Some refinement regarding the priority to be afforded to investors' claims for unpaid redemption proceeds in the winding up of Cayman Islands investment funds; however, questions linger.


A recent judgment of the Cayman Islands Court of Appeal1 (CICA) has provided a degree of certainty for investors and insolvency practitioners alike with respect to the 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 uncertainty with respect to the enforceability of such claims, with enforceability now seemingly entirely dependent on the particular terms of redemption contained in individual articles of association.

The CICA decision is the most recent in the ongoing liquidation proceedings of Herald Fund SPC (Herald), a segregated portfolio company incorporated in the Cayman Islands which was one of the largest so-called feeder funds into the Madoff Ponzi scheme.

This aspect of the proceedings involves an important point of statutory construction, namely how section 37(7) of the Companies Law operates in the context of significant unpaid redemption proceeds sought to be enforced several years after the discovery of the Ponzi Scheme notwithstanding that, with the benefit of hindsight, those redemption claims were clearly based on a wholly fictitious NAV. The outcome of the proceedings would be highly material to Herald's various categories of stakeholders (the redemption claims, if valid, being valued at almost $200m). The issue is one that has rarely confronted the Grand Court of the Cayman Islands (Grand Court) and certainly this was the first time it had been considered at appellate level.

The Additional Liquidator of Herald2 has subsequently issued a further appeal to the ultimate appellate Court of the Cayman Islands, the Judicial Committee of the Privy Council (Privy Council). It is hoped the Privy Council will hear and determine the appeal within the next 6 – 12 months.


Prior to the discovery of Madoff's fraud in December 2008, a significant number of investors in Herald had submitted redemption requests for a trade date of 1 December 2008 (the December Redeemers), with payment specified under the constituent documents to be made generally within 20 business days after that date. Under Herald's Articles of Association (Articles), the trade date was specified to be the "Redemption Day", with the articles of a Cayman Islands mutual fund. payment of redemption proceeds and removal from the share register to be completed thereafter – a very common, if not typical, mechanism in

Shortly after Madoff was arrested on 11 December 2008, Herald's directors convened a board meeting on 12 December 2008 at which they passed a resolution suspending the calculation of NAV, subscriptions, redemptions and, importantly, the payment of redemption proceeds3 – in excess of $190 million of which had not yet been paid to the December Redeemers. This suspension took place after the 1 December 2008 Redemption Day had passed (the Directors being wholly unaware at the time that Herald's sole asset was about to be exposed as an interest in the world's largest Ponzi Scheme).

Following the presentation of a winding up petition by the largest December Redeemer, Primeo Fund (in Official Liquidation) (Primeo)4, Herald was placed into official liquidation in July 2013. Primeo and various of the other December Redeemers subsequently filed proofs of debt in the ordinary way in respect of their claims for unpaid redemption proceeds.

Rather than adjudicating those proofs of debt in accordance with the procedure set out in the Companies Law and The Companies Winding Up Rules (CWR), the Additional Liquidator of Herald sought directions from the Grand Court as to the enforceability of those "redemption creditor" claims under section 37(7)(a) of the Companies Law (the December Redeemer Issue).

Section 37(7)(a) provides:

Where a company is being wound up and, at the commencement of the winding up, any of its shares which are or are liable to be redeemed have not been redeemed or which the company has agreed to purchase have not been purchased, the terms of redemption or purchase may be enforced against the company, and when shares are redeemed or purchased under this subsection they shall be treated as cancelled:

Provided that this paragraph shall not apply if-

  1. the terms of redemption or purchase provided for the redemption or purchase to take place at a date later than the date of the commencement of the winding up; or
  2. during the period beginning with the date on which the redemption or purchase was to have taken place and ending with the commencement of the winding up the company could not, at any time, have lawfully made a distribution equal in value to the price at which the shares were to have been redeemed or purchased.

Utilising a mechanism available under the CWR, the Grand Court made orders for the determination of the December Redeemer Issue through inter partes proceedings within Herald's liquidation5, with Primeo appointed as class representative for the December Redeemers and the Additional Liquidator appointed as class representative for Herald's remaining stakeholders.6

First Instance Ruling

At the first instance hearing in the Grand Court in June 2015, Primeo contended that the December Redeemers fell outside the scope of section 37(7) of the Companies Law in circumstances where the December Redeemers had already "redeemed" their shares as a matter of law on 1 December 2008 and those shares were not therefore shares which "are or are liable to be redeemed but have not been redeemed" under section 37(7)(a) of the Companies Law. Primeo also sought a declaration that the December Redeemers had a creditor claim ranking pari passu with external or third party creditors.

Acknowledging that the legislative drafting of section 37(7) was not as precise as it could have been, the Additional Liquidator took the position that, claim was enforceable in a liquidation in circumstances where section 37 of the Companies Law established a complete code for the issuance and redemption of shares and, in that context, the term "redemption" in the statute was concerned with the payment of redemption proceeds. notwithstanding Herald's articles focused on a redemption date, this was immaterial when determining whether or not a "redemption creditor"

In determining the December Redeemer Issue in favour of Primeo, the Grand Court found that the December Redeemers had "redeemed" their shares on 1 December 2008 and, accordingly, fell outside the operation of section 37(7) of the Companies Law.

As a result, it seemed that as a consequence of the Grand Court's decision, "redemption creditors" were entitled to prove in a winding up as creditors, with their claims to be paid pari passu with the claims of ordinary third party or "outside" creditors7 – a significant departure from the previously accepted position in the Cayman Islands and, indeed, the long-standing position at common law.

The Additional Liquidator appealed the Grand Court's ruling.

CICA Decision

Affirming the Grand Court's ruling, the CICA found that, as a matter of construction, section 37(7)(a) of the Companies Law does not apply to the claims of December Redeemers in circumstances where, at the commencement of the winding up, the relevant redeemable shares had been "redeemed" in accordance with the terms of Herald's Articles, notwithstanding that payment had not been made and was not due to be paid at that time.

The CICA instead found that the December Redeemers were "contingent creditors" who had, as a result of having "redeemed" the relevant shares in accordance with the terms of the Articles prior to the commencement of the liquidation, divested themselves of their rights as shareholders, meaning that they had provable claims under section 139(1) of the Companies Law without the need of a specific enactment in the nature of section 37(7)(a).

The CICA however rejected Primeo's contention that the claims of the December Redeemers rank pari passu with the claims of ordinary third party or "outside" creditors, accepting the Additional Liquidator's submission that those claims are claims founded on the statutory contract of membership, and therefore are subordinated to the claims of ordinary third party or "outside" creditors – a position which is consistent with over 100 years of common law jurisprudence.

In affirming the Grand Court's ruling, it was necessary for the CICA to find a coherent construction for the operation of section 37(7)(a). The CICA expressed the view that section 37(7)(a) applies where, at the commencement of a company's winding up, a holder of redeemable shares has an accrued right of redemption (having served a valid notice under the relevant articles of association), but there has been no redemption because the steps required for "redemption" to occur under the relevant articles of association have not been completed (meaning that no payment of redemption proceeds has been made).

One difficulty with this application of section 37(7)(a) is that any such claim would appear to be immediately rendered unenforceable in a winding up by reason of the operation of the proviso in section 37(7)(a)(i) of the Companies Law, which renders claims under section 37(7)(a) unenforceable in circumstances where the terms of redemption provide for redemption (which, as a result of the CICA's decision, can only mean redemption under the relevant articles of association) to take place at a date after the commencement of the winding up, which effectively leaves the section with no discernible purpose and makes the provisions of section 37(7)(a)(ii) and section 37(7)(b) redundant.8

As a result of the CICA's decision, it appears that there is no consistent statutory definition of the term "redemption". "Redemption" for the purposes of the Companies Law and, in particular, section 37(7)(a), means whatever "redemption" means under the specific provisions of articles of association which are being considered. Accordingly, the enforceability of a claim for unpaid redemption proceeds is now entirely dependent on how "redemption" is defined under the relevant articles of association. In a statutory context, it does not mean "payment of redemption proceeds" as investors would legitimately expect in ordinary parlance. This has essentially shifted part of the statutory insolvency regime into the realm of contract.


Whilst the CICA's decision provides welcome clarity that claims for the payment of redemption proceeds in a winding up will always rank behind ordinary third party or "outside" creditors, uncertainty remains for investors as to the enforceability of those claims in the absence of a consistent statutory definition of "redemption". Absent clarification from the Privy Council, this has the potential to create real difficulties as new and existing funds alike (together with their respective investors and prospective investors) may reconsider new formulations of what "redemption" means under their individual constituent documents.9

The current state of the law still does not reflect a coherent interpretation of section 37(7)(a). Regardless of the ultimate outcome of the Privy Council appeal in this matter, further clarification is required – either by the Privy Council itself or by way of legislative reform.

Matthew Goucke and Chris Keefe act for the Additional Liquidator of Herald.10


1. Michael Pearson (in his capacity as Additional Liquidator of Herald Fund SPC (in Official Liquidation)) v Primeo Fund (in Official Liquidation), unreported, 19 July 2016.

2. An additional official liquidator was appointed in addition to two joint official liquidators for the purpose of dealing with a number of discrete issues in the liquidation.

3. A second resolution was passed on 24 December 2008 which, inter alia, suspended the payment of outstanding redemption requests (prior to the date upon which Herald would otherwise have been contractually obligated to pay those redemption requests). In any event, as Herald's sole asset (other than a limited amount of cash for operating expenses) was its interest in BLMIS, Herald was not in a position to pay those redemption requests at the time (or indeed for many years thereafter).

4. This was a contributory's "just and equitable" petition, rather than a creditor's petition.

5. Given the number of common issues between the Herald and Primeo liquidations, the Grand Court also directed, by way of a "parallel order", that any matters determined in Herald's "representative proceedings" would be similarly binding in Primeo's liquidation.

6. The Grand Court also made orders for the substantive determination of a number of other issues in the same "representative proceedings"; however, these issues are unrelated to the December Redeemer Issue.

7. As the CICA pointed out, this was not dealt with expressly in the first instance judgment.

8. A matter which was raised in submissions by the Additional Liquidator, but not addressed by the CICA in its judgment.

9. It should be noted that the facts of this case were somewhat unusual in the sense that Herald had a single asset which had historically always had immediate liquidity. Accordingly, notwithstanding the receipt of redemption requests totaling some $190m for 1 December 2008, the Directors did not contemplate taking the usual defensive measures facing a fund with liquidity issues such as the imposition of a suspension of redemptions and/ or "gates" prior to the Redemption Day.

10. Together with Leading Counsel, Lord Goldsmith QC PC and Francis Tregear QC.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.