No Path To Redemption: Privy Council Rules On Pearson vs. Primeo

"The path to redemption is not always smooth."

So begins the judgment of Lord Mance in the Privy Council in the case of Pearson v Primeo1 - the latest but almost certainly not the final word on redemption rules in Cayman Islands hedge funds. Indeed, Lord Mance's decision is likely to mean that there is, in fact, no path to redemption for those investors who have not already "redeemed" their shares when a fund is suspended and then goes into liquidation.

This case revolved around section 37(7) of the Cayman Islands Companies Law - a provision which the Grand Court called a "comprehensive code"2 for redeeming investors. Following Pearson v Primeo, that section looks less like a comprehensive code than a dead letter. As Lord Mance says in his judgment, "The likelihood in practice of successful section 37(7) claimants may [...] be slight."3

The Privy Council has upheld the findings of both the Grand Court and the Cayman Islands Court of Appeal to the effect that those shareholders in the Herald Fund (a Madoff feeder fund which is now in liquidation) who had "redeemed"( i.e. property in their shares had passed back to the Fund on the relevant Redemption Day) have a form of creditor claim which is outside the ambit of section 37(7).

A novel point was raised in the Privy Council by the intervention of Reichmuth & Co, a shareholder whose shares had not been redeemed but who had served a valid redemption request prior to the suspension of the Fund. Reichmuth argued that the section must apply to it and to similarly situated shareholders (the "Late Redeemers"). No other party argued that the section applied to them and the Courts have yet to articulate a convincing real world scenario in which the section would apply to any other class of shareholder.

The Privy Council agreed with Reichmuth's submission that the section applies to the Late Redeemers; however, it went on to rule that the effect of a suspension of the Fund was to deny those redeemers (and probably any redeemers) the benefit of the section:

"When as here the suspension continued until the commencement of the winding up, the terms of redemption must be regarded as having provided for redemption to take place at a date later than the date of the commencement of the winding up, within the language of Proviso (i) to section 37(7)(a)"4

What this means is that the section, which is predicated as a means by which shareholders whose shares "have not been redeemed" can enforce the terms of...