Re Stewardship Credit Arbitrage Fund Ltd; BNY AIS Nominee Ltd and Others v Stewardship Credit Arbitrage Fund Ltd

• Jurisdiction: Bermuda
• Judgment Date: 27 November 2008
• Date: 27 November 2008
• Docket Number: Commercial Jurisdiction 2008 No. 266
• Court: Supreme Court (Bermuda)

In The Supreme Court of Bermuda

Commercial Jurisdiction 2008 No. 266

BETWEEN:

BNY AIS NOMINEES LIMITED (AS NOMINEE FOR THE 2ND TO 6TH PETITIONERS

GOTTEX ABI MASTER FUND LIMITED

GOTTEX ABL (CAYMAN) LIMITED

GOTTEX/NOMURA MARKET NEUTRAL FUND (USD) LIMITED

HUDSON ABL FUND LIMITED

GOTTEX MATRIX ASSET FOCUSED

MASTER FUND LIMITED

Petitioners/Applicants

and

STEWARDSHIP CREDIT ARBITRAGE FUND LTD

Respondent

Mr A Potts and Ms L Spencer for the Petitioners

Mr A Martin and Mr S Froomkin, QC for the Company

Mr J Woloniecki and Mr P Dunlop for the Intervenor

The following cases were referred to in the judgment:

Discover Reinsurance Co v PEG Reinsurance Co Ltd BDLR [2006] Bda LR 88

Basis Capital Funds Management Ltd v BT Portfolio Services Ltd UNK [2008] NSWSC 766

MSP Nominees Pty Ltd v Commissioner of Stamps UNK (1999) 198 CLR 494

Heesh v Baker UNK [2008] NSWSC 711

Mann v Goldstein WLR [1968] 1 WLR 1091

Stonegate Securities Ltd v Gregory UNK [1980] 1 All ER 242

Re A Company UNK [1988] BCLC 282

Redemption of shares - Action for disputed debt leading to insolvency of fund company - Petition to wind up company - Fraud

RULING of BELL, J

Introduction

1. The petition in these proceedings was issued on 4 November 2008 and was first returnable on Friday, 28 November 2008. I will refer to the petitioners collectively as "the Gottex Funds" and to the respondent either as "the Company" or "the Fund". The Company's principal lender, DZ Bank AG Deutsche Zentral-Genossenschaftsbank ("DZ Bank") has sought to intervene in the proceedings to oppose the application.

Background

2. This is the second set of proceedings between the Gottex Funds and the Company, the first being proceedings No. 114 of 2008 ("the Debt Action"), which was commenced on 23 May 2008 by specially indorsed writ of summons. The issue of those proceedings was followed by an application for a worldwide Mareva injunction up to the value of US$110 million, made by a summons dated 27 June 2008, which summons came on for hearing before the Chief Justice that same day. The Chief Justice made an order broadly in terms of the relief sought, and there was a further hearing on Monday, 30 June 2008 which dealt with outstanding aspects of that Mareva injunction.

3. A defence was filed in the Debt Action on 15 July 2008, following which there was little activity on the court file, although no doubt considerable activity as between the parties and their legal advisors. Following the issue of these proceedings, DZ Bank applied to vary the Mareva injunction, as did the Company itself. I took the view that it was preferable to deal with the applications in these proceedings first, so that at the date of this ruling the variation applications in the Debt Action remain outstanding.

These Proceedings

4. The petition in these proceedings identifies the Gottex Funds, which are funds of funds, as current, contingent and/or prospective creditors of the Company for the reasons set out in the petition. It details the nature of the contractual arrangements between the Gottex Funds and the Company, and I will deal with that aspect of matters when I come to deal with the material facts. Suffice it to say at this stage that the Gottex Funds, having entered into various investment contracts to acquire Class A shares in the Company between 1 December 2005 and 1 November 2007 (the latter date apparently being the date of the latest share transfer), served redemption requests between 31 May 2007 and 8 October 2007, requesting a complete redemption of their Class A shares in the Company. By virtue of an agreed variation as to the effective redemption date, the redemption date became 31 March 2008 and the Gottex Funds maintain that the value of their Class A shares held in the Company at that date totalled $103,152,659.15.

5. I will also deal with the relevant redemption provisions in more detail in due course, but for the purpose of this part of the narrative it is sufficient to say that the arrangements in relation to payment of the redemption price, as set out in bye-law 15 of the Company's bye-laws, provided for a payment of 90% of the redemption price within thirty business days, with the balance of 10% being payable within ten days following the final determination of the net asset value per participating share of the redeemed shares as of the redemption date.

6. The primary case for the Gottex Funds is that they were entitled to be paid in cash, firstly as to 100% of the redemption price on or before 12 May 2008 (the date representing thirty business days following the agreed redemption date of 31 March 2008), and alternatively as to 90% in cash on or before 12 May 2008, with the balance of 10% payable in accordance with the formula referred to above.

7. The alternative position taken on behalf of the Gottex Funds is that the Company was obliged to pay to them the sum of US$103,152,659.15 either in cash or in kind on or before 12 May 2008, with the same alternative position as to the payments of 90% and 10%.

8. It is then the position of the Gottex Funds that the Company has paid out only a "tiny fraction" of the redemption price owed to them on or before 12 May 2008, in the total sum of $64,547.61. However, further payments were made, in the sum of $429,577.82 on or about 4 June 2008, and the sum of $1,976,505.43 on or about 18 June 2008. The Gottex Funds maintain that the Company still owes them the aggregate sum of US$100,814,573.03.

9. The petition then deals with the purported tender by the Company to the Gottex Funds, on or about 13 May 2008, of certain documents described on their face as participation notes, which the Company asserts, but the Gottex Funds deny, were worth an aggregate sum of US$92,772,845.63 as at 13 May 2003. The Gottex Funds then complain that the Company is in breach of its obligation by not making the payment of the redemption price in cash in full, or alternatively not making a valid payment in kind. The petition refers to the Debt Action and then pleads that the Company was unable to pay its debts, and particularly its debts to the Gottex Funds, and was therefore insolvent on a commercial basis insofar as it could not meet its liabilities as they fell due. Alternatively, the Gottex Funds maintain that the Company's liabilities exceed the value of its assets taking into account its current liabilities, contingent liabilities and prospective liabilities. In this latter regard the Gottex Funds relied upon the fact that the Company had indefinitely suspended the calculation and publication of its NAV statements and all subscriptions and redemptions with effect from 10 June 2008, saying: "the Fund cannot withstand such a large demand for redemption requests at the same time in the current market conditions".

Further, the Gottex Funds refer to the fact that the Company had almost 70% of its assets owing from various companies connected to one Thomas Petters, and in view of the allegations of fraud which have now been made in relation to Mr. Petters and his companies ("the Petters Fraud"), and the proceedings which have been taken against various Petters entities in the United States, there was no realistic prospect that the Company would recover any or any substantial value from those assets within a reasonable period of time. Finally, the petition sought in the alternative to wind up the Company on the basis that it was just and equitable to do so, for the reasons set out in an affidavit sworn on 30 October 2008 by Amy Lai, who holds a senior position with the investment manager for the Gottex Funds. That affidavit also supported the application for the appointment of joint provisional liquidators referred to below.

10. The petition sought the winding up of the Company by the Court under the provisions of the Companies Act 1981 ("the Act"), and also prayed for the appointment of Peter Mitchell and Geoffrey Hunter of PricewaterhouseCoopers Advisory Ltd. as joint liquidators.

11. At the same time, an application was made by ex parte summons dated 4 November 2008 for Messrs. Mitchell and Hunter to be appointed as joint provisional liquidators of the Company, with the powers identified in the form of draft order attached.

12. The first return date of the ex parte summons was 5 November 2008. By that time, the Company had been put on notice of the application by the Gottex Funds. The position on that first return date was that Mr. Potts for the Gottex Funds sought to proceed forthwith on the basis of the extreme urgency of the situation, whereas Mr. Martin for the Company sought fourteen days within which to file affidavits in reply in opposition to the application. In the event, I ordered that the Company should have seven days within which to file its reply evidence, and that the matter should be set down for an inter partes hearing during the course of the week of Monday, 17 November 2008. The deadline for the filing of affidavits was therefore by close of business on Wednesday, 12 November 2008 and I will in due course come to the fact that the Company was two days late in filing its affidavits, and the point made by Mr. Potts in that regard as to the solvency of the Company at the time that the affidavits should have been filed, and the time that they were in fact filed.

13. In terms of the affidavit evidence, I have referred to the affidavit sworn by Ms. Lai, but not the fact that it exhibited pleadings in the Debt Action, and more particularly the extensive affidavits of J. P. Bailey and Gabriel Bousbib, sworn respectively on 25 and 26 June 2008, which affidavits were sworn in support of the application for the Mareva injunction in the Debt Action. In reply, the Company filed four affidavits, sworn by Jennifer Kelly, Marlon Quan and Gustav Escher on 14 November 2008 and by Thomas Davis on 18 November 2008. All four deponents are directors of the Fund. Finally, Sandeep Srinath swore an affidavit on behalf...