Cayman Islands: No Loss Of Substratum Finding In Case Of Liquidating Fund

Last Updated: 29 November 2015
Article by David Butler and James Elliott

In a significant decision, the Cayman Islands Grand Court on 10 November 2015 handed down an important judgment in Re Harbinger Class PE Holdings (Cayman) Limited, dismissing a winding-up petition presented on grounds of loss of substratum.

The decision follows the traditional approach applied by the English courts in loss of substratum cases in the case of a fund which is set up as a liquidating vehicle, differing from what has been suggested as a controversial line of authorities in the Cayman Islands, dealing with when an open-ended mutual fund may be said to have lost its substratum.  


By a winding-up petition dated 14 May 2015 (Petition) an entity called "NYROY/RBC Acct# 1583 pledged to Royal Bank of Canada" (Petitioner) sought the winding-up of Harbinger Class PE Holdings (Cayman) Limited (Company) on "just and equitable" grounds under section 92(e) of the Companies Law (2013 Revision) (Section 92(e)), alleging in particular that there had been a failure of the Company's substratum. 

The Company was initially incorporated as a subsidiary of Harbinger Capital Partners Offshore Fund I Limited (Offshore Fund). The Offshore Fund operated as a feeder fund to Harbinger Capital Partners Master Fund I Limited (Master Fund). Various investors subscribed for shareholdings in the Offshore Fund and the sole asset of the Offshore Fund was a shareholding in the Master Fund.

Following the onset of the financial crisis in 2008, the Offshore Fund was faced with substantial redemption requests from investors which it and, in turn, the Master Fund, lacked the liquidity to meet. Faced with this situation, the Master Fund restructured: it created a new class of shares (Class PE Shares) to which it allocated certain private equity-type investments (the Private Portfolio). The Class PE Shares were then contributed to the Company by the Offshore Fund and used to satisfy in part the redemption claims of redeeming investors by way of an in specie redemption of shares in the Company.


Section 92(e) provides that a company may be wound up if the court is of the opinion that it is just and equitable to do so.  The allegation relied upon in the Petition that there had been a failure of the substratum of the Company was predicated on the basis that:

  1. The Company stated in a supplement to the Confidential Offering Memorandum of the Offshore Fund issued in December 2008 that it would use "commercially reasonable efforts" to complete the redemption of Class PE Shares by the end of 2010 but failed to do so; and
  2. The Company had not indicated when there might be further compulsory redemptions of the Class PE Shares.

In addition, the Petition and the evidence filed on behalf of the Petitioner raised numerous complaints surrounding the Master Fund's treatment and management of the investments contained in the Private Portfolio, although it was not alleged in the Petition that the Master Fund or the Private Portfolio had been mismanaged. One of the principal complaints was that the proceeds of some of the realisations of the assets in the Private Portfolio had not been distributed to the Company for onward payment to shareholders but had been used to collateralise or finance other obligations or investments held by the Master Fund outside of the Private Portfolio.

The Company defended the Petition on the basis that there had been no loss of substratum: the Company had fulfilled and continued to fulfil the purpose for which it was established, namely, the holding of the Class PE Shares held by the Company and the distribution of the proceeds of those shares to shareholders in the Company upon the realisation of investments in the Private Portfolio. Evidence filed on behalf of the Company also responded to the complaints made regarding the Master Fund's management of the Private Portfolio and set out the extensive efforts made by the Master Fund's investment manager to realise those investments.

At the trial on 5 and 6 October 2015, the Company argued that there was no reason whatsoever why the Company could not continue to fulfil its purpose in holding the Class PE Shares and distributing the proceeds to investors and, as such, the court had no jurisdiction to wind up the Company on the grounds of failure of substratum pursuant to Section 92(e). Further the Company argued, even if the court did have jurisdiction to make a winding up order it should not exercise its discretion to do so as this would be unlikely to have positive benefits for the investors and could have a detrimental impact on the investment manager's on-going efforts to realise the remaining assets in the Private Portfolio.


Dismissing the Petition, the Judge (Clifford J) distinguished the Company, formed specifically as a means to hold and realise illiquid investments, from open-ended corporate mutual funds which are capable of issuing and redeeming shares of investors at any time, investing the net investment proceeds in investments, for the benefit of shareholders. In the present circumstances, the Judge found that the correct test to be applied in establishing whether there had been a failure of substratum was to determine whether it had become impossible for the Company to achieve the purpose for which it was formed, by "ascertaining the principal or main objects of the company and then deciding whether it has become impossible for the company to attain those objects." In order to ascertain the objects of the company, the Judge was of the view that the court was required to look beyond a wholly general objects clause in the Company's memorandum of association and to ascertain, on the material evidence, the principal or main object of a company in line with the reasonable expectations of its participating shareholders.

In applying the above test, the Judge endorsed the Company's case that the principal object for which the Company was formed was limited to holding the Class PE Shares issued by the Master Fund and receiving net available cash flow from the realisation by the Master Fund of the assets in the Private Portfolio, for onward payment to its shareholders. In doing so, the Judge made clear that there could be "no reasonable expectation on the part of its shareholders for the Company to do anything else" and that the evidence demonstrated that the Company was fulfilling this purpose and continued to do so:

"That really is the end of the Petitioner's case.  It cannot possibly be said that the attainment of the Company's principal or main object has been rendered impossible in some sense resulting in a failure of substratum.  Accordingly there is no jurisdiction to make a winding up order."

The Judge also dismissed the relevance of the complaints raised by the Petitioner regarding the Master Fund's management of the Private Portfolio, stating that there had been a "fundamental misconception that the purpose of the Company is to realise the Private Portfolio and return proceeds to investors, whereas its actual purpose is to receive proceeds from realisations of the Private Portfolio by the Master Fund."

The Judge made clear that the court did not have any jurisdiction to make a winding-up order and that he did not therefore need to consider factors going to court's discretion. However, he nevertheless made clear that such factors were against making a winding-up order in any event. Such factors included the fact that there was very little support for the Petition from other contributories of the Company, notices of support for the Petitioner having been filed which represented only six per cent in value of contributories. In addition, the Judge found it difficult to see how the appointment of a liquidator could serve any useful purpose and was of the view that such an appointment might in fact be counterproductive, introducing an additional layer of costs for no obvious benefit and "could even carry the risk of being detrimental to the interests of shareholders in the Company."


This case sees the Grand Court apply what might be regarded as the conventional approach adopted by courts in other common law jurisdictions in respect of the question what loss of substratum entails, and marks a departure from a line of first instance decisions in the Cayman Islands in which it has been said that a Company's substratum has failed when it is no longer "viable". On first impression it might be thought that this judgment has in some way disapproved that line of Cayman cases based on "viability" and reintroduced the "impossibility" test which applied before that line of cases was decided. That is not so, and the Judge expressly pointed out that this was not the case.

The Cayman cases which have expanded the traditional view of loss of substratum were all decided after the financial crisis in cases which involved open ended mutual funds (ie hedge funds) which, while they had not technically failed, were suffering paralysis and could not make redemptions as investors had expected (indeed when they were wound up there was virtually no prospect that these funds would ever recover from the effects of the financial crisis). It is perhaps not surprising in those circumstances that the court revived and expanded what at the time was a largely dormant doctrine to wind up those companies, although it is certainly debatable whether the "viability" test adopted was sufficiently certain and clear to be the appropriate test. This is similar to the highly publicised line of decisions from the BVI, the other major funds jurisdiction, which relied on a more traditional "impossibility" test which this case reflects; it is therefore likely that in the case involving a Cayman Islands company which is not an open-ended mutual fund, the courts will follow the decision in Re Harbinger.

David Butler and James Elliott of Harneys' Cayman Litigation team represented the Company, instructing Tom Smith QC of South Square chambers in London.

A full copy of the judgment can be found here.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.