DD Growth Premium 2X Fund (in Official Liquidation) v Rmf Market Neutral Strategies (Master) Ltd (Cayman Islands)
| Jurisdiction | UK Non-devolved |
| Judge | Lord Sumption,Lord Briggs,Lord Carnwath,Lord Hodge,Lord Mance |
| Judgment Date | 23 November 2017 |
| Neutral Citation | [2017] UKPC 36 |
| Court | Privy Council |
| Docket Number | Appeal No 0050 of 2016,Privy Council Appeal No 0050 of 2016 |
| Date | 23 November 2017 |
[2017] UKPC 36
Lord Mance
Lord Sumption
Lord Carnwath
Lord Hodge
Lord Briggs
Privy Council Appeal No 0050 of 2016
From The Court Of Appeal Of The Cayman Islands
Company Law - Redemption payments — Illegality — Solvency — Whether payment out of share premium account towards premium payable on redemption of share was a capital payment within meaning of Companies Law — Whether redemption payments were illegal — Whether claim for recovery of an unlawful redemption payment may be pursued by company or its liquidator against recipient — Whether company was in a position to satisfy solvency when payments were made — Appeal allowed — Matter remitted to Grand Court.
Appellant
Tom Smith QC Adam Al-Attar Jeremy Snead (Instructed by Peter McMaster QC of Appleby (Cayman) Ltd and by Alan Taylor and Co)
Respondent
David Chivers QC Paul Smith Ben Hobden (Instructed by Herbert Smith Freehills LLP and by Conyers Dill & Pearman)
JUDGMENT GIVEN ON
Lord Sumption And (with whom Lord Carnwath agrees)
In late 2008, just after the Lehman Brothers crash, a group of investors in a Cayman Islands open-ended investment company called DD Growth Premium 2X Fund (“the Company”) decided to cash in their investments by exercising their right to have their shares in the Company redeemed. The management of the Company responded, in January 2009, by paying some of the investors in full, and some of them nothing. The largest payments were made to one investor, RMF Market Neutral Strategies (Master) Limited (“RMF”), in the aggregate sum of US$23m odd, but this was less than 40% of the amount owed to RMF by way of redemption. The Company then ran out of money and, shortly thereafter, went into insolvent liquidation. The liquidator then caused the Company to claim the US$23m back from RMF but the claim failed, both in the Grand Court and in the Cayman Islands Court of Appeal.
The Company's appeal from the Court of Appeal raises issues about Cayman company law, as it was between 1989 and 2011, in relation to payments by the Company of premium due on the redemption of its shares, on largely undisputed facts which were either agreed at the outset of the litigation, or found by the Chief Justice of the Cayman Islands, at the trial of preliminary issues in 2014.
The first and second issues are about the interpretation of section 37 of the Cayman Companies Law (2007 Revision) in its statutory and historical context. Section 37 permits a company to issue redeemable shares and regulates the circumstances in which, and the manner in which, they may be redeemed. The 2007 Revision will be referred to as the Companies Law. The third issue is about the common law, which in this respect is not suggested to be different as between the Cayman Islands and England, and concerns the nature of the remedies available to the company or to its liquidator for the recovery of a redemption payment rendered unlawful by section 37.
Cayman law (like the law of the UK) has always contained restrictions upon the ability of a company to reduce its capital, primarily for the protection of its creditors. Although originally to be found in judge-made law, they are now almost completely statutory. The particular restriction in issue on this appeal consists of a form of solvency test which must be satisfied by a company if it is lawfully to pay for the redemption of shares out of capital. It is to be found in section 37(6) of the Companies Law in the following form:
“(6)(a) A payment out of capital by a company for the redemption or purchase 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.
(b) The company and any director or manager thereof who knowingly and wilfully authorises or permits any payment out of capital to effect any redemption or purchase of any share in contravention of paragraph (a) is guilty of an offence and liable on summary conviction to a fine to fifteen thousand dollars and to imprisonment for five years.”
The first issue is mainly a question of interpretation or application of the phrase “its debts as they fall due in the ordinary course of business” in section 37(6)(a). The question is whether generally that phrase is apt to include the debts constituted by the redemption price payable to shareholders who have exercised their right to redeem (“a redemption debt”). A subsidiary question is whether in any event redemption debts were incurred by this Company in the ordinary course of its business, as the judge held. It is common ground that, if redemption debts are generally, or are in the context of this Company's business, within section 37(6)(a), then the Company was insolvent at the material time. There is a factual dispute whether, if not, the Company had other debts which rendered it insolvent within the meaning of section 37(6)(a). The judge found it unnecessary to resolve that question and, for reasons which will appear, so does the Board. This issue will be referred to as “the Solvency Issue”.
The second, and main, issue in the appeal is whether a payment out of a company's share premium account towards the premium payable on redemption of shares (rather than towards the nominal amount of those shares) is a capital payment with the meaning of section 37(6)(a). If it is, then a company may not use sums standing to the credit of its share premium account for payment of the premium due on redemption of shares unless it satisfies the solvency test in section 37(6)(a).
The appellant liquidators also challenged the lawfulness of the redemption payments made by the Company in this case by two alternative submissions which do not involve reliance upon section 37(6)(a). For reasons which will become apparent the Board has not found it necessary to address those in detail. Since all three routes of challenge question the legality of the redemption payments made, these issues will be referred to collectively as “the Illegality Issue”.
The third issue, which will be called “the Remedies Issue”, may be summarised in this way. The Companies Law creates no express statutory cause of action or other civil remedy against the recipient of an unlawful redemption payment. There is only a criminal sanction against the company, its directors and managers. It is not in dispute that the directors of a company who procure the making of an unlawful redemption payment would be liable to the company for breach of trust, and that a recipient with knowledge of the facts as to the unlawfulness of the payment would be liable as a constructive trustee. The question is whether a claim for the recovery of an unlawful redemption payment may be pursued by the company or its liquidator against a recipient which received the payment without knowledge of the facts giving rise to the illegality, and in settlement (or part-settlement) of the debt constituted by the Company's obligation to pay the redemption price after a valid exercise of the shareholder's right to redeem, by means of a claim in unjust enrichment, subject only to established defences, such as change of position.
The Company is a Cayman Islands company limited by shares which, until placed in official liquidation in March 2009, carried on business as a feeder fund for the facilitation of investment in the DD Growth Premium Master Fund (“the Master Fund”). That was a hedge fund which, until the collapse of Lehman Brothers in late 2008, pursued what the judge described as a well-known trading strategy of investment in correlated stocks. The mechanism whereby the Company made this facility available to investors was by the issue of redeemable ordinary shares at a premium, and by using the proceeds of the issued shares as investments in the Master Fund. Investors could realise their investments through the Company in the Master Fund by making written requests to redeem their shares on one of a regular monthly series of redemption days. Both the issue price payable by the investor and the redemption price payable by the Company was to be calculated by reference to Net Asset Value (“NAV”) calculations based upon the market value, from time to time, of the Company's investment in the Master Fund on the relevant issue or redemption date.
The use of redeemable shares as the vehicle for investment in this way was a common business practice in the Cayman Islands, and involved both the issue and the redemption of the ordinary shares at a very substantial premium. By way of example, the NAV per US$ share of the Company's ordinary shares ranged during the period from January to June 2008 between US$106,575 and US$112.288, whereas the nominal value per share was US$0.001. Thus, an incoming investor during that period would pay for the issue of shares an amount consisting almost entirely of premium, and the payment to an outgoing investor on a redemption day during that period would be similarly constituted.
As a feeder fund, the Company's ordinary business consisted of the issue of shares, the transmission to the Master Fund of the proceeds of the issue, the receipt from the Master Fund of payments necessary to fund redemptions, and the payment out of redemption moneys to redeeming shareholders. The company had no separate trading activities of its own.
The timetable for redemption laid down by the Company's articles may be summarised as follows:
i) A shareholder is required to give 30 days' written notice of its wish to redeem, prior to a redemption day.
ii) Redemption days were scheduled for the first business day of each month.
iii) The NAV per share was to be...
To continue reading
Request your trial
-
Pearson (in his capacity as Additional Liquidator of Herald Fund SPC (in Official Liquidation)) v Primeo Fund (in Official Liquidation)
...The meaning of section 37(5) was considered by the Board in DD Growth Premium 2X Fund v RMF Market Neutral Strategies (Master) Ltd [2017] UKPC 36; [2018] Bus LR 1595 and in that case the Board accepted a concession by the liquidator that shares could be redeemed even if the manner of redem......
-
Christopher Purkiss (as Liquidator of Ethos Solutions Ltd) v Tim Kennedy & 34 Others
...(in liq) v Migani [2014] UKPC 9 … at [18] and DD Growth Premium 2X Fund (in official liq) v RMF Market Neutral Strategies (Master) Ltd [2017] UKPC 36 … As stated in DD Growth Premium by Lord Sumption and Lord Briggs (at [62]): “[62] … It is fundamental that a payment cannot amount to an en......
-
Byers and Others v Saudi National Bank
...London Borough Council [1996] AC 669 at 685A-D and end with the joint opinion of myself and Lord Sumption in DD Growth Premium 2X Fund v RMF Market Neutral Strategies [2017] UKPC 36; [2018] Bus LR 1595, 1610, para 58: “Conceptually these two proposed bases of recovery are very different. A ......
-
Vodafone Ltd v The Office of Communications
... ... that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment ... , the development of the internal market, and the promotion of the interests of the ... 19 See DD Growth Premium 2X Fund v. RMF Market Neutral Strategies (Master) Ltd [2018] Bus LR 1595 (“ DD Growth ”) ... ...
-
Clawback Claims Against Redeemed Cayman Islands Fund Investors
...can be found here. Footnotes DD Growth Premium 2X Fund (In Official Liquidation) v RMF Market Neutral Strategies (Master) Limited [2017] UKPC 36. RMF Market Neutral Strategies (Master) Limited v DD Growth Premium 2X Fund [2014] (2) CILR 316. See our update of 2 December 2014 entitled Cayman......
-
Cayman Islands Funds Clawbacks - Business As Usual
...becoming an overused phrase. You may have heard about the recent Privy Council ruling in DD Growth v RMF Market Neutral Strategies [2017] UKPC 36, dealing with clawbacks from fund redeemers in Cayman Islands funds. While interesting, it is not earth-shattering. In particular, it does not al......
-
Knowing receipt: continuing trusts and conscionability Byers v Saudi National Bank
...of Nigeria [2014] UKSC 10 (Williams) at [31], andDD Growth Premium 2X Fund (in liquidation) vRMF Market Neutral Strategies (Mastear) Ltd [2017]UKPC 36 at [58].278 © 2022 The Author s. The Modern Law Review published by John Wiley & Sons Ltd on behalf of Modern Law Review Limited.(2023) 86(1......