Citco Global Custody NV Applicant v Y2K Finance Inc. Respondent
| Jurisdiction | British Virgin Islands |
| Judgment Date | 25 November 2009 |
| Neutral Citation | VG 2009 HC 27,[2009] ECSC J1125-3 |
| Docket Number | CLAIM NO: BVIHCV 2009/0020A |
| Court | High Court (British Virgin Islands) |
| Date | 25 November 2009 |
EASTERN CARIBBEAN SUPREME COURT
IN THE HIGH COURT OF JUSTICE
(CIVIL)
CLAIM NO: BVIHCV 2009/0020A
In The Matter of the Insolvency Act 2003 and The Insolvency Rules 2005
And in The Matter of Y2K Finance Inc.
Mr Simon Browne-Wilkinson QC; Mr Jeffrey Chapman and Ms Arabella di Iorio and Ms Aisling Dwyer of Maples & Calder for the Applicant Citco Global Custody NV
Ms Barbara Dohmann QC; Mr Jack Husbands of Walkers; and Mr Robert Weekes for the Respondent Y2K Finance Inc
(Member's application for the appointment of liquidators on just and equitable grounds - substratum lost - respondent company undertaking to go into voluntary liquidation - application opposed by majority of other investors - whether any investors had become creditors - section 62(2)(c) Business Companies Act, 2004 - exercise of Court's discretion)
Bannister J [ag]: This is an application for the appointment of a liquidator over the respondent, Y2K Finance Inc ('Y2K'). The application has a chequered history and I must set some of it out in order for this judgment to be intelligible.
Y2K is a BVI incorporated company and operated as a Professional Fund within the meaning of the British Virgin Islands Mutual Funds Act, 1996, as amended. It used a typical hedge fund corporate structure, with investors subscribing for shares and being entitled to redeem those shares in accordance with the provisions of Y2K's Articles of Association. Redemptions were paid out on the familiar Net Asset Value ('NAV') basis and there were provisions in the Articles permitting the directors to suspend the calculation of NAV in certain specified circumstances. Such suspensions, if validly made, would prevent the making of applications to redeem or the further processing of such applications if not completed before the suspension was declared. The applicant, Citco Global Custody NV ('CitcO') is a nominee shareholder for various different beneficial owners of shares in Y2K.
Between 25 and 27 July 2007 Y2K received six redemption notices. Five were from the holders of Class A shares and one was from a holder of Class X shares. There is no dispute between the parties that the Articles of Association provide (somewhat ungrammatically) for A shares to be redeemed on the basis of a calculation of NAV made at the end of the calendar month which first occurs after the expiry of 30 days from the giving of the redemption notice. In the case of the A shares the subject of these late July redemption notices, there is again no dispute that Y2K, instead of redeeming them on the basis of NAV calculated at the end of August 2007, as envisaged by the terms of the Articles which I have summarised above, paid them out between 10 and 16 August 2007 on the basis of NAV calculated as at 31 July 2007. I shall refer to these redemptions as ('the early redemptions'). The amounts so paid out to the A shareholders amounted in aggregate to some US$41 million. The amount paid out in respect of the X shares referred to above was some US$9.8 million - making a total paid out between 10 and 16 August 2007 of some US$51 million. I pause to mention that there is a dispute between the parties whether the X shares are redeemable at all. For reasons which will become obvious, it is not necessary for me to resolve that question for the purposes of this decision.
The early redemptions were made out of cash available to Y2K at the relevant time. Subsequently, Y2K realised assets and unwound its positions. On 10 September 2007 NAV was suspended. That remains the position.
On 22 November 2007 a company called Headstart Class F Holdings Limited ('Headstart') commenced proceedings in the High Court claiming that the conduct of the directors of Y2K in authorizing or permitting the early redemptions very shortly summarised above amounted to conduct of the affairs of Y2K in a manner unfairly prejudicial to Headstart ('the unfair prejudice proceedings'). Following the realization that Headstart was not a member of Y2K, the claim was amended to join Citco as a claimant. Citco undoubtedly is a member of Y2K and holds the 8,000 A shares in the capital of Y2K which are in issue in these proceedings for Headstart beneficially. When referring to Citco as applicant I shall refer to it as Citco/Headstart.
On 4 November 2008 Hariprashad-Charles J struck out the unfair prejudice proceedings. Citco/Headstart appealed.
Meanwhile, on 21 May 2008, three days after the argument in the unfair prejudice proceedings had taken place, Citco/Headstart issued an originating application for the appointment of a liquidator to Y2K. The application relied (a) upon the early redemptions and (b) upon alleged loss of substratum as entitling Citco/Headstart to a winding up order. In other words, the liquidator application relied upon substantially the same grounds as were relied upon to support the unfair prejudice proceedings, but in addition relied upon alleged loss of substratum. On 11 November 2008 Y2K applied to strike out Citco/Headstart's liquidator application.
There then followed a series of events which it is unnecessary to go into in any detail for present purposes. They culminated in the issue of a second liquidator application, in substantially the same terms as the first. It is this second liquidator application which is before me for decision.
On 16 January 2009 a consent order was made by Hariprashad-Charles J in the second liquidator application. Its effect was that the second liquidator application was treated as a 'continuation' of the first; that Y2K's application to strike out the first liquidator application was to be treated as an application to strike out the second; that the strike out application was to be heard after the decision of the Court of Appeal in Citco/Headstart's appeal against the dismissal by Hariprashad-Charles J of its unfair prejudice claim; and that the substantive hearing of the originating application (if still on foot) be heard over 5 days beginning not before 1 June 2009. Importantly, the consent order contained an undertaking by Y2K not to resume the calculation of NAV or permit redemptions. That undertaking remains on foot.
As a result of two subsequent orders of mine Y2K's strike out application was heard on 18 September 2009, despite the fact that the decision of the Court of Appeal in Citco/Headstart's appeal in the unfair prejudice proceedings had yet to be handed down.
I had better now set out the material grounds relied upon in the second liquidator application:
'The grounds upon which [Citco/Headstart] seek[s] the order are summarized below and are further set out in the first affidavit of Helen Mulcahy sworn on 21 May 2008:
1. [not material]
2. Y2K is a BVI company operating as a Professional Fund within the meaning of the British Virgin Islands Mutual Fund Act 1996, as amended. The Applicant is, in its capacity as custodian for Headstart Class F Holdings Limited, an investor in, and member of, Y2K.
3. Y2K was incorporated as a fixed income performance mutual fund, however, Y2K has itself expressed that its life has come to an end and it no longer has any reasonable expectation of meeting its objects as a mutual fund. It is Y2K's intention to realize the last of its assets and to distribute those assets between the remaining members.
4. In July and August 2007, Y2K purported to accept and pay out substantial redemptions in excess of US$50 million notwithstanding Y2K's own admission the redemptions failed to comply with the notice requirement contained in Article 10 of Y2K's Articles of Association.
5. Y2K has indicated that it will distribute its remaining assets to its members and no longer has any prospect of meeting its objectives. Should Y2K be put into voluntary liquidation, it is likely that Y2K's claims in respect of 27 July 2007 redemption will never be investigated or pursued to the detriment of Y2K and accordingly, its members.
6. In all the circumstances, it is just and equitable that a liquidator be appointed over the Company.
My decision on Y2K's strike out application, for which I gave reasons in writing on 24 September 2009, was that the grounds relied upon in paragraph 4 and in the second sentence of paragraph 5 of the second liquidator application be struck out as disclosing no reasonable prospect of success and as being bound to fail. The reasons are set out more fully in the written judgment which I gave on 24 September 2009, but I can summarise them by saying that I took the view that to permit minority shareholders to wind up a company on the basis simply that it had, or might have, claims against its directors and others and which the incumbent board was unlikely to prosecute was something unsupported by authority and inconsistent with the principle of majority rule established in Foss v Harbottle 1.
I refused, however, to strike out paragraph 3 and the first sentence of paragraph 5 (the 'loss of substratum' grounds). The result was that on the substantive hearing of the liquidator application, which took place on 9 November 2009, argument (and evidence) was restricted to that issue.
The only other procedural matter to which I need to refer before turning to consider the arguments of the parties on this issue is that on 19 October 2009 the Court of Appeal reversed the decision of Hariprashad-Charles J striking out the unfair prejudice proceedings. Citco/Headstart is therefore free to prosecute them.
There is no dispute that the commercial life of Y2K is at an end, in the sense that it does not intend to and will never resume operation as a mutual fund. It appears that Y2K has some 23 investors who have yet to receive redemption payments. There is undisputed evidence that the fund is fully encashed and that it has no creditors. I think...
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