Guernsey: Issues Affecting Investment Funds

Last Updated: 31 January 2017
Article by Jeremy Le Tissier

Most Read Contributor in Guernsey, July 2017

The majority of investment funds operate without problem and allow investors a convenient approach to invest monies in a chosen manner, taking advantage of all of the beneficial attributes of the investment fund structure. However, when there are problems with an investment fund there are a number of issues that can arise and which can have a marked effect upon how matters are resolved, writes Jeremy Le Tissier, Partner at Ashton Barnes Tee.

This article begins to explore some of the more general issues to be aware of in relation to some problems concerning investment funds and funds in distress. Generally, the article is based on Guernsey law but the principles are likely to be of general application in other common law jurisdictions.

The constitution of the fund

One of the first issues to consider, and which can have a fundamental difference on how matters may develop, is how the fund has been set up and the 'constitution' under which it operates. At the most basic level, the fund is likely to be either a corporate structure, a unit trust type of structure or a partnership structure. This article is going to deal mainly with the first two types. They are fundamentally different types of legal entity and which one they are is likely to have a very significant effect on how matters may be approached and also what remedies may be available.

Once the structure of the fund is known there is further information which will help work out how the fund is intended to operate. If it is a corporate structure it will have a memorandum and articles of incorporation which will govern how the company is to operate. For a unit trust type of structure, the trust instrument governs how the trust should operate.

In additional to the above documents, there will also be further documentation which is important to consider, if available. The fund will have scheme particulars which is a further document setting out how the fund is intended to be run. In addition, there are likely to be agreements with service providers, such as the fund manager and also the fund administrator. Given that every fund is inevitably different, the documents and content of them change with each fund.

If there have been breaches of the provisions set out within these documents and there has been loss arising from such a breach. It may well be that this could give rise to a cause of action.

Statutory and other requirements and duties

In addition to the agreement and instruments set out above, there will be statutory requirements which impact on how the fund operates. These may well be set out in primary legislation, in secondary legislation and other rules and documentation issued by the relevant regulator of the fund. A breach of such statutory requirements may be able to be actioned as a breach of statutory duty.

In addition, there will most likely be common law duties imposed on those connected with the fund, such as the directors of a corporate fund or the trustees of a unit trust. Once again, breach of such duties can be actionable where loss has been suffered.

What if losses have been incurred?

If it appears as though there has been some form of breach of duty or a term of an agreement has been breached, or similar, which has caused loss it is important to establish to whom any cause of action has accrued. While investors may feel as though they have suffered loss where something has gone wrong which has caused a drop in the value of their interest in the fund, the reality is likely to be that they are not the party to sue as they are not the ones who have suffered the loss. Often any loss that they experience, such as a drop in the value of their investment in the fund, is what is known as reflective loss, which generally is not actionable.

Often where there has been an actionable loss, the party in whom the action vests is the fund itself. This means that if there is to be an attempt to recover losses, the fund must be the entity which seeks to recover the losses. However, matters become more complicated where the people or entities who are the potential target of an action are also the decision-makers of the fund. For instance, if, in the context of a corporate structure, the directors have breached their duties to the fund and loss has been suffered as a result, then in normal circumstances there should be attempts made to recover the losses from the directors. However, it would normally be the directors who decide whether or not the fund should commence the action for recovery of the loss.

It is not difficult to imagine directors considering they have done nothing wrong and not causing the fund to sue themselves. This does not mean that there are no remedies available to deal with such a situation. It is possible that the shareholders/investors may be able to commence what is known as a derivative action, where they would sue in the name of the fund, and if there were any recoveries then they are paid to the fund (which the shareholders/investors would then, reflectively, benefit from). However, proceedings such as a derivative action are generally subject to a number of requirements in order to ensure that such an action is commenced only in the appropriate circumstances and is not abused.

A similar difficulty can arise in circumstances where, in a fund constituted as a unit trust, there is a breach of duty by the trustee which causes an actionable loss. However, in such circumstances a beneficiary/investor of the trust is generally able to sue the trustee directly.

Distressed funds

It is possible that some investment funds may become distressed and possibly need to be wound up or similar. There can be any number of reasons for this, but commonly this may arise from poor or problematic investments, liquidity problems, significant redemptions, allegations of fraud or a combination of a number of these.

How the winding up of a distressed fund is approached will be different when comparing a corporate structure to a unit trust structure. Generally, there are well established statutory provisions for the winding up of corporate structures and these will often involve the appointment of an independent liquidator to undertake the winding up of the fund, ensuring all assets are realised and all liabilities are discharged, with any remaining monies being distributed to shareholders/investors. By contrast, the winding up of a trust is something over which there is little statutory provision. The approach to the winding up of a trust structure may be provided for within the trust instrument or it may be silent. Irrespective of which it is, absent contrary provisions it will generally be the trustee who undertakes the winding up. While the entity winding up the fund is likely to take broadly the same approach as if a corporate fund was being wound up – realising assets and settling liabilities, before returning any surplus to investors – the fact that it is the trustee who is winding up the fund has the potential for there to be conflicts of interest.

If the fund became distressed, depending on the particular cause of this, there is the possibility that the fund has potential claims against its service providers – for example, if they are part of the reason why the fund has become distressed. These potential claims will be assets of the fund. If the trustee has caused loss and there is a good cause of action against the trustee we return to the position where the entity deciding whether steps should be taken to recover that loss is the same entity against whom the steps to recover the loss would be being taken. It is clear to see the conflict of interest in such circumstances, which would not be the case if an independent entity was winding up the fund.

Conclusion

Funds are complex. When there are problems, losses or they get into distress the constitution of the fund and the other documents governing how it operates are likely to be very important in resolving the issues. A careful analysis of the position is needed before deciding what the best course of action may be.

An original version of this article was first published by Financier Worldwide, November 2016. 

For more information about Guernsey's finance industry please visit www.guernseyfinance.com.

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
 
In association with
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
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (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 www.mondaq.com

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 Mondaq.com’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.

Disclaimer

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.

Registration

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 unsubscribe@mondaq.com 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.

Cookies

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.

Links

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.

Mail-A-Friend

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.

Security

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 webmaster@mondaq.com.

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 EditorialAdvisor@mondaq.com.

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 enquiries@mondaq.com.

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