Vol 13 (2016) - Issue 1

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Cayman Islands Court of Appeal Clarify Law in Favour of Redeeming Investors

On 20 November 2015 the Cayman Islands gave its long awaited decision in RMF Market Neutral Strategies (Master) Limited v DD Growth Premium 2X Fund (in Official Liquidation). The decision held that redemption payments made to RMF Neutral Strategies (Master) Limited ('RMF') by DD Growth Premium 2X Fund (the '2X Fund'), at a time when it was subsequently shown that the 2X Fund was insolvent, were not capable of being clawed back by the liquidators of the 2X Fund. The decision creates certainty for investors and is a disappointment to many liquidators who may have wished to pursue clawback claims of their own.
In the fallout to the 2008 financial crisis it became apparent that many Cayman Islands’ hedge funds had made redemption payments to investors at a time when they were, as a matter of fact, insolvent. There were potential claw backs of such payments from investors by liquidators of funds that had made such payments because of the provisions of section 37(6)(a) of the Companies Law (2007 Revision) (the 'Law') which provided as follows:
'A payment out of capital by a company for the redemption or purchase of its own shares is not lawful unless immediately following the date on which the payment out of capital is proposed to be made the company shall be able to pay its debts as they fall due in the ordinary course of business.'

The critical question of concern to the legal profession, insolvency practitioners and investors alike was what amounted to a payment out of capital for the purposes of section 37(6)(a).
Taking pre-emptive action to avoid the need to await the expiry of the limitation period, RMF brought an action in the Grand Court of the Cayman Islands seeking a negative declaration that the sums paid by 2X Fund for the redemption of redeemable shares held in the 2X Fund had been lawfully paid and received; arguing that any payments made were payments out of share premium, not payments out of capital and therefore did not fall foul of section 37(6)(a). The liquidators sought to recover sums paid to RMF on the basis that they had been paid unlawfully contrary to section 37(6)(a) of the Law, and that the payment made to RMF was a voidable preference payment.
The matter first came before the Grand Court in September 2014 with the Chief Justice delivering his judgment on 17 November 2014. The Chief Justice found in favour of RMF on both the construction of section 37(6)(a) and the voidable preference claim.
The Chief Justice was unequivocal in adopting the interpretation of the Law proffered by RMF, holding that save for a de minimis amount of USD1/1000 per share, the purchase price of the 2X Fund’s shares represented share premium.
The Chief Justice came to his decision because of section 34(2) of the Law which provides for the uses to be made of money in a company’s share premium account, providing as follows:
‘The share premium account may be applied by the company subject to the provisions, if any, of its memorandum or articles of association in such manner as the company may, from time to time, determine including, but without limitation –

a) Paying distributions or dividends to members;
b) …
c) In the manner provided in section 37;
d) …
e) Writing off the expenses of, or the commissions paid or discount allowed on, any issue of shares or debentures of the company; and
f) Providing for the premium payable on redemption of any shares or debentures of the company.