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Parmalat Capital Finance Ltd & Ors v. Food Holdings Ltd & Anor (The Cayman Islands)
Parmalat Capital Finance Ltd & Ors v. Food Holdings Ltd & Anor [2008] UKPC 23 — Structured Summary
Factual and Procedural Background
The Parmalat group, based in Italy, conducted a US bond-market financing scheme in 1999. Two Cayman Islands companies, Food Holdings Ltd ("Food") and Dairy Holdings Ltd ("Dairy"), were incorporated to issue loan notes (each ~US$150m). Proceeds were used to purchase stock in a Brazilian subsidiary (Parmalat Brazil). Food and Dairy charged the stock and their rights under put agreements to Norwest Bank Minnesota ("Norwest") as trustee for the noteholders. PCFL (Parmalat Capital Finance Ltd), a Cayman group member, had entered into put agreements to buy the stock when the notes fell due; those obligations were guaranteed by Parmalat Spa.
In late 2003 the Parmalat group collapsed. Provisional liquidators were appointed for Food and Dairy in the Cayman Islands (the "Cayman liquidators"). Acting by their provisional liquidators, Food and Dairy petitioned to wind up PCFL on the basis of sums owing under the put agreements. Henderson J appointed the Cayman liquidators as provisional liquidators of PCFL on 24 December 2004 and, after hearing the winding up petition in 2006, ordered PCFL to be wound up on 12 May 2006 and appointed the Cayman liquidators as liquidators.
PCFL, acting by Dr Bondi (administrator of the controlling shareholder), appealed the winding up order and the appointment of the Cayman liquidators. The objections were principally that (1) Food and Dairy lacked locus standi because they had assigned the benefit of the put agreements to Norwest, and (2) the debt was bona fide disputed on substantial grounds. As to the liquidators, PCFL contended there was a conflict of interest in appointing the Cayman liquidators who were already liquidators of Food and Dairy.
Legal Issues Presented
- Whether Food and Dairy were "creditors" under section 96 of the Companies Law and therefore had locus standi to present winding up petitions despite having assigned the benefit of the put agreements as security to Norwest.
- Whether Norwest, as equitable assignee, should have been joined in the winding up proceedings (i.e., whether an equitable assignee must be joined for the petition to be properly constituted).
- Whether the debt claimed by Food and Dairy was bona fide disputed on substantial grounds (principally by reason of alleged fraud/illegality) so as to require dismissal of the winding up petition.
- Whether Henderson J erred in appointing the Cayman liquidators (already acting for Food and Dairy) to be liquidators of PCFL, in circumstances where potential conflicts of interest arose — including specific transactions (notably a US$30m debt transaction) said to demonstrate an inability to handle conflicts properly.
Arguments of the Parties
Appellants' (PCFL) Arguments (as presented by Mr Moss QC)
- Food and Dairy had assigned the entire benefit of the put agreements to Norwest and therefore lacked locus standi as "creditors" to present the winding up petitions against PCFL.
- Even if Food and Dairy could sue, the proceedings were improperly constituted because Norwest (the equitable assignee) should have been joined — relying by analogy on actions to recover a debt where an assignee must be joined (citing Walters & Sullivan Ltd v J Murphy & Sons Ltd).
- The debt was bona fide disputed on substantial grounds: PCFL alleged (in separate proceedings against Bank of America and affiliates) that a dishonest scheme had defrauded PCFL and the noteholders; the funds raised by the notes were said not to have been genuinely for investment in Brazil but used to stave off Parmalat group's insolvency. Because PCFL and other group companies were alleged participants in the scheme, the obligations under the put agreements were said to be tainted with illegality, giving PCFL a defence to enforcement.
- The Cayman liquidators were conflicted and had demonstrated an inability to present conflicts to the court, exemplified by a transaction concerning a US$30m debt where the liquidators struck an arrangement resulting in PCFL receiving a share of proceeds used to pay liquidation expenses.
Cayman Liquidators' / Petitioners' Position (as reflected in the opinion)
- Food and Dairy were the contracting parties to the put agreements and had the right to demand payment; they retained legal title and the equity of redemption despite charging those rights to Norwest as security for the noteholders.
- The assignment to Norwest was by way of security and did not deprive Food and Dairy of creditor status for the purpose of presenting winding up petitions.
- Regarding the US$30m note incident, the Cayman liquidators relied upon advice of leading London counsel who had advised that the transaction was a commercial compromise they could enter into if it was in the best interests of creditors as a whole; they treated that advice as an "adequate response" to the judge's inquiries.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Walters & Sullivan Ltd v J Murphy & Sons Ltd [1955] 2 QB 584 | Illustrates the principle in actions to recover a debt that an assignor seeking recovery of an assigned debt must join the assignee. | The court noted the precedent but held the analogy to proceedings on a winding up petition is false — the reasons for joining an assignee in an action do not apply to winding up petitions. |
| Re Steel Wing Company Ltd [1921] 1 Ch 349 | Explains why the requirement to join assignees in debt-recovery actions does not apply to winding up petitions; the court in winding up can adjudicate all interests in the debt. | The Board relied on the reasoning from Re Steel Wing to conclude that an equitable assignor (the petitioner) has sufficient interest to present a winding up petition without joining the assignee. |
| Brinds Ltd v Offshore Oil NL (1986) 2 BCC 98,916 | Example of the court's discretion to make a winding up order even where there is a dispute about the debt (discretion under practice, to avoid abuse). | The Board referred to this authority to note that the court retains discretion to make a winding up order despite a dispute, but concluded it was unnecessary to explore the discretion's limits because here there was no substantial dispute. |
| Re Falcon RJ Developments Ltd (1987) 3 BCC 146 | Authority for discounting the views of intra-group creditors (i.e., creditors who are members of the same group and hold intra-group indebtedness) when considering creditor preferences in appointing liquidators. | The judge discounted intra-group creditors' views; the Board regarded that approach as consistent with existing authority and appropriate in the exercise of judicial discretion. |
| Re Arrows Ltd [1992] BCC 121; Re Maxwell Communications Corporation plc [1992] BCC 372 | Support the proposition that the same liquidators may be appointed to related companies and that conflicts of interest can be managed by the court as they arise. | The Board applied these authorities to confirm that appointing the same liquidators for related companies is not exceptional and that potential conflicts are matters the court can address subsequently rather than being a ground for automatic removal. |
Court's Reasoning and Analysis
The Board proceeded through the issues in sequence:
- Creditor status and locus standi: The Board concluded Food and Dairy were creditors. They were the contracting parties to the put agreements, retained legal title and the equity of redemption, and had the right to demand payment from PCFL. Assignment to Norwest by way of security did not deprive them of the status of creditors for the purpose of presenting winding up petitions under section 96 of the Companies Law.
- Need to join the equitable assignee: The appellants' reliance on the rule requiring an assignee to be joined in an action to recover a debt (Walters & Sullivan) was rejected as inapposite. Quoting Re Steel Wing, the Board explained that the reasoning for joining assignees in ordinary debt actions — avoiding inconsistent judgments and future actions — does not apply to winding up petitions because a winding up order triggers a collective process in which the court will investigate and settle all claims. Therefore an equitable assignor has sufficient interest to present a winding up petition without joining the assignee.
- Whether the debt was bona fide disputed on substantial grounds: The Board treated the normal practice (dismissal if a petitioner's debt is bona fide disputed on substantial grounds) as one of practice rather than strict law, and acknowledged the court's discretion to order winding up notwithstanding a dispute. They examined the substance of the alleged dispute: PCFL's separate proceedings alleged an extensive dishonest scheme involving members of the Parmalat group and certain bankers, and suggested the put obligations were tainted with illegality. The Board rejected the contention that such allegations could permit a defendant company (used as part of the mechanism to defraud noteholders) to assert illegality as a defence that would prevent the noteholders (the beneficiaries) from obtaining payment. The Board found no substantial dispute sufficient to block the winding up petition.
- Appointment of the Cayman liquidators and conflicts of interest: The Board recognized that appointment of liquidators is principally a matter of judicial discretion and that it was unusual for the Privy Council to intervene where the Court of Appeal had upheld the exercise of that discretion. The judge appropriately discounted certain intra-group creditors' views (consistent with Re Falcon) and legitimately took into account the Cayman liquidators' long incumbency and the delay and expense of replacing them.
- Specific conflict incident (US$30m note): The Board expressed concern about the transaction in which a US$30m debt owed by Food to PCFL involved an arrangement that resulted in PCFL receiving a quarter of the sale proceeds (used to pay liquidation expenses). The Board found the conduct troubling, suggesting a plain conflict of interest and even potential personal-interest concerns for the liquidators. The Board considered that it would have been preferable for the liquidators to have sought the court's directions rather than "role-playing" between themselves. However, Mr Crystal QC gave undertakings that the incident could be investigated if desirable, and the Board declined to order a fresh investigation in the absence of creditor interest and because the courts below had not erred in principle.
The Board emphasized deference to the lower courts' discretion in appointing liquidators and their established approach to managing conflicts through the court process rather than removal at the appointment stage.
Holding and Implications
Holding: The appeal is dismissed with costs.
Direct implications for the parties:
- PCFL's appeal against the winding up order and the appointment of the Cayman liquidators was rejected; the winding up order and the appointment of the Cayman liquidators stand.
- The Board did not order immediate investigation into the US$30m incident but noted the matter was troubling. The Board left Mr Crystal's undertaking (that the incident could be investigated) to be considered by the Cayman court if any application is made there, thereby permitting further local process if a party pursues it.
Broader implications:
- The decision confirms that a party who has assigned rights by way of security (an equitable assignee situation) nevertheless may have locus standi to present a winding up petition; the court in winding up proceedings can adjudicate competing interests without the necessity of joining equitable assignees at the petition stage.
- The court reiterated that alleged illegality in underlying group dealings will not necessarily permit a company used in a fraud to assert such illegality to defeat the claims of defrauded noteholders; accepting such a defence would lead to a "bizarre" result, in the Board's words.
- The Privy Council manifested reluctance to displace the exercise of discretion by lower courts in appointing liquidators, especially where potential conflicts can be managed by the court subsequently and where the lower courts have applied recognised principles (including discounting intra-group creditor views and weighing continuity and cost considerations).
The opinion does not purport to lay down new, overriding principles of law; it applies established authorities and leaves local courts to manage investigatory steps regarding potential conflicts in the first instance.
Parmalat Capital Finance Ltd & Ors v. Food Holdings Ltd & Anor (The Cayman Islands) [2008] UKPC 23 (9 April 2008)
Privy Council Appeal No 7 of 2007
Parmalat Capital Finance Ltd
and others Appellants
v.
(1) Food Holdings Ltd (in liquidation)
(2) Dairy Holdings Ltd (in liquidation) Respondents
FROM
THE COURT OF APPEAL OF
THE CAYMAN ISLANDS
- - - - - - - - - - - - - - - - -
JUDGMENT OF THE LORDS OF THE JUDICIAL
COMMITTEE OF THE PRIVY COUNCIL
Delivered the 9th April 2008
- - - - - - - - - - - - - - - - -
Present at the hearing:-
Lord Hoffmann
Lord Hope of Craighead
Lord Walker of Gestingthorpe
Baroness Hale of Richmond
Lord Mance
- - - - - - - - - - - - - - - -
[Delivered by Lord Hoffmann]
The Parmalat group of companies is based in Italy. Its principal business is supplying food and dairy products. Parmalat Capital Finance Ltd ("PCFL") is a member of the group incorporated in the Cayman Islands. It carried on business raising finance for other members of the group.
In 1999 PCFL took part in a scheme to raise money for the group by the issue of loan notes on the US bond market. The scheme involved the incorporation in the Cayman Islands of two companies named Food Holdings Ltd ("Food") and Dairy Holdings Ltd ("Dairy"). Each was to issue loan notes to the value of about US$150m. The proceeds were to be used to purchase stock in a Brazilian subsidiary called Parmalat Administracao SA ("Parmalat Brazil) and thereby provide it with equity finance.
The security for the noteholders was, in the first instance, the stock in Parmalat Brazil. Food and Dairy charged the stock to Norwest Bank Minnesota ("Norwest") as trustee for the note holders. It was however contemplated that when the notes fell due, PCFL would buy the stock and the notes would be paid off out of the purchase price. For this purpose, PCFL entered into put agreements with Food and Dairy, giving them the right to demand that PCFL buy the stock at a price determined in accordance with a formula. This obligation was guaranteed by the Italian parent company, Parmalat Spa. The rights under the put agreements were likewise charged to Norwest as security for repayment of the notes. Norwest gave notice to PCFL of its security interest in the stock and the put agreement. These documents were governed by New York law and their effect was that the money which might become payable under the put agreement became payable to Norwest, to be deposited in a collection account for the benefit of the noteholders and in which Food and Dairy would have only an equity of redemption.
Just before Christmas 2003, the Parmalat group collapsed. In Italy, Dr Enrico Bondi was appointed special administrator of the Italian company. In the Cayman Islands, some of the noteholders applied for the appointment of provisional liquidators of Food and Dairy. Henderson J appointed James Cleaver and Gordon MacRae ("the Cayman liquidators"). Those companies, acting by their provisional liquidators, then petitioned for the winding up of PCFL. The debts upon which the petitions were founded were the sums owing under the put agreements. On 24 December 2004, Henderson J appointed the Cayman liquidators as provisional liquidators of PCFL. The winding up petition was heard in 2006 and on 12 May 2006 Henderson J ordered PCFL to be wound up and appointed the Cayman liquidators to be its liquidators.
There appears to have been some lack of co-operation between the Cayman liquidators and Dr Bondi. No one has sought to assign blame for this state of affairs and the Board will not attempt to do so. But the result was that although PCFL is admitted to be heavily insolvent, it has (acting by Dr Bondi as administrator of its controlling shareholder) appealed against both the winding up order and the appointment of the Cayman liquidators. The grounds of objection to the winding up petition were, first, that Food and Dairy had no locus standi as petitioners because they had assigned the entire benefit of the put agreements to Norwest, and secondly, that the debt was disputed on substantial grounds. The main ground for objection to the Cayman liquidators was that their interests as liquidators of Food and Dairy conflicted with the interests of PCFL. The Court of Appeal rejected both objections.
There is no dispute that, at the commencement of the winding up, the money due under the put agreements had become payable and PCFL was insolvent. Section 96 of the Companies Law provides that a petition may be presented by a "creditor" and the first question is whether Food and Dairy were creditors. The Board considers that they were. Food and Dairy were the contracting parties to the put agreements and had the right, as against PCFL, to demand payment. They retained both the legal title and the equity of redemption. In the opinion of the Board, the fact that they had assigned the debts by way of security to Norwest did not deprive them of the status of creditors.
Mr Moss QC, who appeared for the appellants, submitted that even if Food and Dairy were entitled to sue, the proceedings were not properly constituted because Norwest, as equitable assignee, should have been joined in the proceedings. He relied upon the analogy of an action to recover a debt, in which it is clear that an assignor seeking to recover an assigned debt must join the assignee: see Walters & Sullivan Ltd v J Murphy & Sons Ltd [1955] 2 QB 584, 588. But the analogy is false. As P O Lawrence J explained in Re Steel Wing Company Ltd [1921] 1 Ch 349, 357:
"The main reason why an assignee of a part of a debt is required to join all parties interested in the debt in an action to recover the part assigned to him is in my opinion because the Court cannot adjudicate completely and finally without having such parties before it. The absence of such parties might result in the debtor being subjected to future actions in respect of the same debt, and moreover might result in conflicting decisions being arrived at concerning such debt. In my opinion, however, this reasoning does not apply to a winding up petition. After a winding up order has been made the Court in all cases when it is necessary will investigate, adjudicate upon, and settle the petitioner's debt as well as the debts of the other creditors. In the case of an assignee of part of a debt the Court in adjudicating upon his claim can and will do so in the presence of the persons entitled to the remainder of the debt, and the rights of all parties interested in the debt will be completely and finally settled once and for all."
In other words, a winding up order does not affect the legal rights of the creditors or the company. It only puts into effect a process of collective execution against the assets of the company, for the benefit of all creditors. In the course of that process, the rights of creditors may have to be determined. But such a determination is not necessary at the stage when the order is made. An equitable assignor therefore has a sufficient interest without joining the assignee.
The next question is whether the debt is disputed. If a petitioner's debt is bona fide disputed on substantial grounds, the normal practice is for the court to dismiss the petition and leave the creditor first to establish his claim in an action. The main reason for this practice is the danger of abuse of the winding up procedure. A party to a dispute should not be allowed to use the threat of a winding up petition as a means of forcing the company to pay a bona fide disputed debt. This is a rule of practice rather than law and there is no doubt that the court retains a discretion to make a winding up order even though there is a dispute: see, for example, Brinds Ltd v Offshore Oil NL (1986) 2 BCC 98,916. But the Board does not find it necessary to examine the limits of the discretion because they consider that there is no substantial dispute.
The material for the alleged dispute is contained in allegations made in proceedings commenced by PCFL, acting by the Cayman liquidators, against Bank of America and affiliated companies, alleging them to be vicariously liable for a dishonest scheme by persons whom they employed in their Italian branch and persons in the Parmalat group to defraud PCFL and the noteholders. It is alleged that the money raised by the notes was not truly for investment in Brazil, but to stave off the insolvency of the Parmalat group. PCFL, Food and Dairy, by the officers then acting on its behalf, were parties to this scheme. Therefore, says Mr Moss, the obligations under the put agreement were tainted with illegality and PCFL would have a defence against their enforcement.
The Board does not accept this submission. The demand for payment under the put agreement was made for the benefit of the note holders. Food and Dairy, though holding the legal title to the debt, have no substantial beneficial interest. The noteholders were not parties to the alleged fraud. They were the persons defrauded. But that fraud is alleged to provide the company which was used as part of the mechanism to defraud them with a defence against their claim. The Board considers that this would be a bizarre result which cannot be the law.
Finally, there is the question of whether the judge should have appointed the Cayman liquidators rather than the candidates proposed by other creditors. That is very much a matter of discretion and where, as in this case, the exercise of the discretion has been upheld by the local Court of Appeal, it would be very unusual for the Board to interfere. In considering the views of creditors, the judge discounted the views of other members of the Parmalat group which held intra-group indebtedness. There is ample authority for doing so: see, for example, Re Falcon RJ Developments Ltd (1987) 3 BCC 146. He gave some weight to the fact that the Cayman liquidators had been in office for nearly three years and the delay and expense which would be caused if new liquidators were to take over. These too were proper matters to be taken into account.
The consideration to which Mr Moss says he did not give sufficient weight was the conflict of interest between the position of the Cayman liquidators as liquidators of Food and Dairy on the one hand and of PCFL on the other. It is not unusual for the same liquidators to be appointed to related companies, even though the dealings between them may throw up a conflict of interest. It avoids the expense of having different liquidators investigate the same transactions. The attitude of the court has been that any conflicts of interest can be dealt with by the court (on the application of the liquidators) when they arise: see Re Arrows Ltd [1992] BCC 121; Re Maxwell Communications Corporation plc [1992] BCC 372.
In this case, however, Mr Moss said that the Cayman liquidators had shown that they could not be relied upon to bring conflicts of interest before the court. He drew attention to a debt of US$30m owed by Food to PCFL, which was evidenced by a secured senior note. The liquidators could not find the note. Its terms provided that it could be replaced, but only on the giving of an insured indemnity which PCFL could not provide. The liquidators then struck a bargain with themselves: Food agreed to issue a new note but in return for an agreement by PCFL to pay it 25% of the value. The note was issued and sold to a third party for US$4.35m, of which PCFL took a quarter. It used the money to pay expenses of the liquidation.
Henderson J asked for an explanation of this transaction and was told that the advice of leading counsel in London had been sought. He had advised the liquidators that it was a commercial compromise into which they could enter if they thought it in the best interests of the creditors as a whole. They did. Henderson J accepted this as an "adequate response" and said there was no need for further investigation. The Court of Appeal did not deal specifically with this incident but held that the judge had made no error of principle.
The Board accepts that Henderson J was entitled to regard the dealings over the US$30m note as insufficient to justify removal of the Cayman liquidators. But they must admit to being troubled by the incident, which appears to have involved a plain conflict of interest, not merely between the liqudators in their different capacities, but even with the interests of the liquidators in their personal capacities in securing payment of their fees. Mr Crystal QC, for the Cayman liquidators, told the Board that one of them assumed the role of PCFL and the other that of Food, and they bargained with each other. This role playing does not seem to the Board an adequate way of dealing with the matter. It would have been much better if the liquidators had sought the directions of the court. But Mr Crystal undertook to the Board that if it was thought desirable, the incident could be investigated. He had given a similar undertaking in the courts below. On the other hand, the Board does not wish to put the parties to the expense of an investigation in which the creditors express no interest. They will therefore leave Mr Crystal's undertaking to be considered on any application which may be made to the Cayman court. They will humbly advise Her Majesty that the appeal should be dismissed with costs.
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