The Rocky Road To Redemption

Investors will undoubtedly agree that "the path to redemption is not always smooth" as stated by Lord Mance in the Privy Council's recent judgment in Pearson -v- Primeo Fund [2017] UKPC 19. The judgment brings finality to the dispute between Herald Fund SPC (in Official Liquidation) ("Herald") and Primeo Fund (in Official Liquidation) ("Primeo") regarding the redemption of shares. The Privy Council dismissed Herald's appeal, confirming the earlier decisions of the Cayman Islands Court of Appeal and Grand Court. All three courts found that an investor who had properly redeemed its shares, but had not been paid, will be a creditor of the company in respect of its redemption proceeds. Accordingly, its claim (as a creditor) will rank ahead of the remaining investors in the liquidation of the company, albeit behind those of 'ordinary' creditors.

The Dispute between Herald and Primeo

Herald, an open-ended investment fund, invested the majority of its funds in Bernard L. Madoff Investment Securities LLC. Primeo also carried on business as an open-ended investment fund. From 2004 onwards, Primeo invested in Herald which resulted in Primeo becoming an indirect victim of the Madoff Ponzi scheme.

On 1 December 2008 (or at some earlier redemption date), a number of investors' redemption requests (represented in the Privy Council by Primeo) were accepted by Herald in accordance with Herald's articles (the "December Redeemers").

On 11 December 2008, the Madoff fraud was exposed and Herald took immediate steps to suspend the calculation of its net asset value and the issuance and redemption of shares, doing so at 5:00 pm on 12 December 2008. The December Redeemers had not been paid.

Herald's position was that all investors who were unpaid on 12 December 2008 rank as ordinary shareholders and should therefore be paid pari passu. Primeo's position was that the December Redeemers were owed simple debts by Herald and so should rank in the liquidation as ordinary creditors (above unredeemed investors).

The Interveners

In addition to the Privy Council hearing the dispute between Primeo and Herald in relation to the December Redeemers, the Privy Council also heard arguments from two additional parties:

Reichmuth & Co appeared representing the interests of investors who, before 5pm on 12 December 2008, gave notice to a subsequent date (the "Late Redeemers"); and Natixis SA appeared representing investors who made requests to redeem after 5pm on 12 December 2008...