Distributing Remaining Value In Liquidated Feeder Funds

The Grand Court of the Cayman Islands has determined how the remaining value in a liquidated feeder fund should be distributed amongst investors.

Introduction

On 2 September 2016, Mr Justice Andrew Jones QC delivered a landmark judgment, determining how the remaining value of a Cayman feeder fund in official liquidation should be distributed amongst its investors (Pearson v Primeo Fund1

The case is the most recent chapter in the ongoing Primeo litigation2 and provides valuable guidance to liquidators of Cayman feeder funds as to the scope of their power to facilitate an equitable distribution of value to investors.

Facts

Herald and Primeo were open-ended investment funds. They both placed funds for investment with a Madoff-related entity called BLMIS.

In 2007, Primeo assigned the credit of its account with BLMIS to Herald in return for subscribing for shares in Herald (the "In Specie Subscription"). The amount of Herald shares provided to Primeo was based on the perceived value of Primeo's account with BLMIS, which at that time was valued at US$466M.

In 2008, it was discovered that BLMIS was a Ponzi scheme, with the consequence that every reported NAV had been misstated, including the NAV used to calculate the value of Primeo's consideration under the In Specie Subscription.

Herald was subsequently put into liquidation and its liquidator sought to determine how the remaining value in the fund should be distributed amongst its shareholders. In particular, the liquidator was tasked with determining whether Primeo's shareholding in Herald should be adjusted to reflect the fact that it had received a greater number of shares in Primeo than it would have otherwise received if the actual value of its account with BLMIS had been known at the time of the In Specie Subscription.

The Court had previous decided3 that the liquidator had the power under section 112(2) of the Companies Law to rectify Herald's share register. The issue before the Court in this instance was:

(a) whether Herald's share register should be rectified; and

(b) if so, on what basis should any rectification be performed?

Decision

Should the register be rectified?

The Court began by noting that the concept of rectification under section 112(2) of the Companies Law implied restoring the register to a position that accurately reflected the relative position of all shareholders, as it would be if all subscriptions and redemptions had been transferred at a "true" NAV per share.

Since every subscription and redemption of shares in Herald after the initial offering had occurred on the basis of a fraudulently misstated NAV, the Court found that there "could be no clearer case" in which the power of the liquidator under section 112(2) should be exercised.

However, Mr Justice Andrew Jones QC made it clear that section...