Cayman Islands: Privy Council Decision Provides Certainty, But Creates Surprising Commercial Results In The Context Of Investors' Claims For Unpaid Redemption Proceeds

Last Updated: 11 July 2017
Article by Matthew Goucke and Chris Keefe

Most Read Contributor in Cayman Islands, March 2019

Further to our advisory issued in August 2016 (click here), a recent judgment of the Judicial Committee of the Privy Council1 (Privy Council), the ultimate appellate court of the Cayman Islands, has provided certainty for investors and insolvency practitioners alike with respect to the enforceability and priority to be afforded to investors' claims for unpaid redemption proceeds in the winding up of Cayman Islands investment funds.

The Privy Council 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. The case involved 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 (valued at almost $200m) were clearly based on a wholly fictitious NAV. 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 the highest appellate level.


Affirming the rulings of the Grand Court and the Cayman Islands Court of Appeal (CICA), the Privy Council found that, as a matter of construction, section 37(7)(a) of the Companies Law does not apply to the claims of certain classes of Herald's unpaid 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 memorandum and articles of association i.e. the Redemption Date had occurred prior to any suspension being implemented, notwithstanding that payment had not been made (and was not due to be paid at that time).

The Privy Council found that "redemption" occurs on surrender of the status of shareholder, which is entirely a function of the terms of the contract of membership between a company and its members inter se - expressing the freedom that shareholders and a company have to shape their relationship as regards redemption or purchase of a company's shares. The Privy Council did not accept the Appellant's argument that "redemption" ought to have an autonomous statutory meaning (being the completion of the entire process of redemption, including payment), with the result that the enforceability of a claim for unpaid redemption proceeds is now entirely dependent on how "redemption" is defined under the relevant articles of association of a particular company. Regrettably, the Privy Council did not address in its judgment a number of the arguments advanced by the Appellant in support of a consistent statutory definition at the hearing of the appeal.

The Appellant was however successful in opposing the claims of intervening investors who had submitted redemption requests after Herald's board had implemented a suspension of redemptions in December 2008 and who asserted that they had enforceable claims arising under section 37(7) of the Companies Law. The Privy Council rightly rejected these claims on the basis that the suspension meant that the terms of redemption provided for it to take place at a date later than the commencement of the winding up (in circumstances where Herald's directors never lifted the suspension prior to that date). In terms of the application of section 37(7), the Privy Council in its judgment did not refer to the various academic texts cited by the Appellant which suggested that redemption for the purposes of the section meant the completion of the entire process of redemption, including payment, and instead found that section 37(7) envisages situations where shares are or are liable to be redeemed or purchased, but where a company had for any reason wrongly failed to take steps necessary to enable the redemption or purchase at the applicable date in accordance with the terms of the relevant articles of association. Acknowledging the very limited practical application of the section, which must arise given the construction favoured by the Privy Council, the Board noted that "the likelihood in practice of successful section 37(7) claimants may well be slight".

Essentially, in the context of the articles of most contemporary Cayman Islands investment funds, this decision means that redeeming shareholders have valid claims for the payment of redemption proceeds as at the relevant Redemption Day, which claims are enforceable in a winding up regardless of (i) whether those claims are based on a NAV which has been wholly mis-stated as the result of a pervasive fraud (as was the case with respect to Herald); and (ii) a company's ability to make payment out of either share capital or share premium at any time prior to the commencement of a winding up.

The Privy Council also appears to have gone a step further than it did in Fairfield Sentry v Migani2 where, in the context of an action by the liquidators of Fairfield Sentry seeking to recover redemption proceeds which had already been paid to investors based on a wholly fictitious NAV, the Privy Council found those proceeds could not be clawed back in circumstances where payment had already been made prior to the commencement of the winding up. In this case, the Privy Council sought to draw "a precise line" (or rather extend the line) so as to allow investors to escape loss (and perhaps with significant fictitious profit) in a liquidation where they have ceased to be a shareholder under the terms of the relevant articles of association prior to the commencement of the winding up, notwithstanding that no payment has in fact been made (nor could it have been made as a matter of fact at the relevant time). It is an unfortunate consequence that unredeemed investors will ultimately bear the loss in a liquidation once claims which are based on a mis-stated NAV have been paid, simply because certain investors submitted redemption requests a matter of days before others and in circumstances where the resultant suspension was due to no fault of the company or its directors, but solely based on the exposure of the Madoff fraud.

This decision means that, in times of uncertainty, boards of investment funds will need to act quickly in deploying suspension or gating mechanisms in order to ensure that, to the extent possible, any unforeseen loss is borne by the investor base as a whole.

Importantly, however, the Privy Council reaffirmed the CICA's finding that the claims of unpaid redeemers rank behind the claims of ordinary third party creditors;3 although, it left open the seemingly difficult question as to the priority to be afforded between claims for unpaid redemption proceeds that sit outside section 37(7) and those claims arising under the section.


Whilst the Privy Council's decision provides finality as to the appropriate treatment of claims for the payment of redemption proceeds in a winding up, it is likely that 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 in order to navigate the unfortunate loss-allocation consequences which may arise pursuant to this judgment. The door of course remains open for legislative reform in light of the very limited practical application of section 37(7) of the Companies Law.

Matthew Goucke and Chris Keefe act for Mr Pearson, the Additional Liquidator of Herald.4


1. Michael Pearson (in his capacity as Additional Liquidator of Herald Fund SPC (in Official Liquidation)) v Primeo Fund (in Official Liquidation) [2017] UKPC 19.

2. [2014] UKPC 9.

3. Reversing the effect of the Grand Court's ruling that those claims ranked pari passu - an argument which was pursued forcefully by the Respondent in the CICA, but ultimately abandoned altogether in its case in the Privy Council.

4. 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.

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.

Similar Articles
Relevancy Powered by MondaqAI
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
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please 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 (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

To Use 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.


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.


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