Vol 10 (2013) - Issue 6

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The Position of Redeeming Members following Monarch Pointe

The post Lehman period produced considerable volatility in the financial markets, and it produced no shortage of litigation in the leading offshore incorporation centers for investment funds, such as the British Virgin Islands (the BVI). Until recently, much of the litigation which the BVI has seen has touched upon two questions: the right of a member, or past member, of a distressed investment fund to begin winding up proceedings, or the right of a liquidator to 'claw back' redemption proceeds, following a mistaken calculation of the Net Asset Value (the NAV) of the Fund.

It was perhaps inevitable that once the liquidation of insolvent funds came to an end, a third question would arise: where does a member of an investment fund that has submitted a valid redemption request (a redeeming member) of the Fund rank in the liquidation of a BVI incorporated investment fund? Is such a member to be treated as a creditor, or does it rank alongside, or ahead, of members that have failed to submit a redemption request? To what extent does its characterisation as a creditor, or its standing to begin winding up proceedings, resolve the issue?

These were the questions which came to be decided recently by the Court of Appeal of the Eastern Caribbean Supreme Court, on an appeal from Mr. Justice Edward Bannister QC sitting in the Commercial Division in the British Virgin Islands in Somers Dublin Ltd A/C KBCS & Ors v Monarch Pointe Fund Limited. In short, restoring conventional wisdom, the Court decided that a redeeming member ranks behind so-called 'external' creditors, but ahead of those members that have not validly redeemed. To understand the reasoning which led to that conclusion, it is necessary to understand the peculiar legislative regime in place in the British Virgin Islands, and to remember that the decisions which have considered it have all been decided in the context of the first question: the right of a member, or past member, to commence winding up proceedings.

Two statutory provisions are relevant. Section 62 of the BVI Business Companies Act 2004 (the BCA) provides:

'If a share is redeemable at the option of the shareholder and the shareholder gives the company proper notice of his intention to redeem the share:'
(a) The company shall redeem the share on the date specified in the notice, or… on receipt of the notice;
(b) Unless the share is held as a treasury share under section 64, the share is deemed to be cancelled;
(c) From the date of redemption, the former shareholder ranks as an unsecured creditor of the company for the sum payable on redemption.

On the other hand, Section 197 of the Insolvency Act 2003 (the IA) provides:

'A member, and a past member, of a company may not claim in the liquidation of the company for a sum due to him in his character as a member, whether by way of dividend, profits, redemption proceeds or otherwise, but such sum is to be taken into account for the purposes of the final adjustment of the rights of members and, if appropriate, past members between themselves.'

A redeeming former shareholder therefore ‘ranks as an unsecured creditor’ for the purposes of the BCA, but may not claim in a liquidation any sum due 'in his character as a member, whether by way of dividend, profits, redemption proceeds or otherwise'. On the face of it, those provisions are in obvious conflict.

The standing of a redeeming member to apply for a winding up order: Westford Special Situations Fund Ltd v Barfield Nominees Limited & Ors (2011)
In Westford, the question which arose in the Court of Appeal was whether or not investors who had partially redeemed – by submitting valid redemption requests – were to be treated as creditors with standing to invoke the winding up jurisdiction of the Court.

At first instance, the Commercial Court Judge considered that his earlier decision in Western Union International Limited v Reserve International Liquidity Fund Ltd (2009) resolved the question of whether a redeemed, but unpaid, former member was claiming a sum due 'in his character as a member'.