Clawback's Back (Back Again): The Privy Council Rules On The Power Of A Cayman Liquidator To Rectify The Register Of Members

In Pearson v Primeo [2020] UKPC 3, the Privy Council considered an appeal by a liquidator on the scope of section 112(2) of the Companies Law (2018 Revision) of the Cayman Islands. The provision relates to a liquidator's power "to settle and if necessary rectify the company's register of members, thereby adjusting the rights of members amongst themselves". The power arises only in the context of a solvent liquidation of a company which has issued redeemable shares at prices based upon its net asset value.

When a hedge fund suffers loss from investing with a third party who is a fraudster, the loss may fall unevenly as between the fund's investors, depending on their subscriptions and redemptions in the fund over time. Does a liquidator have the power equitably to 'adjust' shareholders' rights to any surplus in the liquidation of the fund, in order to even up those losses? Does the power to rectify go beyond the mere implementation of the shareholders' underlying legal rights?

The Board's opinion, expressed by Lord Briggs, was that section 112(2) was not so wide. In particular, the power of rectification was only to bring the register into line with the underlying legal rights of the members as they exist at the commencement of the liquidation. Those rights could not be rewritten by the liquidator to do justice as between the investors. Lady Arden's judgment dissents from the majority on the scope of section 112(2), although she agreed that the liquidator's appeal should not succeed.


Herald Fund SPC (in Official Liquidation) ("Herald") was a hedge fund that placed all its assets under management with Bernard Madoff's firm ("BLMIS"). Herald and its investors were victims of Madoff's Ponzi scheme, though some investors fared better than others.

Primeo Fund (in Official Liquidation) ("Primeo") acquired the largest part of its equity position in Herald through an 'in specie subscription' in 2007 when, not long before Madoff's fraud was discovered, the purported value in Primeo's remaining direct investments with BLMIS was assigned to Herald in exchange for Herald issuing new shares in Herald to Primeo. That value was overstated because of BLMIS's fictitious profits. Accordingly, Primeo received a windfall in terms of the number of new shares it received in Herald.

Appeal Unsuccessful

The liquidator (in this case the additional liquidator of Herald) argued that section 112(2), which came into force in 2009, permitted him to adjust the...

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