Bny Ais Nominees Ltd et Al v New Stream Capital Fund Ltd
| Jurisdiction | Bermuda |
| Judge | Kawaley, J. |
| Judgment Date | 27 May 2010 |
| Court | Supreme Court (Bermuda) |
| Docket Number | 178 and 374 of 2009 |
| Date | 27 May 2010 |
Supreme Court
Kawaley, J.
178 and 374 of 2009
Mr. Jan Woloniecki and Mr. Alex Jenkins, Atride-Stirling and Woloniecki, for the plaintiffs
Mr. Thomas Lowe QC of Counsel and Mr. Mark Chudleigh and Mr. Cameron Hill, Sedgwick Chudleigh, for the defendant
Company law - Shares and shareholders — Segregated accounts — Whether purported plan would alter the segregated nature of accounts contrary to the Bye-Laws of the defendant — Whether plan was unlawful — Appointment of receiver — Whether appointment would be just and equitable.
The present action results from the consolidation on November 26, 2009 of a Writ action commenced on June 18, 2009 and an action commenced by an Originating Summons issued on November 16, 2009. The plaintiffs seek the following relief under paragraph 1 of the prayer to their Generally Indorsed Writ, as reformulated in paragraph 1 of the prayer set out at the end of their Statement of Claim:
“A declaration or declarations that the purported variation of the rights of each of the second to sixth plaintiffs as members of the defendants of which notice was purportedly given to the first plaintiff by letter dated May 22, 2009 (“the Purported Plan”) is ultra vires and/or contrary to the Bye-Laws of the defendant and/or contrary to the provisions of the Segregated Accounts Companies Act 2000 and that, accordingly, the said purported variation of rights is void and without legal effect.”
Paragraphs 2–4 of the Writ and Statement of Claim each seek relief which is consequential upon the granting of the primary relief sought. Paragraph 1 of the plaintiffs' Originating Summons seeks the following relief:
“1. A receivership order pursuant to sections 19 and 20 of the Segregated Accounts Companies Act 2000 (“the SAC Act”):
1.1 Approving a fit and proper person as a receiver of each of the segregated accounts of the defendant titled Class B, Class C, Class H, Class I and Class L (together the “Relevant accounts”) with all powers of a receiver under the SAC Act; and
1.2 Directing that the business and assets linked to each of the Relevant Accounts shall be managed by the receiver of each Relevant Account for the purposes of the distribution of the assets linked to each of the Relevant Accounts to those entitled thereto.”
The first plaintiff is the nominee and agent of plaintiffs 2–6 (“the Gottex AB Funds”), which are all mutual fund companies. Plaintiffs 2–5 are incorporated in the Cayman Islands and the sixth plaintiff is incorporated in the British Virgin Islands. The defendant is incorporated in Bermuda and registered under section 6 of the Segregated Accounts Company Act 2000 (hereinafter either (“the Act” or “SACA”). It issued shares in various classes to the plaintiffs, who proceeded to trial in their capacity as 100% holders of Class C and I shares. The defendant's investment activity consisted of advancing funds by way of loan, as far as Classes C and I are concerned, to an onshore affiliate incorporated in Delaware, New Stream Insurance, LLC (“NSI”). NSI is wholly owned by New Stream Secured Capital, L.P (“NSSC”), a Delaware limited partnership, in which other of the defendant's share classes invested in.
The Act creates a unique offshore legal construct under which: (a) account owners, if they are characterised as shareholders, are issued shares of a designated class; and (b) the segregated account company conducts its business on behalf of its investors by reference to the relevant class of shares through transactions linked to the relevant segregated accounts or cells. The legalities of the segregated account company corporate structure have seemingly never been tested by any Court before. However, I refused the application of another of the defendant's investors to appoint a receiver under the Act in UBS Fund Services (Cayman) Ltd. and Tensor Endowment Fund Ltd. v. New Stream Capital Fund Ltd. [2009] SC (Bda) 63 Civ. (18 December 2009) (“the Tensor case”). In that case the applicant owned 20% of the shares linked to the relevant segregated account and did not directly challenge the Plan's compliance with SACA.
The plaintiffs ultimately contend that an out of court restructuring approved by the majority of various share classes of the defendant in May 2009 (“the Plan”) ought to be declared unlawful because it contravenes the defendant's constitution and the Act itself, as well as the plaintiffs' legal and economic rights in their capacity as 100 % shareholders of Classes C and I (On November 26, 2009, the plaintiffs' application to appoint a receiver in respect of classes B, H and L was stayed). It seeks to appoint a receiver to manage the relevant accounts under the provisions of the Act. In addition to contesting the legal entitlement of the plaintiffs to the relief they seek, the defendant crucially contends that unwinding the Plan (which has widespread support from its investors as a whole) will require NSI and NSSC to file for bankruptcy and create: (a) great uncertainty at best; and (b) economic disaster for all concerned, the plaintiffs included, at worst.
The plaintiffs allege that the Prospectus and the defendant's Bye-laws represented to prospective investors that the defendant would establish segregated accounts in accordance with SACA. The following provisions of Bye-law 4 are relied upon:
“(6) Save as otherwise provided in the Bye-laws, the assets held in each Fund shall be applied solely in respect of the Shares of the Class to which such fund appertains. The following provisions shall, subject to SACA, apply to the Funds established and maintained pursuant to this Bye-law:
(a) The proceeds from the allotment and issue of each class of Shares shall be applied in the books of the Company to the Fund established for that class of Shares, and the assets and liabilities and income and expenditure attributable thereto shall, subject to this Bye-law, be applied to such fund and linked to its corresponding Segregated Account;
(b) …
(c) ….
(d) On a redemption of Shares of a class, the redemption proceeds shall be paid to the holder redeeming such shares out of the relevant Fund;
(e) ….
(f) …
(g) Notwithstanding anything to the contrary in the Bye-laws or in any prospectus, offer document, agreement or other document relating to the Company:
(i) the company shall maintain a Segregated Account in respect of each Fund and the assets of each Fund shall be held by the Company in accordance with and subject to SACA; and
(ii) the holders of the class of Shares in respect of which a Fund is established shall be the only Account Owners of the Segregated account maintained in respect of such Fund.”
The plaintiffs also rely on Bye-law 9, which provides an entitlement to payment as soon as practicable after a redemption request, and Bye-law 7(1), which provides that share rights may only be varied with the consent of three-quarters of either (a) the issued shares of the relevant class, or (b) on the resolution of three-quarters of those meeting at a separate class meeting.
The plaintiffs allege that the Plan was proposed by a letter dated April 6, 2009, that they negotiated on the proposal thereafter and that, despite the fact that the defendant incorporated certain amendments in a revised proposal forwarded to them on May 6, 2009, the plaintiffs still declined to consent to the Plan. The validity of the Plan, and in particular its implementation through modifications made to the Loan Agreement linked to each segregated account, is essentially challenged on the following grounds. It is alleged that collateralized assets linked to the plaintiffs' accounts were improperly made available to meet the claims of other investors who did not previously have claims linked to those assets.
In its Amended Defence, the defendant avers that the Prospectus makes it clear that numerous notes would be issued by the same New Stream fund to various segregated accounts. Reliance is also placed on that portion of the March 2007 Prospectus which discloses that the Manager would have a broad discretionary power to manage the investments. NSI is said to have been formed solely for investing in life settlements and premium finance loans. It was established by NSSC's general partner, New Stream Capital LLC (“NSC” or the “Managers”) in 2004 and became a subsidiary of NSSC in 2006. As of June 30, 2009, insurance policy investments constituted 44.4% of the total assets of NSSC. NSI's private placement memorandum (“PPM”) made full disclosure about the illiquid nature of NSI's investments.
The defendant avers (paragraph 19) that it was “established as a Bermuda segregated account mutual fund company on 31 October 2005 primarily for non-US investors and structured to allow offshore investors who wanted to invest in NSSC or NSI (when it existed as a separate fund) without subjecting their investments to U.S. taxation by taking advantage of the Portfolio Interest Exemption (“PIE”) under U.S. tax law.” To qualify for PIE, neither non-US investors nor the defendant could invest directly in NSSC or NSI; they did so indirectly through segregated accounts with the defendant, which in turn placed investments in the form of loans under broadly similar Loan and Security Agreements and a common Collateral Agency Agreement. Under these documents, each borrower (NSI or NSSC) pledged all of its assets as collateral for each of the Bermuda loans. It is then averred:
“22. Accordingly, the defendant will say that the plaintiffs were fully aware of the fact that the Collateral relied on in respect of the Loan and Security Agreements and the Loan Notes issued to each of the segregated accounts of the defendant and to the Cayman and US Feeder Funds…related to the same pool of assets.”
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