Vol 14 (2017) - Issue 6

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'The Path to Redemption Is Not Always Smooth': Unfortunate Consequences for Unredeemed Investors in the Cayman Islands

Introduction
A recent judgment of the Judicial Committee of the Privy Council ('Privy Council' or 'Board'), the ultimate appellate court of the Cayman Islands, has provided certainty for investors and insolvency practitioners alike with respect to the enforceability and priority to be afforded to investors’ claims for unpaid redemption proceeds in the winding up of Cayman Islands investment funds. The judgment has, however, given rise to rise to commercially unfortunate results in that the effects of a mis-stated NAV now appear capable of being perpetuated in a winding up, regardless of the fund’s ability (or inability as the case may be) to lawfully make payment of redemption proceeds prior to the commencement of liquidation.
The Privy Council decision is the most recent in the ongoing liquidation proceedings of Herald Fund SPC ('Herald'). Herald was, in terms of its constituent documents at least, a fairly typical Cayman Islands domiciled open-ended mutual fund, often referred to as a 'hedge fund'. However, as explained below, Herald’s sole investment turned out to be a substantial investment in the Madoff Ponzi scheme and Herald ultimately ended up in official liquidation in the Cayman Islands.
This aspect of the proceedings involved an important point of statutory construction, namely how section 37(7) of the Companies Law operates in the factual context of Herald which involved claims to significant unpaid redemption proceeds which were sought to be enforced several years after the discovery of the Ponzi scheme and which with the benefit of hindsight were clearly based on a mis-stated NAV. The outcome of the proceedings is highly material to Herald’s various categories of stakeholders (the redemption claims being valued at almost USD 200m). The issue is one that has rarely confronted the Grand Court in any detail and
certainly this was the first time it had been considered at the highest appellate level.