Bermuda Fire & Marine Insurance Company Ltd v BF&M Ltd

• Jurisdiction: Bermuda
• Judgment Date: 24 July 1996
• Date: 24 July 1996
• Docket Number: Companies Winding Up Jurisdiction 1995 No. 393
• Court: Supreme Court (Bermuda)

In The Supreme Court of Bermuda

Companies Winding Up Jurisdiction 1995 No. 393

BETWEEN

Bermuda Fire and Marine Insurance Company (in liquidation)

Plaintiffs

and

BF&M Limited & others

Defendants

Mr R Potts, QC and Mr J Riihiluoma for the Applicants

Mr G Moss, QC, Mr W Trower and Mr J Woloniecki for the Respondents

The following cases were referred to in the judgment:

Intercontinental Natural Resources Limited v Dill [1982] Bda LR 1

In re City Equitable Fire Insurance CoELR [1925] 1 Ch 407

Re Augustus Barnet & Sons LtdUNK [1986] BCLC 170

Neptune (Vehicle Washing Equipment) Ltd v FitzgeraldWLR [1995] 3 WLR 108

Abstract:

Application to strike out consolidated statement of claim - Fraudulent conveyance - Pleadings - Bye-laws - Dividend - Transfer of shares to create debt - Self dealing

RULING of Ground, J

1. This matter came before me on the application of the ninth to thirteenth defendants to action 1995 No. 393 ("the individual defendants") to strike out the consolidated statement of claim as against them.

2. There were originally three actions, but they have been consolidated by order of the Court of Appeal. The plaintiffs in the consolidated action are Bermuda Fire and Marine Insurance Company (BFMIC), which is in compulsory insolvent liquidation, and certain of its creditors. The claim is brought in respect of a series of transactions carried out in 1991 (collectively referred to as "the 1991 transaction") whereby BFMic's interest in various subsidiaries was transferred to a new holding company, BF&M Limited (BFM) in return for 2,800,000 of the issued shares of BFM and other valuable consideration, and the shares thus received were then distributed to the common shareholders of BFMIC by way of the declaration of a dividend in specie. The plaintiffs allege that that transaction was done to strip substantial assets out of BFMIC so as to put them beyond the reach of its creditors. They frame their complaint in various ways, and these include allegations of breach of duty against certain, but not all, of the then directors of BFMIC, and a claim under section 37 of the Conveyancing Act 1983 (s. 37), which is substantially a re-enactment of the English provisions concerning conveyances of property with intent to defraud creditors. The plaintiffs also seek to add further formulations of the claim by way of amendment, and although that application was not strictly before me, argument proceeded by consent upon the amended version of the consolidated statement of claim de bene esse.

3. The applicants before me were directors of BFMIC, and members of its finance committee, at the time of the 1991 transaction, and are said by the plaintiffs to have been the prime movers of it. In addition to the applicants, the defendants to the consolidated actions include BFM, the subsidiary companies, certain professional advisers and all the recipients of the dividend in specie, who number one thousand and two.

4. A prior attempt has been made by the corporate defendants and two shareholders to strike out the actions as against them, but this was refused by Meerabux, J. That decision, which turned largely upon the availability of the remedy under s 37, was upheld by the Court of Appeal, Kempster, JA, in giving the decision of the Court, saying:-

"It is far from clear that the cause of action under section 37 is not sustainable."

5. Notwithstanding that, the individual defendants have revisited the applicability of s 37 before me on new grounds, not before Meerabux, J or the Court of Appeal, and have also mounted an attack upon the sufficiency of the pleaded case of default against the Directors. The two prongs of their attack involve very different considerations, and I will deal with each separately.

Section 37

6. The applicants invite me to look at the dividend in specie in two steps:-

i. The declaration of the dividend; and

ii. The transfer of shares in fulfillment of it.

7. They say that the declaration itself transferred nothing, not even an equitable interest in the shares, but merely created a simple contract debt owed by the Company to its shareholders. That, they say, is incapable of constituting a conveyance. In any event they say that there were sufficient lawfully distributable assets available at that time to support the dividend, and they point to the before and after accounts and balance sheets. Indeed, they say a recognition of that is implicit in the plaintiff's reliance on s 37, as they have not alleged that the dividend was paid out of capital. The applicants argue that any subsequent transfer of the shares was merely in satisfaction of the liability created by the declaration of the dividend, and the recipients were not, therefore, volunteers. They say that the discharge of a liability cannot constitute a fraudulent conveyance, it being...