Re Kingate Management Ltd

• Jurisdiction: Bermuda
• Judgment Date: 03 October 2012
• Docket Number: Commercial Jurisdiction 2011 No 301
• Date: 03 October 2012
• Court: Supreme Court (Bermuda)

In The Supreme Court of Bermuda

Commercial Jurisdiction 2011 No 301

In the matter of the Companies Act 1981

And in the matter of

Kingate Management Limited

Mr A Potts for the Joint Liquidators of Kingate Global Fund Ltd and Kingate Euro Fund Ltd (the Funds)

Mr S Froomkin QC and Ms V Memari for the Official Receiver and Provisional Liquidator of Kingate Management Ltd

Mr T Marshall and Ms K Tornari for First Peninsula Trustees Ltd, Port of Hercules Trustees Ltd, Ashby Holding Services Ltd, El Prela Group Holdings Services Ltd, Ashby Investment Services Ltd, El Prela Trading Investments Ltd and Alpine Trustees Ltd

The following cases were referred to in the judgment:

Xena Investments Ltd v New Stream Capital Fund Ltd (in Liquidation)BDLR [2011] Bda Lr 4

Ace Bermuda Insurance Ltd v PedersenBDLR [2005] Bda LR 44

In re Mentor Insurance LtdBDLR [1987] Bda LR 76

In re OT Computers Ltd (in administration)WLR [2004] 3 WLR 886

New Cap Reinsurance Corporation Ltd v HIH & General Insurance LtdUNK [2002] EWCA Civ 300

Winding up — Stay — Joinder — Discovery

RULING of Kawaley CJ

1. Introductory

2. On March 2, 2012, I made a winding-up order in respect of the Company on the Court's own motion in the unusual circumstances explained in my Judgment dated March 6, 2012: Re Kingate Management Ltd.BDLR[2012] Bda LR 14. For present purposes it suffices to explain that the shareholders of the Company decided to petition for its own winding-up on September 7, 2011. A winding-up order was not sought at the first return date of the Petition when joint provisional liquidators (‘JPLs’) were appointed. When funding arrangements could not be worked out with the members who had caused the winding-up proceedings to be commenced (who were also defendants in the Civil Action), only the Court appeared competent to seek a winding-up order.

3. The Company's principal business function was managing the Funds, British Virgin Islands companies which were placed into liquidation there in 2009. Ancillary liquidation proceedings were subsequently commenced in Bermuda in 2010. The Funds were feeder funds through which non-US investors were able to invest with Bernard L. Madoff Investment Securities (‘BLMIS’) in New York.

4. Following the arrest of Bernard Madoff in December 2008 and the discovery that investors such as those who invested through the Funds had suffered grave financial losses due to his Ponzi scheme, litigation was commenced by or on behalf of investors in various jurisdictions seeking to mitigate these losses. On December 22, 2010, the Funds issued proceedings in Supreme Court of Bermuda Civil Jurisdiction 2010: 454 (‘the Civil Action’) against, inter alia, the trustees which held the shares in the corporate shareholders of the Company and the corporate shareholders themselves. The Funds seek to recover under various claims what now seem in cumulative terms to be generous management fees which were paid to the Company and distributed to its shareholders before the business structure collapsed as a result of the implosion at BLMIS consequent upon Bernard Madoff's arrest.

5. The underlying commercial background to the Funds' claims valued by them at in excess of $300 million is that the Company has virtually no liquid assets and the Defendants are seeking to retain substantial distributions received at a time when the Company was flush with money. Although two of the Trust Defendants claim to be creditors in the amount of some $900,000, this pales into insignificance when one considers that their legal entitlement to retain the far larger distributions they allegedly received (in excess of $300 million) is in question in the Civil Action.

6. For the purposes of the present applications, I have assumed (despite Mr Potts' impassioned protestations that their status is in doubt) that the Trust Defendants include amongst their number two actual or contingent creditors of the Company (Ashby Holding Services Limited and El Prela Group Holding Services Limited).

7. Accordingly, it seemed obvious from the outset that the predominant commercial interest of the Trust Defendants (Defendants 4–7 and 10–12 in the Civil Action) in relation to the present cross-applications (by the Funds for leave to continue the Civil Action against the Company and by the Shareholder Defendants to be joined to the aforesaid application) derives from their status as Defendants in the Civil Action. While it is also obvious that the Funds' investor creditors are the ultimate victims of the Madoff fraud, there is no suggestion that the Trust Defendants were themselves implicated in the fraud. These Defendants' desire to vigorously defend their right to retain what they view as a legitimate return on their own investment in the structure that provided international investors with access to a highly popular product is entirely understandable —and could ultimately be vindicated.1 Who should bear the risk of the losses sustained by the Funds in the present scenario (and similar scenarios elsewhere in the Madoff-infected commercial world) remains to be decided.

8. The Funds' liquidators appear to have formulated arguable claims for the return of some (if not all) of the management fees their investments generated for the Company as the monies passed through the offshore structure on the way to New York. And the main question raised by the present application is whether the claims asserted against the Company ought to be continued in the Civil Action or advanced instead through the proof of debt process in the Company's liquidation.

9. The Funds' primary application was made by Summons dated March 7, 2012; the Trust Defendants' joinder application was made by Summons dated July 9, 2012. On August 29, 2012, the Funds also issued a discovery Summons seeking disclosure by the OR of the current status of insurance cover in relation to the Company by the OR (‘the Discovery Summons’).

10. The so-called FIM Defendants (Defendants 2–3, 8–9) on July 9, 2012 issued a joinder Summons of their own. However, this Summons was discontinued by consent on September 19, 2012.

11. The Civil Action

12. Essentially two sets of claims are asserted by the Funds against the Company, the unjust enrichment claims and the contractual/tort claims. These claims correspond to claims pleaded against other Defendants and are based on the same core factual matrix.

13. The unjust enrichment claims are based on the simple premise that the Company's fee entitlements were based on the Funds' net asset value (‘NAV’). The NAV of each Fund was calculated by reference to the value of assets believed to have been held by BLMIS but which in fact did not exist. The fees received by the Company based on a mistake of fact unjustly enriched the Company to the extent of the overpayment. A corresponding claim is pleaded in the alternative against the Trust Defendants and Defendants 8–9, as the alleged ultimate beneficial owners of the Company's shareholders. The right to trace the proceeds of the relevant receipts in equity is also asserted.

14. The fault-based claims against the Company are for ‘breach of contractual and/or tortious duties of care and/or negligent misstatement’. Corresponding claims are asserted against the FIM Defendants (Defendants 2–3).

15. Liquidated amounts are claimed in respect of the unjust enrichment claims; unliquidated damages to be assessed are sought in respect of the fault-based claims.

16. Findings: governing legal principles

17. The Funds section 167(4) application

18. Section 167(4) of the Companies Act 1981 provides as follows:

‘When a winding-up order has been made or a provisional liquidator has been appointed, no action or proceeding shall be proceeded with or commenced against the company except by leave of the Court and subject to such terms as the Court may impose.’

19. This provision is based on section 231 of the Companies Act 1948 (UK), and even earlier similar provisions, which were re-enacted in section 130(2) of the Insolvency Act 1986 (UK). Mr Potts accurately submitted in the Funds' Skeleton Argument:

‘8. Section 167(4) obviously confers a discretion upon the Court to lift the automatic stay of proceedings either unconditionally or subject to conditions as may be appropriate in the circumstances of the case.

9. The application of section 167(4) has been considered occasionally by the Bermuda courts in various first instance judgments, and similar statutory provisions have been considered more regularly by the Courts in jurisdictions such as England and Wales, Australia, Canada, Singapore and Hong Kong, which cases are discussed, to some extent, in the textbooks. Although the case law is informative and illustrative of the various circumstances in which the discretion has been exercised one way or another, much depends on the facts and circumstances of each particular case. As the English Court of Appeal has stated on more than one occasion, the discretion is “broad and unfettered” and gives the court “freedom to do what is right and fair in all the circumstances”.’

20. From the helpful review of cases set out in section 11.9 of French, “Applications to Wind Up Companies”, 2^nd edition, upon which the Funds relied, it is clear that:

• i. the Company is ordinarily the only other party to an application to lift the stay;

• ii. the purpose of the stay is both

  • (a) to ensure that the proof of debt process is the predominant means of adjudicating creditors' debts rather than more expensive litigation, and

  • (b) to prevent individual creditors gaining an unfair advantage which subverts the fundamental principle of a pari passu distribution of an insolvent company's assets;

• iii. the stay will normally be lifted to pursue proceedings involving questions which cannot be determined in the liquidation or where the company is a necessary party to proceedings against others, provided the...