Pearson v Primeo Fund (Cayman Islands)
| Jurisdiction | UK Non-devolved |
| Judge | Lord Mance |
| Judgment Date | 06 July 2017 |
| Neutral Citation | [2017] UKPC 19 |
| Court | Privy Council |
| Docket Number | Appeal No 0092 of 2016 |
| Date | 06 July 2017 |
[2017] UKPC 19
Privy Council
From the Court of Appeal of the Cayman Islands
Lord Neuberger
Lord Mance
Lord Clarke
Lord Sumption
Lord Carnwath
Appeal No 0092 of 2016
Appellant
Lord Goldsmith QC
Francis Tregear QC
(Instructed by Debevoise & Plimpton LLP)
Respondent
Tom Smith QC
(Instructed by Enyo Law LLP)
Ist Intervener
Lawrence Rabinowitz QC
Maximilian Schlote
(Instructed by Proskauer Rose (UK) LLP)
2 nd Intervener
Stephen Atherton QC
Jonathan Allcock
(Instructed by Stephenson Harwood LLP)
Appellant
Michael Pearson (additional liquidator of Herald Fund SPC) (in official liquidation)
Respondent
Primeo Fund (in official liquidation)
Interveners
(1) Reichmuth & Co (the Late Redeemer)
(2) Natixis SA (the Later Redeemer)
Heard on 24 and 25 May 2017
The path to redemption is not always smooth. Herald Fund SPC ("Herald") issued quantities of participating non-voting shares, redeemable on terms set out in its articles, and placed the funds so raised with Bernard L Madoff Investment Securities LLC ("BLMIS"). On 11 December 2008, Mr Bernard Madoff confessed that BLMIS was a giant Ponzi scheme. At 5.00 pm (Luxembourg time) on 12 December 2008, Herald suspended the calculation of its NAV and, inter alia, all further payments to those who had invested in its redeemable shares. On 16 July 2013, the Grand Court made a winding up Order in respect of Herald pursuant to a petition presented on 14 February 2013 by the respondent, Primeo Fund (in official liquidation) ("Primeo"), with the consequence that Herald's liquidation was deemed to commence on 14 February 2013. On 8 January 2015, Herald received some USD259m by way of a first realisation of sums payable under a settlement with the Trustee for the liquidation estate of BLMIS ("Trustee"). Herald subsequently received further substantive distributions from the Trustee of several hundred million USD. These amounts and any future realisations would be sufficient to pay in full the sums claimed by the December Redeemers and the KYC Redeemers (defined below) — but would fall short of the total sums claimed in the liquidation by investors in Herald's redeemable shares.
In these circumstances, various interests are represented before the Board:
i) Herald, represented by its additional liquidator, advances the case that all investors who were unpaid at 5.00 pm on 12 December 2008 (and so, by reason of the suspension, also unpaid at the commencement of the liquidation on 14 February 2013) rank as ordinary members.
ii) Primeo represents investors who, under Herald's articles, either gave the necessary 35 days' notice, or had such notice period waived by Herald's directors, and had their shares redeemed either on 1 December 2008 ("the December Redeemers") or at some earlier redemption date ("the KYC Redeemers"), but were not paid the redemption proceeds before Herald suspended further payments. The KYC ("Know Your Client") Redeemers were redeemers who were owed the redemption proceeds, but to whom no payment was made, because Herald was awaiting proof of entitlement. No distinction has been drawn by any parties between the positions for present purposes of the December and KYC Redeemers. Primeo's primary case is that they are all the beneficiaries of simple debts owed by Herald and so rank as (although immediately below other) ordinary creditors. The bracketed qualification is agreed to arise under section 49(g) of the Companies Law, because the debt owed to the December and KYC Redeemers by Herald originated in a shareholding interest as members. Alternatively, if contrary to its primary case, section 37(7) of the Companies Law has any relevance to the December and KYC Redeemers, Primeo submits that they satisfy the pre-conditions for the priority provided by that subsection.
iii) Reichmuth & Co appears, by leave of the Board, as first intervener representing the interests of investors ("the Late Redeemers") who, prior to 5.00 pm on 12 December 2008, gave notice under the articles of at least 35 days to redeem on a subsequent date (being, in Reichmuth's case, 2 February 2009). Reichmuth relies on section 37(7) of the Companies Law to give them a priority at least equivalent, if not superior, to any enjoyed by Primeo by virtue of its primary case.
iv) Natixis SA appears as second intervener representing the interests of investors ("the Later Redeemers"), who made requests to redeem after 5.00 pm on 12 December 2008. It joins with the additional liquidator for Herald in submitting that neither Primeo nor, at any rate, Reichmuth enjoys any special priority, and that both rank alongside Natixis as ordinary members.
The appeal is by Herald's additional liquidator, Mr Michael Pearson, against a judgment given on 12 June 2015 by Jones J in favour of Primeo. Reichmuth and Natixis did not intervene, and their interests were not separately represented, below. Jones J and the Court of Appeal both accepted Primeo's primary case, holding that Primeo's shareholding had been redeemed, for the purposes of the Companies Law as well as Herald's articles, on 1 December 2008, and that the fact that payment remained suspended and outstanding until the commencement of the winding up on 14 February 2013 was irrelevant. In the light of the interventions, the issues before the Board, outlined above, now also embrace the positions of those whose redemptions under the articles were not completed before the suspension took effect on 5.00 pm on 12 December 2008, either because (as in the case of those represented by Reichmuth) they only gave notices for a redemption date falling after that time or because (as in the case of those represented by Natixis) they only made requests for redemption after that time.
The Companies Law (2007 revision) contained provisions permitting companies to issue redeemable shares as follows:
"Redemption and purchase of shares
37.(1) Subject to this section, a company limited by shares or limited by guarantee and having a share capital may, if authorised to do so by its articles of association, issue shares which are to be redeemed or are liable to be redeemed at the option of the company or the shareholder.
(2) Subject to this section, a company limited by shares or limited by guarantee and having a share capital may, if authorised to do so by its articles of association, purchase its own shares, including any redeemable shares.
(3)(a) No share may be redeemed or purchased unless it is fully paid.
(b) A company may not redeem or purchase any of its shares if, as a result of the redemption or purchase, there would no longer be any issued shares of the company other than shares held as treasury shares.
(c) Redemption or purchase of shares may be effected in such manner and upon such terms as may be authorised by or pursuant to the company's articles of association.
(d) If the articles of association do not authorise the manner and terms of the purchase, a company shall not purchase any of its own shares unless the manner and terms of purchase have first been authorised by a resolution of the company.
(e) The premium, if any, payable on redemption or purchase must have been provided for out of the profits of the company or out of the company's share premium account, before or at the time the shares are redeemed or purchased or in the manner provided for in subsection (5).
(f) Shares may only be redeemed or purchased out of profits of the company, out of the share premium account or out of the proceeds of a fresh issue of shares made for the purposes of the redemption or purchase or in the manner provided for in subsection (5).
(g) Shares redeemed or purchased under this section shall be treated as cancelled on redemption or purchase, and the amount of the company's issued share capital shall be diminished by the nominal value of those shares accordingly; but the redemption or purchase of shares by a company is not to be taken as reducing the amount of the company's authorised share capital.
(h) Without prejudice to paragraph (g), where a company is about to redeem or purchase shares, it has power to issue shares up to the nominal value of the shares to be redeemed or purchased as if those shares had never been issued:
Provided that where new shares are issued before the redemption or purchase of the old shares the new shares shall not, so far as relates to fees payable on or accompanying the filing of any return or list, be deemed to have been issued in pursuance of this subsection if the old shares are redeemed or purchased within one month after the issue of the new shares.
(4)(a) Where, under this section, shares of a company are redeemed or purchased wholly out of either or both of the company's profits or share premium account, the amount by which the company's issued share capital is diminished in accordance with paragraph (g) of subsection (3) on cancellation of the shares redeemed or purchased shall be transferred to a reserve called the "capital redemption reserve" and the share premium account or company's profits, as the case may be, shall be adjusted accordingly.
…
(5)(a) Subject to this section, a company limited by shares … may, if so authorised by its articles of association, make a payment in respect of the redemption or purchase of its own shares otherwise than out of its profits or the proceeds of a fresh issue of shares.
…
(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.
…
(7)(a) Where a company is being wound up and, at the commencement of the winding up, any of its shares which...
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