Cayman Islands: Herald v Primeo: The Court Of Appeal Clarifies The Status And Priority Of Unpaid Redemption Creditors

Last Updated: 4 August 2016
Article by Guy Manning, Guy Cowan and Shaun Tracey

In a recent judgment,1 the Cayman Islands Court of Appeal (the "Court") has upheld the decision of the Grand Court which found that investors who have redeemed their shares but remain unpaid at the commencement of a company's liquidation are entitled to prove in the liquidation for their redemption proceeds as a creditor. This is the case irrespective of whether or not the company could lawfully have distributed the redemption proceeds to them prior to the commencement of the liquidation. The Court also resolved uncertainty as to the priority of such redemption creditors, by finding that they rank behind the company's general creditors but ahead of its shareholders.

Background

The first instance case, which was heard by the Honourable Mr Justice Jones QC, arose as a result of redemption requests submitted by Primeo Fund ("Primeo"), one of several investors in Herald Fund SPC ("Herald"), for a redemption date of 1 December 2008. Shortly thereafter, in light of the Madoff fraud, Herald's directors suspended (among other things) its obligation to pay redemption proceeds. Primeo therefore never received its redemption proceeds and, in July 2013, Herald was wound up by order of the Grand Court.

The Judgment of the Grand Court

As discussed in our briefing note dated 29 July 2015, the case concerns a dispute about the applicability of section 37(7) of the Companies Law (2013 Revision) (the "Law"), which provides, in summary, that an investor whose shares are or are liable to be redeemed but have not been redeemed before the commencement of a liquidation may enforce its redemption claim in the liquidation, provided that the company would lawfully have been able to distribute the redemption proceeds up until the commencement of the liquidation.

At first instance, Jones J held that section 37(7) had no application at all where shares have already been redeemed as at the commencement of a company's liquidation, and that if an investor had been redeemed by that stage, but had not yet been paid the proceeds of its redemption, it would be an unsecured creditor for those proceeds. Herald appealed this decision.2

The Court's Decision

In summary, the result of the Court's decision is that:

  1. section 37(7)(a) of the Law does not apply to an investor (such as Primeo) whose shares were redeemed in accordance with the company's articles of association before the commencement of its liquidation;
  2. such investors' claims are enforceable in the company's liquidation and rank behind ordinary creditors but ahead of unredeemed shareholders pursuant to section 49(g) of the Law;
  3. section 37(7)(a) of the Law applies where a holder of redeemable shares has an accrued right to redemption under the articles of association at the commencement of a company's liquidation, but redemption has not taken place because some further step which was required to be taken by the company to complete the redemption was not taken;
  4. such investors' claims will also be enforceable in the liquidation, provided that the company could lawfully have made a distribution equal in value to the redemption proceeds between the due date of redemption and the commencement of the liquidation; and
  5. if such claims are enforceable then they will rank behind ordinary creditors but ahead of unredeemed shareholders pursuant to section 37(7)(b) of the Law and, it appears (although the Court's remarks in this regard were strictly obiter), equally with the unpaid investors to whom section 37(7)(a) of the Law does not apply.

Analysis

The Court followed the now well established principle that, as a matter of common law, an investor ceases to be a member of the company and becomes a creditor upon redemption of its shares occurring pursuant to the company's articles of association.3 Having found that Primeo's shares had been redeemed before the commencement of Herald's liquation, it was then necessary for the Court to determine whether Primeo's claim was enforceable in Herald's liquidation pursuant to section 37(7)(a) of the Law or otherwise. There were two reasons why the basis of enforceability of Primeo's claim mattered.

First, if Primeo's claim had fallen within section 37(7)(a) then it would have been subject to the proviso in section 37(7)(a)(ii), which prohibits the enforcement of a redemption claim in a liquidation unless the company could lawfully have made a distribution of that amount to the investor between the date of redemption and the commencement of the winding up. As a matter of construction of section 37(7)(a), the Court found that it did not apply where shares had already been redeemed before the liquidation, and that such investors had claims which were capable of being proved pursuant to section 139(1) of the Law.

Second, the statutory basis on which the claim was enforceable would arguably have affected the order of priority which Primeo's claim would have in the liquidation, and in particular whether it would rank equally with or behind the claims of ordinary creditors.

Section 37(7)(b) provides that claims falling under the section are payable (a) behind (i) all other liabilities of the company (other than any due to members in their character as such) and (ii) amounts due in respect of capital or income to the holders of shares which are preferred to the rights of the section 37(7) claimant as to capital; but (b) ahead of amounts due to members (whether as to capital or income).

The Court's finding that section 37(7) did not apply to Primeo's claim meant that the order of priority prescribed by section 37(7)(b) was not engaged. Primeo argued that the consequence of this was that its claim was not statutorily subordinated to, and therefore ranked equally with, the claims of ordinary creditors. The Court found, however, that Primeo's claim ranked behind ordinary creditors but ahead of unredeemed shareholders pursuant to section 49(g) of the Law.4

Section 49(g) of the Law provides that the claims of a company's ordinary creditors shall have priority over sums "due to any member of a company in his character of a member by way of dividends, profits or otherwise", but that such sums "may be taken into account for the purpose of the final adjustment of the rights of the members amongst themselves". Although a redeemed investor's claim for share redemption proceeds arises pursuant to the "statutory contract" between the company and its members, it is somewhat difficult to reconcile the Court's interpretation of section 49(g) (which applies to sums due to a "member" of the company) with its acknowledgment that redemption proceeds are due to a redeemed investor in its capacity as a creditor which has ceased to be a member.

Although the question did not arise on the facts, the Court went on to observe that claims for redemption proceeds falling outside section 37(7) (such as Primeo's) and those falling within the section would rank equally with each other.

Conclusion

The Court's decision brings helpful clarification to the status and ranking of claims for unpaid share redemption proceeds in the liquidation of Cayman Islands funds. It remains to be seen however whether there will be further appeals to the Privy Council either by Herald (in relation to the application of section 37(7)) and/or by Primeo (as regards the construction of section 49(g) and the ranking of its claim).

Aside from any potential appeals, the judgment does call into question the practical relevance of section 37(7). Herald had argued strenuously that the consequence of Primeo's interpretation was that section 37(7) would have no application in practice, such that it cannot have been correct. In rejecting that argument the Court relied on Herald's example of section 37(7) applying where an investor's shares had been liable to be redeemed but were not redeemed because the NAV was not calculated prior to the liquidation. In practice, however, this example would appear to have limited relevance, because the redemption of shares in Cayman funds almost invariably occurs automatically on the redemption date. The timing of the redemption is rarely dependent and effective on the completion of the NAV calculation, which would typically not occur until some time after the applicable redemption date. Shares are generally redeemed on the redemption date for a price to be determined upon completion of the NAV calculation.

Further, in light of the Court's view that redemption claims rank equally whether or not they fall under section 37(7), the only remaining consequence of the section's application is its requirement, under section 37(7)(a)(ii), that for a redemption claim to be enforceable in the liquidation the company must have been able, between the redemption date and the start of the liquidation, to have lawfully made a distribution equal in value to the redemption price. But subject to the possibility of a successful appeal to the Privy Council of the Court of Appeal's earlier decision in DD Growth Premium 2X Fund (in Official Liquidation) v RMF Market Neutral Strategies (Master) Limited5, it is now difficult to envisage circumstances in which it would ever be unlawful, within the meaning of section 37(7), for a Cayman Islands fund to distribute redemption proceeds in accordance with its articles of association.

Lastly, the Court's judgment also highlights the policy question of whether an investor which has redeemed its shares and become a creditor before the liquidation should rank behind the fund's ordinary creditors (including those ordinary creditors whose claims arise after the investor has exited the fund) or equally with them. That is a question for the legislature, but section 37(7) and section 49(g) are both arguably ripe for statutory reform.

Footnotes

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 Jones J had also determined the question of whether/when a liquidator is obliged and/or entitled to rectify a company's register of members where the company's NAV has been mis-stated., That issue was not subject to this appeal, although we understand that a separate appeal remains a possibility.

3 See Culross Global SPC Limited v Strategic Turnaround Master Partnership Ltd 2010 UKPC 33.

4 This interpretation of the legislation incidentally produces a result which is consistent with the position in the British Virgin Islands, albeit based on different statutory provisions, following the Eastern Caribbean Court of Appeal's decision in Somers Dublin Ltd AC KBCS v Monarch Pointe Fund Ltd (In Liquidation) HCVAP 2011/040.

5 2015 (2) CILR 141

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 Mondaq.com.

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

Authors
Similar Articles
Relevancy Powered by MondaqAI
Maples and Calder
 
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 Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Maples and Calder
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
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
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

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 or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq 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 of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions