Cayman appeal court makes key ruling on fund

(CNS): In what is being described as an important ruling, the Cayman Islands Court of Appeal has decided in favour of a solvent hedge fund that was faced with a winding up petition from a disgruntled investor, ruling that such petitions should not put companies under pressure to accede to investor demands, The fund on the winning end of this decision, Camulos Partners Offshore Limited, was represented by local law firm Walkers, who said the appeal court had sent a clear message that winding up petitions are an abuse of protest. The judges ordered that the investor should also pay the fund’s costs on an indemnity basis.

“This case is important as the Court of Appeal has clarified the very limited circumstances in which a dissentient investor may properly invoke the class remedy which is a contributory’s winding up petition,” Walkers said in a client advisory.  “The Court of Appeal has made it clear that, although it widened the relief available to petitioners, the new s 95 (3) of the Companies Law introduced in 2009 has not widened the grounds upon which a petitioner may present a winding up petition.”

The legal case began back  in the summer of 2008 when the fund in question received a number of redemption requests, including from the investor in the recent litigation, Kathrein & Co, an Austrian private bank. Camulos decided to control the redemption requests through an exchange offer to all investors. However, Kathrein declined the offer and tried to enforce its redemption request but the fund suspended redemptions, and then in April last year the investor brought legal proceedings against Camulos. It claimed over $27 million in unpaid redemptions and said at least 15% of that had to be paid in cash.

In July Kathrein threatened to present a contributory’s winding up petition, which would have put the fund into involuntary liquidation. Camulos sought an injunction against such a petition and the issue was heard in the Cayman Islands court. The judge decided in favour of Kathrein, finding that the case was indistinguishable from previous case law. During September the investor filed two identical winding up petitions with the Grand Court of Cayman, one before the judge’s final decision and one just after that decision was sealed.

The petitions forced Camulos to seek validation orders to enable it to carry on its normal business. The fund also appealed against the petitions.

On 18 March the Court of Appeal decided ordinary litigation in the Grand Court’s Financial Services Division was a more suitable course of action in this case. It said all the relief sought by the investor would be available if such litigation were pursued. They said winding up petitions were designed to put pressure on the fund to give in to the investor’s demands. As such they were abuse of process. The court awarded indemnity costs to Camulos, enabling the fund to recover most of its legal costs.

“The clear message is that disputes between an investor and a hedge fund should ordinarily be litigated in the usual way i.e. by way of writ of summons or originating process in the Grand Court’s new Financial Services Division,” the Walkers legal team stated. “It is inappropriate and likely to be an abuse of the Court’s process for an investor to seek to use the threat of a winding up petition as a means of placing undue and improper pressure on a company or fund to accede to its demands. Acting in this manner is a high risk strategy which, if unsuccessful, may well be sanctioned by an award of indemnity costs. We understand that the Court of Appeal intends to issue an addendum to its judgment dealing with the circumstances in which indemnity costs may be awarded against an unsuccessful petitioner and will produce an update as necessary.”

The case has confirmed that the Cayman companies law introduced in 2009 did not expand the grounds on which an investor or shareholder can present a winding up petition, although it did expand the reliefavailable to successful petitioners.