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.
3.
The first and second issues are about the interpretation of section 37
of the Cayman Companies Law (2007 Revision) in its statutory and historical
context. Section 37 permits a company to issue redeemable shares and regulates
the circumstances in which, and the manner in which, they may be redeemed. The
2007 Revision will be referred to as the Companies Law. The third issue is
about the common law, which in this respect is not suggested to be different as
between the Cayman Islands and England, and concerns the nature of the remedies
available to the company or to its liquidator for the recovery of a redemption
payment rendered unlawful by section 37.
4.
Cayman law (like the law of the UK) has always contained restrictions
upon the ability of a company to reduce its capital, primarily for the
protection of its creditors. Although originally to be found in judge-made law,
they are now almost completely statutory. The particular restriction in issue
on this appeal consists of a form of solvency test which must be satisfied by a
company if it is lawfully to pay for the redemption of shares out of capital.
It is to be found in section 37(6) of the Companies Law in the following form:
“(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.”
5.
The first issue is mainly a question of interpretation or application of
the phrase “its debts as they fall due in the ordinary course of business” in
section 37(6)(a). The question is whether generally that phrase is apt to
include the debts constituted by the redemption price payable to shareholders
who have exercised their right to redeem (“a redemption debt”). A subsidiary
question is whether in any event redemption debts were incurred by this Company
in the ordinary course of its business, as the judge held. It is common ground
that, if redemption debts are generally, or are in the context of this
Company’s business, within section 37(6)(a), then the Company was insolvent at
the material time. There is a factual dispute whether, if not, the Company had
other debts which rendered it insolvent within the meaning of section 37(6)(a).
The judge found it unnecessary to resolve that question and, for reasons which
will appear, so does the Board. This issue will be referred to as “the Solvency
Issue”.
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).
7.
The appellant liquidators also challenged the lawfulness of the
redemption payments made by the Company in this case by two alternative
submissions which do not involve reliance upon section 37(6)(a). For reasons
which will become apparent the Board has not found it necessary to address
those in detail. Since all three routes of challenge question the legality of
the redemption payments made, these issues will be referred to collectively as
“the Illegality Issue”.
8.
The third issue, which will be called “the Remedies Issue”, may be
summarised in this way. The Companies Law creates no express statutory cause of
action or other civil remedy against the recipient of an unlawful redemption
payment. There is only a criminal sanction against the company, its directors
and managers. It is not in dispute that the directors of a company who procure
the making of an unlawful redemption payment would be liable to the company for
breach of trust, and that a recipient with knowledge of the facts as to the
unlawfulness of the payment would be liable as a constructive trustee. The
question is whether a claim for the recovery of an unlawful redemption payment
may be pursued by the company or its liquidator against a recipient which
received the payment without knowledge of the facts giving rise to the
illegality, and in settlement (or part-settlement) of the debt constituted by
the Company’s obligation to pay the redemption price after a valid exercise of
the shareholder’s right to redeem, by means of a claim in unjust enrichment,
subject only to established defences, such as change of position.
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$0.001. Thus, an incoming investor
during that period would pay for the issue of shares an amount consisting
almost entirely of premium, and the payment to an outgoing investor on a
redemption day during that period would be similarly constituted.
11.
As a feeder fund, the Company’s ordinary business consisted of the issue
of shares, the transmission to the Master Fund of the proceeds of the issue,
the receipt from the Master Fund of payments necessary to fund redemptions, and
the payment out of redemption moneys to redeeming shareholders. The company had
no separate trading activities of its own.
12.
The timetable for redemption laid down by the Company’s articles may be
summarised as follows:
i)
A shareholder is required to give
30 days’ written notice of its wish to redeem, prior to a redemption day.
ii)
Redemption days were scheduled for
the first business day of each month.
iii)
The NAV per share was to be
assessed by the Administrator at the close of business on the day prior to the
first business day of each month.
iv)
On the redemption day redeeming
shareholders redeemed their shares at a price per share based on the NAV per
share of the relevant class of share. They ceased to be shareholders and became
creditors of the Company for that price on that day.
v)
Payment of the redemption price
was to be made by the Company within 14 business days of the redemption day.
13.
The conversion of the status of a redeeming investor from a shareholder
to a creditor on the redemption day, in advance of payment, was expressly laid
down by the articles, and the validity of that first stage in the redemption
process was affirmed by the Board in Pearson v Primeo Fund [2017] UKPC 19.
14.
By August 2008 the Respondent RMF Market Neutral Strategies (Master)
Limited (“RMF”) was a substantial investor in the Company’s US$ 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.
15.
The seismic shock to the derivatives markets which was triggered by the
collapse of Lehman Brothers in late September 2008 had a catastrophic effect
upon the investment strategy, and therefore the asset value, of the Master
Fund. This meant that, in reality (and as later calculated by the Master Fund’s
liquidators), the Master Fund had a net asset value of minus US$69m odd by the
end of November 2008, having lost US$76m odd in October and US$173m odd in
November.
16.
The manager of the Master Fund, and of the Company, was Dynamic
Decisions Capital Management Limited which was itself run by a Mr Alberto
Micalizzi, who was also a director of the Master Fund and of the Company. It
appears that, under his supervision, the Master Fund concealed its catastrophic
losses by investments in worthless bonds (the Asseterra bonds) which were
attributed a value in the Master Fund’s books sufficient both to conceal its
insolvency and to portray to the world, and in particular to those responsible
for the calculation of the NAV, a continuing state of profitability.
17.
Meanwhile, RMF and six other investors decided to redeem shares in the
Company, giving redemption notices effective on the 1 December 2008. Of its
693,630.656 ordinary US$ shares, RMF gave notice to redeem 87,466.106 on 29
October and 437,330.534 on 31 October 2008, both effective on the 1 December
redemption day. This left RMF holding 168,834.016 shares thereafter, which it
unsuccessfully sought to redeem in January 2009.
18.
Based upon the false information provided by or on behalf of the Master
Fund, the NAV per US$ share for the December redemption date was calculated at
US$118.880. Accordingly RMF became a creditor of the Company on 1 December 2008
in respect of its two redemption notices in the aggregate sum of US$62,387,824.
19.
The Company had no cash of its own at that time. Nonetheless those
managing the Master Fund managed to scrape together sufficient cash, made
available first on 8 January 2009, to enable the Company to make part payment
to the investors who redeemed in December. In summary, RMF was paid (between 12
January and 6 February 2009) US$23m odd, amounting to some 36.89% of what it
was owed. Of the other six investors, the aggregate of whose redeemed shares
was much less than that of RMF, three were paid in full, but three were paid
nothing.
20.
The Company suspended its redemptions shortly thereafter and in March
2009 was placed in official liquidation. By these proceedings the liquidators
seek, through the Company, to recover the whole of the US$23m odd paid in
January 2009 to RMF, on the basis that those redemption payments were rendered
unlawful by section 37, or alternatively section 34, of the Companies Law.
21.
Since the Company had no assets other than its investment in the Master
Fund, it followed that it had in truth a negative asset value by 1 December
2008, and at all times thereafter. It was also common ground that, if the debts
to redeeming shareholders are to be taken into account, the Company failed the
solvency test imposed by section 37(6)(a) both on 1 December 2008, and when the
part payments of the Company’s redemption debts to RMF were made. The Company
submits (and asserted before the judge) that it also owed debts to creditors
other than redeeming shareholders which it was from December 2008 onwards
unable to pay in the ordinary course of business. The judge found it
unnecessary to reach any conclusions about that.
The Proceedings
22.
RMF initiated this litigation with a claim for a negative declaration (ie
that it was not liable to repay the US$23m) in February 2011. The Company
cross-claimed for recovery of that sum, on the alternative bases that (1) it
was the aggregate of unlawful redemption payments, recoverable by way of unjust
enrichment or constructive trust and (2) that the payments constituted
fraudulent preferences.
23.
In his judgment handed down on 17 November 2014 (after a trial of
preliminary issues in September) the Chief Justice held that:
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.
24.
In the circumstances, the judge found it unnecessary to decide any part
of the remedies issue. Indeed, the facts relevant to any claim based in
constructive trust were neither agreed nor determined as part of the
preliminary issues.
25.
The Company’s liquidators have not sought to appeal the judge’s
rejection of the claim based on fraudulent preference. Apart from that, the
Company sought to pursue its unsuccessful claims in full by way of appeal.
26.
By its judgment handed down on 20 November 2015 the Court of Appeal (Mr
John Martin, Sir Richard Field and Sir Alan Moses JJA) dismissed the Company’s
appeal, in substance agreeing with the judge’s interpretation of sections 34
and 37, albeit partly for different reasons. Like the judge, the Court of
Appeal found it unnecessary to address any issues about remedy. Nor does it
appear that the Court of Appeal addressed RMF’s challenge, raised by
Respondent’s notice, to the judge’s finding of insolvency within the meaning of
section 37(6)(a).
The Solvency Issue
27.
It is convenient to take this issue first since, if the Judge’s finding
that the Company failed the section 37(6)(a) solvency test was unsound, this
undermines the claim for recovery based upon the alleged unlawfulness of the
redemption payments.
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.
29.
The insolvency test laid down by section 37(6)(a) is quoted in full at
the beginning of this judgment. The main submission made for RMF was that
“debts” should be held, on a purposive construction, to exclude debts due to
former shareholders. This, it was said, is because section 37(6) is part of a
statutory buttress for the maintenance of capital, and maintenance of capital
is something designed for the protection, not of contributories, but of
ordinary creditors, so that it would be perverse to read section 37(6) as
designed to ensure that former shareholders could not be paid on redemption,
merely because of a shortfall available to pay all redeeming shareholders in
full. Accordingly, the test should address only the question whether, after the
proposed payment, the company would be able to pay its ordinary creditors
(principally trade and expense creditors), and since this Company was not
proved to have had any such creditors at the material time, it could not be
said to have failed this solvency test.
30.
In the Board’s judgment this submission should be rejected, for the
following reasons. First, although there is force in the proposition that the
underlying purpose of any statutory or common law provisions or principles for
the maintenance of capital is to protect ordinary creditors rather than
shareholders or former shareholders, the protection afforded by section 37(6)
would not be effective if debts still owing to former shareholders who had
redeemed could not be paid after the proposed payment. This is because those
creditors would, pending any liquidation, be competing for payment with the
company’s “ordinary” creditors, and the existence of those competing debts
would hamper the ability of the company to pay its ordinary creditors in full
as and when their debts became due. It is in that context nothing to the point
that section 49 of the Companies Law postpones claims of members of a company
to the claims of ordinary unsecured creditors, precisely because it only
operates in the context of a liquidation. Until then, former shareholders with
redemption debts are as much entitled to exercise creditors’ remedies as any
other creditors.
31.
Secondly, there is no textual basis within section 37(6) on which this
purposive restriction can be founded. The words “in the ordinary course of
business” in section 37(6)(a) do not operate so as to disqualify some debts
rather than others. They are words which amplify the meaning of the phrase “as
they fall due”. The question whether a company is able “to pay its debts as
they fall due” is now a well-known test for commercial rather than balance
sheet solvency, and requires that regard be had to the company’s forthcoming
liabilities, and to its likely forthcoming resources with which to discharge
them. It would be an entirely artificial exercise in the context of a company
with substantial redemption liabilities to former shareholders who have, in
respect of their redeemed shares, become creditors, to leave the debts owed to
them out of any test for commercial solvency.
32.
Thirdly, as the judge found, the payment of debts owed to redeeming
creditors lay right at the heart of the ordinary business of this Company. It
is an open-ended investment company. Thus, even if the phrase “in the ordinary
course of business” qualified the type of debt to be taken into account,
payment of redeeming shareholders fell squarely within this Company’s ordinary
course of business.
33.
The Board therefore approaches the larger and more difficult illegality
issue on the basis that the judge was right to find that the Company could not
satisfy the section 37(6) solvency test when it made the payments now claimed
to have been unlawful.
The Illegality Issue
34.
It is convenient at this point to set out in full the provisions of the
Companies Law which bear in any way upon this issue. As consolidated in 2007
they represent provisions introduced in 1963, 1987 and 1989. It cannot be
doubted that their clarity suffers to a substantial extent from the piecemeal
way in which they have come together over time.
“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.
37.
The main arguments that there are sufficient pointers to the contrary,
advanced for RMF, have thus far persuaded both the courts below. They may
conveniently be divided into three classes, namely:
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).
39.
While attractively argued by Mr David Chivers QC for RMF, the Board has
not been persuaded that this analysis is correct. Neither on its own nor when
aggregated with the other arguments to which reference will be made below is it
sufficient to displace the clear meaning and effect of subsection (6), read
with and interpreted by reference to subsection (5)(a) and (b). The reasons
follow.
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.
41.
Thirdly, the third gateway in subsection (5)(e), namely “the manner
provided for in subsection (5)” could, had this been intended, easily have
referred also to subsection (6), or subsection (6) could itself have been
framed so as to be expressly confined to payments sought to be achieved by
using the subsection (5) gateway. In short, subsection (6) could have been, but
is not, expressed to be parasitic upon subsection (5). It is only if that
parasitic relationship between the two subsections is assumed, rather than
treated as the issue to be determined, that the alternative construction,
advanced by RMF and favoured by Lord Hodge, gains strength.
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.
51.
Lord Hodge criticises this analysis, in particular the reference to
Professor Gower’s report, as a misuse of UK legislative history and policy for
the interpretation of the undoubtedly different provisions of the Cayman
Company Law. But when Professor Gower reported in 1980 the statutory provisions
regulating the issue and redemption of shares were substantially the same in both
jurisdictions, and the risks arising from the extension of the redemption of
shares from preference to equity shares were therefore also the same. Professor
Gower was doing no more than point out the logical consequences of providing
for the redemption of equity shares upon the maintenance of capital.
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).
57.
For the reasons already given, the Board has concluded that the payments
in issue in these proceedings were unlawful payments, because they were capital
payments which triggered the solvency test in section 37(6), with which the
Company was at the time unable to comply.
The Remedy Issue
58.
If, as the Board concludes, payment of the redemption proceeds was
unlawful by virtue of section 37(6)(a) of the Companies Law, the next question
is whether they are recoverable by the Company. The liquidators’ primary case
is that they are recoverable at common law on the ground of unjust enrichment.
Alternatively they submit that they are recoverable in equity on the ground
that the redeeming shareholder is accountable as a constructive trustee on the
footing of knowing receipt. Conceptually these two proposed bases of recovery
are very different. A common law liability in restitution depends on the
defendant having been unjustly enriched by the receipt. The liability of a
constructive trustee is essentially a custodial liability comparable to that of
an express trustee, which is imposed on him because he has sufficient knowledge
to affect his conscience. The difference is of some practical importance in the
present case. If the payments are recoverable only on the footing of knowing
receipt, the company must establish that the redeeming shareholder had
sufficient knowledge of the facts which made the payment unlawful. But
knowledge of the facts giving rise to a right of restitution is generally
irrelevant.
59.
A number of uncontroversial points should be made by way of
introduction. First, section 37(6)(a) of the Companies Law prohibits a payment
out of capital of the redemption proceeds, but does not prohibit the redemption
itself. It is, as the Board has observed, common ground that the redemption
itself was lawful and effective. It follows that on the relevant Redemption
Days the transaction was executed. The redeemed shares were thereupon cancelled
and the Company’s issued share capital was reduced by their nominal value: see
the Companies Law, section 37(3)(g). Secondly, there is nothing in the
Companies Law to prevent the redemption proceeds from being payable at some
time after the Redemption Day. Under the terms of the Offering Memorandum for
the shares in question, the redemption proceeds were payable within 14 days. It
follows, as the parties agree, that on the Redemption Day, the Company came
under a liability to pay the redemption proceeds by the due date. The debt was
incurred by the Company in consideration of the cancellation of the shares, and
the payment was in consideration of the discharge of that debt. Thirdly, the
prohibition in section 37(6)(a) is directed at the Company, ie at the directors
by whom it acts. Fulfilment of the conditions imposed by section 37(6)(a) is a
matter of internal administration. It is a breach of trust on the part of the
directors to authorise the payment of the redemption proceeds if the conditions
in section 37(6)(a) are not satisfied.
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).
61.
The present case is, however, rather different. The basis for the
payment of the redemption proceeds is that the shares have been redeemed and
cancelled and a valid debt is owed by the Company. That basis has not failed.
On the contrary, the redemption was lawful. The shares have been duly cancelled
and the nominal share capital of the company adjusted accordingly. The Company’s
payment of part of the proceeds discharged pro tanto the lawful debt
that arose in consequence. It is accepted by the liquidators that if it had not
been paid, it could have been proved as a debt in the liquidation of the
company. It follows that although the Company acted illegally in making the
payment, upon receipt it discharged a valid legal entitlement of the redeeming
shareholder.
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.
64.
The Board concludes that the Company is not entitled to recover the
payments at common law on the ground of unjust enrichment. The reality of the
present case is that a payment has been received from a company for lawful
consideration but it has been authorised by its directors in breach of their
duties to the Company. This is the proper domain of the law of constructive
trusts. Not even in return for good consideration can a person retain assets
which he knows to have been paid to him in breach of the statutory duties of
the directors. But knowledge, especially in relation to apparently routine
transactions where lawfulness depends on the internal affairs of the Company,
may be hard to prove.
65.
The Board will humbly advise Her Majesty that this appeal must be
allowed, and a declaration made that the payments of redemption proceeds
pursuant to the respondents’ redemption requests dated 29 and 31 October 2008
were unlawful by virtue of section 37(6)(a) of the Companies Law. The courts
below did not deal with the right of recovery because they considered that the
payments were lawful. Accordingly, there are no findings of fact to found the
claim to make the redeeming shareholder accountable on the footing of knowing
receipt. The matter must therefore be remitted to the Grand Court to determine
whether the respondent is accountable for those payments as a constructive
trustee.
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
79.
I would therefore have dismissed the appeal.
