Primeo V Herald: Clarifying The Rights Of Redeemed Investors

The recent decision of Jones J in Primeo Fund (in official liquidation) v Herald Fund SPC (in official liquidation)1 addresses two matters of importance for investors in Cayman Islands' investment funds and Cayman Islands' insolvency practitioners: (1) the effect of Section 37(7) of the Companies Law (2013 Revision) (the "Law") on the rights of redemption creditors; and (2) whether, and if so when, a liquidator must or may rectify the register of members of a fund in respect of which the net asset value ("NAV") has been mis-stated.

Background

The relevant factual background to the case can be briefly summarised as follows: Herald Fund SPC ("Herald") had been incorporated as an open ended investment fund in March 2004, and had originally invested substantially all of its assets in Bernard L Madoff Investment Securities LLC. In turn, the Primeo Fund ("Primeo") had, from 2004 onwards, invested substantially all of its assets in Herald. Accordingly, both Herald and Primeo were direct or indirect victims of the Madoff Ponzi scheme, which came to light on 11 December 2008.

Primeo was one of several investors which had submitted redemption requests to Herald for a redemption date of 1 December 2008 (the "December Redeemers"). Substantially all of these redemption requests were accepted by Herald and, on 1 December 2008, all of the December Redeemers' shares were removed from Herald's share register. Save for one investor, however, none of the December Redeemers were paid their redemption proceeds before Herald went into liquidation on 23 July 2013.

In Herald, the Grand Court (the "Court") was concerned with two issues:

whether Section 37(7) of the Law applied in respect of the shares which were subject to unpaid redemption requests submitted by the December Redeemers; and whether/when a liquidator is obliged and/or entitled to rectify a company's register of members where the company's NAV has been mis-stated. The Section 37(7) issue

Section 37 of the Law provides a statutory framework relating to the redemption and issue of a company's shares (and the purchase by a company of its own shares); section 37(7), which governs the redemption of a company's shares when that company is in liquidation, is of particular interest to Cayman Islands' insolvency practitioners but, somewhat surprisingly, has never previously been considered in any substantive detail by the Court.

Section 37(7)(a) of the Law provides as follows:

"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:

Provided...