Vol 6 (2009) - Issue 2

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Investor Protection in Cayman Hedge Funds: The ‘Just and Equitable’ Winding up Jurisdiction

It is well known that a high proportion of hedge funds are incorporated in the Cayman Islands, with 10,291 regulated funds based in Cayman as at September 2008 (Cayman Islands Monetary Authority Statistics). As the economic environment has deteriorated since August 2007, there has been much speculation about the impact on hedge funds of the so-called ‘credit crunch’ and the large falls in the value of securities and other assets. Some funds have already failed and observers have suggested that many more may fail. Whilst there is currently little evidence of such widespread failure, it is clear that a growing number of investors are considering their options, often because redemptions may have been suspended and they are interested in finding an exit from the investment or because they wish to take action to recover losses against those they believe to be responsible for causing them.

The typical hedge fund structure tends to restrict the ability of investors to take action by placing shareholder control in the hands of the investment manager. Investors often hold non-voting shares, with all the voting shares being held by the investment manager. All management functions are usually delegated to the investment manager. The investment manager will, therefore, usually have control of the fund and investors may feel powerless to take any action themselves. The Rule in Foss v Harbottle (1843) 67 ER 189, which limits the circumstances in which a shareholder may bring a derivative action on behalf of the company or a personal action to claim loss which is reflective of loss suffered by the company, further restricts the ability of investors to take action themselves.

Against this background, the possibility of seeking a winding up on the just and equitable ground may have considerable appeal because it may allow investors to obtain an element of control, as well as the reassurance that matters will be dealt with by a truly independent professional liquidator. Concerns relating to the timing of any sale of the assets need not rule out a just and equitable winding up, since the liquidator may take such issues into account and, in appropriate cases, may even re-engage the investment manager to continue managing the assets so far as may be necessary for the beneficial winding up of the fund. In this event, the liquidator can provide more effective supervision of the activities of the investment manager than may otherwise be the case. Investors who have concerns that they feel are not being addressed may, therefore, wish to give serious consideration to the possibility of seeking a winding up order based on the just and equitable ground, which has long been seen as an important means of shareholder protection and of control over the management of companies.

Although in some jurisdictions, notably England & Wales, the relevance of the just and equitable winding up jurisdiction has been reduced by the availability of other remedies, such as that contained in section 459 of the Companies Act 1985, the Cayman Islands have not sought to introduce alternative remedies. As a result, the ability of the Grand Court of the Cayman Islands (the ‘Grand Court’) to make a winding up order is not limited by the types of restrictions placed on the English Courts to make an equivalent order (e.g. in section 122 of the Insolvency Act 1986 and see the comments of Jonathan Parker J in Re Guidezone [2001] BCC 692). Section 94(d) of the Cayman Islands’ Companies Law (2007 Revision) simply provides a power to make a winding up order if the Court is of the opinion that it is just and equitable that the company should be wound up. The Grand Court is guided by the English and other common law authorities but has interpreted its jurisdiction widely and sought to be flexible in the approach taken in respect of such petitions. It has, however, also been prepared to refuse to make winding up orders where other more appropriate remedies have been available, such as in circumstances where a fair offer has been made to purchase the petitioner’s shares (see In the matter of CVC/Opportunity Equity Partners Limited 2002 CILR 77, where the Privy Council, upholding the decision of the Cayman Islands’ Court of Appeal, indicated that a petition would not be allowed to proceed where a fair offer had been made to purchase the petitioner’s shares).