Re Gerova Financial Group Ltd

• Jurisdiction: Bermuda
• Judgment Date: 06 July 2012
• Date: 06 July 2012
• Docket Number: Companies Winding-Up Jurisdiction 2011 No. 369
• Court: Supreme Court (Bermuda)

In The Supreme Court of Bermuda

Companies Winding-Up Jurisdiction 2011 No. 369

In the matter of Gerova Financial Group Limited

Company No 44558

And in the matter of the Companies Act 1981

Mr C Hill for the Petitioner

Mr M Ouwehand for the Company

The following case was referred to in the judgment:

OAO "CT-Mobile" v IPOC International Growth FundBDLR [2006] Bda LR 69

Abstract:

Winding-up - Status of Applicant as a creditor - Agency agreement - Litigation funding - Sufficient interest

JUDGMENT of Kawaley CJ

Introductory

1. On March 16, 2012 I made the following findings about the status of the Petitioner (by substitution-Maxim LLC ("Maxim")):

"53. Mr. Ouwehand advanced no convincing reasons as to why this Court should not determine this aspect of the standing issue at a hearing set down for two hours and which lasted a full day and in relation to which copious amounts of evidence had been filed.

It is common ground that Maxim was issued a promissory note on February 19, 2010 pursuant to a Settlement Agreement under which its obligation to pay Maxim an underwriting fee was deferred ("the Promissory Note"). Although the amounts said to be due and the due dates pleaded in the draft Amended Petition do not appear to me to perfectly match the terms of the Promissory Note (the pleaded amounts appear to be rounded down), it seems clear that at least $2 million is prima facie owed under the Note. Demand for payment was made on the last date specified in the Note (December 15, 2011) and the Company failed to pay the Note.

On December 16, 2011, CAC, the Company's friendly debt-purchaser, commenced negotiations to purchase the Note from Maxim. The evidence shows that although a written agreement was almost consummated, Maxim pulled out at the last minute as a result of a better offer. On January 12, 2012, CAC filed a Complaint in the Superior Court for the State of California (County of Los Angeles) seeking to enforce an alleged oral agreement concluded by CAC and Maxim for the purchase of Maxim's Note.

On February 2, 2012 at 3.35 pm, Maxim filed its Summons seeking to be substituted as Petitioner in this Court. The same day the Company filed a Complaint against Maxim in the United States District Court for the Southern District of New York seeking, inter alia, a declaration that the Promissory Note and related release (presumably given by the Company to Maxim in the Settlement Agreement) are 'unenforceable because they are the result of a mistake on the part of Gerova'. Other complaints are made about the alleged assignment by Maxim of the Note which do not appear relevant to present concerns save to note that it is asserted that the note was not legally capable of being assigned.

The standing of Maxim as a creditor petitioning on the basis of an undisputed debt is, implicitly at least, challenged on two inconsistent grounds. Firstly that it entered into an oral agreement to assign the Note to CAC which is legally

enforceable. Secondly, it is alleged that the Note is unenforceable as against the Company and cannot according to its terms be validly assigned to a third party.

The evidence before this Court clearly shows that no binding assignment agreement was reached with CAC by Maxim. It is further impossible to regard the disputes raised by the Company about the validity of the Note after attempts by CAC to purchase it failed as being either substantial or raised in good faith.

I find that Maxim is an actual creditor with standing to be substituted under rule 27 of the Rules as Petitioner as submitted by Mr Hill on Maxim's behalf. However, in the exercise of my discretion under rule 157 of the Rules, I postpone any final determination of how (if at all) any agreement entered into between Aramid and Maxim impacts on its status as a creditor until the hearing of the Petition because this matter was not fully addressed either by the evidence or by way of argument."

2. This is a hotly contested winding-up Petition at the centre of which lies the Company's assertion that the Petition ought to be dismissed in any event. This assertion is based on the grounds that Maxim's pursuit of the present proceedings is tainted by the improper collateral motives of Aramid Entertainment Fund Ltd. ("Aramid"), allegedly the driving force behind the Petition. In addition, the Company relies heavily on the fact that the only other creditors who have participated in the present proceedings at the hearing of the Petition stage have lent their support to the Company's position that the winding-up application should be refused.

3. The Petitioner's primary grounds for seeking a winding-up order are that the Company is insolvent on a cash-flow and balance-sheet basis and that as an unpaid creditor it is entitled to a winding-up order as of right. In the course of the hearing Mr Ouwehand indicated, to substantiate the Company's assertions of solvency (it seemed to me), that if the Court was minded to make a winding-up order a short time should be afforded to enable the Company to tender payment.

4. Based on the evidence placed before the Court and the findings made on the substitution application, the position on the controversial issues appeared to me to be as follows:

i. Maxim's status as a creditor had already been determined and the challenges to that standing already rejected as neither bona fide nor substantial, subject to a residual discretion to stay or dismiss the Petition to allow the...