Last week, the Cayman Islands Court of Appeal upheld the Grand Court’s judgment in the latest proceeding in the liquidation of the Herald Fund, clarifying the rights of redeemed investors. The court of appeal held that shareholders who have redeemed their shares but not received the redemption proceeds have claims against the liquidating company as creditors, ranking behind ordinary unsecured creditors but ahead of continuing shareholders.
Primeo invested in the Herald Fund, an open-ended investment fund that placed all of its assets with Bernard L. Madoff Investment Securities LLC. In late November 2008, less than two weeks before the Madoff fraud was first exposed, certain Primeo investors submitted redemption requests to Herald. Herald accepted the redemption requests and gave a valuation of approximately $1,400 per share. Primeo investors had not yet received the redemption proceeds when the Madoff fraud was revealed on December 11, 2008. The following day, the Herald Fund suspended the redemption of shares and calculation of NAV, and ultimately went into liquidation. The parties disputed the rights of the so-called “December Redeemers,” who did not receive payment for their redeemed shares before the Herald Fund went into liquidation, and the issue reached the Grand Court last year.
Section 37 of the Companies Law governs the redemption of shares in a liquidation, but the Grand Court held (and the Court of Appeal affirmed) that Section 37 only applies to shareholders, not to creditors, of a company in the process of winding up. The court of appeal noted that it is not uncommon for the redemption of redeemable shares to occur prior to the payment of redemption proceeds, and held that the outstanding payment does not impact the rights of the redeemers as shareholders. The court of appeal explained that upon redemption, the shareholder is divested of his rights as a shareholder and ceases to be a member of the company, regardless of whether the redemption proceeds have actually been paid to the shareholder or not. Therefore, Section 37 does not provide unpaid shareholders with rights to “enforce the terms of the redemption” because redemption occurs when a redeemer ceases to be a shareholder and not only upon receipt of the redemption proceeds. In other words, the December Redeemers were not shareholders so they did not have the rights of shareholders; rather, they were creditors of the company. As creditors, the claims of the December Redeemers were given a higher priority than the claims of investors who had not redeemed at the time the Madoff fraud was revealed.
This decision provides important insight into the Cayman courts’ interpretation of the rights of investors as shareholders and creditors in a liquidation context. It’s now clear that investors in funds with uncertain futures should exercise their redemption rights, rather than wait, so as to obtain priority over fellow investors in the event of liquidation.
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