Vol 12 (2015) - Issue 5

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Cayman Islands: Guidance on Status of Investors in Mutual Fund Liquidations

Introduction
In its recent decision in Primeo, the Grand Court of the Cayman Islands (the 'Court') held that investors who redeem under the terms of the articles of association prior to the winding up of a Cayman company rank as creditors and do not fall within s.37(7)(a) of the Companies Law (2013 Revision) (the 'Law'). It is an important decision because it means that investors who have redeemed from a Cayman fund are not at risk, by virtue of s.37(7)(a), of losing their right to be paid out ahead of unredeemed investors in the fund’s liquidation.
The Court also considered the position of unredeemed investors. In particular, it considered the circumstances in which a liquidator of a Cayman company can rectify the register of shareholders pursuant to the Law and the Companies Winding Up Rules (the 'CWR') (the 'Rectification Issue').
The decision provides welcome guidance and certainty to investors in Cayman funds and others involved in the Cayman funds industry. The Court highlighted the need for investor certainty but indicated that there are some circumstances in which a liquidator of a Cayman fund may be permitted to rectify the register, at least where the fund’s net asset value ('NAV') has been mis-stated by a fraud such as a Ponzi scheme. However, the precise circumstances in which rectification should take place and the methodology which should be applied is to be determined at a future hearing.

Background
Primeo and Herald are Cayman investment funds which formed part of a master/feeder structure which invested in Bernard L Madoff Investment Securities LLC ('BLMIS').
Primeo invested substantially all of its assets in Herald which in turn invested substantially all of its assets in BLMIS. Primeo, along with a number of other Herald shareholders, submitted redemption requests in respect of certain shares (the 'Shares') for a redemption date of 1 December 2008 (the 'December Redeemers'). Herald accepted those requests and it was conceded by Herald that the Shares were redeemed on 1 December 2008, pursuant to Herald’s articles of association (the 'Articles').
On 11 December 2008, before the redemption monies were paid to Primeo, Bernard Madoff confessed that BLMIS was an elaborate fraud. Shortly afterward, Primeo was placed into liquidation. Herald followed in July 2013, upon Primeo’s petition.
In November 2014, the Court directed that a number of issues arising from the Herald liquidation be determined within the liquidation proceedings and that Primeo and Herald’s Additional Liquidator act as the representative parties on behalf of the various classes of investors.