Pearson v Primeo Fund

Redemption of a company’s own shares ordinarily occurs when the shareholder’s status is surrendered and extinguished, not when the redemption price is paid. Articles may define that point, and a short contractual deferral of payment creates credit rather than preserving membership.

Where redemption was complete before winding up, the statutory regime for shares not yet redeemed cannot restore shareholder status. Where valuation and redemption were suspended, a redemption due during the suspension was postponed beyond commencement of winding up and did not receive that regime’s protection. Former members’ redemption claims remained provable, subject to statutory subordination.

Herald Fund SPC issued redeemable participating shares and invested the proceeds with Bernard L Madoff Investment Securities LLC. After Bernard Madoff’s fraud was exposed, Herald suspended calculation of its net asset value and payments on 12 December 2008. Herald was subsequently wound up, with the liquidation deemed to commence on 14 February 2013.

Primeo represented investors whose shares had been redeemed on 1 December 2008 but whose redemption proceeds remained unpaid. The additional liquidator appealed from Jones J’s judgment, which the Court of Appeal also accepted, that those investors had become creditors. Interveners represented investors whose redemption dates fell after the suspension or who requested redemption after it. The central issue was whether those investors obtained the protection and priority under section 37(7) of the Companies Law.

Lord Mance delivered the Board’s judgment. The appeal was dismissed as against Primeo. Declarations were made that Reichmuth and Natixis had no claims under section 37(7) of the Companies Law and ranked as ordinary members.

1. Meaning of redemption. Payment is not an inherent element of redemption or purchase. The essence of redemption is surrender and extinguishment of shareholder status. A short deferral of payment is a period of credit and does not preserve the shareholding. Section 37(3)(c) confirms that the articles may shape the manner and terms of redemption. Culross Global Spc Ltd v Strategic Turnaround Master Partnership Ltd [2010] UKPC 33 was distinguished because the articles there differed. Its recognition of contractual freedom was endorsed. The discussion in In re HIH Insurance Ltd (in liquidation) [2008] FAC 623 arose in a different context and could not replace examination of the relevant articles.
2. Section 37(7). The provision addresses shares which ought to have been redeemed or purchased before winding up but were not. It permits enforcement of the relevant terms and confers statutory priority. It does not reverse a redemption already completed or reconvert a former shareholder into a member. The provision also qualifies the strictness of section 125 of the Companies Law.
3. Primeo. Under Herald’s articles, the December and KYC Redeemers’ shares were redeemed on 1 December 2008. They therefore ceased to be members and became creditors for the redemption proceeds. Their claims were provable under section 139(1), subject to subordination under section 49(g). The winding-up principle that liabilities are ascertained at the commencement of winding up was applied, but the valuation underlying completed redemptions was not reopened. Fairfield Sentry Ltd v Migani [2014] UKPC 9 concerned redemption moneys already paid and did not decide the present issue.
4. Reichmuth. Article 19 suspended valuation and article 20(4) suspended the right to redeem until the suspension ended. Because the suspension continued until winding up, the Late Redeemers’ terms provided for redemption after commencement of winding up. Proviso (i) to section 37(7)(a) therefore excluded them from the statutory protection, leaving them ordinary members.
5. Natixis. The Later Redeemers could not satisfy proviso (i), since the suspension preceded their redemption requests. The Board left open whether those requests were independently invalid under article 20(4), because that question was unnecessary.
6. Priority observations. The Board treated section 49(g) as governing a former member’s claim for return of capital through redemption proceeds. Such a claimant ranked after creditors who were not formerly members but ahead of current members. The relative priority between those claims and claims under section 37(7)(b) was expressly left without final determination because it was unnecessary and had not received detailed submissions. The authorities in In re Anglesey Colliery Co, (1866) 1 Ch App 555, In re Consolidated Goldfields of New Zealand [1953] Ch 689 and In re Compania de Electricidad [1980] Ch 146 supported the treatment of former-member claims.

The parties were directed to make submissions on the precise form of the declarations and costs, if not agreed, within 14 days.

• Privy Council ([2017] UKPC 19): dismissed the additional liquidator’s appeal against Primeo and declared that Reichmuth and Natixis had no claims under section 37(7) of the Companies Law.
• Court of Appeal of the Cayman Islands: agreed with Jones J that Primeo’s shareholding had been redeemed before payment was suspended.
• Grand Court of the Cayman Islands: Jones J gave judgment for Primeo on 12 June 2015.