On 13 December 2010, the Privy Council delivered its judgment in the Strategic Turnaround appeal from the Cayman Islands Court of Appeal. Maples and Calder comments on the decision, which clarifies a number of important points in respect of suspensions and redemptions by Cayman Islands investment funds.
The key point from the Privy Council’s decision is that it is the terms of the fund’s articles that determine the rights of all parties in respect of redemption by investors and the suspension of redemptions and payment rights.
Colin McKie (pictured), partner, Litigation Group, Maples and Calder Cayman Islands, welcomes this confirmation of Maples and Calder’s long standing view and adds, "This lays to rest the uncertainties that arose from the Court of Appeal decision that there was any wider principle that an investor always remains a shareholder until paid in full". In addition,
Jon Fowler, Head of Investment Funds Group, Maples and Calder Cayman Islands, adds that the decision "confirms that in the absence of a clear and unambiguous term in the articles, a fund cannot suspend payment of redemption proceeds to an investor pursuant to a valid redemption notice after the redemption date has passed".
Background to the case: In brief, an investor submitted a redemption request and the NAV was duly struck. Before the investor received the redemption proceeds, the fund purported to suspend redemptions and payment of redemption proceeds.
The investor issued a winding up petition against the fund on the basis of cash flow insolvency (i.e. it was unable to pay the debt due under its redemption notice) and on just and equitable grounds. The fund applied to strike out the petition summarily. The Privy Council refused to do so.
Therefore, terms contained in the fund’s offering documents will only be relevant if they are clearly incorporated into the articles. In the absence of such a clear wording, the court will give effect to the plain meaning of the articles even if that is inconsistent with what has been stated in the offering documents.
The Implications for funds and their advisors are very clear. Care must be taken to draft fund’s articles and offering documents so that they clearly state: (i) the investor’s entitlements on redemption; (ii) the fund’s powers of suspension.
