Kingate Global Fund Ltd and Kingate Euro Fund Ltd v Bank of Bermuda Ltd, Knightsbridge (USD) Fund Ltde, Fortis Bank (Nederland) NV and Standard Chartered Bank

• Jurisdiction: Bermuda
• Judgment Date: 28 August 2009
• Date: 28 August 2009
• Docket Number: Commercial Jurisdiction 2009 Nos. 23, 149 & 150
• Court: Supreme Court (Bermuda)

In The Supreme Court of Bermuda

Commercial Jurisdiction 2009 Nos. 23, 149 & 150

BETWEEN:

KINGATE GLOBAL FUND LTD AND KINGATE EURO FUND LTD

Plaintiffs

and

THE BANK OF BERMUDA LTD (HSBC)

Defendent

and

KNIGHTSBRIDGE (USD) FUND LIMITED, FORTIS BANK (NEDERLAND) NV, STANDARD CHARTERED BANK

Interveners / Defendants

and

KNIGHTSBRIDGE (USD) FUND LIMITED, FORTIS BANK (NEDERLAND) NV, STANDARD CHARTERED BANK

Plaintiffs by Counterclaim

and

KINGATE GLOBAL FUND LTD AND THE BANK OF BERMUDA LIMITED (HSBC)

Defendants to Counterclaim

Mr V Lyon, QC and Mr N Turner for the Interveners/Counterclaimants

Mr S Atherton, QC and Mr D Dwyer for the Plaintiffs/Counterclaim Defendants

Mr A Dunch for the Bank of Bermuda

The following cases were referred to in the judgment:

Foskett v McKeown [2001] 1 AC 102

Barclays Bank v Quistclose Investments Ltd [1970] AC 567

In re Nanwa Gold Mines [1955] 1 WLR 1080

Moseley v Cressey's Company (1865) LR 1 Eq 465

Twinsectra Ltd v Yardley [2002] 2 AC 164

Stewart v Austin (1866) LR 3 Eq 299

In re Fada (Australia) Ltd [1927] SR 590

Swiss Bank Corp v Lloyds Bank Ltd [1982] AC 584

Neste Oy v Lloyds Bank plc [1983] 2 Lloyds LR 658

Westdeutsche Bank v Islington LBC [1996] AC 669

Napier v Hunter [1993] AC 713

Henry v Hammond [1913] 2 KB 515

Re Goldcorp Exchange [1995] 1 AC 74

Abstract:

Payment for shares - Whether repayable as debt or held on trust - Insolvent fund - Construction of contract - Segregation of monies - Special purpose trust - Equitable lien

JUDGMENT of KAWALEY, J

Introductory

1. This action concerns whether subscription monies paid for shares the issuance of which was suspended in December 2008 (following the arrest of Bernard Madoff in New York) by a Fund which is now insolvent is repayable as a debt or is held on trust for the would-be subscribers. It is common ground that this central legal issue falls to be determined by a construction of the terms upon which the subscription monies were paid. The primary facts and the governing legal principles, as distinct from the

inferences to drawn from those facts and the application of those principles to the applicable factual matrix, were not materially in dispute.

2. Kingate Global Fund Ltd. ("Kingate") is a company incorporated in the British Virgin Islands ("BVI"). It issued shares to investors wishing to invest in Bernard L Madoff Investment Securities LLC ("BLMIS") in New York. The Interveners/Counterclaimants ("the Subscribers") were two such investors. Knightsbridge (USD) Fund Ltd ("Knightsbridge"), a Caymanian company (acting by and/or through its agent Fortis Bank (Nederland) NV) remitted US$6 million to Kingate's account in Bermuda with the Bank of Bermuda Limited ("the Bank") by way of subscription for Kingate shares. Standard Chartered Bank ("SCB"), a British company, remitted US$3 million. In each case, the subscription monies were remitted on or about November 28, 2008. Before the subscription applications had been approved, Bernard Madoff was arrested on December 11, 2008 and, the following day Kingate suspended all share issues and redemptions, as well as the calculation of its net asset value ("NAV").

3. After the US District Court for the Southern District of New York on December 15, 2008 appointed Irving Picard as Trustee to liquidate BLMIS in the US Bankruptcy Court and, in effect, to secure BLMIS assets at home and abroad, the Bank froze all monies it held in Bermuda for Kingate and Kingate Euro Fund Ltd. in response to the Trustee's claims. On January 28, 2008, both Kingate companies applied to this Court in Civil Jurisdiction 2009: No. 23 for a declaration that the Bank was not entitled to freeze these monies. Kingate's position at this juncture was that the Subscribers were entitled to be repaid their money. However, with the BLMIS Trustee threatening Kingate in late February, 2009 with a claim for the return of the $100 million received from BLMIS in late 2008, Kingate's lawyers in mid-March made it clear that the question of whether or not the subscription monies were held on trust was in dispute. On May 8, 2009 Kingate placed itself into provisional liquidation in BVI. On May 26, 2009, Knightsbridge and SCB filed proceedings (Civil Jurisdiction 2009: Nos. 149 and 150) against Kingate and the Bank seeking, inter alia, declarations that they each possessed a proprietary interest in the subscription monies.

4. On May 5, 2009, Bell J (on the Subscribers' application to intervene in the Kingate proceedings) consolidated all three actions and gave directions for an expedited trial. This resulted in the present dispute being tried within two months of the Subscribers issuing proceedings and within six months of Kingate issuing its Writ. Due to sensible case management by the parties, there was no oral evidence at trial, with reference being made to affidavits and agreed documents in a single 'Speedy Trial Bundle'.

Undisputed facts

5. The Bundle contained ten substantive affidavits. Three were sworn by Christopher Wetherhill, a director of Kingate, on January 28, April 17 and May 6, 2009, respectively. The latter was in fact filed in the Eastern Caribbean Supreme Court (BVI High Court) in support of the application to appoint joint provisional liquidators for Kingate. One affidavit was sworn by David Addington on behalf of the Bank on March 19, 2009. Two affidavits were sworn by Susan Lo Yee Har, a corporate director of Knightsbridge, both dated May 26, 2009 and filed in support of interlocutory matters. Two affidavits were sworn by SCB's Group Legal counsel, Tahir Salman Khan on May 27, 2009, in support of the corresponding interlocutory applications made by SCB. Finally, an affidavit was sworn on June 3, 2009 by one of the two Joint Provisional Liquidators ("JPLs") of Kingate, William Tacon, managing partner of Zolfo Cooper.

6. The May 6, 2009 Wetherhill Affidavit explains the background to Kingate's insolvency and suggests that the company's management responded to the unprecedented crisis which confronted it in December 2008 with considerable care after taking appropriate legal advice. The company's business involved raising money from investors who would subscribe for redeemable shares. All monies raised were managed by BLMIS, Kingate's Investment Advisor from the outset. The Information Memorandum's description of the "split strike conversion" would have identified BLMIS to investors as a Bernard Madoff entity. Although all money invested was forwarded to BLMIS in New

York, "some cash was kept by the Company in its account with the Bank e.g. for the payment of fees and redemption requests" (paragraph 19). Because of a large number of redemption requests between October and December 2008, BLMIS forwarded $100 million to Kingate's account with the Bank: "Sometimes cash from the subscriptions for new shares were used to pay redemptions" (paragraph 28).

7. The May 6, 2009 Wetherhill Affidavit proceeds to describe the action taken by Kingate following the arrest of Bernard Madoff, which "came as an enormous shock to the Company's board" (paragraph 31). Kingate notified investors of the BLMIS liquidation and kept them informed of various developments, and the day following the arrest suspended the calculation of the NAV and all redemptions and subscriptions. When the Bank froze its assets in early January 2009, Kingate applied to immediately release money to pay immediate operating expenses, as well as to challenge the validity of the Bank's action altogether. It later became clear that the Bank's action was in response to pressure from BLMIS' Trustee, who asserted the right to recover the $100 million from Kingate by letter dated February 27, 2008 on the grounds that the payment constituted a preference. This claim was formally asserted against Kingate in the US Bankruptcy Court on April 17, 2009. As a result of the Bank's freeze, the indefinite suspension of business (its sole business had been destroyed) and the assertion of the Trustee's and Subscribers' claims, Kingate was insolvent and the directors resolved to place the company into liquidation.

8. The dispute between the Kingate JPLs and the Subscribers in the present action is not whether or not Kingate is liable to repay the subscription monies now that it is clear that the applications will never be approved. The controversy turns on whether the monies when initially received became the property of Kingate or whether the funds were received on terms that they remained (in equity) the property of the subscribers until such time as the subscriptions were approved. The disputants are agreed that this question is one of contractual construction, to be resolved without regard to the subjective intention of the parties. So while the affidavit evidence sheds light on the surrounding circumstances, it is to the subscription documentation that one must ultimately turn to resolve this fundamental issue.

9. Knightsbridge and SCB each executed a Subscription Agreement "for non-US Investors". It is self-evident that these are standard form documents prepared by Kingate, which are essentially filled in by investors, as opposed to individualised contracts negotiated in each case. The first paragraph of the Agreement, set out in the form of a letter from each subscriber to Kingate, states as follows:

"The undersigned subscriber (the 'Subscriber') acknowledges having received, reviewed and understood the Amended and Restated information Memorandum dated as of 6 October, 2008 as may be further amended and restated (the 'Information Memorandum') for the Offering of USD Participating Common Shares (the 'Shares') of Kingate Global Fund, Ltd. (the 'Fund') and hereby subscribes for as many Shares as may be purchased for the amount indicated below on the terms of the information Memorandum and subject to the provisions of the Memorandum and Articles of Association of the Fund."

10. The subscriber makes various...