Parmalat Capital Finance Ltd & Ors v. Food Holdings Ltd & Anor (The Cayman Islands) [2008] UKPC 23 (9 April 2008)

Privy Council Appeal No 7 of 2007

Parmalat Capital Finance Ltd
and others									Appellants

v.

(1) Food Holdings Ltd (in liquidation)
(2) Dairy Holdings Ltd (in liquidation)	Respondents

FROM

THE COURT OF APPEAL OF
THE CAYMAN ISLANDS

- - - - - - - - - - - - - - - - -

JUDGMENT OF THE LORDS OF THE JUDICIAL
COMMITTEE OF THE PRIVY COUNCIL

Delivered the 9th April 2008

- - - - - - - - - - - - - - - - -

Present at the hearing:-

	Lord Hoffmann
	Lord Hope of Craighead
	Lord Walker of Gestingthorpe
	Baroness Hale of Richmond
	Lord Mance
	
- - - - - - - - - - - - - - - -

[Delivered by Lord Hoffmann]

1.	The Parmalat group of companies is based in Italy.  Its principal business is supplying food and dairy products.  Parmalat Capital Finance Ltd (“PCFL”) is a member of the group incorporated in the Cayman Islands. It carried on business raising finance for other members of the group.

2.	In 1999 PCFL took part in a scheme to raise money for the group by the issue of loan notes on the US bond market. The scheme involved the incorporation in the Cayman Islands of two companies named Food Holdings Ltd (“Food”) and Dairy Holdings Ltd (“Dairy”).  Each was to issue loan notes to the value of about US$150m.  The proceeds were to be used to purchase stock in a Brazilian subsidiary called Parmalat Administracao SA (“Parmalat Brazil) and thereby provide it with equity finance.

3.	The security for the noteholders was, in the first instance, the stock in Parmalat Brazil. Food and Dairy charged the stock to Norwest Bank Minnesota (“Norwest”) as trustee for the note holders. It was however contemplated that when the notes fell due, PCFL would buy the stock and the notes would be paid off out of the purchase price. For this purpose, PCFL entered into put agreements with Food and Dairy, giving them the right to demand that PCFL buy the stock at a price determined in accordance with a formula. This obligation was guaranteed by the Italian parent company, Parmalat Spa.  The rights under the put agreements were likewise charged to Norwest as security for repayment of the notes. Norwest gave notice to PCFL of its security interest in the stock and the put agreement. These documents were governed by New York law and their effect was that the money which might become payable under the put agreement became payable to Norwest, to be deposited in a collection account for the benefit of the noteholders and in which Food and Dairy would have only an equity of redemption.

4.	Just before Christmas 2003, the Parmalat group collapsed.  In Italy, Dr Enrico Bondi was appointed special administrator of the Italian company.  In the Cayman Islands, some of the noteholders applied for the appointment of provisional liquidators of Food and Dairy. Henderson J appointed James Cleaver and Gordon MacRae (“the Cayman liquidators”). Those companies, acting by their provisional liquidators, then petitioned for the winding up of PCFL.  The debts upon which the petitions were founded were the sums owing under the put agreements. On 24 December 2004, Henderson J appointed the Cayman liquidators as provisional liquidators of PCFL.  The winding up petition was heard in 2006 and on 12 May 2006 Henderson J ordered PCFL to be wound up and appointed the Cayman liquidators to be its liquidators.

5.	There appears to have been some lack of co-operation between the Cayman liquidators and Dr Bondi.  No one has sought to assign blame for this state of affairs and the Board will not attempt to do so.  But the result was that although PCFL is admitted to be heavily insolvent, it has (acting by Dr Bondi as administrator of its controlling shareholder) appealed against both the winding up order and the appointment of the Cayman liquidators. The grounds of objection to the winding up petition were, first, that Food and Dairy had no locus standi as petitioners because they had assigned the entire benefit of the put agreements to Norwest, and secondly, that the debt was disputed on substantial grounds.  The main ground for objection to the Cayman liquidators was that their interests as liquidators of Food and Dairy conflicted with the interests of PCFL.  The Court of Appeal rejected both objections.

6.	There is no dispute that, at the commencement of the winding up, the money due under the put agreements had become payable and PCFL was insolvent. Section 96 of the Companies Law provides that a petition may be presented by a “creditor” and the first question is whether Food and Dairy were creditors.  The Board considers that they were. Food and Dairy were the contracting parties to the put agreements and had the right, as against PCFL, to demand payment. They retained both the legal title and the equity of redemption.  In the opinion of the Board, the fact that they had assigned the debts by way of security to Norwest did not deprive them of the status of creditors.

7.	Mr Moss QC, who appeared for the appellants, submitted that even if Food and Dairy were entitled to sue, the proceedings were not properly constituted because Norwest, as equitable assignee, should have been joined in the proceedings.  He relied upon the analogy of an action to recover a debt, in which it is clear that an assignor seeking to recover an assigned debt must join the assignee: see Walters & Sullivan Ltd v J Murphy & Sons Ltd [1955]  2 QB 584, 588. But the analogy is false. As P O Lawrence J explained in Re Steel Wing Company Ltd [1921]  1 Ch 349, 357:

“The main reason why an assignee of a part of a debt is required to join all parties interested in the debt in an action to recover the part assigned to him is in my opinion because the Court cannot adjudicate completely and finally without having such parties before it. The absence of such parties might result in the debtor being subjected to future actions in respect of the same debt, and moreover might result in conflicting decisions being arrived at concerning such debt. In my opinion, however, this reasoning does not apply to a winding up petition. After a winding up order has been made the Court in all cases when it is necessary will investigate, adjudicate upon, and settle the petitioner's debt as well as the debts of the other creditors. In the case of an assignee of part of a debt the Court in adjudicating upon his claim can and will do so in the presence of the persons entitled to the remainder of the debt, and the rights of all parties interested in the debt will be completely and finally settled once and for all.”

8.	In other words, a winding up order does not affect the legal rights of the creditors or the company. It only puts into effect a process of collective execution against the assets of the company, for the benefit of all creditors.  In the course of that process, the rights of creditors may have to be determined. But such a determination is not necessary at the stage when the order is made. An equitable assignor therefore has a sufficient interest without joining the assignee.

9.	The next question is whether the debt is disputed.  If a petitioner’s debt is bona fide disputed on substantial grounds, the normal practice is for the court to dismiss the petition and leave the creditor first to establish his claim in an action.  The main reason for this practice is the danger of abuse of the winding up procedure.  A party to a dispute should not be allowed to use the threat of a winding up petition as a means of forcing the company to pay a bona fide disputed debt.  This is a rule of practice rather than law and there is no doubt that the court retains a discretion to make a winding up order even though there is a dispute: see, for example, Brinds Ltd v Offshore Oil NL (1986) 2 BCC 98,916.  But the Board does not find it necessary to examine the limits of the discretion because they consider that there is no substantial dispute.

10.	The material for the alleged dispute is contained in allegations made in proceedings commenced by PCFL, acting by the Cayman liquidators, against Bank of America and affiliated companies, alleging them to be vicariously liable for a dishonest scheme by persons whom they employed in their Italian branch and persons in the Parmalat group to defraud PCFL and the noteholders.  It is alleged that the money raised by the notes was not truly for investment in Brazil, but to stave off the insolvency of the Parmalat group.  PCFL, Food and Dairy, by the officers then acting on its behalf, were parties to this scheme.  Therefore, says Mr Moss, the obligations under the put agreement were tainted with illegality and PCFL would have a defence against their enforcement.

11.	The Board does not accept this submission.  The demand for payment under the put agreement was made for the benefit of the note holders. Food and Dairy, though holding the legal title to the debt, have no substantial beneficial interest. The noteholders were not parties to the alleged fraud.  They were the persons defrauded. But that fraud is alleged to provide the company which was used as part of the mechanism to defraud them with a defence against their claim. The Board considers that this would be a bizarre result which cannot be the law.

12.	Finally, there is the question of whether the judge should have appointed the Cayman liquidators rather than the candidates proposed by other creditors. That is very much a matter of discretion and where, as in this case, the exercise of the discretion has been upheld by the local Court of Appeal, it would be very unusual for the Board to interfere.  In considering the views of creditors, the judge discounted the views of other members of the Parmalat group which held intra-group indebtedness. There is ample authority for doing so: see, for example, Re Falcon RJ Developments Ltd (1987) 3 BCC 146.  He gave some weight to the fact that the Cayman liquidators had been in office for nearly three years and the delay and expense which would be caused if new liquidators were to take over. These too were proper matters to be taken into account.

13.	The consideration to which Mr Moss says he did not give sufficient weight was the conflict of interest between the position of the Cayman liquidators as liquidators of Food and Dairy on the one hand and of PCFL on the other. It is not unusual for the same liquidators to be appointed to related companies, even though the dealings between them may throw up a conflict of interest. It avoids the expense of having different liquidators investigate the same transactions.  The attitude of the court has been that any conflicts of interest can be dealt with by the court (on the application of the liquidators) when they arise: see Re Arrows Ltd [1992] BCC 121; Re Maxwell Communications Corporation plc [1992]  BCC 372.

14.	In this case, however, Mr Moss said that the Cayman liquidators had shown that they could not be relied upon to bring conflicts of interest before the court.  He drew attention to a debt of US$30m owed by Food to PCFL, which was evidenced by a secured senior note.  The liquidators could not find the note. Its terms provided that it could be replaced, but only on the giving of an insured indemnity which PCFL could not provide. The liquidators then struck a bargain with themselves: Food agreed to issue a new note but in return for an agreement by PCFL to pay it 25% of the value.  The note was issued and sold to a third party for US$4.35m, of which PCFL took a quarter.  It used the money to pay expenses of the liquidation.

15.	Henderson J asked for an explanation of this transaction and was told that the advice of leading counsel in London had been sought. He had advised the liquidators that it was a commercial compromise into which they could enter if they thought it in the best interests of the creditors as a whole. They did.  Henderson J accepted this as an “adequate response” and said there was no need for further investigation.  The Court of Appeal did not deal specifically with this incident but held that the judge had made no error of principle.

16.	The Board accepts that Henderson J was entitled to regard the dealings over the US$30m note as insufficient to justify removal of the Cayman liquidators.  But they must admit to being troubled by the incident, which appears to have involved a plain conflict of interest, not merely between the liqudators in their different capacities, but even with the interests of the liquidators in their personal capacities in securing payment of their fees.  Mr Crystal QC, for the Cayman liquidators, told the Board that one of them assumed the role of PCFL and the other that of Food, and they bargained with each other.  This role playing does not seem to the Board an adequate way of dealing with the matter.  It would have been much better if the liquidators had sought the directions of the court. But Mr Crystal undertook to the Board that if it was thought desirable, the incident could be investigated. He had given a similar undertaking in the courts below.  On the other hand, the Board does not wish to put the parties to the expense of an investigation in which the creditors express no interest. They will therefore leave Mr Crystal’s undertaking to be considered on any application which may be made to the Cayman court.  They will humbly advise Her Majesty that the appeal should be dismissed with costs.