The Cayman Islands' Court of Appeal recently heard an appeal on the ability of a fund to suspend redemptions and the payment of redemption moneys. The case, in the matter of Strategic Turnaround Master Partnership Limited (the "Company"), was heard between 4 and 8 December 2008 with judgment being delivered on 12 December 2008. The leading judgment given by Mr Justice Vos provides helpful guidance and will be of interest to investors, investment managers, directors and their legal advisers.
By way of background, the Company was a regulated mutual fund pursuant to the Cayman Islands' Mutual Funds Law (MFL) and was registered as such with the Cayman Islands Monetary Authority (CIMA). The petitioner gave notice of intention to redeem its shares on 31 October 2007 and the redemption date was identified as 31 March 2008. According to the Confidential Explanatory Memorandum ("CEM"), 90% of redemption proceeds were to be paid within 30 days of the redemption date, with the balance due after completion of the annual audit. Prior to paying the redemption moneys, on 17 April 2008, the directors of the Fund resolved to suspend redemptions. On 22 April 2008 the directors passed a further resolution suspending calculation of the Net Asset Value. The petitioner brought a winding up petition seeking to wind up the Company either on the basis that it was unable to pay its debts or that it was just and equitable that it should be wound up. The Fund opposed the winding up petition arguing that it had acted in accordance with the Articles of Association (the "Articles") and other associated documentation, and that the petitioner had no locus standi to present the petition.
The Issues In The Case
The Court of Appeal identified a number of important issues to be resolved. They included the date on which the petitioner became a creditor, the status of the petitioner after the redemption date of 31 March 2008, the extent of the powers contained in the Articles and other documentation and the locus standi of the petitioner to bring the winding up petition.
The following points are particularly significant:
- The petitioner was held to have become a creditor on 31 March 2008 (i.e. the redemption date). This finding was based on (1) the wording of the Articles which provided for the "price to be paid for shares which are to be redeemed shall be deemed to be a liability of the Company] from the close of business on the Redemption Day [Date]"; and (2) paragraph 12.3 of the English Insolvency Rules 1986 (which presently apply in the Cayman Islands) that provide for the kinds of debts that can be proved in a winding up and expressly include debts which are "present or future, certain or contingent, ascertained or sounding only in damages".
- Based on various English legal authorities, the Court of Appeal held that a redeeming shareholder remains a member of the company until he has received payment and his name has been removed from the register of members. In a winding up, a redeeming shareholder whose redemption date has passed but who has not been paid would rank behind unsecured creditors but ahead of shareholders who had not served notice to redeem. The priority position was also noted to be enshrined in Cayman Islands' law by sections 37(7)(a) and (b) of the Companies Law (2007 Revision) that expressly provide that, at the date of the winding up, amounts payable in respect of shares which are or are liable to be redeemed, but which have not been redeemed, rank behind all other debts and liabilities of the company.
- The extent of the powers to suspend redemptions and the payment of redemption moneys is determined, in each case, by careful reference to the Articles and other associated documentation. In this case, "redemption" was found to apply to the entire process of redemption from the notice through to payment and the removal of the member from the register. The power to suspend could be exercised at any time prior to the completion of the process and was not retrospective in effect because the resolutions only took effect from the time at which they were passed. A provision in the Articles incorporating the provisions relating to redemption contained in the CEM was upheld to the extent those provisions were not inconsistent with the Articles.
- Since payment of the petitioner's redemption moneys had been suspended, the petitioner had no locus standi to petition for winding up on the basis that the Company was unable to pay its debts. The petitioner's debt was not one which was presently due and payable and the test for these purposes under the Companies law (2007 Revision) takes no account of contingent or prospective liabilities.
- The debt could possibly form the basis of a just and equitable winding up petition and, as a result, the petition was not struck out as an abuse of process. However, to succeed on such a claim the petitioner would need to demonstrate that the exercise of strict legal rights by the Company (i.e. the suspension of redemptions and payment of redemption moneys) was not a legitimate exercise of those rights in the circumstances.
Need To Obtain Legal Advice
The decision highlights the importance of obtaining professional advice on the relevant legal provisions dealing with redemptions. Redeeming investors, investment managers and directors should specifically check to see if there is any power allowing the payment of redemption moneys to be suspended and, if so, the circumstances in which it can be exercised.
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.