![]() |
[Home] [Databases] [World Law] [Multidatabase Search] [Help] [Feedback] [DONATE] | |||||||||
The Judicial Committee of the Privy Council Decisions |
||||||||||
PLEASE SUPPORT BAILII & FREE ACCESS TO LAW
To maintain its current level of service, BAILII urgently needs the support of its users.
Since you use the site, please consider making a donation to celebrate BAILII's 25 years of providing free access to law. No contribution is too small. If every visitor this month gives just £5, it will have a significant impact on BAILII's ability to continue providing this vital service.
Thank you for your support! | ||||||||||
You are here: BAILII >> Databases >> The Judicial Committee of the Privy Council Decisions >> DD Growth Premium 2X Fund v RMF Market Neutral Strategies (Master) Ltd (Cayman Islands) [2017] UKPC 36 (23 November 2017) URL: https://www.bailii.org/uk/cases/UKPC/2017/36.html Cite as: [2018] Bus LR 1595, [2017] UKPC 36 |
[New search]
[Context]
[View without highlighting]
[Printable PDF version]
[Buy ICLR report: [2018] Bus LR 1595]
[Help]
Michaelmas Term
[2017] UKPC 36
Privy Council Appeal No 0050 of 2016
JUDGMENT
DD
Growth
Premium
2X Fund (In Official Liquidation)
(Appellant) v RMF Market Neutral Strategies (Master) Limited
(Respondent) (Cayman Islands)
From the Court of Appeal of the Cayman Islands
before
Lord Mance
Lord Sumption
Lord Carnwath
Lord Hodge
Lord Briggs
JUDGMENT GIVEN ON
23 November 2017
Heard on 4 and 5 October 2017
Appellant Tom Smith QC Adam Al-Attar Jeremy Snead (Instructed by Peter McMaster QC of Appleby (Cayman) Ltd and by Alan Taylor and Co) |
|
Respondent David Chivers QC Paul Smith Ben Hobden (Instructed by Herbert Smith Freehills LLP and by Conyers Dill & Pearman) |
LORD SUMPTION AND LORD BRIGGS: (with whom Lord Carnwath agrees)
Introduction - the issues
1.
In late 2008, just after the Lehman Brothers crash, a group of investors
in a Cayman Islands open-ended investment company called DD
Growth
Premium
2X
Fund (“the Company”) decided to cash in their investments by exercising their
right to have their shares in the Company redeemed. The management of the
Company responded, in January 2009, by paying some of the investors in full,
and some of them nothing. The largest payments were made to one investor, RMF
Market Neutral Strategies (Master) Limited (“RMF”), in the aggregate sum of
US$23m odd, but this was less than 40% of the amount owed to RMF by way of
redemption. The Company then ran out of money and, shortly thereafter, went
into insolvent liquidation. The liquidator then caused the Company to claim the
US$23m back from RMF but the claim failed, both in the Grand Court and in the
Cayman Islands Court of Appeal.
2.
The Company’s appeal from the Court of Appeal raises issues about Cayman
company law, as it was between 1989 and 2011, in relation to payments by the
Company of premium
due on the redemption of its shares, on largely undisputed
facts which were either agreed at the outset of the litigation, or found by the
Chief Justice of the Cayman Islands, at the trial of preliminary issues in
2014.
“(6)(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) is guilty of an offence and liable on summary conviction to a fine to fifteen thousand dollars and to imprisonment for five years.”
6.
The second, and main, issue in the appeal is whether a payment out of a
company’s share premium
account towards the
premium
payable on redemption of
shares (rather than towards the nominal amount of those shares) is a capital
payment with the meaning of section 37(6)(a). If it is, then a company may not
use sums standing to the credit of its share
premium
account for payment of the
premium
due on redemption of shares unless it satisfies the solvency test in
section 37(6)(a).
The Facts
9.
The Company is a Cayman Islands company limited by shares which, until
placed in official liquidation in March 2009, carried on business as a feeder
fund for the facilitation of investment in the DD
Growth
Premium
Master Fund
(“the Master Fund”). That was a hedge fund which, until the collapse of Lehman
Brothers in late 2008, pursued what the judge described as a well-known trading
strategy of investment in correlated stocks. The mechanism whereby the Company
made this facility available to investors was by the issue of redeemable
ordinary shares at a
premium,
and by using the proceeds of the issued shares as
investments in the Master Fund. Investors could realise their investments
through the Company in the Master Fund by making written requests to redeem
their shares on one of a regular monthly series of redemption days. Both the
issue price payable by the investor and the redemption price payable by the
Company was to be calculated by reference to Net Asset Value (“NAV”)
calculations based upon the market value, from time to time, of the Company’s
investment in the Master Fund on the relevant issue or redemption date.
10.
The use of redeemable shares as the vehicle for investment in this way
was a common business practice in the Cayman Islands, and involved both the
issue and the redemption of the ordinary shares at a very substantial premium.
By way of example, the NAV per US$ share of the Company’s ordinary shares
ranged during the period from January to June 2008 between US$106,575 and US$112.288,
whereas the nominal value per share was US$0.001. Thus, an incoming investor
during that period would pay for the issue of shares an amount consisting
almost entirely of
premium,
and the payment to an outgoing investor on a
redemption day during that period would be similarly constituted.
12. The timetable for redemption laid down by the Company’s articles may be summarised as follows:
i) A shareholder is required to give 30 days’ written notice of its wish to redeem, prior to a redemption day.
ii) Redemption days were scheduled for the first business day of each month.
iii) The NAV per share was to be assessed by the Administrator at the close of business on the day prior to the first business day of each month.
iv) On the redemption day redeeming shareholders redeemed their shares at a price per share based on the NAV per share of the relevant class of share. They ceased to be shareholders and became creditors of the Company for that price on that day.
v) Payment of the redemption price was to be made by the Company within 14 business days of the redemption day.
13. The conversion of the status of a redeeming investor from a shareholder to a creditor on the redemption day, in advance of payment, was expressly laid down by the articles, and the validity of that first stage in the redemption process was affirmed by the Board in Pearson v Primeo Fund [2017] UKPC 19.
14.
By August 2008 the Respondent RMF Market Neutral Strategies (Master)
Limited (“RMF”) was a substantial investor in the Company’s US$ denominated
shares. The Company operated a substantially similar Euro denominated share
structure, which can be ignored for the present purposes. One effect of the
Company’s trading was that it had a substantial surplus of share premium
available for redemption of shares, although it did not maintain a formal share
premium
account in its books.
The Proceedings
i) The payments were
not unlawful, being a legitimate use of the share premium
account pursuant to
sections 34 and 37 of the Companies Law.
ii) That the Company was insolvent, both within the meaning of section 37(6)(a) and generally, at the material time.
iii) That the fraudulent preference claim failed on the facts.
The Solvency Issue
28. It is common ground between the parties that, if redemption debts owed to the shareholders redeeming on the 1 December 2008 redemption day are to be taken into account, then the Company was then unable to pay its debts as they fell due. This is because the payments challenged satisfied only part of the December redemption debts, and the Company was thereafter unable to pay the rest. It is also necessary to bear in mind at the outset that it is common ground that the December redemptions were themselves valid in the sense that, with effect from 1 December 2008, both RMF and the six other redeeming shareholders were converted from shareholders to creditors in respect of the shares being redeemed, and the shares cancelled. It is also part of that common ground that, although the NAV of US$118.880 per share had been calculated upon false information, it was nonetheless a valid NAV for the purpose of crystallising the amount of the redeeming shareholders’ debt: see Fairfield Sentry Ltd (in liquidation) v Migani [2014] 1CLC 611.
The Illegality Issue
“34.(1)
Where a company issues shares at a premium,
whether for cash or otherwise, a
sum equal to the aggregate amount of the value of the
premiums
on those shares
shall be transferred to an account called ‘the share
premium
account’. Where a
company issues shares without nominal or par value, the consideration received
shall be paid up share capital of the company.
(2) The
share premium
account may be applied by the company subject to the provisions,
if any, of its memorandum or articles of association in such manner as the
company may, from time to time, determine including, but without limitation -
(a) paying distributions or dividends to members;
(b) paying up unissued shares of the company to be issued to members as fully paid bonus shares;
(c) in the manner provided in section 37;
(d) writing off the preliminary expenses of the company;
(e) writing off the expenses of, or the commission paid or discount allowed on, any issue of shares or debentures of the company;
and
(f) providing
for the premium
payable on redemption or purchase of any shares or debentures
of the company:
Provided
that no distribution or dividend may be paid to members out of the share
premium
account unless, immediately following the date on which the distribution
or dividend is proposed to be paid, the company shall be able to pay its debts
as they fall due in the ordinary course of business; and the company and any
director or manager thereof who knowingly and wilfully authorises or permits
any distribution or dividend to be paid in contravention of the foregoing
provision is guilty of an offence and liable on summary conviction to a fine of
fifteen thousand dollars and to imprisonment for five years. …
37.(1) Subject to this section, a company limited by shares or limited by guarantee and having a share capital may, if authorised to do so by its articles of association, issue shares which are to be redeemed or are liable to be redeemed at the option of the company or the shareholder.
(2) Subject to this section, a company limited by shares or limited by guarantee and having a share capital may, if authorised to do so by its articles of association, purchase its own shares, including any redeemable shares.
(3) (a) No share may be redeemed or purchased unless it is fully paid.
(b) A company may not redeem or purchase any of its shares if, as a result of the redemption or purchase, there would no longer be any other member of the company holding shares.
(c) Redemption of shares may be effected in such manner as may be authorised by or pursuant to the company’s articles of association.
(d) If the articles of association do not authorise the manner of purchase, a company shall not purchase any of its own shares unless the manner of purchase has first been authorised by a resolution of the company.
(e) The
premium,
if any, payable on redemption or purchase must have been provided for
out of the profits of the company or out of the company’s share
premium
account
before or at the time the shares are redeemed or purchased or in the manner
provided for in subsection (5).
(f) Shares may only be redeemed or purchased out of profits of the company or out of the proceeds of a fresh issue of shares made for the purposes of the redemption or purchase or in the manner provided for in subsection (5).
(g) Shares redeemed or purchased under this section shall be treated as cancelled on redemption or purchase, and the amount of the company’s issued share capital shall be diminished by the nominal value of those shares accordingly; but the redemption or purchase of shares by a company is not to be taken as reducing the amount of the company’s authorised share capital.
(h) Without prejudice to paragraph (g), where a company is about to redeem or purchase shares, it has power to issue shares up to the nominal value of the shares to be redeemed or purchased as if those shares had never been issued:
Provided that where new shares are issued before the redemption or purchase of the old shares the new shares shall not, so far as relates to fees payable on or accompanying the filing of any return or list, be deemed to have been issued in pursuance of this subsection if the old shares are redeemed or purchased within one month after the issue of the new shares.
(4) (a) Where, under this section, shares of a company are redeemed or purchased wholly out of the company’s profits, the amount by which the company’s issued share capital is diminished in accordance with paragraph (g) of subsection (3) on cancellation of the shares redeemed or purchased shall be transferred to a reserve called ‘the capital redemption reserve’.
(b) If the shares are redeemed or purchased wholly or partly out of the proceeds of a fresh issue and the aggregate amount of those proceeds is less than the aggregate nominal value of the shares redeemed or purchased, the amount of the difference shall be transferred to the capital redemption reserve.
(c) Paragraph (b) does not apply if the proceeds of the fresh issue are applied by the company in making a redemption or purchase of its own shares in addition to a payment out of capital under subsection (5).
(d) The provisions of this Law relating to the reduction of a company’s share capital apply as if the capital redemption reserve were paid-up share capital of the company, except that the reserve may be applied by the company in paying up its unissued shares to be allotted to members of the company as fully paid bonus shares.
(5) (a) Subject to this section, a company limited by shares or limited by guarantee and having a share capital may, if so authorised by its articles of association, make a payment in respect of the redemption or purchase of its own shares otherwise than out of its profits or the proceeds of a fresh issue of shares.
(b) References in subsections (6) to (9) to payment out of capital are, subject to paragraph (f), references to any payment so made, whether or not it would be regarded apart from this subsection as a payment out of capital.
(c) The amount of any payment which may be made by a company out of capital in respect of the redemption or purchase of its own shares is such an amount as, taken together with -
(i) any available profits of the company are being applied for purposes of the redemption or purchase; and
(ii) the proceeds of any fresh issue of shares made for the purpose of the redemption or purchase, is equal to the price of redemption or purchase,
is equal to the price of redemption or purchase, and the payment out of capital permitted under this paragraph is referred to in subsections (6) to (9) as the capital payment for the shares. Nothing in this paragraph shall be taken to imply that a company shall be obliged to exhaust any available profits before making any capital payment.
(d) Subject to paragraph (f), if the capital payment for shares redeemed or purchased and cancelled is less than their nominal amount, the amount of the difference shall be transferred to the company’s capital redemption reserve.
(e) Subject
to paragraph (f), if the capital payment is greater than the nominal amount of
the shares redeemed or purchased and cancelled, the amount of any capital
redemption reserve, share premium
account or fully paid share capital of the
company may be reduced by a sum not exceeding, or by sums not in the aggregate
exceeding, the amount by which the capital payment exceeds the nominal amount
of the shares.
(f) Where the proceeds of a fresh issue are applied by a company in making any redemption or purchase of its own shares in addition to a payment out of capital under this subsection, the references in paragraphs (d) and (e) to the capital payment are to be read as referring to the aggregate of that payment and those proceeds.
(6) (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) is guilty of an offence and liable on summary conviction to a fine of fifteen thousand dollars and to imprisonment for five years.
(7) …”
35.
Beginning again with section 37(6), and leaving aside the issue about
the meaning of “debts as they fall due in the ordinary course of business”,
there is nothing difficult or uncertain about its purpose and effect, which is
to subject any payment out of capital for the redemption or purchase by a
company of its own shares to the solvency test as a condition for its
lawfulness. But it immediately begs the question what is “a payment out of
capital”. That question is answered in terms by section 37(5)(b), which is
expressed to apply in the context of subsections (6) to (9). It is “any payment
so made, whether or not it would be regarded apart from this subsection as a
payment out of capital”. It is common ground, and clearly correct, that the phrase
“any payment so made” means any payment referred to in section 37(5)(a); ie “a
payment in respect of the redemption or purchase of its own shares otherwise
than out of its profits or the proceeds of a fresh issue of shares”. Since a
payment out of share premium
account is plainly not a payment out of profits or
out of the proceeds of a fresh issue of shares, it is deemed to be a payment
out of capital, provided only that it is made “in respect of” the redemption or
purchase of the company’s own shares. It was common ground, and plainly
correct, that the phrase “in respect of” is wide enough to include a payment of
the
premium
due on the redemption of shares.
36.
In the Board’s judgment that is the end of the matter. Section 37(6) is,
on its face, a free-standing condition for the lawfulness of a particular type
of payment for the redemption or purchase of shares, namely payment out of
capital. Section 37(5)(a) and (b) operate, expressly, as a form of definition
of the meaning of “payment out of capital” and do so for the purpose of deeming
that to be capital whether it would or would not otherwise be so regarded. The
conclusion that, therefore, a payment in respect of the redemption of shares
out of share premium
account is a deemed payment out of capital subject to the
section 37(6) solvency test is a straightforward application of clear statutory
language, the displacement of which would require very strong pointers to the
contrary.
i) Arguments based on section 37(3)(e);
ii) Arguments based on section 34; and,
iii) Arguments based on the legislative history behind these provisions, both in the UK and in the Cayman Islands.
38.
Section 37(3)(e) provides for three permitted ways or “gateways” whereby
the premium
payable on redemption for purchase of shares may be provided for,
namely: (1) out of profits (2) out of share
premium
account or (3) “in the
manner provided for in subsection (5)”. RMF submitted that section 37(3)(e)
permits the use of share
premium
account to pay
premium
on redemption,
regardless of the restriction in section 37(6), which only applies if the third
gateway, namely the manner provided for in subsection (5), has to be employed
for the purpose. The submission therefore treats section 37(6) as if it is
purely parasitic upon section 37(5).
40.
First, section 37(3)(e) is silent as to whether the use of share premium
account for the payment of
premium
on redemption is, or is not, subject to the
solvency test. The answer to that question lies elsewhere. Secondly,
subsections (5) and (6) are both expressly concerned with conditions for
payment of redemption amounts whereas subsection (3)(e) is, by its terms,
concerned with the making of provision in advance of, or at the time of,
redemption.
42.
Fourthly, this argument pays insufficient attention to what appears to
be the main purpose of subsection (3)(e), read in the context of its sister,
subsection (3)(f). Subsection (3)(f) is designed to identify the legitimate
resources for payment of the nominal amount due on redeemed shares, whereas
subsection (3)(e) is about resources for the payment of premium.
Reading the
two together, they both permit the use of profits and the manner provided for
in subsection (5), but they prohibit the use of share
premium
account for the
payment of the nominal amount due, and they prohibit the use of a fresh issue
of shares for payment of the
premium
amount. That purpose is unrelated to the
question whether any of the permitted methods, and in particular the use of
share
premium
account, amounts to a deemed capital payment, thereby triggering
the solvency test in subsection (6).
43.
Finally, if the legislature had intended to exclude share premium
account from the reach of the deeming effect of subsections (5)(a) and (b),
this could so easily have been expressly stated in subsection (5)(a), by adding
a reference to share
premium
account in the words following “otherwise than”.
This is incidentally just what the legislature did do in 2011, although that is
irrelevant for the purposes of construction.
44.
Turning to section 34, the argument is that, when subsection (2) is read
as a whole, it appears to contemplate and indeed authorise the use of share
premium
account for providing for the
premium
payable on redemption or purchase
of shares without any solvency requirement. This is because the provision on
redemption is given in subsection (2)(f), whereas the proviso, which contains
an identical solvency test to that in section 37(6)(a), is expressed to apply
only to distributions or dividends which are authorised by subsection (2)(a).
Again, this is an attractive argument, and one which strongly influenced the
judge and the Court of Appeal.
45.
The Board has not been persuaded by this argument, for two main reasons.
The first is that the provision for a solvency test in relation to
distributions or dividends in section 34 does not mean or imply that there is
not some other solvency test applicable to one or more of the other permitted
uses of share premium
account, such as that in section 37(6). Section 34 is the
only place in the Companies Law in which the use of share
premium
account for
distribution or dividends is dealt with. By contrast the use of share
premium
account for redemption for purchase is just mentioned in the non-exclusive list
in section 34(2), but dealt with in detail in section 37.
46.
The second reason derives from the history of the piecemeal introduction
of these provisions, and reinforces the first. The provisions for the use of
share premium
account on redemption of shares, including earlier versions of
what are now sections 37(3)(e) and (f), and section 37(5) and (6), were
introduced in 1987, as parts of what were then section 34. At that stage
section 32 (which was the earlier version of what is now section 34) made no
mention of the use of share
premium
account for distribution or dividends, made
no reference to any solvency test and merely noted that it could be used in
providing for the
premium
payable on redemption of any shares or any debentures
of the company. The permission to use share
premium
account for distribution or
dividends was introduced, side by side with the solvency proviso now in section
34(2), in 1989. If the provisions newly introduced in 1987 subjected the use of
share
premium
account to the solvency test, it could not sensibly be suggested
that the 1989 addition of distribution and dividends, side by side with its own
solvency test, was intended by a side-wind to release the use of share
premium
account for redemption from a solvency requirement.
47. Turning to the wider legislative history, counsel for both parties travelled at length through the history of the common law and statutory provision for the maintenance of capital, beginning with Trevor v Whitworth (1887) 12 App Cas 409 and continuing through the UK Companies Acts from 1929 onwards into the Cayman Islands legislation which, in its original form in 1963, mirrored that to be found in the UK Companies Act 1948. Thereafter the two legislative schemes diverged.
48.
The argument for RMF was that, in the context of a progressive
liberalisation of the regime for the maintenance of capital, share premium
account had, from 1948 in the UK and from 1963 in the Cayman Islands, been
available for the payment of a
premium
on redemption of shares without any
requirement for commercial solvency. For completeness, it was pointed out that
this has clearly been the position from 2011, when share
premium
account was,
by further amendment of section 37(5)(a), clearly excluded from the definition
of capital payments. Why, it was asked rhetorically, should there have been a
blip in that process of liberalisation which applied a solvency test to the use
of share
premium
account for this purpose, which had previously been absent?
49.
The answer in the Board’s judgment is that, prior to 1987, Cayman law
permitted only the issue and redemption of preference shares, rather than
equity shares, following in that respect the precedent set by the Companies Act
1948. In sharp contrast with shares of the type in issue in these proceedings,
where the premium
may exceed the nominal amount by several orders of magnitude,
the
premium
likely to be payable upon the redemption of preference shares would
typically be modest, limited to some capitalisation of coupon, unpaid on early
redemption. The propensity for permitting the
premium
payable on redemption of
equity shares to undermine capital maintenance, by comparison with preference
shares, was perceptively analysed by Professor Gower in 1980 in his
consultative report “The Purchase by a Company of its Own Shares” (Cmnd 7944).
At para 22, after pointing out that section 58 of the Companies Act 1948
permitted a
premium
payable on redemption to be provided for out of share
premium
account, he continued:
“This
anomaly may not matter much in the case of preference shares in the strict
sense, where the premiums
are likely to be small. But in relation to redeemable
equity shares the
premiums
might well be many times the nominal value,
resulting in a substantial reduction of capital on redemption. It is therefore
suggested that sections 56 and 58 should be amended so as to prevent redeemable
shares from being redeemed otherwise than out of profits or an issue of new
capital without any use of share
premium
account which would be left intact.”
50.
In due course, the UK Parliament followed that advice and prohibited the
use of share premium
account for the payment of
premium
on redemption of
shares, when extending the ability of a company to issue and redeem shares from
preference shares to equity shares. This was done in the Companies Act 1981. By
contrast, in 1987 the Cayman Islands adopted a more nuanced approach. The
ability to issue and redeem shares was extended from preference shares to
equity shares, and share
premium
account was permitted to be used for funding
the
premium
payable on redemption. It is not surprising in that context that
the Cayman Islands legislature took the more modest step of imposing a solvency
test from the use of share
premium
account for that purpose rather than, as in
the UK, prohibiting it altogether. It may well be that this was done
specifically to permit or encourage the use of shares and share
premium
as an
investment vehicle in the way commonly used by open-ended investment companies
as illustrated by the facts of this appeal. There was no time before 2011 at
which, in the Cayman Islands, redeemable equity shares could be issued, or
redeemed, when there was also an uncontrolled right to fund
premium
payable on
redemption out of share
premium
account. If the solvency test was imposed in
1987, as the Board considers that it was, it cannot in the light of the
legislative history sensibly be described as some unaccountable blip in an
otherwise seamless liberalisation of the capital maintenance regime.
52.
Lord Hodge draws support from a detailed textual analysis of the
progressive development of the Cayman regime regulating the issue and
redemption of shares from 1963, through 1987 and 1989 to 2007, for a conclusion
that the solvency test now in section 37(6) was never intended to apply to the
use of share premium
account for the payment of
premium
on redemption. In the
Board’s view the question turns primarily upon the construction of the 2007
Revision. If the 1987 Revision had clearly not applied the solvency test, then
this might have been a sufficient contra-indication to displace the apparently
clear meaning of section 37(6) read with the definition of payment out of
capital in subsection (5), in the 2007 Revision. But the Board’s view is that
the broadly equivalent provisions of the 1987 Revision do not lead to any
different conclusion, construed on their own, and the modest textual changes to
what is now section 37 introduced in 1989 make no significant difference.
53.
The judge was clearly influenced in his approach to the construction of
sections 34 and 37 by a perception that to subject the lawfulness of a payment
of redemption premium
out of share
premium
account to a solvency test would
expose investors in companies of this kind to unacceptable risks of uncertainty
because of the risk of claw-back claims, sometimes long after redemption,
arising from facts internal to the issuing company, unknown to the investor but
affecting the commercial solvency of the company. If those claw-back claims
could indeed be made against innocent investors (ie without knowledge of the
facts about the company’s solvency giving rise to the illegality) then the
judge’s concerns would be understandable. Nonetheless, as will shortly appear,
the Board considers that the answer to those concerns lies in the limited
nature of the remedy, rather than in adopting a strained construction of
sections 34 and 37.
54.
The conclusion that the solvency test in section 37(6) applies to the
use of share premium
account for payment of
premium
on redemption means that it
is unnecessary to address in detail either of the other grounds upon which the
Company argued that the payments in issue were unlawful. For completeness there
follows a brief explanation why the Board found neither of them persuasive.
55.
The first was that, separately from section 37(6), and although only
applicable to payment of the nominal amount due on the redemption of shares,
section 37(3)(f) was nonetheless itself a cumulative condition which would
render the use of share premium
account for payment of the
premium
under
section 37(3)(e) unlawful, if the nominal amount was not to be funded out of
proceeds of a fresh issue or in the manner provided for in subsection (5).
Although generally the conditions for redemption are cumulative in section 37,
subsections 3(e) and (f) deal with quite different aspects of the manner in
which redemption is to be funded. Once a valid redemption has occurred (as is
common ground in these proceedings) then the company owes a debt to the
redeeming shareholder equivalent to what will always be the aggregate of the
nominal amount and any relevant
premium.
It does not follow, merely because the
nominal amount is not provided for or paid in a manner which renders the
payment lawful, that this necessarily affects the lawfulness of the payment of
the
premium
amount.
56.
The second alternative submission was that, in the context of the
payment of premium
on redemption, where there was no lawful payment of the
nominal amount, the payment of the
premium
would be a distribution or divided,
separately subjected to a solvency test by section 34(2). Again, the concession
that there was a valid redemption, sufficient to convert the redeeming
shareholders into creditors and to bring to an end their rights as
shareholders, necessarily means that a payment then or thereafter made to them
is neither a dividend nor a distribution. Accordingly, it is not subject to the
solvency test in section 34(2).
The Remedy Issue
60. In principle, money paid under an ineffective (eg a void) transaction is recoverable: Westdeutsche Landesbank Girozentrale v Islington London Borough Council [1994] 4 All ER 890 (Hobhouse J), approved (obiter) on appeal to the House of Lords [1996] AC 669, 681-682 (Lord Goff), 714 (per Lord Browne-Wilkinson), 723 (per Lord Woolf); Guinness Mahon & Co Ltd v Kensington and Chelsea Royal London Borough Council [1999] QB 215. As the editors of Goff & Jones, The Law of Unjust Enrichment, 9th ed (2016), Chapter 13, explain, the ground of recovery in these cases is failure of basis. The transfer was not intended to be gratuitous, but the ineffectiveness of the transaction means that there never was any consideration for it. The same is in principle true if the reason why the transaction is ineffective is that it is illegal, although in this case the position is complicated by the public policy against the recovery of money paid for an illegal purpose: Smith v Bromley (1760) 2 Doug KB 696n; Patel v Mirza [2016] 3 WLR 399, paras 146-148 (Lord Neuberger), 194-197 (Lord Mance), 251-252 (Lord Sumption).
62. It is fundamental that a payment cannot amount to enrichment if it was made for full consideration; and that it cannot be unjust to receive or retain it if it was made in satisfaction of a legal right. As Professor Burrows has put it in his Restatement of the English Law of Unjust Enrichment (2012), para 3(6), “in general, an enrichment is not unjust if the benefit was owed to the defendant by the claimant under a valid contractual, statutory or other legal obligation”. The proposition is supported by more than a century and a half of authority: see, in particular, Aiken v Short (1856) 1 H & N 210, 215, Barclays Bank Ltd v W J Simms, Son and Cooke (Southern) Ltd [1980] QB 677, Lipkin Gorman (a firm) v Karpnale Ltd [1991] 2 AC 548, 574-577, 580-581, Kleinwort Benson Ltd v Lincoln City Council [1999] 2 AC 349, 408 (Lord Hope), Fairfield Sentry Ltd (in liquidation) v Migani [2014] 1 CLC 611 (JCPC), para 18.
63.
The liquidators submitted that, subject to any change of position
defence, there was a right to restitution because the purpose of section
37(6)(a) was the protection of the company’s assets for the benefit of its
creditors. In support of this submission, he cited Smith v Bromley
(1760) 2 Doug KB 696n, Browning v Morris (1778) 2 Cowp 790, and Kiriri
Cotton Co Ltd v Dewani [1960] AC 192. These are all decisions about the
rule of public policy against the recovery of money paid for an illegal
purpose. They are authority for the proposition that although in principle
money paid for an illegal purpose is not recoverable, there is an exception for
cases where the parties to the illegal transaction were not in pari delicto.
One circumstance in which they will not be in pari delicto is that the
illegality consisted in the breach of an obligation laid upon the defendant for
the protection of the very class of persons to which the claimant belonged.
Thus in Kiriri Cotton Co Ltd a tenant was entitled to restitution of an
illegal premium
which he had paid by agreement to the landlord, because the
duty not to charge it was laid by statute on landlords for the protection of
tenants. This line of cases needs to be revisited in the light of the decision
of the Supreme Court in Patel v Mirza [2016] 3 WLR 399, in which every
member of the court (albeit for different reasons) recognised a more general
right to restitution of money paid under an illegal transaction. But this does
not matter, for these cases have no bearing on facts like those presently
before the Board. They assume a prima facie right to restitution and address the
circumstances in which the illegality of the underlying transaction may afford
a defence, whereas in the present case there is no prima facie right to
restitution to call for such a defence. They go on to assume (as was in fact
the case in all of them) that the party seeking restitution was party to the
illegality, whereas in the present case the redeeming shareholder simply
received payments which were due to him under lawful transactions. The purpose
of the rule which made the transaction illegal may be relevant to defeat
reliance on the principle of public policy ex turpi causa non oritur actio.
But it cannot create a right of restitution which would not otherwise exist.
LORD HODGE: (dissenting) (with whom Lord Mance agrees)
66.
I agree with the judgment of Lord Sumption and Lord Briggs on the
solvency issue and also on the remedy issue if the repayment of the premium
on
the redeemed shares were illegal. I am not however persuaded that the Chief
Justice and the Court of Appeal of the Cayman Islands erred in their
conclusions on the illegality issue.
67.
The relevant provisions of the 2007 Companies Law are the consolidation
of provisions introduced in 1963, 1987 and 1989. The legislative history of the
current provisions, which have been set out in para 33 above, differs markedly
from the way in which companies legislation in the United Kingdom has regulated
the share premium
account. The policies behind the legislation in the United
Kingdom do not, in my view, provide a reliable guide as to the meaning of the
2007 Companies Law.
68.
The 1963 Companies Law, in section 32, treated the share premium
account
as a species of capital by applying the provisions of the 1963 Law relating to
the reduction of share capital to the share
premium
account “as if the share
premium
account were paid-up share capital”. But that deeming provision was
qualified in subsection (1) by the words “except as provided in this section”.
It was therefore subject to exceptions in subsection (2), of which the relevant
one was that the share
premium
account could be applied “in providing for the
premium
payable on redemption of any redeemable preference shares or of any
debenture of the company”. Section 34 of the 1963 Law, which empowered a
company, if authorised by its articles, to issue redeemable preference shares,
drew a distinction between the redemption of shares and the repayment of the
premium
on those shares. It provided (i) that the shares were to be redeemed
out of profits otherwise available for dividend or out of the proceeds of a
fresh issue of shares made for the purposes of the redemption (section
34(1)(a)) and (ii) that any
premium
payable on redemption must have been provided
for out of profits or the share
premium
account before the shares are redeemed
(section 34(1)(c)). The 1963 Law reflected the relevant provisions (sections 56
and 58) of the United Kingdom’s Companies Act 1948. No other provision was
needed to authorise the use of funds in the share
premium
account in paying the
premium
on redemption of the preference shares.
69.
At that time, the only redeemable shares which a company was authorised
to issue were preference shares, which would normally have only a modest
premium
payable on redemption. But in 1987 company law in the Cayman Islands
was altered radically when companies were empowered to issue redeemable equity
shares. The 1987 Law substituted a new section 32 which did not alter the basic
rule which treated the share
premium
account as if it were capital but, by
extending the exception of the provisions of that section from that deeming
provision, allowed the use of that account to provide for the
premium
payable
on the redemption of any shares or of any debenture of the company. The
substituted section 34, providing for the redemption and purchase of shares,
preserved the substance of section 34(1)(c) of the 1963 Law by providing (in
subsection (2)(e)):
“The premium
(if any) payable on
redemption or purchase must have been provided for out of the profits of the
company or out of the company’s shares [sic]
premium
account before or at the
time the shares are redeemed or purchased.”
The section retained the distinction between the use of
the share premium
account to pay the
premium
on redemption or purchase and the
repayment of the nominal value of the shares on redemption or purchase by
providing (in subsection 34(3)(f)):
“Subject to the provisions of subsection (5), shares may only be redeemed or purchased out of profits of the company or out of the proceeds of a fresh issue of shares made for the purposes of the redemption or purchase.” (emphasis added)
But, as the emphasised words show, the repayment of the nominal value of the shares was subjected to a new regime, which is in substance that which is now contained in section 37(5) and (6) of the 2007 Act. That regime allows the company to make a payment in respect of the redemption or purchase of its own shares otherwise than out of its profits or the proceeds of a fresh issue of shares but deems such payments to be a payment out of capital and subjects those payments to the solvency test in subsection (6).
70.
The 1989 Law by repealing subsections (1) and (2) of section 32 removed
the provision that the share premium
account was to be subjected to the rules
relating to the reduction of capital as if it were paid up share capital,
except as provided in that section. It replaced those subsections with the
provisions which are now found in section 34 of the 2007 Law and are set out in
para 33 above. Those amendments preserved the share
premium
account but no
longer deemed the share
premium
account to be capital for any purpose. The new
subsection (2) provided that the share
premium
account may be applied in such
manner as the company may determine. The enumerated uses of the account were
stated not to limit that discretion. Those uses included the paying of
distributions or dividend to members, which use alone was subjected to the
solvency test in what is now the proviso to section 34(2) of the 2007 Act. The
uses which were not so subjected included and include the application of the
share
premium
account “(f) providing for the
premium
payable on redemption or
purchase of any shares or debentures of the company”.
71.
Another use which was not subjected to the solvency test in section
34(2) of the 1963 Law as amended in 1989 is the application of the share
premium
account “(c) in the manner provided in section 34” (now section 37 of
the 2007 Law). This would allow the funds in the share
premium
account to be
used to redeem the nominal value of shares, but such application would fall
under what under the 2007 Law is the section 37(5) regime and thus the section
37(6) solvency test.
72. The 1989 Law amended section 34(3)(e) of the 1963 Law to read:
“The premium
(if any) payable on
redemption or purchase must have been provided for out of the profits of the
company or out of the company’s share
premium
account before or at the time the
shares are redeemed or purchased or in the manner provided for in subsection
(5).” (emphasis added)
This provision as amended thus provided an additional
source of the funds, deemed capital under subsection (5), which a company could
use to pay the premium
payable on redemption or purchase. The 1989 Law also
amended section 34(3)(f) by deleting the opening words emphasised in para 69
above and by adding the words emphasised below so as to read:
“Shares may only be redeemed or purchased out of profits of the company or out of the proceeds of a fresh issue of shares made for the purposes of the redemption or purchase or in the manner provided for in subsection (5).” (emphasis added)
Thus the nominal value of redeemed or purchased shares could be paid for out of profit, out of the proceeds of a fresh issue of shares made for that purpose or out of deemed capital as provided in subsection (5). Changes were also made by the 1989 Law to section 34(5) (now section 37(5) of the 2007 Law) but they are not relevant.
73.
From this legislative history the following conclusions can be drawn.
First, the legislation has throughout authorised the application of the share
premium
account to pay the
premium
on the redemption of redeemable shares.
Secondly, when redeemable equity shares were introduced, the 1987 Law preserved
a distinction between the repayment of the
premium
on redeemable shares (now
including redeemable equity shares) and the repayment of the nominal value of
those shares by subjecting only the latter to the provisions of subsections (5)
and (6) in the opening words of section 34(3)(f) (para 69 above). Thirdly, this
distinction is preserved by the amendments introduced by the 1989 Law which
expressly provide for an additional optional source of payment in both section
37(3)(e) and section 37(3)(f) of the 2007 Law. Thus the
premium
on redemption
of shares may be paid out of (a) profits or (b) the share
premium
account or
(c) as provided for in subsection (5) (ie a deemed capital payment subject to a
solvency test). The nominal value of the shares on the other hand may be paid
(a) out of profits or (b) out of the proceeds of a fresh issue of shares or (c)
as provided for in subsection (5) (ie a deemed capital payment subject to the
solvency test). The use of the disjunctive “or” in section 37(3)(e) means that
the payment of the
premium
on redemption or purchase out of the share
premium
account is not subjected to the regime under subsections (5) and (6). This is
consistent with section 34 of the 2007 Law, which does not impose a solvency
test on the use of the share
premium
account when it is used to provide the
premium
payable on the redemption or purchase of shares.
74.
Lord Sumption and Lord Briggs start their analysis with section 37(6) of
the 2007 Law, and thereby bypass the restrictions on the scope of section 37(5)
on which subsection (6) is parasitic. Subsection (6) is parasitic on subsection
(5) because the solvency test imposed by that subsection is applied only to the
payments out of capital or out of that which subsection (5) deems to be capital
when used to make a payment in respect of the redemption or purchase of the
company’s own shares. But, as I have shown, under the 1963 Law and the 1987 Law
the share premium
account was not treated “as if [it] were paid up capital”
when it was used to pay the
premium
on the redemption of shares because such
use was exempted from the deeming provision. In the 1989 Law the share
premium
account ceased to be subject to the provisions of the Law relating to the
reduction of share capital. Thus, under the 2007 Law the share
premium
account
is not capital and therefore is not caught by section 37(6) unless subsection
(5) applies to make it so. But section 37(5)(a), which introduces the regime
for payment in respect of the redemption or purchase of shares out of deemed
capital, is stated to be “[s]ubject to this section”, which requires reference
to the other provisions of section 37, including subsection (3)(e), in order to
determine the scope of subsection (5).
75.
Lord Sumption and Lord Briggs in paras 40 and 42 above interpret section
37(3)(e) and (f) of the 2007 Law as being concerned only with “the making of
provision” or being “to identify the legitimate resources” for the payment of
the premium
and the nominal amount of the redeemed shares, while they construe
section 37(5) as providing the authorisation for payment subject to the
subsection (6) solvency test (paras 35 and 36 above). On their approach,
section 37(3), when read with section 34(2), does not authorise the use of
those funds. I respectfully disagree. Section 37(3)(e) of the 2007 Law performs
a purpose which can be traced back to section 34(1)(c) of the 1963 Law (para 68
above). It identifies the sources of the payment of the
premium
on redemption
and one source is the share
premium
account, which under section 34(2) of the
2007 Law (and formerly section 32(2) of the 1963 Law both as originally enacted
and as amended in 1987 and 1989) can be applied in providing for the
premium
payable on redemption. Under the 1963 Law, and the 1948 UK Act on which it was
modelled, no other authorisation for the payment was required. The amendments
to section 34(3)(f) of the 1963 Law in 1987 (para 69 above) and to both section
34(3)(e) and (f) of that Law in 1989 (para 71 above) preserved this position.
Against this legislative background, I am not persuaded that the introduction
of what is now section 37(5) of the 2007 Law overrode the authorisation given
by the combination of section 34(2) and section 37(3)(e) of that Law.
76.
This view of the scope of the deeming provisions in section 37(5)(a) and
(b) of the 2007 Law does not empty those provisions of content. The deeming
provisions would cover liquid assets of the company, such as cash obtained by
borrowing, if they were to be used in respect of the redemption or purchase of
the company’s shares. Further, the conclusion that the share premium
account is
available for the payment of
premium
on the redemption of redeemable shares is
consistent with the altered status of that account which ceased to be deemed in
any circumstances to be capital for the purpose of the provisions of the Law
relating to reduction of capital in 1989. But for the imposition of the
solvency test in relation to the use of the share
premium
account in paying
distributions and dividends to members (now by section 34(2) of the 2007 Law)
the share
premium
account would have reverted to its pre-1963 status in
Jamaican (and Cayman) law in the Jamaican Companies Act 1864 (as amended) as
profits available for distribution: In re Hoare & Co Ltd [1904] 2 Ch 208; Drown v Gaumont-British Picture Corporation Ltd [1937] Ch 402.
In this regard the amendments made to the Law in 1989 confirm my view that the
legislature in 1987 by making only section 34(3)(f) subject to section 34(5)
did not include the use of the share
premium
account to pay the
premium
on the
redemption or purchase of shares within the section 34(6) solvency test.
77.
It is undoubtedly correct that the legislation could have been more
clearly drafted as Lord Sumption and Lord Briggs have stated. But the
legislative history which I have set out does not suggest that the legislature
altered the substance of the 2007 Law when in 2011 it amended section 37(5)
expressly to exclude payments out of the share premium
account from the
extended definition of capital and thus from the solvency test. In short, the
legislature of the Cayman Islands in 1987 adopted a radically different approach
to the use of the share
premium
account from that which Professor Gower
recommended to the UK government and which the UK Parliament adopted in the
Companies Act 1981. The 1987 Law extended the authorised use of the share
premium
account in payment of the
premium
on the redemption of shares, which
previously had been limited to redeemable preference shares, to provide for the
payment of the
premium
on the redemption of equity shares, notwithstanding that
the
premium
commanded by such shares would often be much larger. In so doing,
it did not impose on such use of the share
premium
account the solvency test
now contained in section 37(6).
78.
I agree with the conclusion of Lord Sumption and Lord Briggs that the
Company’s other submissions, namely (i) that there were cumulative conditions
in section 37(3)(f) and (e) of the 2007 Law and (ii) that the payment of the
premium to a former shareholder would be a distribution subject to the solvency
test in the proviso to section 34(2) of the 2007 Law, fall to be rejected for
the reasons which they have stated in paras 51 and 52 of the judgment.
Conclusion