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Before the Court of Appeal in RMF Market Neutral Strategies (Master) Limited -v- DD Growth Premium 2X Fund (In Official Liquidation), Paul Smith and Ben Hobden of Conyers successfully opposed an appeal brought by the liquidators of DD Growth seeking to clawback redemption payments made to RMF at a time when it was subsequently shown that the fund was insolvent at the time that the payments were made.
Due to the timing of the redemption payments, it was the construction of the Companies Law (2007 Revision) (the “Law”) that fell to be considered.
The liquidators’ argument was based upon Section 37(6)(a) of the Law which provided that:
“A payment out of capital by a company for the redemption or purchase out 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.”
The liquidators sought to argue that the payments made to RMF were payments made out of capital at a time that DD Growth was insolvent and that, in effect, payments out of either share capital or share premium was impermissible.
At first instance, the Chief Justice had dismissed that argument, instead preferring Conyers’ construction of the Law that the provisions of Section 37(6)(a) were not breached as only a, de minimis, amount of $1/1000 per share represented share capital, with the remainder representing share premium, the use of which was permissible pursuant to the Law. This is the position that is found in the current version of the Companies Law.
In a landmark decision, the Court of Appeal wrestled with these issues, describing the issue of statutory construction as ‘a difficult question’. However, the Court of Appeal held that Section 37 of the Law must be read in conjunction with Section 34 of the Law which provided that payments by a company out of share premium for the redemption or purchase of its own shares are not payments out of capital and as such are not subject to any solvency requirement. The Court of Appeal attached particular importance to Section 34(2)(f) which refers to the use of share premium “for providing for” the premium payable on redemption which is held to cover payment for the premium due.
Further, the Court of Appeal failed to be persuaded by the liquidators’ argument that the convoluted wording of Section 37(5) supported the contention that the payments made to RMF were made out of capital, considering this argument to be “circular”.
It is now therefore clear that for the purposes of Section 37(6) share capital is given its natural meaning and represents only the par value of shares.
The judgment of the Court of Appeal makes sound commercial common sense and will come as a relief to many investors and a disappointment to many liquidators who were anxiously awaiting the outcome of this matter.
Paul Smith and Ben Hobden of Conyers successfully represented RMF.