Saturn Petrochemicals Holdings Ltd v Titan Petrochemicals Ltd

• Jurisdiction: Bermuda
• Judgment Date: 10 May 2013
• Date: 10 May 2013
• Docket Number: Commercial Jurisdiction 2012 No 242
• Court: Supreme Court (Bermuda)

[2013] Bda LR 42

In The Supreme Court of Bermuda

Commercial Jurisdiction 2012 No 242

Between:

In the matter of Titan Petrochemicals Limited

And in the matter of the Companies Act 1981

Saturn Petrochemicals Holdings Limited

Petitioner

and

Titan Petrochemicals Limited

Respondent

Mr J Woloniecki and Ms K George for the Petitioner

Mr P Smith and Mr C Luthi for the Company

Mr C Hill for KTL Camden Inc (a Supporting Creditor)

The following cases were referred to in the judgment:

Soden v British Commonwealth Holdings PlcELR [1998] AC 298

In re Rica Gold Washing CompanyELR (1879) 11 ChD 36

In re Chesterfield Catering Co LtdELR [1975] 1 Ch 373

Re Bellador Silk LtdUNK [1965] 1 All ER 667

Westford Special Situations Fund Ltd v Barfield Nominees Ltd et al HCVAP 2010/014, Eastern Caribbean Court of Appeal

Culross Global SPC Ltd v Strategic Turnaround Master Partnership LtdUNK [2010] UKPC 33

BNY AIS Nominees Ltd v Stewardship Credit Arbitrage Fund LtdBDLR [2008] Bda LR 67

Gamlestaden Fastigheter AB v Baltic Partners Ltd (Jersey)UNK [2007] UKPC 26

Bio-Treat Technology Ltd v Highbridge Asia Opportunities Master Fund LPBDLR [2009] Bda LR 29

Winding-up — Application for strike-out — Standing as contingent or prospective creditor — Realistic prospect of making a recovery — Ranking of claim — Abuse of process — Restructuring

RULING ON STRIKE-OUT of Kawaley CJ

Introductory

1. On July 9, 2012, the Petitioner, a shareholder of the company which had served a redemption notice, presented the Petition as a prospective and contingent creditor on the following bases:

• i. as a prospective creditor on the ground that a redemption price of just under US$50 million (HK$384,358,271) would become payable on the Redemption Date; and

• ii. as a contingent creditor because payment of the prospective debt was contingent upon the Company being lawfully able to make the payment which the Petitioner believed (because of its balance-sheet and cash-flow insolvency) it would be unable to do.

2. The Petition was first heard on August 16, 2013 and has been adjourned on an essentially consensual basis since then while the Company, listed on the Hong Kong Stock Exchange, has pursued attempts to implement an out of court restructuring. On August 27, 2012, the Petitioner issued a Summons seeking the appointment of joint provisional liquidators; that application has been adjourned from time to time together with the Petition.

3. On March 12, 2013, the Company issued a Summons to strike-out the Petition which, after directions were ordered for the filing of evidence, was listed for effective hearing in Court on the same date as the Petition was scheduled to be mentioned. Also issued returnable for the same hearing date was a Summons issued on April 29, 2013 by KTL Camden to be substituted as a creditor should the Company's strike-out Summons be successful.

4. The Company presented a powerful case in support of the contentions that, even if the Petitioner technically had standing to petition (which, with the enthusiastic support of KTL Camden, it contested), its prosecution of the Petition was an abuse of process because it lacked sufficient interest in a winding-up. This argument had two limbs to it; both premised on the assumption that standing as a creditor and some realistic prospect of making a recovery in the liquidation were inextricably intertwined. Firstly, there was the somewhat technical argument that because of section 158(g) of the Companies Act 1981, its redemption claim would rank behind ordinary unsecured creditors' claims. The Petitioner's pleaded case was that the Company was insolvent on a balance sheet basis and accordingly it had no prospect of any recovery. Second, and more practically, it was argued that because the Petitioner had on October 12, 2012 agreed to sell its redemption recovery rights to a third party (under an agreement the validity of which had very recently been referred to arbitration by the purchaser), it had no economic interest in the Petition debt in any event.

5. The Petitioner countered that the challenges to its standing as a creditor were misconceived and that the question of sufficient interest in a winding-up merely went to its prospects of successfully obtaining a winding-up order. If it had standing to petition, its pursuit of a weak Petition could not properly be characterised as abusive.

6. I reserved judgment on the Company's strike-out application and adjourned the Petition (as well as the substitution application) to the date of the present Judgment.

Findings: the Petitioner's standing

The impact of section 158(g) on standing as a creditor

7. Bearing in mind that the principles applicable to the standing to present winding-up petitions have been more or less settled for many years, the Company's belated challenge to the Petitioner's standing as a creditor had a somewhat odd ring to it. However, this response was also influenced by the fact that recent cases of winding-up petitions presented by redemption creditors have arisen in the context of Funds where the right to receive redemption proceeds often explicitly creates a debt.

8. Mr Woloniecki submitted that the Company's analysis involved merging the distinct questions of standing to petition and sufficient interest to obtain a winding-up order. Mr Smith, however, fundamentally relied on section 158(g) of the Companies Act 1981, which provides:

“(g) a sum due to any member of a company, in his character as a member, by way of dividends, profits or otherwise shall not be deemed to be a debt of the company payable to that member in a case of competition between himself and any other creditor not a member of the company, but any such sum may be taken into account for the purpose of the final adjustment of the rights of the contributories among themselves.” [emphasis added]

9. It is important to read this paragraph in the wider context of the section in which it appears, which on its face is concerned with the status of shareholders (contributories) after a winding-up order is made:

“158. Subject to section 158A, in the event of a company being wound up, every present and past member shall be liable to contribute to the assets of the company to an amount sufficient for payment of its debts and liabilities, and the costs, charges and expenses of the winding up, and for the adjustment of the rights of the contributories among themselves, subject to the following qualifications…”

10. The submission that section 158(g) potentially had the effect of subordinating the Petitioner's which claim based on its redemption rights under the Company's bye-laws to the claims of third party creditors was not in dispute. This proposition was supported by Soden v British Commonwealth Holdings PlcELR[1998] AC 298; but this was a case where the issue arose in the context of liquidator seeking directions as to the applicable distribution priorities. The question was whether the claim arose from the shareholder's contract with the company in relation to his shares or arose independently of that contract. This case shed no light on the connection between those distribution rights and the standing to present a petition.

11. Mr Smith, supported by Mr Hill for the would be substituting creditor KTL Camden, then submitted that the impact of section 158(g) was that the Petitioner lacked sufficient interest to obtain a winding-up order because, on the basis of its own pleaded case of balance sheet insolvency, it would not be entitled to any distribution in the liquidation. How this impacted on the Petitioner's standing as a contingent or prospective creditor was not clearly explained; moreover, this submission was supported by reference to cases concerning shareholders petitioning to wind-up on the just and equitable ground: In re Rica Gold Washing CompanyELR(1879) 11 ChD 36: In re Chesterfield Catering Co. LtdELR[1975] 1 Ch 373; Re Bellador Silk, LtdUNK[1965] 1 All ER 667.

12. Mr Woloniecki insisted that a creditor's prospects of recovery, which after all did not depend purely on an insolvent company's booked assets but might include recoveries made from claims against officers and directors, had no bearing on the right to obtain a winding-up order. He referred the Court to the following provision in the Act:

“164 (1) On hearing a winding-up petition the Court may dismiss it, or adjourn the hearing conditionally or unconditionally, or make any interim order, or any other order that it thinks fit, but the Court shall not refuse to make a winding-up order on the ground only that the assets of the company have been mortgaged to an amount equal to or in excess of those assets or that the company has no assets.” [emphasis added]

13. This provision was also only directly relevant to the issue of the discretion to make a winding-up order; however, it did undermine to a significant extent the proposition that an essential element of the right to present a winding-up petition was an ability to demonstrate the plausibility of a petitioning creditor obtaining a distribution from the liquidation estate. It is well recognised, on the other hand, that when considering whether or not to make a winding-up order on the merits at the effective hearing of the petition, the Court will ordinarily take into account the size of the petitioning creditor's stake if other creditors of equal rank oppose the making of a winding-up order.

14. Nevertheless, Mr Smith was able to point to one authority which he contended directly supported his client's case that the Petitioner lacked standing because its claim was essentially a shareholder claim subordinated to the claims of unsecured creditors. The Eastern Caribbean Court of Appeal in Westford Special Situations Fund Ltd v Barfield Nominees Limited et al, HCVAP 2010/014, Judgment dated March 28, 2011 (George-Creque JA — as she then was) held as follows:

“[32] It is quite...