICIARIES

BCD Trust [2015] SC (Bda) 83 Civ

Confidentiality in trust proceedings, especially non-contentious proceedings, can be a pressing issue for trustees. Trustees sometimes need to obtain the guidance of the Bermuda Court, or the exercise of the Court's broad powers under Section 47 of Bermuda's Trustee Act, on entirely non-contentious issues. The trustees may not, however, want undue press attention placed on the beneficiaries. Trustees may avoid seeking the assistance of the Court if, by doing so, they might undermine their beneficiaries' privacy. For this reason, trustees often seek confidentiality orders, which typically provide that the names of the parties involved can be anonymised in the cause book, for the hearing to be heard in private and for subsequent access to court files by the public to be restricted.

Confidentiality, however, is increasingly hard to find in modern courts. The courts continually trend towards ever greater transparency. While non-contentious trust actions were, in the past, heard in chambers (which meant members of the public and the press were in practice, left outside), chambers hearings are now held in court rooms to which the public have ready access. Further, due to recent procedural reforms in Bermuda, court papers held in the Registry are increasingly open to public and media scrutiny.

Thus, confidentiality orders are in increasing demand. They can, however, be hard to obtain. In England for example, such orders, even in non-contentious matters, are treated as exceptional and only granted on the basis of cogent evidence of need (V -v- T [2014] EWHC 3432 (Ch) Civ). This effectively means that trustees must show evidence of a security risk or dangers such as 'false friends' latching on to minor beneficiaries.

In BCD Trust [2015] SC (Bda) 83 Civ, Kawaley CJ in an ex tempore ruling adopted a liberal and pragmatic approach. The Chief Justice emphasised that the Bermuda Constitution specifically permits the Courts to hold hearings in private if it considers it necessary or expedient for the protection of the private lives of the persons concerned in the proceedings. He also commented that, in the absence of any obvious public interest in knowing about internal trust administration, it was in the public interest to deal with noncontentious trust applications as private hearings.

Trustees who wish to obtain the Court's guidance, while protecting the privacy of the beneficiaries, can be confident that their privacy will be protected.

COMPANY LAW - SHAREHOLDERS - TEST FOR UNFAIR PREJUDICE - APPLICATION TO PUBLIC COMPANIES

Annuity & Life -v- Kingboard [2015] (Bda) LR 97

Shareholders who believe that they are being treated unfairly have several remedies. One of the most effective can be an unfair prejudice petition. Such petitions were historically rare in Bermuda, not least because the hurdle is a high one. A petitioner must not only show that its interests (as shareholder) have been unfairly prejudiced. It must also show that the prejudice is so bad that it would justify the winding up of the company on just and equitable grounds.

In Annuity & Life -v- Kingboard [2015] (Bda) LR 97, Kawaley CJ found that this test had been met. What makes the case particularly notable is that Kingboard is a company publically listed on the Singapore Stock Exchange.

The shareholder's allegations in Kingboard were two-fold. The first allegation was that Kingboard had intentionally depressed its own profitability. The Claim was that Kingboard, which produced copper foil and sold it to affiliated companies, had been selling its copper foil at an under-value. Shareholders in Kingboard, it was claimed, suffered at the expense of shareholders in the affiliated companies. The second allegation was that, when minority shareholders raised these allegations and blocked Kingboard's ability to sell its copper foil to affiliates, as they had the power to do, Kingboard's reaction had been unreasonable. (Kingboard's reaction had been to cease producing copper foil altogether, instead licensing its production facilities to a third party. The third party then proceeded to supply copper foil to the same affiliates).

Much of the trial was taken up with the allegations of transfer pricing and allegations as to whether or not the licensing arrangement was a sham. Ultimately, Kawaley CJ rejected the transfer pricing allegations in their entirety and also rejected the Claim that the license arrangement was a form of sham. He did, however, find that Kingboard's reaction (ceasing all production of copper foil) to the minority shareholders' concerns about transfer pricing had been unreasonable and "a visible departure from the standards of fair dealing". He concluded that the test for unfair prejudice had been met and that the remedy was for the majority shareholders to purchase the petitioner's shares at a price to be assessed.

Both sides are appealing the Judgment and any appeal will likely not be heard until 2017. However, the Kingboard decision shows the power of the unfair prejudice petition and that it applies equally to publicly listed companies as to private.

INTERNATIONAL COOPERATION (TAX INFORMATION EXCHANGE AGREEMENTS) ACT, 2005 (THE "2005 ACT") - CONTEMPT - COSTS

Minister of Finance -v- A Company [2015] SC (Bda) 51 Civ (24 July 2015)

The Plaintiff alleged that the Defendant Company had failed to comply with a Production Order made under the 2005 Act. It was common ground that, by the date of the hearing, the Company had in fact complied; the Plaintiff therefore sought the imposition of a fine.

The Company denied that it had in fact breached the Order, and sought an Order that each party bear its own costs. The Company asserted that it had only been required to disclose documents that were in existence and were in its custody, and also that it was only required to disclose documents it considered relevant. The Court held that the wide definition of "document" as held in Derby & Co Ltd -v- Weldon (No.9) [1991] WLR 652 applied to Production Orders under the Act. The Court also held that the scope of 'information', which may be requested and made the subject of a Production Order under the 2005 Act, is much broader than particular documents, as may be requested in foreign judicial proceedings. As to relevance, the Court held that it is a matter for the Court, not for the Company or its legal advisors to determine. If the Company believed that some documents were irrelevant, or the Order overly burdensome, it should have applied to Court to vary the Order.

The Court applied principles from an earlier Bermuda case, namely Joliet 2010 Ltd -v- Goji Ltd [2012] (Bda) Lr 75. The Court held that the terms of the Production Order were clear, certain and unambiguous. The Court was satisfied that the Company was in breach of the Production Order. However, as the Company had substantially complied with the Order, albeit belatedly, the interests of justice did not require any consideration of whether the breaches were deliberate. As the Plaintiff had been the, de facto, successful party, the Company was ordered to pay its costs.

The Court reaffirmed that it was in the public's interest that Bermuda comply with its obligations under Tax Information Exchange Agreements, in a timely manner, to enhance its reputation in the sphere of international tax enforcement.

DISCLOSURE OF DOCUMENTS USED BY TRUSTEE IN BEDDOE PROCEEDINGS - USE OF DOCUMENTS OUTSIDE OF BEDDOE PROCEEDINGS - APPLICATION TO VARY CONFIDENTIALITY ORDER

Trustee N and Others -v- The Attorney General and Others [2015] SC (Bda) 50 Com (13 July 2015)

At the outset of the Beddoe proceedings the Plaintiff Trustee obtained a Confidentiality Order as is necessary to protect the information being disclosed in the proceedings. The Trustee then filed a number of affidavits in the proceedings and provided very considerable disclosure.

The Second Defendant applied to discharge or vary the Confidentiality Order so as to grant him leave to use a number of specified documents for the purpose of other proceedings ("the Main Action"). The Second Defendant asserted that the documents were relevant to the pleaded causes of action in the Main Action, and would also disclose new causes of action in the Main Action, and new causes of action in relation to different trusts.

The traditional view, set out in Midland Bank Trust Co -v- Green [1980] Ch. 590, was that no obligation to disclose arose, as the documents were obtained in confidential proceedings. However, the Court noted that a general principle had developed, that a claimant in a main action should be permitted to participate in the Beddoe hearing as fully as reasonably practicable.

In this case, the Confidentiality Order protected the specified documents in any event. However, in the absence of the Confidentiality Order, as the specified documents were not privileged and did not disclose the Trustee's view of the strengths or weaknesses in the Main Action, if the Trustee wished to rely on the specified documents, they ought to have been disclosed.

The Court also held that the purpose of a Beddoe application is to allow the Trustees to obtain guidance from the Court, not to provide a hostile litigant with ammunition. It was this purpose that underpinned the Confidentiality Order. The Second Defendant got to see material that he would not otherwise have seen (at least until discovery, if at all). But the disclosure of that material in the Beddoe proceedings was on condition that it could not be used for any other purpose.

It was an important consideration that the Trustee had applied for and obtained the Confidentiality Order, and that the Second Defendant had not sought to vary it until after the documents had been disclosed.

The Court considered that the use of documents following disclosure in Beddoe proceedings was analogous to the implied undertaking given in civil disclosure generally, although it will be a more onerous task to obtain leave to use documents obtained in Beddoe proceedings, as there are strong policy reasons militating against disclosure.

The Court, therefore, applied a two-limb test. Firstly, whether there were special circumstances, meaning cogent reasons for disclosure, that were particular to the facts of the case, which would not normally be present in other cases, as opposed to particular examples of generic reasons, which might apply to many cases. Secondly, whether such disclosure would cause injustice to the disclosing party (in this case, the Trustees).

Applying that test, the Court found that the reasons given by the Second Defendant were examples of generic reasons which might apply to many cases, and as such did not amount to special circumstances.

The Court went on to hold that the Second Defendant should receive material that would, in fact, be discoverable in the Main Action in any event. It was held that there was no specific prejudice to the Trustee from this early disclosure, and, if the Second Defendant was then to amend the pleadings in the Main Action, he could do so now, rather than having to wait until after disclosure. However, the Court stated that it would be wrong to waive or dilute the requirement of special circumstances for the sake of good case management. The application for leave to use the specified documents for purposes other than the Beddoe proceedings was therefore dismissed.

CONTRACT - ENTITLEMENT TO FEES - UNJUST ENRICHMENT - MISTAKE

Kingate Global Fund Limited (In Liquidation) and Others -v- Kingate Management Limited and Others [2015] SC (Bda) 65 (25 September 2015)

The Plaintiffs were 'feeder funds' for the Bernard L. Madoff Investment Securities LLC ("BLMIS"). As a result of the Ponzi scheme run by Mr. Madoff, the Plaintiff Funds collapsed and were placed in liquidation.

The Plaintiffs had paid management fees to the First Defendant ("KML"). The Defendants sought the determination of a preliminary issue, being whether the fees actually paid were in fact payable under the various management agreements and, if so, whether the Plaintiffs were able to assert a claim in unjust enrichment against KML and the other Defendants. The preliminary issue was brought about following the decision of the Privy Council in Fairfield Sentry Ltd -v- Migani & Others [2014] 1 CLC 611.

The management agreements provided that the management fees would be calculated by reference to the Net Asset Value ("NAV") of the Plaintiffs calculated by the Administrators. The NAV was also used to determine the subscription and redemption prices for investors and, in the absence of bad faith or manifest error, the NAV calculation was binding as between the Plaintiffs and investors.

The Plaintiffs alleged that as a result of the fraud committed by Madoff, the NAV calculations were massively overstated and the management fees were mistakenly overpaid. KML asserted that it was contractually entitled to the fees as calculated by the Administrator and that the NAV was binding between the Plaintiffs and KML. The Plaintiffs' response was that in calculating the amount, the Administrator made a manifest error. The Plaintiff also asserted that in practice the calculation was not carried out by the Administrator.

The Court held that in the absence of bad faith or manifest error, the NAV, as calculated by the Administrator, was binding as between the Plaintiff and KML for the purpose of calculating the management fees. The Court also held that the calculation of the NAV was undertaken by the Administrator and that, in the absence of bad faith or manifest error, the management fees were properly due to KML pursuant to the management agreements. A consequence of the receipt of the fees, pursuant to a valid contract, is that the receipt could not be unjust for the purpose of unjust enrichment and any mistake was not such as to avoid the management agreement.

However, the Court did find that, if the mistake on the part of the Plaintiff was induced by the Defendants, then such inducement would negate the right to rely on the contract. Thus, the right to payment under the contract would not be a defence to the Claim for unjust enrichment for those sums in excess of the true NAV. No findings of fact were made, however, as to whether there was such an inducement.

In regards to the 'bad faith' or 'manifest error', it was held that the impropriety of Madoff did not transfer to the Administrators so as to render the NAV calculation invalid. It was only the bad faith or manifest error of the Administrators themselves that was relevant. The Court was asked to consider whether, if the facts are found in the Plaintiffs' favour, they would amount to manifest error. The Plaintiffs argued that the Administrator should have spotted certain errors, which included ignoring or failing to consider and address inconsistencies in the information provided by Bernard L. Madoff Investment Securities LLC. The Court was not required to resolve the disputes of fact, but held that if the facts were as the Plaintiff asserted, the Administrator may have made a manifest error.

The Judge concluded by noting that in order for the Plaintiff to succeed in a claim based on mistake, they must first establish fault on the part of the Administrator or KML.

BRITISH VIRGIN ISLANDS

COURT OF APPEAL

INTERLOCUTORY APPEAL - CIVIL PROCEDURE RULES - SETTING ASIDE DEFAULT JUDGMENT - WHETHER A PERSON CAN BRING A CLAIM IN HIS OR HER BUSINESS NAME AND OBTAIN A DEFAULT JUDGMENT

Deidre Pigott Edgecombe and Nordel Edgecombe -v- Antigua Flight Training Centre Claim No. ANUHCVAP2015/0005 (June 2015)

This Appeal was against the decision of the Court below to refuse to set aside judgment obtained in default on the ground that there were exceptional circumstances. The Appellant contended that because the Claim was commenced in the name of an entity that was not a legal person the Judgment obtained was contrary to law because the Respondent, not being a juristic person, could not be a party to and obtain judgment in respect of the Claim.

The Appeal was heard on paper before the full panel. Dismissing the Appeal, the Court held that Civil Procedure Rules ("CPR") 22.2 (b)(iii) allows a person to bring a claim if they were carrying on business in the jurisdiction when the right to claim arose, as "X.Y." followed by the words "a trading name". The Court found that this case fell within that Rule and the omission of the words "a trading name" would not render the Claim bad in law and in any event could be rectified by an amendment of the Claim. The Court further held that the Claim could be brought in the business name (although not a corporate entity at the time) since CPR 22.2(2) provides for a Claim to be made by or against a person in his or her business name and that the rules regarding claims by or against partners apply as if that person had been a partner in a firm when the right to claim arose and the business name were the firm's name.

Although the Appeal was concerned with whether the Appellant had shown that exceptional circumstances existed in the context of a set aside application, the Court of Appeal observed that since the Appellant's complaint was that the Judgment should be considered a nullity or one which was irregular that the true appeal was to the Court's inherent jurisdiction to set aside the Judgment ex debito justitiae. Even then, the Court found that the Appellant's complaint did not warrant the exercise of the Court's inherent jurisdiction.

INTERLOCUTORY APPEAL - DEFAMATION - LIBEL - CIVIL PROCEDURE AMENDMENT TO STATEMENT OF CASE AFTER FILING - RULE 20.1 OF THE ENGLISH CIVIL PROCEDURE RULES, 2000 - FACTORS TO BE TAKEN INTO ACCOUNT IN DECIDING WHETHER OR NOT TO ALLOW AMENDMENT TO STATEMENT OF CASE AFTER DATE FIXED BY COURT FOR FIRST CASE MANAGEMENT CONFERENCE - LEAVE TO AMEND DEFENCE TO INCLUDE ADDITIONAL DEFENCE OF JUSTIFICATION

Mark Brantley -v- Dwight C. Cozier Claim No. SKBHCAP 2014/0027

This Appeal was against the decision of the Court below refusing permission to the Appellant, Mark Brantley to amend his defence and refusing his application for a stay of the proceedings pending the determination of unrelated proceedings in the Court of Appeal. The amendment was sought four years after the Claim was issued. Applying the decisions in Charlesworth -v- Relay Roads Ltd. and Others [2000] 1 WLR 230, Clarapede & Co. -v- Commercial Union Association (1883) 32 WR 262 and George Allert (Administrator of the Estate of George Gordon Matheson, deceased) et al -v- Joshua Matheson et al GDAHCVAP2014/0007 (delivered 24 November 2014, unreported), the Court held that in exercising its discretion in relation to amendments the Court should be guided by the general principle that amendments should be made where they are necessary to ensure that the real question in controversy between the parties is determined, provided that such amendments could be made without causing injustice to the other party and could be compensated in costs. The Court further held that the amendment should be allowed regardless of how negligent or careless the omission from the statement of case may have been, and no matter how late the proposed amendment was.

CIVIL APPEAL - SETTING ASIDE STATUTORY DEMAND - SECTION 157(1) AND SECTION 157(2) OF THE INSOLVENCY ACT, 2003 - WHETHER STATUTORY DEMAND CONTRARY TO ARBITRATION CLAUSE IN CONTRACT - WHETHER THE RESPONDENT WAS BARRED BY THE CONVENTION ON THE LIMITATION PERIOD IN THE INTERNATIONAL SALE OF GOODS (NEW YORK, 1974).

C-Mobile Services Limited -v- Huawei Technologies Co Limited Claim No. BVIHCMAP 2014/0006 (September 2015)

This Appeal concerned the decision by the Court below to refuse the Appellant's application to set aside the service of a statutory demand on it. The Appellant relying on Section 157(1) of the Insolvency Act, 2003 (the "Insolvency Act"), sought to set aside the statutory demand on various grounds, which it was alleged amounted to there being a substantial dispute as to the debt.

Dismissing the Appeal, the Court held that while Section 157(2) of the Insolvency Act gives the Court a discretionary power, Section 157(1) did not. Moreover, to exercise the discretion given under Subsection (2) the Applicant would need to adduce evidence showing that a "substantial injustice would be caused", unless the demand was set aside, this had not been done. The Court held that the test for determining whether there was a substantial dispute as to a debt was as set out in Sparkasse Bregenz Bank AG -v- Associated Capital Corporation Appeal 10 of 2002, an earlier decision of the BVI Court of Appeal. The Court also found that since the application to set aside had not been made under Section 157(2) of the Insolvency Act, the Learned Judge was not being asked to exercise a discretion. Accordingly, if having examined the evidence, he was of the view that a substantial dispute (as distinct from a fanciful or make-believe or mere trifling or frivolous one) existed, he was bound to set aside the statutory demand.

CIVIL APPEAL - ARBITRATION - STAY PURSUANT TO SECTION 6(2) OF THE ARBITRATION ORDINANCE - APPLICATION FOR APPOINTMENT OF LIQUIDATORS - WHETHER ARBITRATION CLAUSE IN CONTRACT BROUGHT THE LIQUIDATION PROCEEDINGS WITHIN THE AMBIT OF SECTION 6(2) OF THE ARBITRATION ORDINANCE

C-Mobile Services Limited -v- Huawei Technologies Co Limited Claim No. BVIHCMAP 2014/0017 (September 2015)

Here, the issue on appeal was whether the application to appoint liquidators should be stayed pursuant to Section 6(2) of the Arbitration ordinance, where the agreement under which the underlying debt arose contained an arbitration clause. The Court of Appeal dismissing the Appeal held, applying Re Sanpete Builders (S) Pte. Ltd [1989] 1 MLJ and Community Development Proprietary Ltd -v- Engwirda Construction Co. (1969) 120 CLR 455, that, as a starting point, the winding up proceedings were not intended to be caught within the ambit of the mandatory stay provisions contained in the Arbitration Ordinance unless the Arbitration Agreement itself was so drawn to encompass such a proceeding. The Court found that under the Arbitration Clause of the agreement it was only matters "arising out of or in connection with the formation, construction, or performance of" the contract that was required to be referred to arbitration and that these winding up proceedings were outside the stay provisions of the Arbitration Act.

CIVIL APPEAL - EX PARTE HEARING - COURT'S COSTS JURISDICTION - CIVIL PROCEDURE RULES - SERVICE OUT OF JURISDICTION OF NON-PARTY COSTS APPLICATION - WHETHER JUDGE ERRED IN DISMISSING APPLICATION TO SERVE PARTY OUT OF THE JURISDICTION - RULE 7.3 OF THE ENGLISH CIVIL PROCEDURE RULES, 2000 - RULE 7.14 OF THE ENGLISH CIVIL PROCEDURE RULES, 2000 - SECTION 11 OF THE EASTERN CARIBBEAN SUPREME COURT (TERRITORY OF THE VIRGIN ISLANDS) ACT

Halliwell Assets Inc et al -v- Hornbean Corporation Claim No. BVIHCMAP 2014/0017 (October 2015)

The Appellants were granted costs orders against the Respondent, Hornbeam Corporation and by notice of application sought a third party costs Order against Mr. Shulman. Mr. Schulman was not a party to the Claim and is a foreigner. This Appeal is against the decision of the Learned Judge below to grant permission to serve the application notice out of the jurisdiction on Re Shulman. The Court of Appeal held that although Rule 7.3(10) (on service of a claim where jurisdiction was provided for by an enactment) did not apply to an application for third party costs, it was fairly arguable that Rule 7.14 could provide the Court with the requisite jurisdiction to serve the application out of the jurisdiction if Mr. Schulman could be successfully joined to it and the Claim would qualify for service out of the jurisdiction.

While recognising that at first blush Rule 7.14 did not appear to be limited to parties who were already parties to an action and after examining the relevant English authorities, which construed similar provisions under the English Civil Procedure Rules, the Court of Appeal recognised that service out of the jurisdiction of an application under Rule 7.14 was not permissible without more and it was necessary to show that the proceedings in which the application was issued would be one which would qualify for service out under one of the gateways contained in Rule 7.3.

The Court found that the appropriate course would be for the Court to consider the joinder application and to determine it, on its merits, along with the non-party costs application and permissions to serve out. The Appeal was allowed and the matter remitted to the Court below.

CIVIL APPEAL - TRUST DEED - DISCRETIONARY TRUSTS - DEED OF APPOINTMENT - POWER OF APPOINTMENT UNDER TRUST - WHETHER POWER OF APPOINTMENT IN TRUST DEED PERMITS TRUSTEE TO EXCLUDE A NAMED BENEFICIARY FROM THE OBJECTS OF A DISCRETIONARY TRUST IN ADVANCE OF APPOINTING CAPITAL TO OTHER NAMED BENEFICIARIES

Re: Royal Fiduciary Group Limited Claim No. BVIHCMAP 2013/0022

This is an Appeal against the Learned Judge's refusal to sanction the terms of a draft deed of appointment, the effect of which would be to disentitle the Settlor from benefiting under the trust deed, on the basis, inter alia, that the Trustee had no power to vary the Trust deed as contemplated by the draft deed of appointment and would be a nullity.

In allowing the Appeal and granting the declarations sought in the Court below, the Court held applying Muir -v- Inland Revenue Commissioners [1966] 1 WLR 1269 and Blausten -v- Inland Revenue Commissioners [1972] Ch. 256 that a trustee, in the absence of any contrary indication and in the face of a power of appointment in the Trust deed authorising the Trustee to appoint property among beneficiaries could validly appoint property among two or more objects of the Trust while excluding altogether one or more objects. The Court, after examining the facts of the case, primarily the justification for the intended variation, found that it could "see no reason based on principle, in terms of the powers of trustees in the exercise of powers of appointment under a trust deed, why the trustee in this case could not properly exercise the power of appointment conferred on him by the trust instrument in excluding the settlor from benefiting under the trust, with the resulting increase in the property interests available for distribution to the children and remoter issue of the settlor, who are obviously the intended beneficiaries of the settlor's benefaction".

INTERLOCUTORY APPEAL - DERIVATIVE PROCEEDINGS - INTERPRETATION OF SECTION 184C(2)(C) OF BVI BUSINESS COMPANIES ACT, 2004 (AS AMENDED) - MEANING OF 'LIKELY' IN WORDING 'WHETHER THE PROCEEDINGS ARE LIKELY TO SUCCEED' - APPEAL AGAINST FINDINGS OF FACT MADE BY LEARNED JUDGE

Basab Inc. -v- Accufit Investment Inc. and Double Key International Limited Claim No. BVI HCMAP 2014/0020(November 2015)

The Appeal concerns the refusal by the Court to grant leave to the Appellant pursuant to Section 184C(2)(c) of the BVI Business Companies Act, 2004 (as amended) (the "BCA") to commence derivative proceedings on behalf of the first Respondent, for what it contends was the sale at an undervalue of the shares in its wholly owned subsidiary.

The Learned Judge's refusal was based on his Judgment that the intention and effect of Section 184C(2)(c), was that for a claim to be "likely to succeed" it must be obvious, without any substantial consideration of or debate on the merits that it is likely to succeed and the proposed Claim must appear to the Court to be self-evidently strong without conducting an inquiry. He observed the application for leave under Section 184C was not an occasion for painstaking analysis of valuation or other evidence and based on a limited examination of the evidence found that the Appellant's Claim was not likely to succeed.

The Court of Appeal dismissed the Appeal. They found that the Learned Judge's interpretation and application of Section 184C(2)(c) of the BCA was wrong because it seemed to be moving into the realm of requiring a strong likelihood or almost requiring certainty that the proceedings would succeed. Applying the case of Cream Holdings Limited and Others -v- Banjeree and Others [2004] UKHL 44, the Court found that the correct meaning of the phrase "whether the proceedings are likely to succeed" in Section 184C(2)(c) of the BCA was "whether it is more probable than not that the proceedings will succeed". The Applicant was therefore not required to demonstrate that success was an absolute certainty, or that the probability of success was very strong. The Court further held that with regard to the level of examination of the evidence required in the present case, the threshold for the grant of leave to bring derivative proceedings – "whether it is more probable than not that the proceedings will succeed" – would require a full and proper examination of the evidence then before the Court. The Court further held that the potential nature of derivative claims, especially those that may be both complex and defended, did not predispose themselves to a cursory review and required the Court to evaluate the evidence before it and the arguments advanced by both parties in order to determine "whether the proceedings are likely to succeed".

However, having exercised its discretion afresh, the Court held that the evidence did not show that the proceedings were likely to succeed and dismissed the Appeal on that basis.

INTERLOCUTORY APPEAL - CIVIL PROCEDURE RULES - APPELLANTS' DEFENCE STRUCK OUT IN COURT BELOW BY LEARNED JUDGE FOR NON-COMPLIANCE WITH PREVIOUS ORDER OF COURT WHICH REQUIRED THAT COSTS BE PAID PRIOR TO LATE FILING OF DEFENCE - JUDGMENT ENTERED FOR RESPONDENT IN HER ABSENCE - WHETHER LEARNED JUDGE ERRED IN STRIKING OUT APPELLANTS' DEFENCE AND ENTERING JUDGMENT FOR RESPONDENT IN HER ABSENCE - WHETHER STRIKING OUT OF DEFENCE AND ENTRY OF JUDGMENT BY LEARNED JUDGE WAS CONTRARY TO CIVIL PROCEDURE RULES ("CPR") 27.2(3) AND RULES OF NATURAL JUSTICE

Agnes Danzie et al -v- Cecil Anthony Claim No. SLUHCVAP 2015/0009 (December 2015)

This Appeal is against the decision of the Court below to strike out a defence following the failure by the Respondent to satisfy an Order that costs be paid prior to the filing of its defence, and to enter summary judgment in the Respondent's absence without taking evidence.

In allowing the Appeal, the Court of Appeal held that while Civil Procedure Rule ("CPR") 26.3(1)(a) gave the Court a discretion to strike out a statement of case or part of one where it appears to the Court that there has been a failure to comply with a rule, practice direction, order or direction given by the Court in the proceedings, it is a well-established principle that this power should only be used sparingly. The Court further held that in exercising his discretion, the Learned Judge was required to consider what was the appropriate response having regard to all of the circumstances, including whether there were other alternatives available that would be just in the circumstances and that having regard to the very wide case management powers of a Judge, striking out the Appellants' defence was not an appropriate response to the breach of the order of the Learned Judge by the Appellants. (Real Time Systems Limited -v- Renraw Investments Limited and Others [2014] UKPC 6 applied).

In relation to the Summary Judgment hearing the Court of Appeal held that while CPR 27.2(3) empowered the Court to treat the first hearing as a trial of the Claim, and that trial could be dealt with summarily, that doing so did not mean entering Summary Judgment. The process contemplated by Rule 27.2 (3) required the Claimant to prove its case and a trial conducted. The Respondent did not attend, so the Court was wrong to enter judgment.

INTERLOCUTORY APPEAL - STAY OF SPECTRUM AWARD 2015 PROCESS - CIVIL PROCEDURE RULES - RULE 56.4(8) OF THE ENGLISH CIVIL PROCEDURE RULES, 2000 (the "ECPR") - WHETHER A 'STAY OF PROCEEDINGS' UNDER ECPR 56.4(8) INCLUDES A STAY OF AN ADMINISTRATIVE DECISION OR PROCESS - EXERCISE OF JUDICIAL DISCRETION IN GRANTING INTERIM RELIEF - INTERIM INJUNCTION AGAINST PUBLIC BODY - ASSESSING WHERE BALANCE OF CONVENIENCE LIES - DETERMINING RISK OF INJUSTICE

Telecommunications Regulatory Commission -v- Caribbean Cellular Telephone Limited Claim No. BVIHCVAP 2015/0015 (December 2015)

This Appeal by the Telecommunications Regulatory Commission (the "TRC") was against the decision of the Judge below to stay the implementation of the Spectrum Award, 2015 process. The Spectrum Award Process as it was called by the TRC was the procedure to be adopted for the allocation of spectrum under various bans to mobile network operators in the BVI. The Respondent, Caribbean Cellular Telephone Limited ("CCT") was one such operator and successfully obtained leave to make a Claim for judicial review of TRC's conduct, generally, including in relation to the Spectrum Award Process. The Respondent also obtained a stay of the Spectrum Award Process purportedly pursuant to Section 56.4(8) of the ECPR and applied for interim injunctive relief. Injunctive relief was refused and the Respondent cross-appealed in relation to same.

In allowing the Appeal and setting aside the stay of the Spectrum Award 2015, the Court held following the decision in Ministry of Foreign Affairs, Trade and Industry -v- Vehicles and Supplies Ltd [1991] 1 WLR 55 that the term "proceedings" as used in ECPR 56.4(8) was to be confined to proceedings before a lower court or tribunal exercising judicial or quasi-judicial functions and would not include an administrative decision or action such as the decisions and actions of the TRC. The Court also found that if the evidence (as it had done) failed to meet the quality for the grant of injunctions, it would similarly fail the test for the grant of a stay as the tests for satisfying either were to be treated as essentially the same. Consequently, the Court found that there was no basis in law or as a matter of discretion for the Judge to grant a stay pursuant to Rule 56.4(8).

As it related to injunctive relief, the Court held applying Regina -v- Secretary of State for Transport, Ex parte Factortame Ltd. And Others (No. 2) [1991] 1 AC 603 that when dealing with restraining a public body, whether from enforcing the law or from performing their public duties as required and contemplated by the law, the balance of convenience must be looked at more widely by taking into account the public interest in the performance of those responsibilities and duties with which the public body is tasked and in seeking to arrive at a just result in all the circumstances. The Court found that TRC should not be restrained from undertaking and performing its duties in serving the wider public interest and the balance of convenience was not in CCT's favour when considered in the wider context having regard to what the TRC had sought to accomplish given its mandate and that allowing the Spectrum Award 2015 process posed the least risk of injustice.

INTERLOCUTORY APPEAL - LOAN AGREEMENT BETWEEN APPELLANT AND RESPONDENT - INTERPRETATION OF CLAUSES OF MEMORANDUM OF UNDERSTANDING - CONVERSION OF LOAN INTO EQUITY - APPOINTMENT OF LIQUIDATORS - WINDING UP - WHETHER APPELLANT BECAME SHAREHOLDER OF RESPONDENT BY IMPLIED AGREEMENT TO CONVERT LOAN TO EQUITY IN RESPONDENT OR WHETHER APPELLANT CONTINUED TO BE CREDITOR OF RESPONDENT AND WAS ENTITLED TO APPOINT LIQUIDATORS OF RESPONDENT - WHETHER LEARNED JUDGE ERRED IN STRIKING OUT APPELLANT'S APPLICATION TO WIND UP RESPONDENT ON JUST AND EQUITABLE GROUND - STANDING - ARBITRATION - EFFECT OF ARBITRATION

Jinpeng Group Limited -v- Peak Hotels and Resorts Limited Claim No. BVIHCMAP2014/0025

This was an Appeal against the decision of the Judge below to strike out an application to appoint liquidators over the Respondent (the "Application") on just and equitable grounds. The Respondent applied to strike out the Application on the grounds that the Appellant had impliedly agreed to convert the loan which it had given to the Respondent into equity and therefore was not a creditor and did not have standing to apply for liquidators on the just and equitable ground.

The Court below in striking out the Application and after carrying out a very limited analysis on the nature of the dispute between the parties, said that any challenge by the Respondent to the Appellants standing, other than a hopeless one, would be sufficient to establish a sufficient dispute for the purpose of removing the Appellant's status as a creditor. In setting aside the order striking out the Appellants Application the Court held, inter alia, (i) following Sparkasse Bregenz Bank AG -v- In the Matter of Associated Capital Corporation BVIHCVAP2002/0010, that while the Learned Judge was correct to observe that the winding up Court should not be used to resolve disputes about debts or to decide issues of fact on a summary basis, the Court had a duty to carry out a preliminary investigation of the facts to determine whether a dispute that a debtor company raises in relation to a debt in winding up proceedings is one which has been raised on genuine and substantial grounds and thus he erred in failing to apply the correct legal test in the circumstances, which was whether the dispute raised by the Respondent, was one that was raised on genuine and substantial grounds, (ii) notwithstanding that the Application was presented by the Appellant as creditor on the just and equitable grounds alleging misconduct, it was still a creditor's application and therefore, the applying creditor was seeking a collective remedy on behalf of itself and all the other creditors of the Respondent, accordingly this was not a Claim by the Appellant to recover its debt from the Respondent Company and (iii) while the arbitration clauses were designed to resolve disputes between the contracting parties, once the Appellant had submitted its dispute to the Court as the basis of a creditor's winding up application, it became an issue between the Respondent and its creditors over the Company's ability to pay its debts as they fall due and therefore fell outside the scope of Section 18(1) of the Arbitration Act (i.e. the Section which provides for a stay of arbitration proceedings).

INTERLOCUTORY APPEAL - CONSPIRACY - LAWFUL MEANS CONSPIRACY - INTENTION TO INJURE - AGENCY - LIABILITY OF DIRECTOR FOR CONSPIRACY TOGETHER WITH COMPANY OF WHICH HE/SHE IS DIRECTOR - WHETHER LEARNED JUDGE EXERCISED HIS DISCRETION IMPROPERLY - APPLICATION BY RESPONDENT TO STRIKE OUT APPELLANTS' CLAIM IN COURT BELOW - APPLICATION BY RESPONDENT FOR SUMMARY JUDGMENT - APPLICABLE LEGAL TESTS - WHETHER BVI IS APPROPRIATE FORUM FOR TRIAL OF APPELLANTS' CONSPIRACY CLAIM

Lin Chee Keen and Steven Ng -v- Fam Capital Management Limited Claim No. BVIHCMAP2015/0002 (December 2015)

This was an Appeal against the decision of the Learned Judge below to strike out the Claim for conspiracy on the basis that a conspiracy could not arise between a company and its sole controller and his decision to dismiss the Appellant's application for permission to serve the Claim out of the jurisdiction on the foreign defendants. The Court dismissed the Appeal on the basis that on the alleged scheme taken at its highest was nothing more than a failed investment in an illiquid real estate development and did not have the trappings of a conspiracy to deliberately deprive the Appellants of their investment. However, the Court did find that the Learned Judge erred in finding that the relationship of principal and agent between the Company and its direct/sole shareholder defeated the allegation of conspiracy.

The Court of Appeal applying Belmont Finance Corporation Ltd. -v- Williams Furniture Ltd. and Others [1979] Ch. 250 and Lim Leong Huat -v- Chip Hup Hup Kee Construction Pte Ltd [2009] 2 SLR 318 that a director, even if he/she is the controlling mind of a company, could combine with that company to injure a third party in circumstances where the company was not the victim, but the beneficiary of the conspiracy.

In so far, it concerned the application for service out of the jurisdiction the Court of Appeal held that the Learned Judge was right in finding that the BVI was not the appropriate forum for the trial of the conspiracy claim notwithstanding that some of the alleged conspirators were BVI companies because the Appellants and the main parties to the alleged conspiracy were not resident in the BVI and the events underlying the claims for breach of trust and conspiracy all occurred in Singapore. (Nilon Limited and Another -v- Royal Westminster Investments SA and Others [2015] UKPC 2 applied.)

CAYMAN ISLANDS

COURT OF APPEAL

CAYMAN ISLANDS TAX INFORMATION AUTHORITY - REQUESTS FOR INFORMATION - AUSTRALIAN TAX INFORMATION EXCHANGE AGREEMENT

Cayman Islands Tax Information Authority -v- MH Investments and another CICA 31 of 2013 G391/2012 (31 July 2015)

In February 2011, the Australian Tax Office (the "ATO") made a request of the Cayman Islands Tax Information Authority (the "Authority") for information pursuant to Article 5 of the Australian Tax Information Exchange Agreement. The request was in connection with an active investigation into the Australian taxation affairs of Mr. Vanda Russell Gould ("Mr. Gould") and Mr. John Scott Leaver ("Mr. Leaver"). The ATO had identified that Mr. Gould and Mr. Leaver and their respective associated entities had made multiple transactions with offshore entities registered in the Cayman Islands. The Cayman Islands entities that were identified were J.A. Investments Limited ("JA") and M.H. Investments Limited ("MH"). The ATO was concerned that the transactions represented attempts by the Australian residents to evade tax properly payable in Australia by establishing offshore arrangements. The ATO believed that Mr. Gould and/or Mr. Leaver were the ultimate beneficial owners and controllers of JA and MH and had omitted income and/or claimed deductions in their Australian tax returns.

In April 2011, following the request from the ATO, the Authority issued and served on FCM Limited (the registered agent of JA and MH) a notice to produce the information required by the ATO. In order to take this step, the Authority was taken to have determined: (i) that the request was in compliance with the Australian Tax Information Exchange Agreement and (ii) that the information was not required for proceedings in Australia or for related investigations. FCM Limited provided the information requested on 4 May 2011 and the Authority forwarded this information to the ATO. The ATO sent a further request for information on 27 May 2011 and the Authority sent to FCM Limited two further notices to provide information. On 20 September 2011 the Authority sent the information produced by FCM Limited to the ATO. Further requests followed and on 19 October 2011, the ATO sent a request seeking the Authority's consent to disclose documents obtained from FCM Limited relating to the Cayman Island entities to HMRC in the United Kingdom. The ATO also requested consent to use the documents obtained from FCM Limited in proceedings before the Australian Federal Court, which were subsequently provided by the Authority.

On 18 September 2012, JA and MH applied to the Grand Court for judicial review of the decisions of the Authority. The relief sought was: (i) a declaration that the decisions were ultra vires of the powers granted to the Authority by the Law; (ii) an order of certiorari, quashing of the decisions and (iii) an order that the Authority provide JA and MH with copies of all documents which it held relating to the requests.

Quin J made orders including, amongst others, an order of certiorari quashing the decisions of the Authority and a declaration that the decisions to comply with the requests from the ATO were unlawful because the Authority had failed to apply to the Grand Court under the relevant sections of the Tax Information Authority Law (the "Law").

The Authority appealed challenging the Judges finding that the Respondents should have been served with notices of the requests under Section 17(c) of the Law.

The Court of Appeal held that JA and MH were the subjects of the requests and on that basis it was bound to find that decisions to execute the requests without having served the Section 17(1) notices on JA and MH were necessarily ultra vires and dismissed the Appeal.

It followed that the decisions to serve notices under Section 8(4)(b) of the Law, requiring FCM Limited to provide information, were made without taking into account material which the Law required that the Authority should take into account; and that the Judge of first instance was correct to conclude that those decisions should be set aside.

GRAND COURT

DETERMINATION OF FAIR VALUE - SECTION 238(1) COMPANIES LAW - VALUATION ACTION - APPRAISAL ACTION

In the Matter of the Companies Law (2013 Revision) and In the Matter of Integra Group FSD 92 of 2014 (AJJ) (13-17 April and 26 May 2015)

This is the first time that the Court has considered the meaning of "fair value" within Section 238(1) of the Companies Law (2013 Revision) (the "Law"). A petition, being described as a "valuation action" or an "appraisal action", was presented by the Integra Group (the "Company"), by which the Court was required to determine the fair value of its Class A Common Shares in accordance with the provisions of Section 238(11) of the Law.

Under Section 238, dissenting shareholders are not required to accept a merger or consolidation agreement which has been approved by the requisite majority. Instead, they are entitled to dissent and demand payment for the fair value of their shares. Section 238(1) provides that:

"A member of a constituent company incorporated under this Law shall be entitled to payment of fair value of his shares upon dissenting from a merger or consolidation."

The Company's offer was not accepted by the dissenting Shareholders and after the requisite period a petition was duly presented on 20 August 2014. The Court was therefore required, in accordance with Section 238(11) of the Law, to determine fair value of the dissenting Shareholders' shares and to determine a fair rate of interest, if any, to be paid by the Company upon the amount determined to be payable in respect of the shares.

The Court held that the point, immediately before the merger decision was made, was the appropriate valuation date (the "Valuation Date"). The Court was therefore required to determine the fair value of the Company's business as a going concern at the point immediately before the merger was approved, it further held that the fair value of the dissenting Shareholders' shares was held to be their proportionate share of this amount without any minority discount or any premium for the forcible taking of their shares.

Section 238 of the Law does not dictate any valuation methodology. However, it is well established in both Canadian and Delaware jurisprudence that fair value should be proved by techniques or methods which are generally considered acceptable in the financial community and are otherwise admissible in court. Two expert witnesses were used in the case and it was generally accepted and agreed by the witnesses that there are three main approaches to an appraisal exercise of the kind that was required to be performed by the Court; the market approach, the income approach and the cost (or asset based) approach.

The Court's approach to the valuation of the Company was to combine an income approach, using the discounted cash flow methodology (75% weighting) with a market approach, using a guideline public company methodology (25% weighting). It was concluded that the fair value of the Company at the Valuation Date was US$105 million and the fair value of the dissenting Shareholders' shares at the Valuation Date was their proportionate share of US$105 million (US$11.70 per share) without any minority discount or premium for forcible taking.

By Section 238(11) the Court was also required to determine the fair value "together with a fair rate of interest, if any, to be paid by the Company upon the amount determined to be the fair value." The Court determined that a fair rate of interest would be the mid-rate between the Company's assumed return on cash (0.2%) and the Company's assumed USD borrowing rate (9.7%) being 4.95% per annum.

Costs of the proceedings were ordered at a later hearing and the Company was ordered to pay the dissenting Shareholders' costs, to be taxed on a standard basis if not agreed.

PETITION STRUCK OUT AS ABUSE OF PROCESS - SECTION 95(3) COMPANIES LAW - AGREEEMENT NOT TO PRESENT WINDING UP PETITION

In the Matter of the Companies Law (2013 Revision) and in the Matter of the Exempted Limited Partnerships Law 2014 and in the Matter of Rhone Holdings, L.P. (12-13 August 2015)

Rhone Holdings, L.P. was a Cayman Islands exempted limited partnership (the "Partnership"). The Petitioners, who were all limited partners in the Partnership, filed a winding up petition on the just and equitable ground, seeking to have the Partnership wound up in accordance with the Companies Law (2013 Revision) (the "Law") and the Exempted Limited Partnership Law (2014 Revision) (the "ELPL"). The Partnership had two general partners: Rhone Capital (GP) Ltd. ("Capital GP") which was controlled by the Petitioners, and Rhone Holdings SLP, L.L.C. ("Holdings GP") which, along with the Director of Holdings GP, was one of the Respondents.

On the hearing of an, ex parte, application filed with the winding up petition, the Court made, amongst other orders, an order appointing joint provisional liquidators ("JPLs") of the Partnership.

Following this, the Respondents filed a Summons seeking orders and directions that the petition be struck out as an abuse of process; that the Petitioners pay the Respondents costs occasioned by the Petition on the indemnity basis; and that the costs of the JPLs be paid by the Petitioners. The Honorable Justice Ingrid Mangatal delivered the Judgment and made the orders sought by the Respondents in substantially the same terms.

In reaching the decision, Mangatal J considered a number of clauses in the Amended & Restated Limited Partnership Agreement. Clause 5.12, which was particularly relevant to the issue in the case, read as follows:

5.12 Bankruptcy. The parties agree not to cause...the appointment of a receiver, trustee, custodian, sequestrator, liquidator, administrator, conservator, or similar official for the Partnership or Rhone II, or (b) the Partnership or Rhone II to (1) voluntarily commence any proceeding or file any petition seeking winding up, liquidation, dissolution, reorganization or other relief under any bankruptcy, insolvency, receivership or similar law of any jurisdiction now or hereafter in effect...

After considering the relevant sections of the Law and the ELPL, Mangatal J determined that if partners can agree that a partnership can only be determinable by mutual agreement, they can also agree not to present a winding up petition and, specifically in the case, not to do any of the other matters set out in Clause 5.12 of the LPA.

Furthermore, there was no principle of public policy that was offended by Clause 5.12; indeed Mangatal J discussed a number of reasons why it is, in keeping with public policy, that limited partners are allowed to enter into agreements regarding the duration of the limited partnership as they think fit.

WINDING UP PETITION - APPLICATION BY SHAREHOLDERS TO STRIKE OUT PETITION ON GROUNDS DIRECTORS NOT AUTHORISED

In the Matter of China Shanshui Cement Group Limited (Unreported, 25 November 2015)

The Grand Court of the Cayman Islands confirmed, in a decision by Mangatal J, that the directors of a company do not have statutory authority to petition the Court to wind up the company (whether the company is solvent or insolvent) without the sanction of a resolution of shareholders, unless the articles of association of the company expressly provide otherwise.

In this case a winding up petition, submitted by the directors of the company, was struck out for lack of standing to file the petition. This decision has re-affirmed the application in the Cayman Islands of the English case of Re Emmadart Ltd [1979] 1 Ch. 540 in which Brightman J had concluded that:

"The practice which seems to have grown up [in England], under which a board of directors of an insolvent company presents a petition in the name of the company where this seems to the board to be the sensible course, but without reference to the shareholders, is in my judgment wrong and ought no longer to be pursued, unless the articles confer requisite authority...".

The decision restores what was generally understood to have been the position under Cayman Islands law until the position was impacted by the first instance decision of Jones J in the Cayman Islands case of Re China Milk Products Group Ltd [2011] 2 CILR 61 ("Re China Milk"). Jones J (applying Section 94(2) of the Companies (Amendment) Law, 2007) held, in 2011, that the Directors of an insolvent company are entitled to present a winding up petition on behalf of a company without reference to shareholders and irrespective of the terms of the company's articles.

Section 94(2), provides as follows:

"Where expressly provided for in the articles of association of a company the directors of a company incorporated after the commencement of the Law have the authority to present a winding up petition on its behalf without the sanction of a resolution passed at a general meeting".

Jones J concluded that the Cayman Legislature must have intended that Section 94(2) would only apply to solvent companies.

In this matter, Mangatal J declined to follow the Judgment of Jones J in Re China Milk. Although the Company in Re China Shanshui Cement was incorporated before 2009 (and hence Section 94(2) was found to be irrelevant), Mangatal J concluded that:

"...whatever the intention of the Legislature may have been, all Section 94(2) did was to provide statutory confirmation that, as was previously held in Re Emmadart, where the articles of association of a company expressly authorise its directors to present a winding up petition on its behalf, the directors do not also need to obtain the sanction of a resolution passed in general meeting".

The restriction on directors statutory authority to petition the Court to wind up the company, as confirmed by the Re Emmadart case, has been criticised (and reversed by statute in England) and not followed in some Commonwealth countries. However, as a result of this decision, it is now clear that the position in Re Emmadart does represent the law in the Cayman Islands.

Editor's note – The position in the Cayman Islands should be contrasted with the postion in Bermuda where it has been held that the directors will have standing to petition on behalf of an insolvent company, provided that the bye-laws do not prohibit such an application (see Re First Virginia Reinsurance Ltd. [2003] BLR 47). This authority has been relied on in order to facilitate director instigated petitions in numerous cases since.

APPARENT BIAS - JUDGES SITTING IN MULTIPLE JURISDICTIONS

Wael Almazeedi -v- BTU Power Company (in official liquidation) (Unreported, 20 November 2015)

This Appeal considered two important questions. First, when sitting in Jurisdiction A in a case concerning parties who are domiciled in Jurisdiction B, should a judge disclose their connection with Jurisdiction B or even recuse himself? Second, does it make a difference that the party domiciled in Jurisdiction B is closely connected with the government in Jurisdiction B or that the Judge's status as a judge in Jurisdiction B may depend on the power of the government in that jurisdiction to terminate that status?

Justice Sir Peter Cresswell, a judge of the Financial Services Division of the Grand Court of the Cayman Islands, heard the petition for the winding up of the Respondent, made a winding up order and appointed the Respondent's liquidators. Cresswell J was also unknown to BTU Power Company's ("BTU") sole director and chief executive officer Mr. Wael Almazeedi (the "Appellant"), a supplementary judge of the Qatar International Court.

The problem with this connection was that a number of the preference shareholders in BTU, who had presented the winding up petition, were in fact related to the Qatari Government. The concern in these circumstances was that the Judge may have been subject to the doctrine of apparent bias: that is to say that, in the absence of any actual bias, nevertheless the appearances of the thing are such that the Judge should not have sat on the case in question.

The modern test for apparent bias was stated by Lord Hope in Porter -v- Magill 1 in these terms:

"The question is whether the fair-minded and informed observer, having considered the facts, would conclude that there was a real possibility that the tribunal was biased".

In coming to a decision, this particular case required Right Honourable Justice Sir Bernard Rix to consider the role that the Minister of Finance plays in the appointment and removal of judges in Qatar. The Minister of Finance is in fact a pivotal figure in determining certain appointments and removals of members of the Court. His Excellency Ali Shareef Al Emadi ("Mr. Al Emadi") was appointed Minister of Finance and Chairman of the Council of Ministers on 26 June 2013. The appointment of Mr. Al Emadi was significant because he had previously been CEO of a subsidiary of one of the original petitioners in the winding up, and also significant preference shareholder in BTU.

After a review of the common law position and applying the modern test for apparent bias, Mr. Justice Rix came to the conclusion that as at the time when the winding up order was made, the fair-minded and informed observer would have concluded that it was not uncommon for a judge to have to deal with litigation in which the government of the country in which he was a judge was interested. However, in these circumstances, where the litigation was brought in a different country from that of the government interested in that litigation, it was unnecessary for the litigation to be conducted by a judge who was also a judge of that government's country. When the litigation was commenced, Mr. Al Emadi was not Minister of Finance and chairman of the Council of Ministers in Qatar. The conclusion was that the fair-minded and informed observer would not have concluded that the Judge's independence and impartiality were compromised at that point. However, the position changed when Mr. Al Emadi became Minister of Finance and Chairman of the Council of Ministers. At that point Mr. Al Emadi had a direct interest in claims that BTU had made against Mr. Wael Almazeedi and in defeating the proofs of debt that Mr. Wael Almazeedi had brought against BTU. The fair-minded and informed observer, knowing of the role of Mr. Al Emadi, would consider that there was a danger that the Judge's independence and impartiality were compromised and in that sense that there was a danger of bias. It was held that all Orders of the Judge in the proceedings after Mr. Al Emadi was appointed on 26 June 2013 should be set aside.

Judges should therefore disclose their connection with any relevant jurisdiction and consider recusing themselves if appropriate, such as if a judge is closely connected with the government of that jurisdiction and the judge's status as a judge may depend on that government.

SECTION 37 OF THE COMPANIES LAW (2007 REVISION) - STATUTORY CONSTRUCTION - SHARE CAPITAL - CLAW-BACK CLAIMS

DD Growth Premium 2X Fund (in official liquidation) -v- RMF Market Neutral Strategies (Master) Limited (Unreported 20 November 2015)

In this case, the Cayman Islands Grand Court clarified that redemption proceeds paid to investors by insolvent companies out of share premium cannot be clawed back by a liquidator under Section 37(6) of the Companies Law (2007 Revision) (the "Law").

The liquidators of DD Growth Premium 2X Fund (the "Fund") sought an appeal to claw-back redemption payments to RMF Market Neutral Strategies (Master) Limited ("RMF") made at a time when the Fund was insolvent.

The Fund was a feeder fund incorporated in the Cayman Islands, which fell into difficulties in late 2008 and early 2009 and faced a large number of redemption requests. One such investor was RMF whose request gave rise to a liability of more than US$62 million, which was paid in part at a time when the Fund was cash flow insolvent.

When the Fund was subsequently wound up it transpired that it had, in effect, become a Ponzi scheme. There was no suggestion that any of the redeeming investors knew about the fraud. The Fund's liquidators instigated proceedings seeking to recover redemption payments in the amount of US$22 million paid to RMF at the end of 2008.

Due to the timing of the redemption payments, it was the construction of the Law that fell to be considered.

The Liquidators' argument was based upon Section 37(6)(a) of the Law which provides that:

"A payment out of capital by a company for the redemption or purchase out of its own shares is not lawful unless immediately following the date on which the payment out of capital is proposed to be made the company shall be able to pay its debts as they fall due in the ordinary course of business".

The liquidators sought to argue that the payments made to RMF were payments made out of capital at a time that the Fund was insolvent and that, in effect, payments out of either share capital or share premium were impermissible.

At first instance, the Chief Justice dismissed this argument and found that the provisions of Section 37(6)(a) had not been breached as only a, de minimis, amount of US$1/1000 per share represented share capital, with the remainder representing share premium, the use of which was permissible pursuant to the Law. This is the position that is found in the current version of the Law.

On appeal, the Court of Appeal held that Section 37 of the Law must be read in conjunction with Section 34 of the Law, which provides that: payments by a company out of share premium for the redemption or purchase of its own shares are not payments out of capital and as such are not subject to any solvency requirement. The Court of Appeal attached particular importance to Section 34(2)(f), which refers to the use of share premium "for providing for" the premium payable on redemption which is held to cover payment for the premium due.

It is now clear that for the purposes of Section 37(6), share capital is given its natural meaning and represents only the par value of shares.

The Judgment of the Court of Appeal makes sound commercial common sense and comes as a relief to many investors, as well as a disappointment to many liquidators.

SECTION 145 COMPANIES LAW - PREFERENCE - SECTION 93 COMPANIES LAW – SOLVENCY

In the Matter of Weavering Macro Fixed Income Fund Limited (In Liquidation) -v- Skandinaviska Enskilda Banken AB (Publ) (Unreported, 4 December 2015)

The Plaintiffs were the Joint Official Liquidators (the "JOLs") of a Cayman fund, Weavering Macro Fixed Income Fund (the "Company"). In the months prior to its liquidation, the Company made three redemption payments to the defendant, Skandinaviska Enskilda Banken AB (Publ) ("SEB"), a Swedish financial institution and investor in the Company. In these proceedings the JOLs sought a declaration that these three payments were invalid pursuant to Section 145(1) of the Companies Law (the "Law") and an order that those monies be returned.

Magnus Peterson, the Company's controlling mind in the payment of the relevant redemptions, made a decision to pay a number of investors, including SEB, in priority, on the basis that those investors were switching to another fund within the Weavering group.

Section 145(1) of the Law provides:

"Every conveyance or transfer of property, or charge thereon, and every payment obligation and judicial proceeding, made, incurred, taken or suffered by any company in favour of any creditor at a time when the company is unable to pay its debts within the meaning of section 93 with a view to giving such creditor a preference over the other creditors shall be invalid is made, incurred, taken or suffered within six months immediately preceding the commencement of a liquidation".

Before determining whether the payments were made with a view of giving a preference under Section 145(1), Clifford J was required to establish whether the Company was "unable to pay its debts within the meaning of Section 93", when each such payment was made. The test of inability to pay debts under Section 93(3) is one of commercial insolvency, a so-called cash flow test rather than a balance sheet test. It is based on a Company's present inability to pay debts as they fall due. Clifford J was satisfied that the JOLs had discharged the burden of proving the Company was unable to pay its debts on the relevant redemption dates. His Lordship was then required to determine whether the relevant redemption payments were made with a view of giving a preference under Section 145(1).

It is important to note that the Cayman Islands legislature has not followed the UK in replacing its voidable preference regime. Therefore, the English authorities in the former regime there continue to be relevant in the Cayman Islands. The Chief Justice reviewed the applicable case law in RMF Market Neutral Strategies (Master) Limited -v- DD Growth Premium 2X Fund [2011] 2 CILR 61 ("DD Growth"). Prior to DD Growth there was limited Cayman authority on the relevant test to be applied to determine the question of preference. The Chief Justice summarised the principals as follows:

"The onus is on the person alleging a fraudulent preference to prove to the satisfaction of the court that the payment impugned was made by the bankrupt with the intention of preferring the payee over his other creditors;

It is competent for the court to draw the inference of an intention to prefer from all the facts of the case;

The intention to prefer, which must be proved, must be the principal or dominant intention; there might, however, be a valid distinction between an intention to prefer and the motive for that intention".

The principles set out by the Chief Justice in DD Growth were determined to be applicable to the current case. Therefore, it was necessary to show that the intention to prefer SEB was the principal or dominant intention when making the redemption payments.

Clifford J was satisfied that each of the SEB redemption payments were made with the principal or dominant intention of preferring SEB as a member of a particular class of creditors, the Swedish Redeemers. In this case, there was not mere selection, but the added dimension of conscious decision making resulting in a particular section for payment. An Order was made that SEB repay the sums received from the three redemption payments to the JOLs.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions