IPC Mutual Holdings Ltd v Friedberg

• Jurisdiction: Bermuda
• Judgment Date: 19 March 2004
• Date: 19 March 2004
• Docket Number: Civil Appeal 2003 No. 17
• Court: Court of Appeal (Bermuda)

In The Court of Appeal for Bermuda

In The Court of Appeal for Bermuda

Zacca, P; Evans, JA; Clough, JA

Civil Appeal 2003 No. 17

Civil Appeal 2003 No. 18

BETWEEN:

IPC Mutual Holdings Ltd

Plaintiff (Intending Appellant)

and

Stephen Friedberg

Defendant (Intending Respondent)

BETWEEN:

Mutual Holdings (Bermuda) Ltd

Plaintiff (Intending Appellant)

and

Stephen Friedberg

1st Defendant (Intending Respondent)

Dale Krapf

2nd Defendant (Intending Respondent)

Dallas Krapf

3rd Defendant (Intending Respondent)

Mr. N Hargun for the Companies

Mr. D Duncan for the Creditors

The following cases were referred to in the judgment:

Flannery v Halifax Estate Agencies LtdWLR [2000] 1 WLR 377

Stonegate Securities Ltd v GregoryUNK [1980] 1 All ER 241

Mann v GoldsteinUNK [1968] 2 All ER 769

Re a Company (No. 0012209 of 1991)UNK [1992] 2 All ER 797

Re Bayoil SAUNK [1999] 1 BCLC 62

Re Claybridge Shipping Co SAUNK [1997] 1 BCLC 572

Alipour v AryUNK [1997] 1 BCLC 557

Re MIC World Com LtdUNK [2003] 1 BCLC 330

Re UOC Corp [unreported]

Re Caliban Holdings Ltd

Re London & Global Ltd [unreported]

Application for leave to appeal — Winding-up — Preferred shares — Rent-a-captive — Payment of debt

JUDGMENT of Evans, JA

This is an application for leave to appeal against judgments given by Mr. Justice Warner on 12^th June 2003. By order of the Court of Appeal dated 20^th November, 2003, the applications have been heard inter partes and the hearing is to be treated as the hearing of the appeal if leave is granted.

We will refer to the appellants as ‘the Companies’, or to ‘IPC’ and ‘Mutual’ when it is necessary to distinguish between them. Similarly, we will refer to ‘the Petitioners’ jointly, except when it is necessary to refer to them individually and by name.

On 12^th August 2002, the Petitioners issued winding-up Petitions against both companies. They did so claiming to be both contributories (Preferred Shareholders) and creditors of the Companies. The order they sought was in the following terms:—

‘(1) That this Petition be adjourned sine die.

(2) That, at such time as this Petition is relisted for hearing, if so moved by the Petitioners, the Company be wound up by the Court under the provisions of the Companies Act, 1981.

(3) That a Provisional Liquidator of the Company be appointed with the power to appoint agents and attorneys and to pay for same out of the assets of the Company at the normal hourly rates charged by such agents and attorneys.

(4) That the costs occasioned by this Petition be paid out of the assets of the Company.

(5) That such other Order may be made in the premises as may to this Honourable Court seem just.’

On 19^th August 2002 the Companies issued Summonses seeking Orders that the Petitions ‘be struck out as an abuse of the process of this Honourable Court.’

The Companies' Summonses were heard (together with a third Summons, which is not relevant to these Appeals) before Warner J. on 11^th /13^th December 2002. He gave his Ruling on 12^th June 2003, holding that the Companies' applications were dismissed.

On 1^st July, 2003, the learned Judge refused the Companies' applications for leave to appeal, on the ground that the applications had ‘no realistic chance of success.’

The Parties

Although there is a complex contractual relationship between the Petitioners and the Companies, and other parties, the essential relationship for the purposes of this appeal is that each of the Petitioners is a Preference Shareholder in one, or both, of the Companies. This aspect of the relationship is regulated by a Shareholder Agreement which provides that ‘on the dates shown in Appendix 1 (hereinafter referred to as the “Dividend Date”) [the Company] agrees to cause a dividend to be declared to the owner of record on such date (1) of the PREFERRED SHARE in an amount equal to’ the sum of a formula which followed in the clause.

The full contractual relationship establishes what are described as Rent-a-captive insurance programmes run by the MRM Group of Companies to which the Companies belong. These programmes were designed to make the economic advantages of a captive reinsurer available to customers who are potential insureds, but who do not own or operate captive insurance companies of their own.

The object of the scheme was to enable the insureds to share in the profits (or losses) of the insurance and reinsurance programme. So the insurance was placed with an insurance company which was an affiliate of the Companies (in the example we were given, Legion Insurance Company) which then reinsured part of the risk with a reinsurer wholly-owned by one of the Companies. The reinsurers were Mutual Indemnity Ltd. and Mutual Indemnity (Bermuda) Ltd., known as ‘MIL’ and ‘MIB’ respectively. To safeguard the reinsurers against losses, the insureds provided them with collateral security in the form of a letter of credit, or cash substitute.

Profits made by the reinsurers became available to the Companies, as the owners of the reinsurers, in form of dividends paid in respect of the Companies' shareholdings. The Companies themselves were not insurers, or reinsurers, and they did not carry on business as such.

By constituting the insureds as Preferential Shareholders in the Companies, they became entitled to share in any profits made by the Companies from their insurance programmes.

Again, the profit-sharing mechanism involved the payment of dividends by the Companies to the insureds as Preference Shareholders, hence the obligation placed on the Companies to declare dividends under Clause 2 of the Shareholders' Agreement, quoted in Paragraph 7 above.

In outline, the amount of the dividends to be declared under Clause 2 took account of investment income received by the Companies and the reinsurers, less an administration fee, ‘plus or minus the amount of underwriting gain or loss realized’ by the reinsurers, calculated as stated in the clause.

There were doubtless valid commercial reasons why the insured's participation in the underwriting gains was agreed to be paid by means of dividends declared by the Companies. These reasons may have been fiscal, or regulatory, or perhaps others, but whatever they were, the terms and effect of the Shareholders' Agreement are clear. They do not provide for any other payment to be made by the Companies to the insureds.

A feature of the arrangements is that separate agreements were entered into and separate accounts were prepared for each insurance programme. These appeals relate to six different programmes. We were told that these were all that have been entered into by the present Respondents, but in total the Companies' business extends over several...