UBS Fund Services (Cayman) Ltd and Tensor Endowment Ltd v New Stream Capital Fund Ltd (No 1)

• Jurisdiction: Bermuda
• Judgment Date: 18 December 2009
• Date: 18 December 2009
• Docket Number: Commercial Jurisdiction 2009 No. 165
• Court: Supreme Court (Bermuda)

In The Supreme Court of Bermuda

Commercial Jurisdiction 2009 No. 165

In the Matter of ClassK of New Stream Capital Fund Limited

And in the Matter of s. 20 of the Segregated Accounts Companies Act 2000 (as amended)

BETWEEN:

UBS FUND SERVICES (CAYMAN) LTD AND TENSOR ENDOWMENT LIMITED

Applicants

and

NEW STREAM CAPITAL FUND LIMITED

Respondent

Mr A Martin for the Applicants

Mr T Lowe, QC and Mr C Hill for the Respondent

The following cases were referred to in the judgment:

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

Strategic Turnaround Master Partnership Ltd (Cayman Civil Appeal 2008 dated 12/12/2008)

Matador Investments Ltd (Cayman Grand Court dated 31/7/2009

International Hospitality Concepts Pty Ltd v National Marketing Inc (1994) 13 ACSR 368

Abstract:

Application for appointment of receiver - Segregated accounts company - Test of solvency

JUDGMENT of KAWALEY, J

Introductory

1. The Applicants applied by Originating Summons dated June 10, 2009 for the appointment of a receiver under section 20 of the Segregated Accounts Companies Act 2000 (as amended) ("the Act") in respect of a segregated account linked to Class K shares. The First Applicant is (or was) admittedly only a nominal registered owner of the relevant shares which were beneficially owned by the Second Applicant. In substance there was only one Applicant, therefore, Tensor Endowment Limited ("Tensor"). Tensor was originally incorporated in Bermuda on April 12, 1999, but was apparently continued in the Cayman Islands with effect from December 29, 2005.

2. The Respondent was incorporated in Bermuda as a segregated account mutual fund company on or about October 31, 2005 and registered under the Act. The Respondent is managed by a Delaware corporation, New Stream Capital, LLC ("NSC"). The Respondent is one of several feeder funds, which invested in a single Delaware master fund, New Stream Secured Capital L.P. ("NSSC"). The General Partner of NSSC is NSC. The Respondent's principal investment activity consisted of lending monies to the master fund at rates of interest above most prevailing market rates. The assets held for each segregated account consisted of loan notes which were secured by floating charges over NSSC's assets. The master fund's own business primarily entails investing in "asset-based loans and equity investments backed by inherently illiquid assets such as real estate , life insurance policies, oil and gas interests, and general corporate assets such as accounts payable, inventory and property, plant and equipment", according to NSC's President1.

3. The present application arises from the liquidity crisis which swept through the financial markets in 2008. Tensor sought to redeem its Class K shares in January

2008, and expected redemption to be completed as of May 31, 2008. However, the Respondent, swamped with redemption requests, declined to pay out redemption proceeds and in April 2009 promoted an out of court plan ("the Plan") purportedly designed to (a) create a two-year forbearance period during which time it was hoped the markets would recover, and (b) avoid investment losses for all classes of shareholders flowing from a fire sale of the collateralised assets and/or the master fund being forced into bankruptcy. The majority of all the Respondent's shareholders including a majority of Class K (but not a majority of each and every class) appear to have supported the Plan. Nevertheless, Tensor asserts its right to immediate payment through the appointment of a receiver over its segregated account.

4. This appears to be the first occasion that a Court has been required to consider, on a contested basis at least, the legal implications of a segregated account company, a unique offshore corporate vehicle which was apparently born in the Channel Islands and replicated in other jurisdictions, including Bermuda and Cayman. Neither side was able to refer the Court to any judicial or text authorities which they considered had any direct bearing on the interpretation of the crucial provisions of the Act.

The originating summons, the applicants' heads of claim and list of issues

5. On July 16, 2009, the first effective return date of Tensor's Originating Summons, the Chief Justice gave directions for Tensor to file a summary of the grounds upon which it relied and for the filing of evidence. On October 25, 2009, the Chief Justice directed that, inter alia, a Case Summary and List of Issues be filed. The matter was also directed to be tried on December 7, 2009, just shy of six months after the commencement of the present proceedings.

6. The Summons and Heads of Claim provide as follows:

"(a) The 2nd Applicant was the beneficial owner and the 1st Applicant the registered owner of Shares in Class K issued by the Respondent which is a Segregated Account within the meaning of the Segregated Accounts Company Act 2000 (as amended).

(b) The 1st Applicant as nominee redeemed the 2nd Applicant's shares in Class K by Notice of Redemption dated January 22 2008, which redemption was accepted by the Respondent.

(c) The Respondent failed to pay to the 1st Applicant as nominee for the 2nd Applicant the redemption price in respect of the shares on the Redemption Date and consequently the 1st Applicant as nominee for 2nd Applicant became a creditor of Class K with effect from that date.

(d) Since the Redemption Date, the Respondent and its investment manager has acknowledged the Respondent's liability to pay to the 1st Applicant the 2nd Applicant's Redemption Price out of the assets of Class K, but has stated that the loans in which Class K was invested are illiquid and are unable to be realised.

(e) The Respondent has acknowledged that Class K is unable to pay the Redemption Price and has stated that the investments attributable to Class K cannot presently be realised to discharge the obligation to the 1st Applicant as nominee for the 2nd Applicant on US$8,820,838.00

(f) Accordingly, the 1st Applicant as nominee for the 2nd Applicant is entitled, as creditor of the Class K Segregated Account, to appoint a Receiver in order to terminate the business of Class K and distribute the assets linked to Class K to those entitled thereto pursuant to Section 20 of the Segregated Accounts Company Act 2000 (as amended)…

Applicants' heads of claim

1. The Applicants seek an order appointing Mr. Mark Smith of Deloitte and Touche, Corner House, Parliament Street, Hamilton as Receiver of the Class K

assets of the Respondent pursuant to Section 19(a) of the Segregated Accounts Company Act 2000 (the "SAC Act"). The Applicants apply on the grounds that (1) Class K of the Fund is insolvent and (2) it is just and equitable that the appointment should be made for the protection of the Applicants' interests in the assets of Class K. The Applicants summarise the basis of their application for relief as below:

Insolvency of the Segregated Account under section 19(a) of the SAC Act

2. The Applicants served a Redemption Notice on the Respondent in respect of their investment in Class K on January 22, 2008 (the "Redemption Notice").

3. The Respondent accepted the Redemption Notice for the Redemption Price to be paid on the Redemption Date, which was later calculated to be US$8,820,838.00.

4. The Redemption Date was May 31, 2008 and the Respondent failed to pay the Redemption Price on that date.

5. The Redemption has promised to make payment but has failed to do so within the times promised. The Respondent has sought extensions of time from the Applicants in order to realize funds in order to pay the Redemption Price, but has failed to do so to date. (See paragraphs 6-11 of the Affidavit of Mr. Bonanno).

6. The Respondent has sought to enter into a plan of reorganization to defer its payment obligations to all members including the applicants as members of Class K. The proposed restructuring plan appears at pages 46-54 of Mr. Bonanno's exhibit FB1.

7. The Applicants say that the plan of reorganization is ineffective in law and does not entitle the Respondent to defer, postpone, otherwise interfere with or alter the Applicants' rights to receive immediate payment pursuant to the terms of the Prospectus and Bye-laws of the Respondent.

8. The Respondent's Bye-laws (BL 9.1) require the Respondent to pay the Redemption Price as soon as practicable.

9. The Class K assets are represented by a note instrument payable to the Respondent by a related entity called New Stream Capital LP. The note instrument is illiquid.

10. Applying normal tests of solvency, Class K is insolvent in that it is unable to meet the obligation to pay the Redemption Price in accordance with the terms of its Bye-Laws and upon the terms of the investment made by the Applicants as and when that obligation fell due. There is no prospect that the Respondent will be able to meet this obligation in the foreseeable future.

It is Just and equitable to appoint a Receiver

11. The Applicants rely on paragraphs 1-10 above.

12. The Applicants also rely on the Respondent's attempt to reorganize the structure of the Segregated Accounts under its proposed Reorganization Plan. The purported effect of the adoption of the plan by the Directors of the Respondent was to pool all of the assets owned by all of the classes of the Fund to meet the overall obligations of all classes of the Fund on a pro rata basis. This is in breach of both the Respondent's Bye-laws and Sections 17 and 18 of the SAC Act.

13. The Applications rely on the fact the current management has failed to achieve an orderly realization of the underlying assets or otherwise failed to distribute the value of the Class K assets in specie to the Class K Shareholders.

14. The Applicants rely upon the apparent attempt by the Respondent to defer the due date of the payment of the Redemption Price to the Applicants in respect of the Class K investment...