HSBC Bank Middle East (Representative of Class B Investor Shareholders) & Ors v. Clarke (Joint Liquidator of the Oracle Fund Limited) & Ors (Bahamas) [2006] UKPC 31 (21 June 2006)

Privy Council Appeal No 60 of 2004

(1) HSBC Bank Middle East
(Representative of Class B Investor Shareholders)
(2) HSBC Investment Bank PLC
(Representative of Class B Investor Shareholders)
(3) HSBC Private Banking Nominees (Jersey) Limited
(Representative of Class B Investor Shareholders)
(4) Hunter Douglas Holdings Limited
(Representative of Class B Investor Shareholders)
(5) Lazamar Foundation
Representative of Class B Investor Shareholders)
(6) Montsol Investments Inc
(Representative of Class B Investor Shareholders)	Appellants
v.
(1) Paul Clarke
(Joint Liquidator of the Oracle Fund Limited)
(2) Maria Ferere
(Joint Liquidator of the Oracle Fund Limited)
(3) Cantrade Privatbank AG, 
now named Ehinger & Armand Von Ernst AG
(Representatives of Class A Investor Shareholders)	Respondents

FROM

THE COURT OF APPEAL OF
THE COMMONWEALTH OF THE BAHAMAS
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JUDGMENT OF THE LORDS OF THE JUDICIAL 
COMMITTEE OF THE PRIVY COUNCIL

Delivered the 21st June 2006

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Present at the hearing:-

	Lord Nicholls of Birkenhead
	Lord Steyn
	Lord Hutton
	Lord Walker of Gestingthorpe
	Sir Martin Nourse
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	[Delivered by Lord Walker of Gestingthorpe]		

1.	Oracle Fund Ltd (“the company”) was incorporated on 3 May 1995 under the International Business Companies Act 1989 (No. 2 of 1990 – “IBCA”).  It was licensed as a mutual fund under the Mutual Funds Act 1995 (No. 6 of 1995 – “MFA”), which came into force on 1 March 1995.  It did business as a mutual fund until July 1999 when it was suspended by the Securities Board.  It was put into voluntary liquidation on 12 July 2000.  This was overtaken by winding-up by the court under an order of the Supreme Court made on 11 September 2000.

2.	On 16 May 2001 the joint liquidators took out a summons asking the court to determine various questions, the first being as to the rights attaching to the various classes of shares issued by the company.  Representative holders of Class A Investor Shares and Class B Investor Shares were added as parties to argue these questions.  On 2 October 2002 Small J decided the first issue in a way which (in view of the state of the company’s finances) was favourable to the holders of Class B Investor Shares.  The other issues raised by the summons were adjourned.  On 27 October 2003 the Court of Appeal (Churaman, Ganpatsingh and Ibrahim JJA) unanimously allowed an appeal by holders of Class A Investment Shares and decided that both classes of shares ranked pari passu in the winding-up.  The representative holders of Class B Investor Shares now appeal to the Board.

3.	This appeal does not turn solely on fine questions of construction of the company’s constitutional documents.  There certainly are some questions of construction to be decided.  But the Board has (with the ready assistance of counsel) had to hack their way through some tangled thickets in order to identify what are the relevant questions.  It is common ground that the company’s constitutional documents have been in disarray from the first.  When the problems were finally recognised, insufficient thought was given as to how to solve them.

4.	It is therefore necessary to set out the facts in some detail.  But there are severe limits on the use of evidence of surrounding circumstances as an aid to the construction of a company’s constitutional documents: see Bratton Seymour Service Co Ltd v Oxborough  [1992] BCLC 693, in which Steyn LJ said at p698:

“I will readily accept that the law should not adopt a black-letter approach.  It is possible to imply a term purely from the language of the document itself: a purely constructional implication is not precluded.  But it is quite another matter to seek to imply a term into articles of association from extrinsic circumstances.

“Here, the company puts forward an implication to be derived not from the language of the articles of association but purely from extrinsic circumstances.  That, in my judgment, is a type of implication which, as a matter of law, can never succeed in the case of articles of association.  After all, if it were permitted, it would involve the position that the different implications would notionally be possible between the company and different subscribers.”

Similarly, Sir Christopher Slade observed at p699:

“I accept that, in construing the articles of association of a company, evidence of surrounding circumstances may be admissible for the limited purpose of identifying persons, places or other subject matter referred to therein.  [Counsel], however, has not invoked extrinsic evidence of surrounding circumstances in the present case for that limited purpose.  He has sought to invoke it for the purpose of imposing additional financial obligations on the members far beyond those which the language of the articles of association of the company, read fairly on its own, would impose on them, because, he says, such an implication is required to give the articles business efficacy.  No authority has been cited to us which begins to support the proposition that extrinsic evidence is admissible for that wide purpose in construing the statutory contract created by the articles of association of a company.  In my judgment, the admission of such evidence for such purpose would be quite contrary to the principles governing this type of statutory contract.”

5.	The same principle must apply even more strongly to a company’s memorandum of association.  The factual summary which follows provides at least a partial explanation of how the problems facing the liquidators have arisen.  But the surrounding circumstances can assist on issues of construction only to the very limited extent indicated in Bratton Seymour Service Co Ltd v Oxborough.

The incorporation of the company

6.	The persons who promoted the company had originally intended its mutual fund business to be that of a company (also called Oracle Fund Ltd) incorporated in the Cayman Islands on 22 February 1993.  The plan was for this company, which already had an established business, to become an international business company under Part VIII of ICBA (Continuation).  But (as Ibrahim JA records in paragraph 19 of his judgment) the promoters made the mistake of deregistering the Cayman company before making their application to the Registrar General in The Bahamas, and the application was refused for that reason.  Instead the company was incorporated as a new company, and the assets of the Cayman company were in due course transferred to it.

7.	That is the explanation of why Cantrade Privatbank AG (now, under its new name of Ehinger & Armand von Ernst AG, one of the representative holders of Class A Investor Shares) is shown (on a printout supplied to the Board by the liquidators) as having become a shareholder on 1 November 1993, long before the company was incorporated.  It is also the explanation of why a table of net asset values (NAVs) of the company’s Class A Investor Shares begins (at $100) in March 1993.  It may also be the explanation of the egregious errors, mentioned below, in a succession of offering documents prepared in order to meet the requirements of section 3 (9) of MFA and Regulation 17 of the Mutual Funds Regulations (“MFR”).  The first of these offering documents was prepared in March 1995 when the plan was for the Cayman company to continue by registration under ICBA.  But the Board has not seen any company documents or accounts relating to the Cayman company.  Moreover for what it is worth (which unfortunately may not be very much) the secretary of the company stated in a fax sent on 12 February 1997 that according to the company’s memorandum of association its capital was “the same as it was in Cayman.”

8.	The factual summary which follows must be preceded by a word of caution.  The Class B Investor Shares referred to in the orders of Small J are not the same as the Class B Ordinary Shares referred to in the original memorandum and articles.  Arguably they are the same as, or closely similar replacements for, the Class C Redeemable Non-Voting Preference Shares referred to in the original memorandum and articles (with the original Class B Ordinary Shares coming to be called Management Shares).  That is an important element (although by no means the only element) in the corporate disarray already referred to.  In what follows their Lordships will (except in direct verbatim quotations) refer to the shares mentioned in the orders as A Investor Shares and B Investor Shares, and to the non-voting shares referred to in the original memorandum and articles as A Preference Shares and C Preference Shares, without any implicit adjudication as to the identity or non-identity of the shares in question.

9.	The company’s memorandum (in its original form) contained the following provisions that are material:

“CURRENCY	

5.	Shares in the Company shall be issued in the currency of the United States of America.

6.	The authorised capital of the Company is Nine Hundred Thousand Dollars (US dollars $900,000) 	divided into 9,000,000 Shares of $0.10 per share.

CLASSES OF SHARES

7.	The Shares shall be divided into 4,495,000 Class “A” Redeemable Non-Voting Preference Shares of a nominal or par value of US$0.10 each, 10,000 Class “B” Ordinary Shares of a nominal or par value of US$0.10 each and 4,495,000 Class “C” Redeemable Non-Voting Preference Shares of a nominal or par value of US$0.10 each provided always that subject to provisions of The International Business Companies Act 1989 (as amended) and the Articles of Association the Company shall have power to redeem or purchase any or all of such shares and to sub-divide or consolidate the said shares or any of them and to issue all or any part of its capital whether original, redeemed, increased or reduced with or without any preference, priority or special privilege or subject to any postponement of rights or to any conditions or restrictions whatsoever and so that unless the conditions of issue shall otherwise expressly provide every issue of shares whether stated to be Ordinary Preference or otherwise shall be subject to the powers on the part of the company herein before provided.

DESIGNATIONS, POWERS, PREFERENCES, ETC OF SHARES

8.	The designations, powers, preferences, rights, qualifications, limitations and restrictions of each Class and Series of Shares that the Company is authorised to issue shall be fixed by resolution of directors.

VARIATION OF CLASS RIGHTS

10.	If at any time the authorised capital is divided into different Classes or Series of Shares, the rights attached to any Class or Series (unless otherwise provided by the terms of issue of the Shares of that Class or Series) may, whether or not the Company is being wound up, be varied with the consent in writing of the holders of not less than three-fourths of the issued Shares of that Class or Series and of the holders of not less than three-fourths of the issued Shares of any other Class or Series of Shares which may be affected by such variation.

The rights conferred upon the holders of the Shares of any Class issued with preferred or other rights shall not, unless otherwise expressly provided by the terms of issue of the Shares of that Class, be deemed to be varied by the creation or issue of further Shares ranking pari passu therewith.”

10.	These paragraphs of the memorandum accord with and echo section 12(1)(e) to (h) of ICBA which require the memorandum of a company registered under ICBA to include—

“(e) the currency in which shares in the company shall be issued;

(f) a statement of the authorised capital of the company setting forth the aggregate of the par value that the company is authorised to issue and the amount, if any, to be represented by shares without par value that the company is authorised to issue; 

(g) a statement of the number of classes and series of shares, the number of shares of each such class and series and the par value of shares with par value and that the shares may be without par value if this is the case;

(h) a statement of the designations, powers, preferences and rights, and the qualifications, limitations or restrictions of each class and series of shares that the company is authorised to issue, unless the directors are to be authorised to fix any such designations, powers, preferences, rights, qualifications, and in that case, an express grant of such authority as may be desired to grant to the directors to fix by resolution any such designations, powers, preferences, rights, qualifications, limitations and restrictions that have not been fixed by the Memorandum.”

Paragraph 8 of the memorandum was clearly taking advantage of the latter part of section 12 (1)(h).

11.	It is convenient to notice at this point some other relevant provisions of ICBA.  Sections 12(4) and 13(3) provide (in relation to a company’s memorandum and articles respectively) that they are (when registered) to bind the company and its members as if each member had covenanted to observe their provisions.  Section 17(1) provides that subject to any limitation in its memorandum or articles, a company incorporated under ICBA may amend its memorandum or articles by a resolution of its members or (where permitted by the memorandum or articles or by ICBA itself) by a resolution of its directors.  Any such amendment is to be registered with the Registrar and to take effect from the date of registration.  Section 33 authorises a company incorporated under ICBA, subject to any limitations in its memorandum or articles, to redeem or otherwise acquire its own shares, but only out of surplus (as defined in section 2(1) of ICBA) or in exchange for newly issued shares of equal value.  Section 33(2) contains further conditions for maintaining the solvency of a company which wishes to redeem any of its shares.

12.	The company’s articles contained a number of provisions about share rights.  In argument attention has focused almost exclusively on article 101, paragraph (a) of which is in the following terms:

“(i) If the Company shall be wound up the liquidator shall apply the assets of the Company in such a manner and order as he thinks fit in satisfaction of creditors’ claims.  

 (ii) The assets available for distribution among the holders shall be applied in the following priority:

	(1)	First in payment pari passu to the holders of the nominal amount of the Class ‘C’ Shares, Class ‘A’ Shares and Class ‘B’ Shares held by them; 
	(2)	Second in payment pari passu to the holders of Class ‘C’ Shares of the premiums paid on the issue of the Class ‘C’ Shares and all accrued but unpaid dividends in respect of the Class ‘C’ Shares; and

(3)	Thirdly any remaining asset shall be distributed pari passu among the holders of Class ‘A’ Shares.”

13.	Article 101 did not however stand alone.  The provisions of article 2 reproduced (completely correctly) paragraphs 6 and 7 of the memorandum, and articles 9 to 16 set out (in a way that was consistent with the memorandum) the rights attached to A Preference Shares, B Ordinary Shares and C Preference Shares respectively.  Article 77 (Dividends) provided in paragraph (c) that dividends might be declared on one or more classes of shares “provided however that no dividends shall be payable upon the Class ‘A’ Shares or the Class ‘B’ Shares unless and until all amounts due and payable in respect of the fixed cumulative dividend on the Class ‘C’ Shares (pursuant to Regulation 9(c) of these Articles) have been paid.”  The reference to article 9(c) appears to be an error for article 14(c).  Article 14(c) provided for the C Preference Shares to carry a fixed cumulative dividend of 8% per annum on their par value plus any premium (that is, under article 14(a), $100 in all).  It is also noteworthy that by article 15 C Preference Shares could be redeemed (for $100 plus any accrued dividends, described as interest) after two years, and if not redeemed were to be converted into an appropriate number of A Preference Shares (using the current NAV calculated under article 9).

The March 1995 offering letter 

14.	This document was prepared, as already noted, some time before the company was eventually incorporated.  (It is sometimes also referred to as the private placement memorandum or PPM, but the term ‘offering letter’ is preferable to avoid any risk of confusion with the memorandum of association.)  The very first sentence of the narrative part of the offering letter (under the heading ‘Organisation’) was rapidly falsified by events:

“The Fund was originally incorporated in the Cayman Islands on 22 February 1993, as an exempted company, and subsequently continued in the Bahamas in March 1995.”

It went on to describe (under the heading ‘The Offering’) how what it called “Class A Investor Shares” had initially (in March 1993) been offered at $100 per share and continued to be offered at NAV on set trading days.  It stated that the Fund also offered “Class B Investor Shares” at $100 per share, these shares carrying “a fixed cumulative preferential dividend at a per annum rate subject to negotiation.”  It also stated that Class A or Class B Shares might also be offered denominated in Swiss francs.

15.	Other relevant headings in the offering letter were ‘Redemption and Conversion’, ‘Net Asset Value per Share’, ‘Constitution of the Fund’ and ‘Share Capital’.  These parts of the letter were intended to meet the company’s statutory obligations under section 3(9) of MFA by describing the company’s equity interests (as defined in section 2(1)) with the details prescribed by the MFR.  But in some important respects the details given were inconsistent with what was in the company’s memorandum and articles.  The most important areas of inconsistency were as follows:

	(1) The amount of the company’s capital was stated in the 		offering letter as consisting of five million shares of $0.01 each – 	a total of only $50,000. 

	(2) The par value of the shares was stated as $0.01 each (not 	$0.10 as in the memorandum and articles) so that the initial share 	premium was $99.99 (not $99.90). 

	(3) The designation of the classes of shares, as stated in the 	offering letter, was “2,499,900 Class ‘A’ Investor Shares, 	2,499,900 Class ‘B’ Investor Shares, and 200 Management 	Shares.”

On these points the offering letter contradicted both the memorandum and the articles.  Except for the designation of the shares, the letter correctly reproduced what was said in the articles about the B Investor Shares’ cumulative preferential dividend and automatic conversion if unredeemed after two years.  There were some other minor inconsistencies in the offering letter (for instance, a misleadingly abbreviated version of the definition of NAV) but nothing turns on that.  The offering letter’s only reference to winding-up was under the heading ‘Suspension of Trading’:

“It is the present intention of the Board that if the Net Asset Value per Class ‘A’ Share as of the close of business on any trading day decreases to $110 per share or less, the Fund will close out all positions and consider seeking the Management Shareholder’s approval of the dissolution and winding-up of the Fund.”

In particular, there was no reference to article 101 or its effect (although there was, under the heading ‘Constitution of the Fund’, a general reference to the memorandum and articles).

The first board meeting

16.	The company’s first board meeting was held on 4 May 1995, the day after its incorporation.  Present at it were the two directors, Mr Barry Herman and Mrs Rhonda McDeigan, who had been appointed by the subscribers to the memorandum and articles.  Full minutes of the meeting were prepared by Mrs McDeigan and signed by both directors.  They record that Mrs McDeigan ‘displayed’ the company’s memorandum and articles, its certificate of incorporation and the appointment of the first directors.  There is no indication that the memorandum and articles were discussed.  The minutes record that later in the meeting,

“The Chairman then stated that the Company had been formed to engage in the purchase of debt instruments from companies whose principle assets are tax sales certificate (‘TSCs’).  TSC represents a first lien on real property for unpaid real estate taxes and other assessments.  The aim of the fund is to obtain rates of return on Investment Interests.  Following extensive discussion, and upon motion duly made, seconded and unanimously carried, it was:

RESOLVED, that the private placement memorandum, substantially in the form presented to this Meeting, be, and the same hereby is, approved and accepted in all respects as the Private Placement Memorandum of the Company notwithstanding the date or jurisdiction of incorporation of the Company.”

There were other resolutions, including a resolution to issue (to a management nominee company called Patina Ltd) what was described as one Class ‘B’ Ordinary Share.  

17.	It is not apparent what changes the board expected to be made in the offering letter presented to them, but in any event it was sent out with the inconsistencies already noted, and subsequent versions of it (the next two dated 1 June 1995 and 1 December 1995) repeated the same inconsistencies.  All these offering letters had annexed to them application forms which referred to Class ‘A’ and Class ‘B’ Shares without stating their par value.  Similarly the standard acknowledgement letter used on behalf of the company did not refer to the par value of the shares applied for.  The only share certificate in evidence, that issued to Patina Ltd, states its par value as $0.10.  The company’s audited accounts for the years ending 31 December 1995 and 1996 (signed by Coopers & Lybrand on 21 November 1997, that is after the important resolution of 21 February 1997 mentioned below) states the company’s capital as in the memorandum and articles.

18.	Their Lordships have had to consider the legal effect (if any) on the company’s constitutional documents of the directors’ approval, at the board meeting on 4 May 1995, of the offering letter ‘substantially in the form presented to [the] meeting.’  The directors had power (under para 8 of the memorandum) to make a resolution fixing the rights and preferences of the different classes of shares, and also had power (under section 17 of ICBA and paragraph 12 of the memorandum) to alter the memorandum (subject to the restriction in paragraph 10 as to the alteration of class rights).  But there is nothing whatever in the minutes of the board meeting, or in the surrounding circumstances so far as relevant, to suggest that the directors intended to do anything of the sort.  The memorandum and articles were simply ‘displayed.’  The inconsistencies in the offering letter were simply blunders.  No doubt they had the effect that successive versions of the offering letter did not comply with section 3(9) of MFA, and possibly shareholders might (if they had acted promptly) have had a remedy for any material misrepresentation.  But their Lordships are satisfied that they did not have the effect of altering the company’s constitutional documents.

19.	Nor did they produce the nightmare scenario (which counsel on both sides agreed to be arguable, though neither put it in the forefront of his submissions) that no A Investor Shares or B Investor Shares were ever validly issued.  It is reasonably clear that ‘Class B Investor Shares’ was a misdescription (originating in the March 1995 offering letter, and then generally adopted by those administering the company, though not apparently by its auditors) for what the memorandum and articles referred to as ‘Class C Redeemable Non-Voting Preference Shares.’  As regards the par value of the shares, it is noteworthy that the application forms accompanying the offering letters, and the company’s letters of acknowledgment, were silent as to the par value of the shares issued: what investors were interested in was NAV.  Such limited evidence as there is suggests that at all times the formal share certificates stated the par value as $0.10 per share.

20.	There were subsequently two board resolutions which undoubtedly were intended to make alterations in the company’s memorandum.  But whether they were effective depends on whether para 10 of the memorandum, relating to the variation of class rights, required the agreement (which was never sought or obtained) of three-fourths majorities of the classes of shareholders affected by the variation.  The first board resolution (“the 1997 resolution”) was in form a pair of linked resolutions both made on 21 February 1997.  The second (“the 1998 resolution”) was purportedly dated 1 October 1997.  The evidence raises grave doubt as to the authenticity of this date, but on any view this resolution was not effective until registered, as it was on 28 January 1998.  But before considering these resolutions, and other later events, it is necessary (because of the paragraph 10 point) to establish the position under the original memorandum and articles.

The effect of the original memorandum and articles

21.	What then was the effect of the memorandum and articles in their original form?  Small J discounted the offering letters and section 12(1) of ICBA (which had been strongly relied on before him) and decided that article 101 was unambiguous and must be taken as effective, even though it had not been given effect by a board resolution under para 8 of the memorandum.  He seems to have reached this conclusion on the memorandum and articles in their original form, although he also referred to the 1998 resolution.  The Court of Appeal reached the opposite conclusion, deciding that article 101 did not effectively set out the priorities in a winding-up.  There are some differences in the reasoning of different members of the Court (although each of them cited Guinness v Land Corporation of Ireland (1882) 22 Ch D 349).  In particular Mr Hildyard QC, for the holders of A Investor Shares, did not seek to support the reasoning in paragraph 19 of the judgment of Gatpansingh JA (which surprisingly treated article 101 as not concerned with priorities).

22.	None of the members of the Court of Appeal fully faced up to the awkward fact that if article 101 was ineffective, so apparently were articles 2, 9-16 (except perhaps so far as concerned with transfer formalities) and part of 77(c).  They seem to have found some comfort in the supposition (probably based on gaps or inconsistencies in the evidence) that no C Preference Shares (alias B Investor Shares) were issued before the 1997 resolution (or, as Churaman JA seems to have thought in para 10 of his judgment, before 1998).

23.	On this view the disarray was very profound.  From the incorporation of the company until the 1997 resolution A Investor Shares were being issued at one NAV and redeemed at another NAV, and B Investor Shares were being issued at $100 and redeemed for $100 plus accrued preference dividends, on the basis of special rights spelled out in the articles and in successive offering letters but not in the one document of real legal significance—the memorandum (or a resolution made under paragraph 8 of the memorandum).  Nevertheless their Lordships consider that the Court of Appeal was right in its conclusion about the ineffectiveness of article 101.  The language of section 12(1) of ICBA is clear and mandatory.  The memorandum (or a resolution complying with section 12(1) (h)) is the only permitted source of differential share rights for an international business company.  The decision of the English Court of Appeal in Guinness is in line with this conclusion though it is not directly in point since in that case (i) it was not mandatory for the share rights to be set out in the memorandum; but (ii) there was an explicit inconsistency between the memorandum (in its objects clause) and the articles.  That was the context in which Cotton LJ said (at p376),

“Now the articles cannot in my opinion alter or vary that which would be the result of the memorandum standing alone.”

and (at p378),

“As regards those conditions which the Act of Parliament does require to be stated in the memorandum, the articles cannot, in my opinion, be referred to for the purpose of modifying or qualifying them.”

24.	In contending for a different result, Mr Knowles QC relied on section 13(3) of ICBA.  He also submitted (in relation to the principles stated in Guinness) that article 101 was not ‘modifying or qualifying’ the company’s memorandum.  In their Lordships’ view section 13(3) of ICBA cannot be relied on to subvert the clear requirement of section 12(1): see Welton v Saffery [1897] AC 299, especially the observations of Lord Davey at p329.

25.	Mr Knowles’ submission as to the principle in Guinness calls for fuller consideration.  The memorandum is not wholly silent (although it is extremely terse) as to the special rights attaching to shares in the company.  Approximately 49.94% of them may be issued as Preference Shares of 10 cents each, approximately 49.94% of them may be issued as C Preference shares of 10 cents each, and the remainder (approximately 0.11%) may be issued as ordinary shares of 10 cents each.  So about 99.89% of the share capital was described as having the same characteristics—that it was to be redeemable, to have no voting rights, and to have some element of preferential rights.  As it happens (though their Lordships attach no significance to this) if the memorandum had added that unredeemed C Preference Shares were to be automatically converted into A Preference Shares after two years, and that they would in the meantime earn a fixed return of 8% or thereabouts (information found in the articles and the offering letters but not in the memorandum) and that the company intended to aim at a yield at least as good as thirty-year US Treasury Bonds (information found in the offering letters), the average investor might have concluded that the risk profiles of the A Preference Shares and the C Preference Shares (which came to be known as A Investor Shares and B Investor Shares respectively) were not likely to be very different.

26.	So the memorandum was not completely silent about differential share rights.  But it contained nothing at all to indicate that there were to be differential share rights in a winding-up between the A Preference Shares and the C Preference Shares—if anything rather the reverse, since both were described as preference shares.  In those circumstances the default position, under well-settled principles of company law, is that shareholders should participate pari passu in surplus assets: Re London India Rubber Company (1868) 5 Eq 519; Re Syston and Thurmaston Gas, Light & Coke Co Ltd [1937] 2 AER 322.  Reference to article 101, even if otherwise permissible, would therefore contradict the shareholders’ rights on a winding-up under the memorandum, properly construed.

What shares were actually issued?

27.	Counsel appearing on the appeal tactfully reminded the Board that there are other questions raised by the liquidators’ summons which are still to be argued at first instance, especially as regards the conversion of shares (as to which there are apparently no records).  Counsel also indicated that the liquidators have during the course of the liquidation continued their efforts to reconstruct (from original source materials) what the company’s share register should have contained, and their Lordships were shown some extensive print-outs summarising this material.

28.	Their Lordships recognise that they must limit their decision to the issues under appeal, difficult though it is to sort out and isolate the various strands of the profound disarray which has attached to the company’s affairs from the outset.  Nevertheless they think it right to mention (although not in any way as a matter of decision) that the liquidators’ more recent researches seem to have cast doubt on some of the factual premises mentioned in judgments in the Court of Appeal—in particular, the statement that no B Investor Shares were issued before the date of the 1997 Resolution, or even before 1998.  The 1995/1996 accounts already mentioned seem to show that 10,637 B Investor Shares (referred to as C Preference Shares) were issued before 1 January 1995 (presumably by the Cayman company) and redeemed during 1996, a further 175,661 apparently being issued during 1996.  An almost identical figure appears in the summary prepared by the liquidators for B Investor Shares issued between September 1996 and February 1997 (although they are probably included in the total of just over 220,000 shares shown to have been redeemed).  It is not necessary or appropriate for their Lordships to try to go further into these evidential uncertainties.

The 1997 resolution

29.	In February 1997 the company secretary, Mrs Helen Forbes, became aware that there was a discrepancy between the memorandum and the offering letters. She consulted Mr Bill Rafter (who ran the company’s investment advisers in Philadelphia) and he asked her to ‘make whatever changes are necessary to bring the Memorandum of Association in line with the practices of the fund as specified in its Offering Document.’  The outcome was a board meeting (or possibly two consecutive board meetings) held on 21 February 1997 and attended by Mrs McDeigan-Eldridge (as Mrs McDeigan had become), Mr Herman and Mrs Forbes.  Two board resolutions were passed.

30.	The first of the pair of resolutions resolved to amend the memorandum by substituting new paragraphs 5, 6 and 7 for the existing paragraphs.  The new paragraph 5 authorised shares to be issued in the currencies of the United States or the Federal Republic of Germany.  Paragraph 6 restated the authorised capital of the company as US$500,000 divided into 5,000,000 shares of 10 cents each and 672,000DM divided into 6,720,000 shares of a par value of 10 pfennig each.  Paragraph 7, headed ‘Classes of Shares’, was as follows:

“Classes of Shares

The Shares shall be divided among 2,499,900 Class “A” Investor shares, 2,499,900 Class “B” Investor Shares, 200 Management Shares each having a par value of ten cents (US$0.10) and 6,720,000 Class ‘DM’ Investor Shares of a par value of ten pfennig (DM0.10) each.  Provided always that, subject to the provisions of The International Business Companies Act 1989 (as amended) and the Articles of Association, the Company shall have power to redeem or purchase any or all of such shares and to sub-divide or consolidate the said shares or any of them and to issue all or any part of its capital whether original, redeemed, increased or reduced with or without any preference, priority or special privilege or subject to any postponement of rights or to any conditions or restrictions whatsoever and so that, unless the conditions of issue shall otherwise expressly provide, every issue of shares shall be subject to the powers on the part of the Company hereinbefore provided.  Management Shares shall be the only Class of Shares having the right to notice of and to vote at Annual General, Special General and Extraordinary General Meetings of Shareholders but shall not have the right to dividends and shall not participate in the profits and losses of the Company. In the event of liquidation and dissolution of the Company, Management Shares shall be entitled to the return only of the par value of such Shares.  Investor Shares shall be entitled to dividends and shall participate pro rata in the profits and losses of the Company and in its assets in the event of liquidation and dissolution.”

31.	The second of the pair of resolutions was in the following terms:

“Whereas it has been detected that the Company has been receiving subscriptions/redemptions for ‘Class B Shares’ and 

Whereas the Fund’s ‘Class B Shares’ were the ordinary voting shares and therefore not available to Investors and

Whereas this [anomaly] in the designation of the ‘Class B Shares’ must be corrected to reflect the proper class
 
Now therefore be it resolved that all Subscriptions/Redemptions received for ‘Class B Shares’ from 2nd September 1996 to 21st February 1997 be treated as if they were in fact received for the newly created ‘Class B Investor Shares.’  This change in the re-classification of ‘Class B Shares’ should in no way affect net asset value of that class.”

32.	There were some obvious defects in the drafting of these resolutions.  The substituted paragraphs of the memorandum said no more than had the original memorandum about the terms and conditions on which A Investor Shares and B Investor Shares were to be redeemed (and the word ‘Redeemable’ no longer appeared in their descriptions).  The articles were left unamended, and starkly inconsistent with the substituted paragraphs of the memorandum, in particular, the last sentence of the substituted paragraph 7:

“Investor Shares shall be entitled to dividends and shall participate pro rata in the profits and losses of the Company and in its assets in the event of liquidation and dissolution.”

was inconsistent with Article 101.

33.	Nevertheless their Lordships are in no doubt but that the memorandum was, so far as it went, effective according to its terms.  For the reasons already stated, under the original memorandum A Preference Shares and C Preference Shares (alias A Investor Shares and B Investor Shares respectively) ranked pari passu in a winding-up.  The new paragraph 7 spelled this out, but did not engage the restriction in paragraph 10 of the memorandum.  The alteration did not therefore call for approval by a three-fourths majority of either of these classes of shareholders (it is fanciful to suppose that holders of Management Shares might have raised objections).

The 1998 resolution

34.	On 14 January 1998 Mr Clifford A Johnson of Coopers & Lybrand wrote to Mrs Dorothea Thompson of Mees Pierson Fund Services, who administered the company.  After commenting on some adjustments to be made following completion of the audited accounts for 1995 and 1996 he referred to the 1997 resolution:

“This resolution sought, inter alia, to resolve the discrepancy in description of the Company’s shares as set out in the Memorandum and Articles of Association and the description set out in the Offering Memorandum.  Whilst this objective was met, the resolution created another discrepancy by failing to limit the Class B Investor Shares participation in the Company’s profits to a fixed cumulative preferential dividend like the Class C Non-Voting Preference Shares which they replaced.  Accordingly, this resolution should be amended or a new resolution approved which would limit the participation of Class B Investor shares in the Company’s profits to a fixed cumulative preferential dividend.”

He added,

“We did not sight a directors’ resolution amending the Company’s Memorandum of Association for the change in authorised capital by the creation of CHF Investor Shares.  These shares were initially issued in October 1997.”

35.	The outcome seems to have been a certificate (signed by Mrs Forbes as company secretary on 23 January 1998) of board resolutions purportedly passed on 1 October 1997.  There is obvious doubt as to the truth of this certificate.  The first part of the resolution was expressed as replacing paragraphs 5, 6 and 7 of the memorandum with paragraphs in similar terms to those in the 1997 resolution, but also referring to 1, 459, 000 Class CHF Investor Shares, and (crucially) substituting the following for the last two sentences of paragraph 7 (the first sentence is unchanged, but gives the context):

“In the event of liquidation and dissolution of the Company, Management Share shall be entitled to the return only of the par value of such Shares.  Class ‘B’ Investor Shares will be limited to its participation in the Company’s profits to a fixed cumulative preferential dividend at a per annum rate.”

36.	Their Lordships are of the clear opinion that this second version of the substituted paragraph 7 did not effectively alter the rights of holders of both classes of Investor Shares to participate pari passu in surplus assets in a winding-up.  There are two reasons for this.  The well-settled principles of company law already mentioned (para 26 above) would (on the true construction of the plain text of the substituted paragraph) produce that result, and neither Mr Johnson’s letter nor any other extrinsic evidence could be relied on as an aid to a different construction.  But in any case, if there was any doubt about the issue of construction, the 1998 resolution was ineffective so far as it altered the rights of holders of either class of Investor Shares without the approval of a three-fourths majority of the holders of that class of Investor Shares.

Conclusions

37.	In the course of their submissions counsel made a few references to the authorisation and issue of Investor Shares denominated in deutschmarks (later euros) and Swiss francs.  Most of these were passing references to a further minor complication or “wrinkle.”  These shares received very little attention in the judgments below.  Particularly in view of counsel’s request to the board not to decide issues which are not squarely raised on the appeal, their Lordships refrain from expressing any further views on this aspect of the matter.

38.	As a fall-back position Mr Hildyard deployed an analogical argument based on the decision of the English Court of Appeal in Barlow Clowes International Ltd (in liquidation) v Vaughan [1992] 4 AER 22.  These submissions raise difficult issues which their Lordships do not have to decide, and they think it better not to express any view about them.

39.	Their Lordships will therefore humbly advise Her Majesty that the appeal should be dismissed.  In accordance with a consent order made below, the costs of all parties on an indemnity basis will be paid as expenses of the liquidation.  That is not an order that their Lordships would have thought appropriate, in the absence of a consent order below.  On an expensive second appeal in a liquidation costs should normally follow the event.