DD Growth Premium 2X Fund v RMF Market Neutral Strategies (Master) Limited

For commercial solvency purposes, debts owed to former shareholders after valid redemption are included among debts falling due. In an open-ended investment company, paying redeeming shareholders may form part of its ordinary business. A payment from a share premium account towards redemption premium is a deemed payment out of capital under the Companies Law, and is subject to the statutory solvency test. However, where redemption was valid and created a lawful debt, payment of the redemption proceeds is not recoverable in unjust enrichment because the recipient received payment of a legal entitlement. Recovery may instead depend on knowing receipt, requiring sufficient knowledge of the facts making the payment unlawful.

DD Growth Premium 2X Fund v RMF Market Neutral Strategies (Master) Limited concerned a liquidators’ claim to recover approximately US$23 million paid after valid redemption requests. The Company alleged that the payments were unlawful under sections 34 and 37 of the Companies Law and were recoverable in restitution or equity.

The Chief Justice held that the payments were lawful, although the Company was insolvent. The Cayman Islands Court of Appeal dismissed the appeal on 20 November 2015. The Privy Council considered whether redemption debts counted in the solvency test, whether share-premium payments were payments out of capital, and whether an innocent recipient could be liable to repay them.

Majority

1. Appeal allowed. Lord Sumption and Lord Briggs, with whom Lord Carnwath agreed, held that the payments were unlawful under section 37(6)(a) of the Companies Law. A declaration was made, and the matter was remitted to the Grand Court to determine whether RMF was accountable as a constructive trustee.
2. The phrase “debts as they fall due in the ordinary course of business” imposes a commercial-solvency test. It requires consideration of forthcoming liabilities and likely forthcoming resources. Redemption debts owed to former shareholders must be included because, before liquidation, those creditors compete with ordinary creditors and may exercise creditors’ remedies. Payment to redeeming shareholders was also within the Company’s ordinary business. Section 49 postponed members’ claims only in a liquidation.
3. Section 37(5)(a) and (b) defined “payment out of capital” broadly. A payment from the share premium account towards redemption premium was made in respect of redemption otherwise than out of profits or the proceeds of a fresh issue. It was therefore deemed to be a payment out of capital and was subject to section 37(6)(a). Section 37(3)(e) did not create an exemption, and section 34’s treatment of distributions and dividends did not displace the detailed regime in section 37. The legislative history supported that construction.
4. The alternative arguments failed. A failure to fund the nominal amount lawfully did not necessarily affect the premium payment. Once redemption was valid, the shares were cancelled and the redeeming shareholder became a creditor. Payment of the premium was therefore neither a dividend nor a distribution.
5. The payment was not recoverable in unjust enrichment. The valid redemption created a lawful debt, and the payment discharged that debt pro tanto. The basis of the payment had not failed. Authorities concerning recovery of money paid for an illegal purpose could not create a restitutionary right where none otherwise existed. The possible route was knowing receipt in constructive trust, for which sufficient knowledge of the facts constituting the illegality was required.

Dissent

Lord Hodge, with whom Lord Mance agreed, would have dismissed the appeal on the illegality issue. He considered that the legislative history preserved separate gateways for redemption premium and nominal capital, so that payment of premium from the share premium account was not subject to section 37(6). He agreed with the majority on solvency and on the remedy issue if the payment had been illegal.

• Privy Council: By [2017] UKPC 36, the appeal was allowed. The payments were declared unlawful and the remedy issue was remitted to the Grand Court of the Cayman Islands.
• Cayman Islands Court of Appeal: Dismissed the Company’s appeal on 20 November 2015, agreeing in substance with the Chief Justice’s interpretation of sections 34 and 37.
• Grand Court of the Cayman Islands: On 17 November 2014, held that the payments were lawful, although the Company was insolvent, and rejected the fraudulent-preference claim.