Privy Council Provides Guidance, But Questions Remain

Further to our advisory issued in March 2018, a recent judgment of the Judicial Committee of the Privy Council ("Privy Council"), the ultimate appellate court of the Cayman Islands, has provided important guidance as to the exercise by an official liquidator of the power to adjust the rights of shareholders in a solvent winding up of a Cayman Islands investment fund, where the rights of shareholders have been distorted by the effects of a pervasive, but external fraud. However, questions remain as to the precise scope of that power.

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.

This aspect of the proceedings involved an important and novel point of statutory construction, namely whether a liquidator has a statutory power under section 112(2) of the Companies Law to rectify (or, in other words, adjust) a share register so as to override the existing legal rights of investors in the winding up of a Cayman Islands investment fund. Notwithstanding that this power has been exercised previously by official liquidators on at least one occasion (of which we are aware) in very similar factual circumstances without opposition, this was the first time the question of its scope and application had been considered at the highest appellate level.

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