Cayman Decision Of Herald Fund SPC

Investors' claims for unpaid redemption proceeds in winding up of Cayman Islands investment funds

Introduction

The Cayman Islands Court of Appeal decision in In the matter of the Herald Fund SPC (In Official Liquidation)1 has provided some clarity on the ranking of priority in liquidation of amounts owing to shareholders and former shareholders of a company operating as an open ended investment fund. In summary, if a former shareholder has completed the redemption process prescribed by the company's articles, s/he will be treated as a creditor (although ranking behind the general body of outside creditors). If a former shareholder has only "accrued the right to redeem", in that the redemption process prescribed by the company's articles has not been completed, then s/he will be treated as a shareholder.

The issue

Herald Fund SPC had been a feeder fund for Bernard L Madoff Investment Securities LLC prior to its collapse following Mr Madoff's revelation that he had been conducting a massive fraud.

The issue before the Court of Appeal was whether a redeemed shareholder, who had completed the redemption process in accordance with the company's articles of association but had not yet been paid because of an intervening winding up, was to be treated as a creditor or a shareholder for the purpose of the redeemed shareholder's claim in the liquidation for the unpaid proceeds of the redemption.

The legislative framework for share redemption and priority ranking in liquidation

Section 37(7)(a) of the Cayman Islands Companies Law (2003 Revision) (the Companies Law)2 deals with redeemable shares in the context of a winding up of the company and materially provides that:

"Where a company is being wound up and, at the commencement of the winding up, any of its shares which are or are liable to be redeemed have not been redeemed or which the company has agreed to purchase have not been purchased, the terms of redemption or purchase may be enforced against the company, and when shares are redeemed or purchased under this subsection they shall be treated as cancelled:

... this paragraph shall not apply if: i. The terms of redemption or purchase provided for the redemption or purchase to take place at a date later than the date of the commencement of the winding up" (our emphasis).

Section 37(7)(b) then sets out the priority ranking of an amount due under sub-section (a). In essence, it provides that these amounts rank behind the company's debts generally...