TRUSTS (SPECIAL PROVISIONS) ACT, 1989 – BEDDOE RELIEF – NON CHARITABLE PURPOSE TRUST – INDEMNITY – DEFENCE BY TRUSTEES
Trustee L and Others –v– The Attorney General and Others  SC (Bda) 41 Com (15 May 2015)
The Plaintiffs are the Trustees (the "Trustees") of certain Bermuda Purpose Trusts (the "Trusts") established under the Trusts (Special Provisions) Act, 1989 (the "1989 Act"). This was a ruling on the Plaintiffs' application for Beddoe relief with respect to proceedings (the "Main Action") brought against them by the Second Defendant ("D2").
The application was novel in two respects: (i) so far as the Court or Counsel were aware this was the first time that Beddoe relief has been sought by the Trustees of a non-charitable purpose trust, albeit the purposes of the trusts in question did include some charitable purposes and (ii) there has not previously been a claim made to trust assets of such high value as those with which the present case is concerned without any beneficiaries to defend the Claim.
The total value of the Trust assets was large with a substantial part of those assets consisting of shares in a group of companies (the "Companies") founded by S and T. Both men were deceased. The Directors of the Trustees included Child 1 and Child 2, who were children of S and T. D2 sued in its proposed capacity as administrator in Bermuda of S's estate; in D2's capacity as one of the heirs of S (and purportedly on behalf of all the heirs). D2's primary case in the Main Action was that all the Trusts were void, or alternatively that the transfers of assets into the Trusts should be set aside, and that the assets form part of the estate.
The primary issue arising on the Beddoe application was whether the Trustees should defend D2's primary case in the Main Action and have an indemnity in respect of their costs of doing so. In considering the issue, the Judge attached particular importance to the absence of any person with a real interest in defending the claims and the fact that there were sufficient prospects of success to warrant the Trustees in defending them. The Judge was satisfied that these factors outweighed the risk of injustice to D2 and the other heirs, should D2 prevail in the Main Action. As such, the Judge was satisfied that the Trustees should, if so advised, defend D2's primary case in the Main Action and granted an indemnity from the Trust assets for that purpose.
RULING ON COSTS – THE EVIDENCE ACT, 1905 (AS AMENDED) – ORDER 70 OF THE RULES OF THE SUPREME COURT, 1985
The Patriot Group, LLC –v– Hilco Financial, LLC N/K/A 1310 Financial, LLC & Others  SC (Bda) 38 Com (23 June 2015)
This hearing was listed to determine how to deal with the costs arising from a prior judgment in which the Court refused the Applicant witness' application to set aside an, ex parte, Order for her examination; an order that had been made without a hearing. While the Judge had found that the Order, as originally granted, was liable to be set aside on various grounds including material non-disclosure, these irregularities occurred in part because the application was prepared and prosecuted as if it was a non-opposed application when in fact the witness had not previously been contacted. In light of the fact that the Respondents had subsequently: (a) offered to vary the Order by including conditions in relation to the proposed examination and (b) on or about 7 November 2014 filed an affidavit which fortified the strength of the merits of the original application and to save costs, the Judge exercised his discretion in favour of varying the Order rather than setting it aside. The Applicant also achieved some marginal outcome of success in terms of broadening the scope of the examination conditions, which the Respondents had previously offered prior to the hearing.
The Respondents sought to persuade the Court that since they had substantially succeeded on the application to set aside, and were willing to concede that they should pay the Applicant's costs up to 7 November 2014, the Applicant should be required to pay the costs of the application to set aside. The standard rule that costs should follow the event, having regard to which party had succeeded in 'real-life' terms was relied upon: Binns –v– Burrows  Bda LR 3 (at Paragraph 5) and Kentucky Fried Chicken (Bermuda) Ltd. –v– Minister of Economy  Bda LR 34 (at Paragraph 14).
The Applicant contended that the Applicant should be awarded her costs and in any event not be required to pay the Respondents' costs. It was submitted that the position of a non-party witness engaged distinctive costs rules according to which the starting assumption was that where evidence was being sought from a non-party, that party is entitled to their costs. The Applicant relied on the authority of Paragraph 46.1 of the Civil Procedure Rules, 2000 ("CPR").
The Judge agreed with the Respondents' submission that the ordinary rules as to costs apply. In doing so the Judge declined to follow by analogy the practice under Rule 46.1 of the CPR on the grounds that the type of application it dealt with was not analogous.
In the exercise of the Court's discretion, the Judge ordered the Respondent to pay the Applicant's costs of responding to and applying to set aside the, ex parte, Order up until 7 November 2014. The Judge held that prior to that date, it was inconceivable that the application to set aside would not have succeeded both on the merits and in the result. After that date the Judge found that the parties ought to have been content to negotiate a consensual variation of the, ex parte, Order in terms which were, at that point, substantially agreed.
EX TEMPORE RULING ON COSTS – COSTS FOLLOW THE EVENT – REAL WORLD SUCCESS OF CLAIM – CONSIDERATION OF THE BACKGROUND TO THE LITIGATION
David R. Whiting –v– Torus Insurance (Bermuda) Limited  SC (Bda) 17 Civ (6 March 2015)
In this matter the Plaintiff, was awarded US$1909 out of a Claim for wrongful dismissal that was potentially worth just over US$300,000. The Plaintiff sought costs on the usual 'costs follow the event' basis. The Defendant contended that having regard to the 'infinitesimal' financial success that the Plaintiff achieved, the appropriate order should be no order as to costs.
In the present case the Judge accepted that the starting assumption must be that the Plaintiff should be entitled to his costs. But, having regard to the authorities cited and looking at the huge disparity between the amount awarded and the amount originally claimed, stated that the Court was bound to find that in 'real world' terms the Plaintiff had not succeeded because this case was quintessentially a claim about money.
The only question to consider was, to what extent the Court should award the Plaintiff any costs at all. In this regard, the Judge outlined that it was the Court's duty to look at the background to the litigation to see how the litigation should have been conducted. In doing so the Judge held that from 13 June 2014 when the Defence was filed, it would not be reasonable for the Court to exercise its discretion to award the Plaintiff any costs.
TRUSTS – COURT'S FUNCTION IN APPROVING EXERCISE OF TRUSTEE'S DISCRETION – DOES REGARD NEED TO BE GIVEN TO WIDER SOCIAL EFFECTS OF PROPOSED SETTLEMENT
In The Matter Of ABC Trusts  SC (Bda) 29 Civ (10 September 2014)
On 18 August 2014, the Judge approved a decision of the Trustees to proceed to conclude negotiations commenced some years ago with the onshore tax authorities about certain personal 'wealth' taxes which were potentially due from the Trusts and/or the Beneficiaries. The contested application by the Trustees for further directions in relation to the approval sought, raised legal questions which are likely to be relevant in future cases and therefore, the Judge provided reasons for the same.
Court's function in approving proposed exercise of Trustees' discretion
The fifth Defendant in this matter sought to argue that: (a) the Trustees' application involved a surrender of their discretion to the Court, (b) the Court should accordingly be put in possession of all material relevant to the exercise of that discretion and (c) the Court's function is solely to determine what ought to be done in the best interests of the estate. The first two limbs of that submission were controversial.
The Judge did not accept that the Court was compelled to find that in seeking the directions which the Trustees sought, they were surrendering their discretion to the Court. Instead, the application was more properly characterised as seeking the blessing of the Court for a momentous decision.
Were the Trustees required to have regard to the wider social effects of the proposed settlement and to interests other than those of the Beneficiaries?
The Trustees in the present case effectively conceded that it was consistent with the commercial interests of both the Trust and the Trustees to avoid a situation where the Trustees and/or the Beneficiaries could be fairly accused of manifesting a socially irresponsible attitude to the payment of onshore taxes which were properly due. That was the driving motivation behind initiating the negotiations, which have resulted in the proposed settlement. The Trustees' definition of the content and scope of their duties in this regard was entirely consistent with the Judge's extra-judicial opinion in that:
"...it is simplistic to imply that offshore commercial law operates in an ethically deprived legal zone... Bermudian offshore structures are formed in and regulated by a legal framework which aims to...ensure compliance with internationally recognised standards of commercial morality."
(See Offshore Commercial Law in Bermuda (Wildy Simmonds & Hill: London, 2013), Paragraphs 1.64, 1.69)
Applying the above principles to the facts of the present case, the Judge found that in all the circumstances:
1. it would be an unreasonable way of expending trust assets to investigate the need to pay a further premium to ward off the risk of wholly unjustified criticism of a tax settlement which was: (i) manifestly hard-fought and negotiated on objectively credible terms and (ii) negotiated in circumstances where there appeared to be no obvious inequality of arms between the well-resourced Trustee and Beneficiary team and an apparently well-resourced revenue authority team working on behalf of a stable and sophisticated State;
2. the Trustees' decision to pursue the negotiations to their conclusion was based on their genuinely formed view that this course is consistent with the best interests of the Trusts and their Beneficiaries as a whole;
3. the said view was one which a reasonable body of Trustees could properly have arrived at;
4. the Trustees had no actual or potential conflicts of interest and
5. the Trustees had placed before the Court sufficient relevant information to support the findings in (1) to (3) above, without the need for any further enquiry.
COURT OF APPEAL
INTERNATIONAL COOPERATION (TAX INFORMATION EXCHANGE AGREEMENTS) ACT, 2005 (THE "ACT") – DISCLOSURE OF DOCUMENTS PLACED BEFORE THE COURT
The Minister of Finance –v– AD  CA (Bda) 18 Civ (12 June 2015)
This was an appeal of an earlier ruling by Hellman J ordering the Minister of Finance to disclose documents which were placed before the Judge in support of an, ex parte, application for a Production Order. Prior to the hearing the Minister voluntarily disclosed the documents, however due to the importance of the decision to other pending and anticipated cases the Minister wished to continue with the appeal. AD was not represented but the Court was assisted by the submissions of the amicus curiae.
Kay JA gave the Judgment of the Court, dismissing the appeal and upholding the decision at first instance. The appeal was essentially based on the submissions that the words used in the Act were clear and unambiguous, that the relevant subsection (Section 5(6A)) was intended to prevent fishing expeditions, which the Judge ought to have found were commonplace, and that the Judge erred in finding that the subsection related to redacted information.
The Court of Appeal confirmed the Judge's findings that the right to disclosure is a fundamental principle of fairness at common law and that any abrogation from this right requires legislation that is "crystal clear". The argument that the wording of the Act was a clear and unambiguous abrogation was rejected. The Court of Appeal also found that there was no evidence of fishing expeditions being commonplace; conversely, the Court was willing to accept that the requests for disclosure did not impose a significant burden on the Minister.
The Court was willing to find that the requirement for disclosure was limited to those documents placed before the Court, and did not apply to information about oral statements or documents not exhibited but expressly referred to.
The Court held that the change in procedure from an executive decision (subject to judicial review) to an originating judicial process necessarily carried with it the fundamental right of disclosure.
In a further 'swing-and-a-miss' the Minister sought to argue that the decision at first instance resulted in Bermuda being in breach of the confidentiality obligations imposed by Article 8 of the OECD Agreement on Exchange of Information on Tax Matters. The Court noted the exception for information being disclosed in court proceedings and judicial decisions, contained in Article 8 itself, and rejected the argument.
RSC ORDER 45 – BERMUDA INTERNATIONAL CONCILIATION AND ARBITRATION ACT, 1993 (THE "1993 ACT") – APPEAL AGAINST REFUSAL OF STAY OF ENFORCEMENT
Laep Investments Ltd –v– Emerging Markets Special Situations 3 Ltd.  CA (BDA) 10 Civ (9 April 2015)
On 18 March 2013 the Respondent, Emerging Markets Special Situations 3 Ltd. ("EMSS") obtained an arbitration award in Brazil against the Appellant company (Laep Investments Ltd (the "Company")). EMSS then quickly proceeded to obtain an Enforcement Order and a Worldwide Freezing Order in quick succession in Bermuda.
The Company unsuccessfully sought an Annulment of the arbitration award in Brazil, and EMSS went on to serve a Statutory Demand in Bermuda. The application for an annulment was successfully appealed and remitted back for a rehearing. EMSS then issued a petition to wind up, the Company having failed to satisfy the Statutory Demand, in response to which the Company served a summons seeking the dismissal of the petition.
Meanwhile in Brazil, the Company unsuccessfully sought a stay of the arbitration award pending the outcome of the annulment application, however the application was successful on appeal and an interim stay was granted on 19 December 2013.
Shortly before the hearing of the application to dismiss the winding up petition, the Company also issued an application seeking a stay of the Enforcement Order pursuant to RCS Order 45 Rule 11, which states that the Court may order a stay of execution of a Judgment or Order on the ground of matters which have occurred since the date of the Judgment.
On 1 April 2014 the Supreme Court dismissed the application to stay the Enforcement Order and dismissed the application to dismiss the winding up petition. The Company appealed.
The Company submitted that the temporary stay was a matter that had taken place since the Enforcement Order and that the Judge at first instance had erred in considering guidance under Part 52 of the 2014 White Book, which is applicable to a stay pending appeal. In addition, the Court at first instance had erroneously considered Section 42(5) of the 1993 Act rather than Section 42(2)(f), the former dealing with circumstances where an application to suspend has been made but not yet determined (here there was an order granting a stay, albeit an interim order).
The Court of Appeal agreed that the Judge appeared to have concentrated on the prospects of success of the annulment application, rather than the manner in which the application for enforcement would or might have been decided in light of the suspension of the Award.
The Judge fell into error when he appeared to consider the principles applicable to the grant of a stay in the context of an application following Judgment and pending the outcome of an appeal. He similarly fell into error when he considered Section 42(5) rather than Section 42(2)(f). The Court of Appeal found that the case law referred to by the Judge did not assist in relation to Section 42(2)(f). The test applied under Section 42(5) (being a consideration of the prospects of success) was inappropriate in relation to Section 42(2)(f). In particular, the Court held that the Judge was wrong to refer to the absence of material before him, which might outweigh the bias towards enforcement inherent in the 1993 Act.
Essentially, the Court of Appeal held that the Judge failed to appreciate the nature of the Brazilian Stay Order, which led him to consider the wrong part of the 1993 Act. This led to him failing to find that there could be no question of the Court allowing enforcement in respect of an award, which was subject to a stay in the country where it had been made. The Court went on to find that this misunderstanding and misapplication of the law entitled the Court to exercise an original discretion in favour of the Appellant.
The Court went on to find that the Judge was correct in his refusal to dismiss the winding up petition, in spite of a finding that the Judge's rejection of the various grounds of opposition to the winding up petition were very much influenced by his findings in regards to enforcement. However, as he had erred in his discretion regarding the stay of enforcement, the issue ought not to have arisen.
The Court of Appeal therefore granted a stay of the Enforcement Order and set aside the Order to wind up the Company.
INTERPRETATION OF CONTRACTS – SHARE REPURCHASE AGREEMENTS
Aircare Limited –v– Wyatt Sellyeh  CA (BDA) 6 Civ (20 March 2015)
The Appeal concerned the construction of a provision in a share repurchase agreement (the "Agreement") whereby Aircare Limited ("Aircare") agreed to repurchase shares from, inter alia, Mr. Sellyeh. The shares were to be purchased in four tranches. The first of those tranches would take place at a time when there were no audited accounts, and so there was a provision in the Agreement for recalculation by a specified formula of the purchase price of the first tranche.
Aircare paid Mr. Sellyah the agreed purchase price. Upon the recalculation, the new purchase price was less than the initial price and so Aircare sought judgment in the sum of the difference. The Judge at first instance held that there were two meanings to the relevant clause. He went on to agree with Mr. Sellyeh that the correct interpretation of the Agreement was that the initial price was a minimum price. The claim by Aircare was accordingly dismissed.
Aircare sought to argue that the Judge was correct to find that this was a case where the contractual term had two meanings, but that business common sense compelled an interpretation of the Agreement which permitted an upward and downward recalculation. Mr.. Sellyeh submitted that the relevant clause was unambiguous and provided for upward recalculation only, and even if the Judge was correct in finding that the clause was capable of two meanings, business common sense still resulted in the clause providing for upwards recalculation only.
The Court of Appeal referred to the well-known speech of Lord Hoffman in Investors Compensation Scheme Ltd –v– West Bromwich Building Society and the principles propounded therein for the interpretation of contracts.
The Court was sympathetic to the Appellant's argument that following a finding of two meanings, it was necessary to consider which meaning was more reflective of business common sense, whereas the Judge reverted to a close consideration of the language. However, the Court considered and agreed with the Respondent's assertion that this was in fact a clause that plainly had one meaning.
The Court went further and found that even if the clause was susceptible to two interpretations, business common sense fell in favour of the Respondent's interpretation. The appeal was therefore dismissed.
BRITISH VIRGIN ISLANDS
COURT OF APPEAL
CIVIL APPEAL – WHETHER LEARNED MASTER ERRED IN REFUSING TO SET ASIDE DEFAULT JUDGMENT – WHETHER LEARNED MASTER ERRED IN THE EXERCISE OF DISCRETION
Yates Associates Construction Co Ltd –v– Brian Quammie BVIHCAP2014/0005 (May 2015)
In this appeal Yates Associates Construction Co Ltd (the "Appellant"), sought to appeal the decision of the Learned Master to refuse to set aside the default Judgment entered against it.
In the Court below, the Appellant relied on inadvertence as the reason for its failure to file its defence in time. In dismissing the Appeal the Court of Appeal held, inter alia, that a court may set aside a default judgment entered under Part 12 of the Civil Procedure Rules, 2000 only if certain requirements were met, one such requirement was the need to provide the Court with a good explanation for the failure to file an acknowledgment of service or a defence.
The Court held applying the Privy Council's decision in the Attorney General –v– Universal Projects Limited  UKPC that where the explanation for the failure to file a defence or acknowledgment of service connoted real or substantial fault on the part of the defendant, then that could not be a good explanation for the failure and while oversight may be excusable in certain circumstances oversight which included administrative inefficiencies was inexcusable and would not amount to a good explanation (John Cecil Rose –v– Anne Marie Uralis Rose SLUHCVAP2003/0019 followed).
INTERLOCUTORY APPEAL – ASSESSMENT OF COSTS – RULE 65.12 OF THE CIVIL PROCEDURE RULES, 2000 – WHETHER LEARNED MASTER ERRED IN ASSESSING COSTS WHERE THERE WAS NO ADEQUATE MATERIAL OR ITEMISED BILL OF COSTS – WHETHER LEARNED MASTER ERRED IN APPLYING ENGLISH HIGH COURT CASE TO ASSESSMENT OF COSTS UNDER CPR 65.12 – WHETHER LEARNED MASTER ERRED IN AWARDING REFRESHER FEES TO COUNSEL
Dawn Emberson Bain –v– Tortola Investment Trust Limited BVIHCVAP 2014/001 (May 2015)
This Appeal arose out of the decision of the Learned Master to assess costs, although the bill of costs was found to be deficient, and to do so, based on the test formulated in the English High Court case of Simpsons Motors Sales (London) Ltd. –v– Hendon Corporation (No 2).
Allowing the Appeal the Court of Appeal held that Rule 65.12 of the Civil Procedure Rules, 2000 ("CPR") required that an application for assessment of costs must be accompanied by a bill of costs or other document showing the sum in which the Court is being asked to assess the costs and how such sum was calculated. The Learned Master, having found that the bill of costs was deficient, should have complied with CPR 65.12(5) and not assessed the costs, but fixed a date, time and place for the assessment to have taken place and by failing to do so the Learned Master was wrong to exercise his discretion and to assess costs.
The Court also held that the test formulated in the English High Court case of Simpsons Motor Sales (London) Ltd. –v– Hendon Corporation (No. 2) was based on the application of Rule 28(2) of the English Supreme Court Costs Rules, 1959 which was dissimilar to CPR 65.12 and 65.2. Thus by assessing costs using the test laid down by the English High Court in the Simpson case the Court of Appeal held that the master was wrong in law.
INTERLOCUTORY APPEAL – DEALING WITH FIXED DATE CLAIM SUMMARILY RULE 27.2(3) OF THE CIVIL PROCEDURE RULES, 2000 – APPELLANT'S DEFENCE STRUCK OUT BY LEARNED JUDGE IN COURT BELOW AND FIRST HEARING OF CLAIM TREATED AS TRIAL AND/OR MATTER DEALT WITH SUMMARILY – NO EVIDENCE RECEIVED FROM OR ON BEHALF OF RESPONDENT/CLAIMANT BY JUDGE IN DEALING WITH CLAIM AND JUDGMENT ULTIMATELY ENTERED FOR RESPONDENT/CLAIMANT – WHETHER LEARNED JUDGE ERRED IN ADJUDICATING CLAIM IN THIS MANNER
Travis Augustin –v– Choc Estates Limited SLUHCVAP 2014/0002 (June 2015)
This Appeal was against an Order made by Wilkinson J wherein the Learned Judge ordered, inter alia, that the defence should be struck out and Judgment entered for the Claimant. Following the case of Richard Frederick et al –v– Comptroller of Customs et al SLUHCVAP2008/0037, the Court of Appeal allowed the appeal and held that having decided to treat the first hearing of the fixed date claim as a trial after striking out the Appellant's defence, the Learned Judge was obliged to receive evidence from the Claimant whether orally or on affidavit.
Notwithstanding that the Claim was being dealt with summarily, the Court held that the Claimant must prove that he/she was entitled to the relief being sought and that a trial must be conducted, albeit in a summary way. As a result the Court of Appeal found that the Learned Judge erred by proceeding to adjudicate the Claim in favour of the Claimant without receiving evidence.
THIRD PARTY COSTS ORDER – COSTS AGAINST NON-PARTIES TO PROCEEDINGS
In the matter of VC Computer Holdings (in official liquidation), FSD 63/2014, per Jones J (17 April 2015)
The Applicant sought Orders for Luis Filipe DaCosta De Souza Azevedo ("Mr. Azevedo") and Mertal Overseas SA ("Mertal SA") to be held jointly and severally liable for the costs of winding up VC Computer Holdings Limited (the "Company"). Mertal SA, a special purpose company incorporated in the British Virgin Islands, was the sole shareholder of the Company. Mr. Azevedo, the ultimate beneficial owner of Mertal SA, was the ultimate beneficial owner of Mertal SA and the Company.
As a general rule, costs incurred by a person who successfully presents a creditor's winding up petition will be paid out of the assets of such company. However, in exceptional circumstances Courts may make an order against a non-party to the proceedings. Specifically, in the current case, the Court had discretion to make orders: (1) against Mertal SA due to the fact that the Company chose to participate in the proceedings and to defend the petition in its capacity as the Company's sole shareholder and (2) against Mr. Azevedo, even though he did not make himself a party to the proceedings, under Section 24(3) of the Judicature Law which provides the Court discretion to determine by whom and to what extent the costs of proceedings are to be paid.
In determining whether Mertal SA and Mr. Azevedo should be held jointly and severally liable for the costs of winding up the Company, the Court followed the principles set out in the New Zealand Privy Council case of Dymocks Franchise Systems (NSW) Pty Ltd –v– Todd  1 WLR 2807, which provided guidance on when the Court could use its discretion to make an Order against a non-party to proceedings. In particular, it was held that:
1. Generally speaking the discretion will not be exercised against "pure funders", namely "those with no personal interest in litigation, who do not stand to benefit from it, are not funding it as a matter of business, and in no way seek to control its course giving priority to the public interest in a funded party getting access to justice."
2. Where, the non-party not merely funds the proceedings but substantially also controls or at any rate is to benefit from them, justice will ordinarily require that, if the proceedings fail, he will pay the successful party's costs. The non-party in these cases is not so much facilitating access to justice by the party funded as himself gaining access to justice for his own purposes. He himself is "the real party" to the litigation.
In applying the above principles to the facts of the case, the Court ultimately concluded that there were exceptional circumstances and accordingly exercised its discretion against Mertal SA and Mr. Azevedo. In particular, the Court found that it was just to make Orders against Mertal SA and Mr. Azevedo as: (1) Mr. Azevedo conducted the defence of the petition in his own interest (essentially, the only interested parties were Mr. Azevedo and the petitioner); (2) the Court found that Mr. Azevedo's defence of the petition was conducted in an improper manner (Mr. Azevedo put forward three different and inconsistent defences) and (3) Mr. Azevedo consistently failed to comply with Orders for directions, which led to multiple interlocutory applications, which ultimately led to increased expenses and delays.
Although the ultimate beneficial owner of the Company was not held fully liable for the debts of the Company, it does show that in questions of costs the Courts are willing to look behind the corporate veil to hold Mr. Azevedo accountable as he had acted solely in his own interest as the sole beneficial owner of the Company to the detriment of the creditors.
REDEMPTION OF SHARES – RECTIFICATION OF THE REGISTER OF MEMBERS – SECTION 37(7) OF THE COMPANIES LAW – UNDER SECTION 112 OF THE COMPANIES LAW
Primeo Fund (in official liquidation) –v– Herald Fund SPC (in official liquidation), FSD 27/2013, per Jones J (12 June 2015)
This case concerned Herald Fund SPC (In Official Liquidation) ("Herald"), which was an open-ended investment fund, which was incorporated on 24 March 2004. Herald invested the majority of its funds in the Bernard L. Madoff Investment Securities LLC ("BLMIS"). The Primeo Fund (In Official Liquidation) ("Primeo") was incorporated on 18 November 1993 and also carried on business as an open-ended investment fund. Primeo initially placed funds for investment directly with BLMIS in 1993 but, from 2004 onwards, it invested in Herald which resulted in it becoming an indirect victim of the Madoff Ponzi scheme.
The above proceedings concerned an application that certain issues involved the liquidation of Herald (which included an additional liquidator (the "Additional Liquidator") acting as Herald's representative) and Primeo be resolved through the direction of the Court. Primeo was placed into voluntary liquidation on 23 January 2009 and its liquidation was brought under the supervision of the Court on 8 April 2009. Herald had suspended the calculation of its net asset value (the "NAV") and the issue and redemption of shares on 12 December 2008 (the day after the revelation of the Madoff fraud) but remained under the control of its Directors until 23 July 2013 when a winding up order was made on the petition of Primeo.
The first issue in question was whether Section 37(7)(a) of the Companies Law applies in relation to the Participating Non-Voting Shares, which form the subject of redemption requests submitted to Herald by various shareholders in December 2008 (the "December Redeemers"). HSBC Securities Services (Luxembourg) SA ("HSSL"), acting on behalf of Herald in its capacity as administrator, received requests from the December Redeemers requesting the redemption of Participating Non-Voting Shares (the "December Redeemer Shares") for a redemption day of 1 December 2008. On or about June 2011, HSSL acting for, and on behalf of, Herald sent the December Redeemers confirmation that their shares had in fact been redeemed. One of the December Redeemers ultimately was paid prior to the suspension of trading on 12 December 2008 (as a result of Madoff's confession of his fraud on 11 December 2008) whilst the others were not.
The Court considered Section 37(7) of the Companies Law issue regarding the redemption of shares. In Culross Global SPC Limited –v– Strategic Turnaround Partnership Limited (2000) 23 CILR 364, it was indicated that the question of when shares are redeemed is a question not only for the Companies Law but also for the relevant company's articles of association. On the basis of the facts, this was non-contentious and it was clear that the December Redeemers had redeemed their shares in accordance with the Company's articles of association. In that case, it was determined that the plaintiff shareholder had in fact served a valid redemption request before the suspension of trading. The Privy Council held that the power to suspend the redemption process did not apply to the Plaintiff in question as the redemption had already taken place. Similarly in RMF Market Neutral Strategies (Master) Limited –v– DD Growth Premium 2X Fund (Unreported, 17 November 2014), the Chief Justice concluded that the effect of the articles was that upon service of a valid redemption notice, the shares in question ceased to be outstanding on the relevant valuation day, whereupon the shareholder became a creditor in respect of the redemption proceeds. Jones J held in favour of Primeo.
In addition to the issue of redemption, the Court also considered the matter of rectification of the register of members. In particular, the Courts considered whether: (a) the NAVs determined pursuant to the articles of association during the period from 24 March 2004 (being the date of its incorporation) to 10 December 2008 (being the date immediately before the revelation of the Madoff fraud) in respect of each class of Participating Non-Voting Shares issued by Herald were not binding on Herald by reason of 'fraud or default' within the meaning of Section 112 of the Companies Law and Order 12, Rule 2 of the Companies Winding Up Rules and (b) Section 112 of the Companies Law and Order 12, Rule 2 of the Companies Winding Up Rules applied so as to empower the Additional Liquidator of Herald to rectify its register of members. Section 112(2) of the Companies Law empowers an official liquidator to rectify the register of members in the case of a solvent liquidation of a company, which has issued redeemable shares at prices based upon its NAV from time to time. Jones J reasonded that for the NAVs not to be binding between the company and its members, there must be some conduct on the part of the company or its agent, which has the effect of vitiating the company/member contract. Further, he reasoned that the mere fact that Herald's NAVs were negatively affected by the BLMIS scandal would not be sufficient to vitiate the contract (see Fairfield Sentry Ltd –v– Migani  UKPC 9). Furthermore, Jones J held:
"I think that it is highly improbable that Rule 2 was intended to operate in a way which would make the determination of a company's NAV open to challenge whenever it could be said, with the benefit of hindsight, that it had been mis-stated by reason of the fraud or default in some way which would not have the effect of vitiating the contract".
The key issue is when the Additional Liquidator should use this power under Section 112 of the Companies Law and what methodology should be used by the Additional Liquidator to determine how the rectification of the register of members should take place. Jones J ultimately adjourned this question until the next hearing.
JUDGMENT ON COSTS – COSTS THROWN AWAY AND OCCASIONED ON PLAINTIFF'S AMMENDMENT TO STATEMENT OF CLAIM – COSTS OF AND THROWN AWAY BY ABANDONED CLAIMS IN DECEIT – INTERIM PAYMENT ON ACCOUNT PENDING TAXATION
Weavering Macro Fixed Income Fund Limited (In Official Liquidation) –v– Ernst and Young Chartered Accounts (a Firm) and Others (5 May 2015)
The Judgment concentrated on three key issues relating to costs: (i) costs thrown away and occasioned by amendments to the Plaintiff's statement of claim; (ii) costs thrown away by the abandoned claims in deceit and (iii) an invitation for the Court to exercise its discretion and to award an interim payment on account pending taxation.
On the first issue the Court took guidance from Order 20 Rule 8 of the Supreme Court Practice, 1999 where Paragraph 20/8/52 states that:
"The usual penalty imposed on a term for giving leave to amend is that the party seeking the amendment should pay in any event all the costs incurred and thrown away by the amendment and the costs of any consequential amendment".
The Defendants argued that the Plaintiff should pay costs of and occasioned by preparing, issuing and serving of the summons. Justice Quin ordered that the Plaintiff pay the costs of, thrown away and occasioned by the amendments to its amended statement of claim up to and including the first day of the hearing (10 February 2015) in any event and further that these costs be taxed on the standard basis if not agreed.
The Defendants' second submission related to costs thrown away by abandoned claims in deceit against Ms. Allen and Mr. Barber. They argued that the costs should be paid by the Plaintiff in any event and further that these costs should be assessed on an indemnity basis. The Plaintiff took the position that the claim in deceit in relation to the 2006 audit would continue and the claim in negligence in relation to the 2007 audit would continue but the deceit claim be abandoned. As a result, the Plaintiff submitted that they could not say that none of the costs incurred in relation to the original case were of no value to the amended case, but also that the Defendants could not say that all the costs incurred in relation to the original case were of no value to the amended case and therefore useless.
Justice Quin agreed that there must be a high degree of overlap between the work done in relation to the withdrawn allegations and the work which will be necessary for the Claim as amended, however, separating what work would be of value would be incredibly difficult. Furthermore, Justice Quin believed this exercise would be unjust to both parties due to the time and expense involved. The Defendants' followed the position as in Sagicor General Insurance (Cayman) Ltd. –v– Corporate Adjusters (Cayman) Ltd.  CILR 482, contending that an award as to their costs of the abandoned claims in deceit be on an indemnity basis.
The court held that "...such an award should be made only in exceptional circumstances, such as where the losing party has behaved improperly, negligently or unreasonably". It found no exceptional circumstances, in this case and at this stage of proceedings, and decided to reserve the question of any costs in relation to the abandoned allegations of deceit – whether on a standard or on an indemnity basis – until the outcome of the trial of this action. However, in relation to the abandoned allegations of deceit against Mr. Barber and the Plaintiff's discontinued claim in deceit relating to the 2007 audit, the Defendants were awarded costs to be taxed on a standard basis if not agreed. The question of indemnity costs remains a live issue.
The third point that Justice Quin considered was the Defendants' application for an interim payment. The Defendants' contended that the costs of dealing with the abandoned claims were substantial and would need to be taxed. Consequently, they were seeking a payment on account of those costs, pending taxation. The Defendants submitted that it would be unjust to keep the Defendants out of their costs of the abandoned Claims until the conclusion of the proceedings. Relying on the decision in Al Sadik –v– Investcorp Bank BSC (2012) (2) (CILR) 33 the Defendants maintained that an award on an interim basis would be justified on the facts. The Court held that an interim award of costs was not within the inherent jurisdiction of the Court, not following Al Sadik –v– Investcorp Bank (unreported) 3 July 2012, and found no basis for making an interim order in this case, and ordered costs to be costs in the case.
DIVIDEND DECLARED BY COMPANY – WHETHER SHAREHOLDERS ENTITLED IMMEDIATELY TO PAYMENT – DISPUTE ARISING OVER CERTAIN PAYMENTS MADE AMIDST ALLEGATIONS AND COUNTERALLEGATIONS OF FRAUD
Talent Business Investments Ltd. –v– China Yinmore Sugar Company Ltd. and Another (24 April 2015)
The case arises out of a Claim by the Plaintiff, Talent Business Investments Limited ("Talent") for unpaid dividends, claiming as a shareholder of the Defendant, China Yinmore Sugar Company Ltd. ("China Yinmore"). Talent's Claim, which was for US$5,663,761, was supported by evidence of Mr. Zhang Nan, acting as its majority shareholder and sole director. The Claim was met with a defence and Counterclaim by China Yinmore, alleging not only that Talent received its dividend but also that it was overpaid by some US$2.8 million, the amount for which the Counterclaim was raised.
The law on entitlement to dividends, once they are declared, is settled and its applicability to the circumstances of this case was not disputed once the dispute over the circumstances of the payment was resolved. In Inland Revenue Commissioners –v– Laird Group Plc  UKHLL 54, Lord Millet speaking on behalf of the Court, explained that:
"...by declaring a dividend, the directors [of the company] effectively release the funds due to the shareholders from their [i.e. the directors'] power to retain them in the business".
It follows that once declared, the Company has no power to retain the money; it has been released to those entitled to share in the amount payable by way of dividend. Under the Companies Law, there is no provision stipulating the time for a company to distribute the dividends. Accordingly, Smellie CJ accepted that the Common Law Rule applied.
On 24 May 2012, a resolution was passed which declared dividends payable to Talent at US$5,663,761.37 (the "Dividend") without stipulating a date for payment, therefore, in accordance with common law, the Dividend was (and remains) immediately due and payable. There was a further dispute over a payment instruction to Great Ally Group Limited (the "GAPI"), dated 31 July 2012, bearing the Great Ally corporate seal, for the payment of US$8,503,460 in respect of dividends to which they were entitled. The dispute pivoted on whether the payment was made and received by Ms. Wen Xia on behalf of Mr. Zhang Nan (76.86% shareholder of Talent) as an overpayment of Talent's dividends (as China Yinmore contended) or whether it was made to and received by her on behalf of Great Ally on Mr. Li Jinquan's (68.42% shareholder of Great Ally Group Limited) instructions, as Mr. Zhang Nan (and through him Talent) contended.
Smellie CJ found that the GAPI was created as Mr. Zhang Nan testified under the instruction of Mr. Li Jinquan. The payment of US$8,503,460 was accepted by Ms. Wen Xia on behalf of and at the request of Mr. Li Jinquan and the money therefore represented a payment from China Yinmore to Great Ally. Accordingly Smeille CJ found that Talent had not received any of its dividends for the year 2011 and that China Yinmore was indebted to Talent for the payment of the Dividend in the amount of US$5,663,761.37, as was claimed. The defence and Counterclaim brought by China Yinmore was rejected.
COURT OF APPEAL
CIVIL PRACTICE AND PROCEDURE – APPLICATION FOR SECURITY FOR COSTS OF AN APPEAL – SUB-SECTION 19(2) OF THE COURT OF APPEAL LAW (2011 REVISION) – SECTION 74 OF THE COMPANIES LAW (2013 REVISION) (JUSTICE MANGATAL SITTING AS A SINGLE JUDGE OF THE COURT OF APPEAL)
DD Growth Premium 2X Fund –v– RMF Market Neutral Strategies (Master) Limited. CICA 24/2014 (was FSD 33/2011), per Mangatal J (29 May 2015)
Conyers Dill & Pearman ("Conyers") represented RMF Market Neutral Strategies (Master) Limited ("RMF"). This case concerned a fund named DD Growth Premium 2X Fund (In Official Liquidation) ("2X"), which suffered severe financial difficulties in the wake of the Lehman Brothers' collapse in 2008. RMF was an investor in 2X for some time and redeemed shares from 2X on multiple occasions. RMF's redemption of shares is the primary basis for this dispute.
The issue in this case primarily concerned redemption requests made by a group of redeeming shareholders known as the "December Redeemers" when 2X was of questionable solvency. Certain parties, such as RMF amongst others, were able to redeem their shares and obtain payment whilst others received nothing. Consequently, the dispute involved 2X's Joint Official Liquidators attempting to "claw back" monies paid to RMF during this period. The Judge ultimately agreed with Conyers' point regarding Section 37(6)(a) of the Companies Law. In particular, Section 37(6)(a) – (b) of the Companies Law states:
(a) A payment out of capital by a company for the redemption or purchase of its own shares is not lawful unless immediately following the date on which the payment out of capital is proposed to be made, the company shall be able to pay its debts as they fall due in the ordinary course of business.
(b) The company and any director or manager thereof who knowingly and wilfully authorises or permits any payment out of capital to effect any redemption or purchase of any share in contravention of paragraph (a) commits an offence and is liable on summary conviction to a fine of fifteen thousand dollars and to imprisonment for five years".
This case has significant legal implications because it concerned the capital maintenance doctrine which is designed to protect the creditors of a company. Smellie CJ held that ultimately, RMF did not have to repay the redemption monies despite the fact that 2X was insolvent when the payments were made. Smellie CJ reasoned that as the funds were paid from share premium, they were not legally classified as capital and as a result, the redemptions did not breach the Companies Law.
The above referenced hearing concerned an application for security for costs of an appeal under Section 19(2) of the Court of Appeal Law and Section 74 of the Companies Law. 2X appealed the prior Judgment made by the Honourable Chief Justice Smellie on 17 November 2014. In particular, Section 19(2) of the Court of Appeal Law states:
"The appellant shall, at the time of lodging the notice of appeal required by subsection (1), deposit in the Grand Court the sum of fifty dollars as security for the due prosecution of the appeal together with such further sum as security for costs of the appeal as a Judge of the Grand Court may direct, and such security for costs may be given by the appellant entering into a bond by himself and such sureties and in such sum as the Judge of the Grand Court may direct, conditioned for the payment of any costs which may be awarded against the appellant and for the due performance of the judgment of the Court".
Furthermore, Section 74 of the Companies Law states:
"Where a company is plaintiff in any action, suit or other legal proceeding, any Judge having jurisdiction in the matter, if he is satisfied that there is reason to believe that if the defendant is successful in his defence the assets of the company will be insufficient to pay his costs, may require sufficient security to be given for such costs, and may stay all proceedings until such security is given".
In support of the application for security for costs, RMF argued, amongst other things, that: (1) unlike a court of first instance, the Court of Appeal has to take into account the fact that 2X, the Appellant, had already had the issue of security for costs determined against it; (2) it would be an injustice to allow the Appeal by 2X to proceed without security for costs being furnished as RMF would be unable to enforce a costs order against 2X due to its impecuniosity and (3) when determining whether an Order for security for costs would prevent an Appeal, it is necessary for 2X to establish not only that it is unable to furnish security from its own resources but it is also unable to realise the money from elsewhere, namely shareholders (i.e. banks and large institutional investors) or third party funders.
In determining that 2X should provide security for costs, the Court ultimately held, amongst other things, that 2X did not provide suffice evidence: (1) of its investors or backers; (2) of its investors' inability, as opposed to unwillingness, to provide the security for costs and (3) to satisfy the Court that RMF, which had previously obtained a Judgment in its favour and an Order for security for costs, was attempting to stifle a genuine appeal by 2X.
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