Appeal court protects fund

| 16/12/2008

(CNS): In a significant decision for the local fund industry, the Cayman Islands Court of Appeal has ruled that in a request to remove money from a fund where the redemption date had passed, a subsequent suspension was still valid. This meant the investor did not have to be paid as he was bound by the rules of the given company. Even though the court confirmed the investor became a creditor after the redemption date, the company’s regulations, which stated it could take action to protect the fund in times of volatility, took precedence over the investor’s right to his cash.

Stuarts Walker Hersant, who successfully appeared in the Court of Appeal on behalf of the investment fund, said that given the investmentclimate and the rush by investors to redeem their investments, the decision is important to directors, administrators, auditors, legal advisers and all others involved in the determination of the rights and liabilities of investment funds and their investors.

"With at least 9,500 of the world’s investment funds being registered in the Cayman Islands, the importance of the Cayman Island’s Court of Appeal’s judgment cannot be overstated," the lawyers stated in a release.

Stuarts Walker Hersant explained that in this case the Court ofAppeal settled the questions of the meaning of redemption in an Investment Fund context and at what point a Member is actually redeemed from an Investment Fund. It also dealt with the issue of when a Member becomes a creditor of an Investment Fund following service of a redemption notice and whether a Member continues in his capacity as a Member after a redemption date has passed and finally whether an Investment Fund is able to validly suspend the payment of redemption proceeds even after the applicable redemption date has passed and the Member has become a creditor of the Fund.

The lawyers said that though the investor with an existing redemption request was properly classified as a creditor of the Investment Fund after the expiry of the redemption date, his right to receive the proceeds of redemption was subject to the fact that even after the redemption date the Investor remained a Member of the Investment Fund.

As such, the investor was bound by the terms and powers stipulated by the Articles of Association (or rules of the fund) and, the Offering Document stated that the Directors could suspend redemptions in times of extreme volatility and market uncertainty and could do so even in light of  a pre-existing redemption request even after the applicable redemption date had passed.

“Although a creditor of the Investment Fund, the Investor was unable (based simply on the non-payment of redemption proceeds) to issue a petition for the winding up of the Investment Fund on the grounds that the Investment Fund was unable to pay its debts and was thereby insolvent,” the lawyers said in the release. “In the Court of Appeal’s judgment, the liability to pay the redemption proceeds was, by virtue of the suspension of redemptions, a future or prospective debt which did not entitle the Investor to seek to wind up the Investment Fund on the grounds of insolvency pursuant to section 94 of the Companies Law (2007 Revision). In order to succeed, the Investor would have to prove that the debt was absolutely due, which, in the particular circumstances of a valid exercise, by the Investment Fund, of its power to suspend redemptions, the Investor would not be able to establish. “

Stuarts Walker Hersant explained the importance of the Court of Appeal’s affirmation of the principle: in the absence of clear evidence to the contrary, that the exercise by the Investment Fund of its powers was presumed to be bona fide and in the Investment Fund’s interests as a whole and added  that if Investors are to avoid winding up proceedings being struck out as an abuse of process, they and their legal advisers will need to take special care when analysing their strategy in response to an exercise by an Investment Fund of its power to suspend redemptions.

Anthony Akiwumi (Head of Litigation) and Richard Annette (Senior Associate) successfully appeared on behalf of the Investment Fund.

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  1. Anonymous says:

    This may be fine for the investment managers who set up the cayman funds. But if this is promoted too widely it could raise questions from investors in the future when they find out that the vehicle is a cayman fund and that this case may set a precedent to make it harder for them to redeem their money when things are going bad…

    That could in turn make it harder for investment maangers to raise the capital for their funds which could then pose a risk to cayman funds industry.