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IN THE GRAND COURT OF THE CAYMAN ISLANDS
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FINANCIAL SERVICES DIVISION
The Hon. Mr Justice Andrew J. Jones OC in Open Court
26th and 27th Jan~ary and 12th February 2010
FSD NOS: 0041, 0042, 0043 & 0044 OF 2009 (AJJ)
IN THE MAnER OF SECTION 94 OF THE COMPANIES LAW (2009 REVISION)
AND IN THE MAnER OF HSH CAYMAN I GP LTD
AND IN THE MAnER OF HSH CAYMAN II GP LTD
AND IN THEMAnER OF HSH CAYMAN V GP LTD
AND IN THE MATTER OF HSH COINVEST (CAYMAN) GP LTD
Appearances:
Mr Terence Mowschenson OC, instructed by Messrs Graeme Halkerston and
Jayson Wood of Appleby on behalf of the Petitioners
Mr Charles Bear OC, instructed by Mr Vahid Chittleborough of Walkers on behalf
of the Companies
JUDGEMENT
On 9th September 2009 ABN AMRO Bank NV ("the Petitioner") presented winding up petitions
against HSH Cayman I GP Ltd, HSH Cayman II GP Ltd, HSH Cayman V GP Ltd and HSH
Coinvest (Cayman) GP Ltd, which I shall refer to collectively as the "the Companies", on the
ground of insolvency. On 13th November 2009 Foster J. made winding up orders and appointed
·
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two qualified insolvency practitioners, namely Messrs Walker and Stokoe who are respectively a
partner and director of the Cayman Islands firm of PricewaterhouseCoopers, as joint official
liquidators of each Company.
On 9th December 2009 the Court of Appeal set aside these
winding up orders on the grounds that the Petitioner had failed. to comply with the requirements of
the Companies Winding Up Rules, but did not strike out the petitions. Instead, it ordered a stay of
all further proceedings for 7 days during which period the Petitioners applied for leave to amend
their petitions and the Companies made a cross application for them to be struck out as an abuse
of the process. On 17th December 2009 I dismissed the strike out applications; granted leave to
amend the Petitions; and gave directions for trial. This is the trial of the amended petitions.
2
The Companies now accept that there has been full compliance with the procedural and
evidential requirements of the Companies Winding Up Rules and that the facts pleaded in the
amended petitions have been proved. In particular, it is now admitted that the Petitioners are
creditors with standing to present the winding up petitions and that each of the Companies is
insolvent by reference to the cash flow test prescribed by Section 92(d) of the Companies Law
(2009 Revision).
3
A winding up order is a discretionary remedy, but it is well established as a matter of Cayman
Islands law that an unpaid petitioning creditor in respect of an undisputed debt is entitled to
expect the Court to exercise its discretion in his favour by making a winding up order in the
absence of some exceptional circumstances or special reasons. Recognising that the burden of
argument lies upon the Companies to establish that there is some exceptional circumstance or
special reason which justifies the Court departing from the usual course, I agreed that Counsel for
the Companies should be allowed to open the case and have the last word in reply.
4"
It was also agreed that the evidence and arguments relevant to the way in which the Court should
exercise its discretion is the same in each case, with the result that it was convenient to hear the
four petitions together. The amounts owing by each Company are different and only three of the
four Companies claim to be solvent on a balance sheet test, but it appeared to be common
ground that these differences did not affect the parties' arguments.
FACTUAL BACKGROUND
5
The relevant factual background can be summarised quite simply as follows. The Companies
were incorporated in the Cayman Islands on 15th September 2006 for the sole purpose of acting
as the general partners of four limited partnerships established pursuant to the law of Alberta,
Canada ("the Limited Partnerships"). The Limited Partnerships were established on 19th
2
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September 2006 as the vehicles through which the underlying investors would acquire and hold
substantial minority interests in HSH Nordbank.
6
HSH Nordbank is a large German regional bank created in 2003 from the merger of two state-
owned banks and the City of Hamburg and the State of Schleswig-Holstein became the largest
shareholde.rs in the merged entity. In 2006 seven investment vehicles advised by J.C. Flowers &
Co, a well known private equity investment adviser based in New York, collectively acquired
26.58% of the shares in HSH Nordbank from Westseutsche Landesbank for an aggregate price
of €1 .25 billion.
The seven investor vehicles (which are referred to in Counsel's skeleton
argument as the "Shareholder Entities") comprise the four Alberta Limited Partnerships, two
Luxembourg companies and a Delaware limited partnership. The Shareholder Entities financed
their acquisition in part by borrowing a total of €350 million from the Petitioner.
7
On 19th October 2006 each of the Companies, in its capacity as a general partner, entered into a
Loan Facility Agreement with the Petitioner, as arranger and facility agent and as original lender.
Apart from the fact that the amounts borrowed vary, I am told by Counsel that ,the terms of the
Facility Agreements are the same, at least in so far as they are material to this matter. Shortly
thereafter, in December 2006 and January 2007 the Petitioner syndicated the loans amongst
itself and six other British and European banks which are now the lenders for the purposes of the
Loan Facility Agreements (whom I shall refer to collectively as "the Lenders"). As one would
expect, this syndicate of banks are acting in concert through their Facility Agent, which is now the
Global Restructuring Group of the Royal Bank of Scotland Pic (the parent company of the
Petitioner). Its Director of Financial Institutions in the Global Restructuring Group, Mr Paul
Fillmore, has sworn five affidavits in connection with this matter.
8
The Loan Facility Agreements comprise two elements, namely (a) a term loan which could only
be used for the purpose of acquiring the shares in HSH Nordbank and (b) a revolving credit
facility which can only be used in or towards financing interest, certain expenses incurred in
connection with the share acquisition and re-financing revolving loans.
Counsel for the
Companies has made the point that it would have been obvious to the Lenders that the only
external source of funds available to the Companies with which to service the loans was the
dividends received from HSH Nordbank. This may be so, but it is irrelevant to the matter in issue.
The Loan Facility Agreements are not limited recourse agreements.
9
In 2008, as a result of the global financial crisis, HSH Nordbank reported substantial losses. The
key financial statistics, extracted from the bank's published accounts, are tabulated in paragraph
31 of Mr. J .C. Flowers' affidavit. It suffered a net loss of about €2.7 billion in 2008 and a further
3
loss of about €BOO million in the first three quarters of 2009. Tangible book value per share fell
from €57.4 as at the 2007 year end, to €2B.7 as at the 200B year end, and fell again to €19.4 as
at the end of the third quarter of 2009. HSH Norbank's financial crisis had an immediate impact
upon its shareholders because it ceased to pay dividends and was forced to seek an injection of
new capital. Three of the four Limited Partnerships participated in the first recapitalisation in
August 200B by subscribing a total of about €400 million for new shares. A second
recapitalisation took place in June 2009 in which the City of Hamburg and the State of Schleswig-
Holstein subscribed a further €3 billion and provided an asset guarantee up to €1 0 billion. None of
the seven Shareholder Entities participated in the second recapitalisation with the result that their
combined equity stake was diluted to 9.19%. The combined equity stake of the four Limited
Partnerships is now 7.31 %. This second recapitalisation is the subject of an investigation by the
European Commission as to whether or not it constituted "state aid" which would be illegal under
the applicable European Union competition law.
10
The Companies failed to pay sums due on 30th January 2009 and on various payment dates
thereafter. It is not necessary for me to analyse or recite the details of the defaults because it is
common ground that there was a default and, as a result of acceleration of the amounts due
under each of the term loans, the four Companies owed a combined sum of approximately €264
million as at Bth September 2009. On 12th November 2009, the day before the hearing before
Foster J., the Companies and the Shareholder Entities had issued a proceeding against the
Lenders in the English High Court, by which they sought a declaration that the Lenders "were/are
estopped from seeking to recover or enforce payment under the Facility Agreements or to
accelerate as they purported to do by way of notices dated B September 2009". However, no
claim form and particulars of claim was ever served and on 20th January 2010 the Companies'
London solicitors informed the Petitioner that it would not be served. This estoppel argument has
now been abandoned. It is now accepted that the Lenders were entitled to accelerate the loans;
that the sums of approximately €124.Bm, €5B.2m, €14.1m and €66.7m (being about €264m in
total) were owed by the Companies respectively, as at Bth September 2009; that they are unable
to pay their debts; and that they are insolvent within the meaning of section 92(d) of the
Companies Law (2009 Revision).
LEGAL PRINCIPLES APPLICABLE TO THE EXERCISE OF THE COURT'S DISCRETION
11
The applicable legal principles are well established and not in dispute between the parties. On the
basis of the admitted facts, the Petitioners have a prima facie right to expect the Court to make
winding up orders. The Court's power is a discretionary one, but the Petitioners can expect the
4
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Court to exercise its discretion in favour of making an immediate winding up order unless it is
satisfied that there is some exceptional circumstance or special reason which justifies the
adoption of a different course. Part V of the Companies Law (2009 Revision) is derived from the
English Companies Act 1862 and this Court has consistently followed the decisions of the English
Courts on this subject. In Re Camburn Products Ltd [1980] 1 WLR 86 at page 93F -94A Slade J
(as he then was) said:
"I do not, however, feel much doubt in principle as to what that attitude should be. In the case of
a creditor's petition not opposed by other creditors, the general approach of the court was
expressed by Lord Cranworth in Bowes v. Hope Life Insurance and Guarantee Co. (1865) 11
H.L.Cas. 389, 402: " ... 1 agree with what has been said, that it is not a discretionary matter with
the court when a debt is established, and not satisfied, to say whether the company shall be
wound up or not; that is to say, if there be a valid debt established, valid both a law and in equity.
One does not like to say positively that no case could occur in which it would be right to refuse it;
but, ordinarily speaking, it is the duty of the court to direct the winding up."
In other words a creditor in the circumstances mentioned is prima facie entitled to his order and is
prima facie not bound to give time to enable the debtor to pay. In my judgment, subject to the
discretion given to it by section 25 and 346 of the Companies Act 1948, to which I have already
referred, the attitude of the court should be, and is, essentially unchanged 'today.
While I
recognise that it would have the right under these two actions to pay regard to the wishes of
contributories, in deciding whether or not to make a winding up order on a creditor's petition, or to
adjourn the hearing, in my judgment it can, and should, ordinarily attach little weight to the wishes
of contributories, in comparison with the weight it attaches to the wishes of any creditor, who
proves both that he is unpaid and that the company is "unable to pay its debts."
12
In Re Lummus Agricultural Services Ltd [1999] BCC 953, at page 955 Park J said:
"I begin with the basic proposition that although [the equivalent sections in the English Act] give
the court a discretion whether to make a winding up order, it is well settled that, if a creditor with
standing to make the application wants to have the company wound up, and if the court is
satisfied that the company is unable to pay its debts, a winding up order will follow unless there is
some special reason why it should not. It is sometimes said that, in such a case, a petitioning
creditor is entitled to a winding up order ex debito justitiae. I therefore start with the assumption
that such an order should be made in this case, and the burden of argument rests upon [counsel
for the company] to show me why it should not."
For this reason is was agreed the burden of argument fell upon Mr Bear as counsel for the
Companies, with the result that he was allowed to open the argument and have the last word in
reply.
5
THE CASE FOR THE COMPANIES
Summary
13
The Companies' case is that the Court should exercise its discretion by adjourning the petitions or
staying all further proceedings in favour of proceedings which were commenced on 21 st January
2010 by the Limited Partnerships under Chapter 11 of the US Bankruptcy Code in the Bankruptcy
Court for the District of Delaware. Counsel put the argument under two basic heads. First, he
contends that putting the Companies under the control of official liquidators is not a commercially
sensible course of action, by which he means that it would not be in the commercial interests of
either the Companies or Lenders. The Petitioner, which is representing the collective view of all
the Lenders, disagrees with this proposition and I am being asked, in effect, to substitute the
Court's own view of what ought to be in their interests. Second, counsel contends that, in
substance the liquidation process would be a liquidation of the Limited Partnerships rather than
the Companies. Liquidating the general partner is said to be a form of "backdoor process" for
liquidating the Limited Partnerships and should therefore lead me to the conclusiqn that this Court
should defer to Chapter 11 proceedings commenced by the Limited Partnerships. I now turn to
analyse the reasons why it is said that there are exceptional circumstances or special reasons
which should lead the Court to adjourn or stay these petitions.
The Companies are said to be "balance sheet solvent"
14
The concept of "balance sheet solvency" is not referred to or defined in the Companies Law
(2009 Revision). In this jurisdiction a company is said to be "balance sheet solvent" if the
realisable value of its assets is greater than the amount of its liabilities, taking into account a due
allowance for its prospective and contingent liabilities. The performance of a "balance sheet test"
is relevant for certain purposes in the course of a liquidation, but it is not relevant for the purpose
of determining whether the Court has jurisdiction to make a winding up order on the ground of
insolvency. Sections 92 and 93 import only a "cash flow test". By section 93, a company is
deemed to be unable to pay its debts if (a) having received a statutory demand, it neglects to pay
the sum due or secure or compound for it to the satisfaction of the creditor within three weeks; or
(b) execution of process on a judgement is returned unsatisfied; or (c) it is otherwise proved to
the satisfaction of the Court that the company is unable to pay its debts. If a company fails to pay
what is presently due and owing to the petitioning creditor, the Court has jurisdiction to make a
winding up order and it is no defence for the company to prove that the realisable value of its
assets is now greater than the amount of its liabilities or will become so at some future date. The
only' relevance of balance sheet solvency is that it may influence the expressed views of creditors
6
and it may justify the Court having some regard to the views of the shareholders, but the weight
to be attributed to their views must still be slight.
15
The amount of the Companies' liabilities under the Loan Facility Agreement is readily
ascertainable and is not in dispute. The Companies have no other liabilities except for some fees
payable tc? their professional service providers, the amount of which must be de minimis in
comparison to the sums owing to the Lenders. It is admitted that HSH Coinvest (Cayman) GP Ltd
must be regarded as "balance sheet insolvent", but is said that the other three Companies should
be regarded as "balance sheet solvent". Looked at collectively, the Lenders can expect to be
repaid in full only if the realisable value of the shares exceeds €12.32 per share. The Court has
the benefit of valuation evidence from Mr J.C. Flowers, the Companies' own investment adviser
who advised in connection with the original acquisition. Whilst I accept that he possesses relevant
knowledge and expertise, he is not put forward as an independent expert witness. I also have the
evid~nce of Mr Thoralf Erb of Susat & Partner OHG who has been retained to give an
independent expert opinion on behalf of the Companies.
16
Mr Erb's report constitutes a series of bullet point summaries of the kind which would be prepared
for an audio visual presentation. Unfortunately, I found myself in the position of having to read the
bullet points without having the benefit of the oral presentation and the opportunity to ask
questions. His opinion is that (a) the "current indicative fair value" of the shares is €19.03 per
share, adopting a discounted cash flow valuation approach; (b) the value which could be
expected to be realised in a sale on short notice under current capital markets' conditions is
between €5.00 and €8.50 per share (subject possible discounts); and (c) the prospective value
which could be expected to be achieved in an IPO in 2013 or 2014 is €30.00 - €31 .50 per share.
I make a number of observations about this evidence.
17
First, I found it unhelpful that Mr Erb did not define what he meant by "fair value" for the purposes
of his report. For financial reporting purposes, the "fair value" of an asset is the amount for which
that asset could be exchanged between knowledgeable, willing parties in an arm's length
transaction. Mr D.J. Katsikas explains (in paragraph 23 of his 1st Affidavit) that this is the basis
upon which the shares are valued for the purposes of the financial statements of the · Limited
Partnerships. Subject to the qualification discussed in paragraph 18 below, I believe that Mr Erb
is using the expression "fair value" in this sense, in which case I should not draw any distinction
between "fair value" and "market value". The fair value put on the shares by the Companies for
the purposes of the Limited Partnerships' unaudited financial statements for the quarter ended
30th September 2009 is €17.00 per share.
7
18
Second, Mr Erb adopts a discounted cash flow methodology for the purposes of determining his
"current indicative fair value" of the shares. Using this methodology, the value of a business is the
equivalent of the net present value of future cash flows generated by the business. The Petitioner
has engaged Mr. S.C. Taylor, the head of Ernst & Young's Valuation and Business Modelling
team, to advise and comment upon Mr Erb's opinion. He agrees (in paragraph 15 of his Affidavit)
that a discounted cash flow approach is an appropriate valuation methodology, albeit not the only
one. He makes the obvious point that this methodology is typically used to value a business as a
whole. Clearly, the market will require a discount for the fact that the Companies' asset is a small
minority interest. Collectively, their shareholding is only 7.31 % of the equity, or 9.12% if it is
marketed with that of the other Shareholder Entities. Mr Erb cannot have overlooked this point.
When he says that €19.03 is the fair value "based on a DCF valuation approach indicating the
share's intrinsic value", I think he means that it is the fair value, disregarding the minority interest
discount or, to put it another way, assuming that the shares will be sold as part of an IPO, which
is not going to happen until 2013 at the earliest. In addition to a minority interest discount, the
Duff & Phelps Report (exhibited to the Affidavit of Mr R.A. Bartell) says that there should be an
illiquidity discount. In my judgment it is not appropriate to look at the "intrinsic value" of the shares
for the purposes of ascertaining whether these Companies are balance sheet solvent or insolvent
for present purposes. I would regard them as balance sheet solvent only if the realisable value
(which is the current market value) is more than the amount of their liabilities. For this reason, it is
more useful to have regard to Mr Erb's "price estimation for short-term sale" of €5.00 - €8.50 per
share which obviously does take account of a minority interest discount and may also take
account of an additional illiquidity discount, rather than his indicative fair value of €19 per share.
On this basis all four Companies are balance sheet insolvent.
19
Third, Mr Erb was given only four days in which to perform his work. Not surprisingly, he says that
it was insufficient time within which to provide his client with a "full scope valuation report". It also
meant that he had to rely upon the cash flow projections contained in HSH Nordbank's business
plan dated as of 1 st September 2009 without doing any work to satisfy himself about the
reasonableness of these projections.
Given that he has adopted a discounted cash flow
valuation methodology, this is an important qualification. Nor has Mr Taylor been able to consider
the reasonableness of these cash flow projections because the business plan has not been
disclosed to the Lenders on the ground that it is a confidential document.
20
Having given careful consideration to the valuation evidence, I have reached the following
conclusions. First, it seems to me that all four of the Companies are probably balance sheet
8
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insolvent, in that the realisable value of their assets is currently less than the amount of their
liabilities. Second, I think that I am bound to recognise that there is at least a possibility that the
Companies will become balance sheet solvent at some point in the future, if and when HSH
Nordbank returns to profitability. I must then ask myself what is the relevance of these
conclusions? I am bound to have regard to the wishes of the creditors and, in my judgment, what
matters is the Lenders' view of this evidence, rather than mine. I am supported in this conclusion
by Re Falcon R.J. Developments Ltd (1987) 3 BCe 146. This was a case in which the English
High Court was called upon to decide whether, if a voluntary winding up had commenced before
the hearing of a petition, a compulsory order should be made if supported by independent
creditors with the largest stake in the outcome, and if so, what weight should be given to the
opposing views of directors and others associated with the company. Vinelott J. said (at page
155):
"I can see no reason why the views of the majority as to what is in their best interest should not
prevail. There is no reason why the court should impose on them its own view as to what is in
their best interests. That is a commercial decision."
I endorse this statement of principle. It is not for me to tell the Lenders what is or is not in their
commercial interest. I am entitled to assume that they have given consideration to the
Companies' valuation evidence. Their collective view of the matter is expressed by Mr Fillmore as
follows :-
"The confidence with which Mr Flowers asserts that an IPO of HSH will take place in 2013 and
that the HSH share price will improve dramatically cannot be relied upon. There is not, as Mr
Flowers seems to imply, any certainty that the HSH share price will increase in the near to mid-
term. This view is supported by the statements made by Mr Belsham in his second affidavit
dated 14 December 2009, in which he states that if the European Commission's investigation
results in the unwinding of the recapitalisation of HSH that took place in June 2009 (which cannot
be ruled out) a new recapitalisation would need to take place at a lower subscription price and
this could result in HSH not being able to continue as a going concern (Belsham Two paragraph
16(d)). This would not just decrease the value of the HSH share price, arguably it may put it into
liquidation. HSH is also a well known lender in the shipping and commercial real estate sectors
and the possibility that additional losses may occur in these sectors directly impacting the equity
value of HSH cannot be discounted. Given the uncertainty in the financial markets, the Lenders
are seeking to wind up the Companies as soon as possible while the HSH shares have any value
at aiL"
Even if I thought that the Companies were balance sheet solvent, that would not be an
exceptional circumstance or special reason for refusing to make an immediate winding up order.
9
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A sale by an official liquidator will be destructive of intrinsic value
21
Counsel emphasised the argument that a sale of the Companies' shares by an official liquidator
will be immensely "destructive of value". What Counsel means by this submission is that the
intrinsic value of the Companies' shares which could be realised in an IPO, assuming that HSH
Nordbank i~ restored to profitability and its recapitalisation is not unwound by order of the
European Commission, is potentially far greater than the amount which could be realised from the
sale of the shares in today's market. This submission is self evidently true. It seems to me that
the sale of an illiquid minority interest is always bound to realise less than the intrinsic value
which would be realised through the mechanism of an IPO or a takeover bid. A sale of the
minority interest will always be destructive of potential value in this sense. However, the
proposition that a winding up order made in respect of these Companies will be destructive of
potential intrinsic value in 3 or 4 years' time is quite different from the proposition that it will be
destructive of actual market value today.
22
The Duff & Phelps Report addresses the difficulties associated with marketing th~ shares in HSH
Nordbank today. It seems to me that some of these difficulties are inherent in this particular
investment. Others are associated with the very difficult market conditions currently prevailing. Mr
Bartell's conclusion (at page 15 of the Report) is that "we estimate that the discount associated
with such a forced sale in the current market would be within the range of 60 to 80 per cent of the
long term going concern value of the Bank ... ". If one take's Mr Erb's valuation of €30 per share
as the long term going concern value of HSH Nordbank, a discount of 60% to 80% points to a
current market value in the region of €6 - €12 per share. From the Lenders' perspective, €12 per
share comes close to a full recovery and €6 per share equates to a 50% recovery.
23
There is no authority for the proposition that the Court can properly exercise its discretion by
refusing to make a winding up order in respect of an admittedly insolvent company, on a petition
supported by all of its creditors, at the request of its shareholders merely because they believe
that the value of its assets may increase sufficiently at some point in the future, such that they will
recover at least part of their investment. The authorities point to exactly the opposite conclusion.
The possibility that a company's sole or main asset may increase in value of the next 3 or 4 years
as a result of extraneous factors (in this case an improved financial performance on the part of
HSH Nordbank and improved market conditions) is not an exceptional circumstance or special
reason which justifies refusing a winding up order or staying proceedings on a petition against the
wishes of a majority or, as in this case, all of its creditors.
10
24
Re Oemaglass Holdings Ltd [2001] 2 BCLC 633 is authority for the proposition that the Court
might properly exercise its discretion by adjourning a petition for a short period if it can be
demonstrated that the order itself would be destructive of current market value in respect of an
asset which is materially important to the financial outcome of a liquidation. It is helpful to
summarise the facts of that case in order to illustrate the point. The company carried on the
business of manufacturing and distributing commercial glassware to hotels and restaurants. The
company's bank, which was its single largest creditor, appointed administrative receivers
pursuant to a debenture. Shortly thereafter, a trade creditor presented a winding up petition. The
petitioner's argument was that the court should make a winding up order and appoint official
liquidators in place of the administrative receivers. The concern was that the receivers, in carrying
out their primary function of protecting the bank's interests, had or might under-estimate the value
of the company's stock or sell it for less than its proper value. The evidence established that the
making of an immediate winding up order would have the opposite effect. The receiver was
carrying on the company's business, albeit for the limited purpose of selling the stock using its
own sales force, which comprised 30 employees. He anticipated that he needed a further 10
weeks in which to complete the stock sales operation.
The Court accepted the receiver's
evidence that a substantially lower price would be likely to be realised if the company were put
into liquidation immediately, with the consequence that it would cease to trade and the contracts
of employment of its sales force would be automatically terminated. The receiver said that the
stock was too large for the market to absorb all at once, so that a severely discounted price would
likely result, especially if an official liquidator did not have the assistance of the existing sales
force.
The 10 week adjournment sought by the receiver was granted because (a) it was
supported by a majority of the creditors and (b) the court accepted that it was definitely more
likely than not that the sale of the remaining stock would achieve a significantly higher price if the
receiver were allowed to continue to sell it over a 10 week period with the assistance of an
experienced sales force, rather than putting it all on the market at once. The court observed that
it was almost certain to make a winding up order at the end of the 10 week adjournment. This
case is not authority for the proposition that a petition can properly be adjourned on the basis that
there are grounds for believing that, for whatever reason, the potential realisable value of an
important asset might increase over time.
25
A series of other points are made in support of the argument that a sale by of the shares by
official liquidators will be difficult and "destructive of value" First, the Companies rely upon the
fact that under HSH Nordbank's articles of association a transfer of shares requires consent from
the other shareholders and Mr J.C. Flowers expresses the view that such consent is unlikely to
11
be forthcoming for most potential purchasers. In particular, he says that the bank is unlikely to
welcome a purchase by a competitor or a "vulture fund". He may be right, but the Lenders must
have been well aware of this restriction when they entered into the Credit Facility Agreement and
they are aware of it now. It is not unusual for official liquidators to deal with the realisation of
shares or other assets which are subject to various kinds of restrictions. By itself, this fact cannot
possibly constitute an exceptional circumstance which would justify the refusal of an immediate
winding up order.
26
Second, the shareholders of HSH Nordbank are parties to a shareholder agreement (described
as "the Principle Agreement") executed in March 2003. As a condition of consenting to a transfer,
any new shareholder will be required to become a party to the Principle Agreement, as the
Shareholder Entities did in October 2006. It gives them the right to representation on the bank's
supervisory board of directors. Mr S.K. Gauke, the Shareholder Entities' German lawyer,
expresses the opinion that the consequence of making a winding up order is that "the opening of
insolvency proceedings with respect to the assets of a shareholder being party to the Principle
,
Agreement could result in an automatic dissolution of the entire Principle Agreement".
He
proceeds on the assumption that the Companies are not themselves the shareholders and
assumes that a winding up order in respect of them would trigger an automatic dissolution of the
Limited Partnerships under Alberta Law.
The Petitioners do not agree with this analysis.
However, assuming Mr Grauke is right, what is the relevance of the point for present purposes?
At worst, the Companies will cease to be represented on the supervisory board. Given that I have
no evidence from HSH Nordbank or any of its other shareholders, it is impossible to know how
they will respond to an automatic termination of the Principle Agreement, except that they can be
..
expected to do whatever is in their best commercial interest. I am not prepared to assume that
the bank, its management and other shareholders will adopt an adversarial approach towards the
official liquidators.
27
Third, there is the point about the European Commission's investigation to which I referred in
paragraph 9 above. The nature and possible outcome of this investigation is explained in the
affidavit of Mr. S.K. Grauke, who was first retained by J.C. Flowers & Co in connection with the
share acquisition in 2006. At the time of swearing his affidavit, Mr Grauke envisaged that a final
decision would be made by the European Commission at the end of January or beginning
February 2010, although he could not exclude the possibility that the Commission might ask for
more information in which case the process could continue for several more months. I infer that
no decision had been made by the time of the hearing, otherwise I would have been told about it.
12
If the Commission concludes that the second recapitalisation did involve the provision of unlawful
"state aid", the beneficiaries of it (which necessarily includes, but is not limited to, HSH Nordbank
itself) could be required to repay it, in which case they will have rights of appeal which might take
3-4 years to conclude.
What relevant conclusion can be drawn? At best, the European
Commission might have ruled in favour of HSH Nordbank by the time I publish my judgment. At
worst, it wi"ll rule that the second recapitalisation has to be unwound in some way, which may in
turn lead to appeals lasting for several years. The worst case scenario probably will have an
adverse impact upon the marketability of the shares.
However, the mere fact that the
marketability and value of a company's sole or principal asset is or may be adversely affected by
events outside the control of its official liquidator, is not a reason for refusing to make a winding
up order.
The current management is best placed to retain value in the shares
28
The Companies argue that an official liquidator would be "considerably less well placed to
maintain the value of the shares" than if the Companies were to remain under tile control of their
existing management, meaning the current team of professional service providers. The
Companies do not have any employees. Whether or not the current value of the shares improves,
declines or is maintained depends upon the performance of HSH Nordbank. It is said thatJ.C.
Flowers & Co will bring to bear expertise and influence which will somehow have a positive effect
and that it is implausible to think that official liquidators will have the ear of the bank's
management. Even if this is true, it cannot possibly constitute an exceptional circumstance which
would justify refusing to make a winding up order. The proposed official liquidators are
experienced insolvency practitioners and they will be expected to engage the services of
appropriately qualified and experienced professionals to advise in connection with the marketing
and sale of the shares. As Vinelott J. said in Re Falcon R.J. Developments Ltd , "the majority of
outside creditors, .. . are entitled to say, faced with a choice between a compulsory winding up
and a voluntary winding up conducted by a man chosen and put into office by [its directors] they
prefer a compulsory winding up." The point applies with even greater force in the present case.
Without in any way questioning the expertise and experience of J.C. Flowers & Co, the creditors
are entitled to say that they prefer to rely upon official liquidators, who can be expected to engage
the services of a new and independent team of professional advisers.
Compromise is the best and inevitable result
29
Given all the various difficulties and obstacles identified by the Companies' counsel, the Court is
asked to conclude that "compromise is the best and inevitable result" and that it can and should
13
be achieved through a Chapter 11 proceeding commenced in the US Bankruptcy Court for the
District of Delaware. This Court recognises that the supervised reorganisation of an entity under
Chapter 11 can, and often does, produce for creditors a result which is commercially preferable to
that which might be produced by a liquidation. It was open to the Companies to seek similar relief
by presenting a petition and applying under section 104(3) of the Companies Law (2009
Revision) and CWR Order 4, Part II. This type of procedure is best suited to the situation in
which there are multiple creditors and/or shareholders. However, in the circumstances of this
case I consider this proposal to be wholly unrealistic and impractical.
30
There are essentially only "two parties in interest". On the one hand there is the syndicate of
seven banks acting in concert through their facility agent. For all practical purposes, they
constitute the entire body of creditors. On the other hand, there are the four Companies, also
acting in concert through their common investment adviser, J.C. Flowers & Co. The fact that the
Companies are articulating the interests of the limited partners and their ultimate beneficial
owners reflects the commercial realities of the matter and I do not regard it as a point of criticism.
Thus, I approach the "Chapter 11 argument" on the basis there are just two groups of parties,
each acting in concert. (I use the expression "the parties" as a convenient shorthand in this
context). The evidence is that these two parties have been engaged in discussions since mid
2008 when HSH Nordbank's financial difficulties first became apparent. They have been actively
negotiating a restructuring agreement from January 2009 onwards. Offers and counter-offers
have been put forward and rejected. The parties failed to reach agreement and the Petitioners
were perfectly entitled to present their petitions when they did in September of last year. In these
circumstances I fail to see how it would now serve any useful purpose for me to force the parties
into a Chapter 11 proceeding in Delaware or to impose a similar process upon them in this Court,
through the mechanism of appointing provisional liquidators and giving directions under CWR
Order 4, Part II. The fact that the relationship between the parties has deteriorated during this
period to the pOint at which allegations of bad faith are being asserted, reinforces the futility of a
Chapter 11 proceeding.
31
On 27th January 2009 the Companies' representative (Mr Sinha of J.C.Flowerrs & Co) informed'
Mr Fillmore that they had "20 million" in cash available for debt service. He assumed (rightly as it
turned out) that this meant US$20m rather than €20m. However, at a meeting in London on 30th
January Mr Sinha said that no part of this cash would be used to pay what had admittedly fallen
due that day under the Loan Facility Agreements. Not only did the Companies continue to refuse
to use their available cash to pay debts which were properly due and owing, the evidence
14
available to the Lenders was that most of it had been disbursed because it is no longer reflected
in the financial statements of the Limited Partnerships for the period ended 30th September 2009.
Given that the Companies are special purpose vehicles which have no business other than
owning the shares and servicing their debt, it is not surprising that the Petitioners drew the
inference that this money had been improperly diverted and that the Companies' directors are in
breach of their fiduciary duties. A full explanation of the source and application of this cash is
contained in Mr Belsham's 5th Affidavit (at par~graphs 13-29) which was sworn on the first day of
the trial. This evidence reflects that sums of approximately US$11.8m, US$5.1 m, US$672,000
and US$5.3m stood to the credit of the respective limited partners in their personal bank accounts
maintained with JP MorganChase Bank as at 22nd January 2010. It is not necessary for me to
express any view on whether or not this evidence leads to the conclusion those who ultimately
control the Companies and the Limited Partnerships were improperly attempting to put
partnership assets outside the reach of the general partners and their creditors. Suffice it to say
that the relevant information was not disclosed until the day before the trial of the petitions and
then only in response to an allegation of impropriety. On any view, conduct of this sort is hardly
conducive to achieving a consensual resolution of the matter.
32
As I have already noted in paragraph 10 above, the Companies commenced proceedings in the
English High Court on the day before the petitions came on for hearing before Foster J. If the
Companies and their advisers genuinely believed that the debts were not due and payable
because of some estoppel argument, that could have been raised as a defence to the petitions.
The Petitioners' suspicion that the English proceeding was merely a spoiling tactic tends to be
confirmed by the fact that it was never served and the argument has now been dropped. This
appears to be an example of commercially illegitimate behaviour on the part of the Companies
and the investors who stand behind them. I also tend to view the amendment of the partnership
agreements and the appointment of new general partners in the same light.
33
On 29th May 2009 Mr Sinha telephoned Mr Fillmore and offered to buy the outstanding
indebtedness for 10% of its face value. Mr Fillmore says (in paragraphs 21-26 of his 5th Affidavit)
that this offer was made in full and final settlement, with no offer of upside participation in the
event that the Companies' optimistic view of HSH Nordbank's forecast performance turns out to
be justified by future events. The Lenders rejected this offer as derisory.
Its significance for
present purposes is that it is reflective of the Companies' attitude towards their bankers. Ten
percent of face value of the indebtedness translates to about €1.23 per share. Even on the most
pessimistic view expressed by Mr Erb of Susat & partner OHG, this was perhaps as little as a
15
quarter of what they probably thought the shares were worth. On the most optimistic view
expressed by Mr Bartell of Duff & Phelps, it might have been as little as a tenth of the current
market value. It is difficult to see why the Companies would seriously expect the Lenders to
accept 10 cents on the Euro. Again, it is another incident which tends to suggest that the time for
negotiation is past.
34
The Companies' case is that the current indicative fair value of the shares is about €19, albeit
without any minority discount, and Mr J.C. Flowers confidently predicts that €30+ will be realised
in an IPO in 3 or 4 years time. In the light of this submission I asked Counsel why his clients had
"chosen not to re-finance their debts". He rightly pointed out that there is no evidence that they
had "chosen" not to re-finance. There is in fact no evidence about this subject at all, which is a
little odd. If the Companies and their advisers' confidently expressed belief about the likely future
realisable value of these shares is realistic, one might have expected them to have at least
investigated the possibility of re-financing the debt, in which case I would expect to read
something about the outcome in one or other of the many affidavits. The absence of any
evidence on this subject does tend to support the view expressed by the Petitioners' counsel that
they are simply attempting to place a "one way bet" if they can get away with it.
35
The procedures and benefits of a Chapter 11 proceeding are explained in the 1st Affidavit of Mr
Mark D. Collins, a Delaware bankruptcy lawyer whose firm has been retained by the Limited
Partnerships. The Limited Partnerships are said to be "debtors" within the meaning of section
109 of the Bankruptcy Code, and therefore eligible to file proceedings under Chapter 11, because
they each have "property in the United States", namely credit balances on bank accounts with JP
MorganChase. Bank. No bank statements are exhibited either to Mr. M.D. Collin's 1st or 2nd
i-_"
Affidavits. The bank accounts discussed in paragraph 25 of Mr O.K. Belsham's 5th Affidavit (and
the copy statements comprised in Exhibit DKB-4) clearly relate to accounts in the names of the
limited partners, not the Limited Partnerships. These statements reflect the amounts distributed to
them by the Limited Partnerships. Presumably some other, as yet undisclosed, accounts have
been established in the names of the Limited Partnerships and/or the Companies with JP
MorganChase Bank in order to satisfy the requirement to have property in the United States,
without which they will not be "debtors" within the meaning of section 109.
36
In my judgment, the fact that the Limited Partnerships and/or the Companies are entitled to treat
themselves as "debtors" eligible to invoke the Chapter 11 jurisdiction by the simple mechanism of
establishing bank accounts with JP MorganChase Bank in New York cannot, by itself, possibly
constitute an extraordinary circumstance or special reason why this Court should adjourn or stay
16
winding up proceedings. It is, after all, open to any and every Cayman Islands company to open
a bank account in New York. There must be something more. As I minimum, I would want to see
this course of action supported by a substantial majority of independent creditors before I would
exercise the Court's discretion in this way.
In this case, it is opposed by all the independent
creditors and the amounts owing to the related party creditors who can be expected to support
their clients' case is de minimis.
37
I would also expect to see some evidence from which to infer that a Chapter 11 proceeding (or
some similar procedure in this or some other jurisdiction) would be likely to produce a positive
result which is capable of becoming binding upon all the creditors. There is no such evidence in
this case. No reorganisation plan was filed by the Limited Partnerships. No draft plan has been
submitted to this Court. I appreciate that the applicable rules allow a debtor 120 days within which
to formulate and file a reorganisation plan, but if these Companies (and the investors who stand
behind them) were serious about putting forward another restructuring proposal rather than
simply "buying more time", I would have expected them to formulate a new proposal which goes
some way towards meeting the Lenders' concerns expressed during the course of negotiations
which have been going on at least since January 2009. There is no basis upon which I can
sensibly infer that the procedures of a Chapter 11 proceeding will lead a majority of the Lenders
to change their minds. The evidence of Mr Mark D. Collins is that the US Bankruptcy Court
cannot impose a reorganisation plan unless it is approved by a majority of the independent
creditors, holding at least tWo-thirds of the debts. (1st Affidavit, paragraph12(e)(iv).) Currently, the
restructuring proposals put forward by the Shareholder Entities have been unanimously rejected.
CONCLUSION
"'.,
38
I have read and given careful consideration to a large volume of written evidence, much of which
is directed at difficult valuation issues and points of foreign law. However, in the final analysis, this
is not a complicated case. The Companies are admittedly insolvent. Having engaged in
restructuring negotiations over a period of many months, the Petitioners now seek an immediate
winding up order and are supported by the whole body of independent creditors. The underlying
investors (whose views are being articulated through the Companies) are "under water" and seek
to delay a winding up for as long as possible in the hope that HSH Nordbank's financial condition
will be restored to such an extent that there will be an IPO in 3 or 4 years' time, in which case
they should recover part of their investment. From the investors' perspective, this is the obvious
strategy. It preserves the potential for upside benefit, but without any further downside risk. As a
matter of law, I am bound to give greater weight to the views of the creditors. The Lenders are
17
unanimously of the view that it will be in their commercial interest to put the Companies into
liquidation now. The evidence suggests that the Lenders can expect a recovery, albeit probably
not a full recovery. In these circumstances, I am satisfied that the Petitfoners are entitled to
winding up orders in respect of each of the Companies.
39
The nomin~ted liquidators are Messrs Walker and Stokoe who respective a partner and director
of the Cayman Islands firm of PricewaterhouseCoopers ("PWC, Cayman"). The procedural and
evidential failings identified in the Court of Appeal's judgment . have been cured and their
credentials have been properly established. However, the Companies now complain for the first
time that Messrs Walker and Stokoe do not meet the independence requirement because the
German firm of PricewaterhouseCoopers ("PWC, Germany") were engaged by the management
board of HSH Nordbank some time in 2009 to determine the indicative business value for HSH
Nordbank as at 31 st March 2009. This was done for the purposes of the second capitalisation
which took place in June 2009. PWC Germany's role was first raised in correspondence at the
beginning of January 2010 and is discussed by Mr D.K. Belsham, J.C.Flowers & Co's European
legal counsel, in paragraph 44 of his 5th Affidavit. I infer that he must have known about PWC
Germany's role long before these petitions were presented in September 2009, but the point was
not taken when the matter came before Foster J. Nor was it raised before the Court of Appeal.
PWC Cayman's response, set out in paragraphs 6-23 of Mr Stokoe's 7th Affidavit is highly
instructive and worth summarising in some detail.
40
In August 2009 Mr Fillmore formally approached Mr Schwarzmann, who is the leader of the
Business Recovery Services practice of the United Kingdom firm of PricewaterhouseCoopers
("PWC UK"), to find out whether PWC UK and/or PWC Cayman would be able to act as official
liquidators of the Companies. PWC UK, PWC Cayman and PWC Germany are all member firms
of PricewaterhouseCoopers International Limited ("PWC International") which is colloquially
referred to as the "PWC network". Mr Stokoe's evidence is that its member firms employ some
150,000 people in 150 countries. In response to Mr Fillmore's enquiry, PWC UK carried out an
independence and conflicts check in accordance with the firm's risk management protocol. At that
stage the intention was that Mr Schwarzmann of PWC UK would be nominated for appointment
as official liquidator jointly with Mr Walker of PWC Cayman. PWC Cayman relied upon PWC UK
to perform the client pre-acceptance procedures. These procedures are conducted internationally
with the co-operation of all the network firms. Every potential new engagement is referred to PWC
UK's Risk Management Team for investigation. It then refers the matter to the Project Acceptance
Committee which is headed by a partner and meets every day. The Project Acceptance
18
Committee applies the Code of Ethics issued by the United Kingdom Joint Insolvency Committee.
Whilst insolvency practitioners qualified to practice in the Cayman Islands may not be bound by
this Code of Ethics, it is regarded by this Court as appropriate guidance to which they should
have regard.
41
As one wou!d expect, this procedure revealed to PWC UK and PWC Cayman that PWC Germany
had performed valuation work for HSH Nordbank earlier in the year. Neither PWC UK or PWC
Cayman participated in this work. Nor do their partners and staff have access to PWC Germany's
working papers. The report itself is a confidential document. Mr Stokoe's evidence is that on 21 st
August 2009 the Project Acceptance Committee determined that PWC UK and/or PWC Cayman
could accept the potential engagement and that their partners could accept appointment as
official liquidators. Given the lapse of time and the complaint raised by the Companies, Mr Stokoe
rightly decided that the original decision should be reviewed and updated. He sent the relevant
documents to PWC UK's Risk Management Team. The original decision that PWC Germany's
role will not present any real threat to the objectivity of Messrs Walker and Stokoe of PWC
Cayman was confirmed. In the light of this evidence, I accept that Messrs Walker'and Stokoe are
independent as regards the Companies for the purposes of Regulation 6.
42
The Companies also complain that Messrs Walker and Stokoe lack relevant experience. This
point is made opportunistically and arises out of the fact that the Petitioners originally intended to
nominate Mr Walker (of PWC Cayman) for appointment jointly with Mr Schwarzmann (of PW UK).
For reasons which are explained in my previous ruling, this turned out not to be possible. In
response to this complaint, Messrs Walker and Stokoe have submitted their curriculum vitae
which reflect lengthy experience of dealing with a variety of insolvency and restructuring matters.
Quite apart from this evidence, the Judges of the Financial Services Division of this Court
necessarily have first hand knowledge of the capabilities and experience of individual insolvency
practitioners and the firms of which they are partners. Whilst Mr Stokoe has worked in this
jurisdiction for a relatively short time and his experience has been gained in the United Kingdom
outside the financial services sector, Mr Walker and his firm have been appointed by this Court in
similar matters on many previous occasions. It is also relevant to note that they will be entitled to
engage independent expert consultants to assist with the marketing and sale of the Companies'
shares in HSH Nordbank and they could of course engage Mr Schwarzmann as a consultant if
they thought it appropriate to do so.
43
I am satisfied that I can properly appoint Messrs Walker and Stokoe of PWC Cayman as joint
official liquidators of each of the Companies and I make orders accordingly.
19
44
I will hear Counsel on the question of costs and any other consequential matters which they may
wish to raise.
,
The Honourable Mr Justice Andrew J. Jones QC
20