In the recent decision of Mangatal J in the matter of the Centaur Entities the Grand Court was asked to consider and sanction a complex distribution model, pursuant to which the joint official liquidators (JOLs) of the Centaur Entities wished to make.
This was an interim distribution of net assets of £42 million to some 1,295 investors who have claims totalling £136 million against the estates of the Centaur Entities.
The Centaur Entities were Cayman Islands investment vehicles incorporated to carry on litigation funding business in the UK, Australia, New Zealand and Asia. Upon the JOLs’ appointment they discovered that there had been gross mismanagement by the former controlling minds of the Centaur Entities, which included intermingling of assets between entities, failing to prepare financial statements, failing to maintain proper books and records more generally, providing inaccurate reports to investors and misappropriating some US$27 million of investor funds. Accordingly, the JOLs undertook what the Court described as “a complex forensic exercise aimed at unravelling the assets and business activities of the Centaur Entities”, based primarily on tracing the Centaur Entities’ cash flows between 2011 and 2014.
As a result, the JOLs formulated a distribution model and payment waterfall with a view to ensuring the most equitable distribution of the assets of the Centaur Entities and sought the sanction of the Grand Court. The Liquidation Committees of the Centaur Entities (LCs), with whom there had been extensive consultation and negotiation throughout the process, were also independently represented in relation to a number of key issues on which the JOLs and the LCs disagreed.
Priority of amounts owing to members in their capacity as members
One of the critical issues considered by Mangatal J was the relative priority of liabilities owing to members under sections 37(7) and 49(g) of the Companies Law. The competing classes of claims are redemption creditor claims (i.e. those investors who have been redeemed but unpaid) (Redemption Claims) and claims by investors for amounts owing by way of dividend or variable return which were declared prior to the date of insolvency but which also remain unpaid (Shareholder Debt Claims). The JOLs contended that both categories of claim should fall within the same class of creditor as they were both ‘sums due to members in their character as members’. However, the LCs argued that Shareholder Debt Claims ranked below Redemption Claims.
While noting that this issue is “a very complicated one”, Mangatal J agreed with the JOLs’ view that there is no statutory or common law basis on which to distinguish Shareholder Debt Claims from Redemption Claims. This is good news for members with outstanding dividend claims (which crystallised prior to the commencement of the liquidation), who may have been concerned that their interests would be subordinated to those of redeemed members, who often did not elect to redeem until shortly before the liquidation date.