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Abstract
In the absence of a secondary market in the shares issued to their investors, hedge funds typically issue redeemable shares to enable investors to achieve liquidity by other means. For prospective investors, therefore, understanding the redemption terms attached to the shares to be issued is a critical part of the due diligence process. But even with such information, woe betide the prospective investor who invests without fully understanding where any claim for redemption proceeds ranks amongst other claimants in the event the fund becomes insolvent. In this article, the writer examines the recent decision of the Cayman Islands Court of Appeal in Herald Fund SPC v Primeo Fund (19 July 2016, unreported), which considered the question of whether certain claims for redemption proceeds rank pari passu with claims of ordinary unsecured creditors or are subordinated to them. It is argued that the decision represents a wrong turn in an area of Cayman Islands company law which is crucial to the hedge fund market.
Notes
1 [2012] UKSC 6; [2012] 3 All ER 1.
2 [2010] UKPC 33; [2010] 2 CILR 364.
3 Construing section 37 of the 2010 Revision of the Cayman Islands Companies Law, which was then in effect.
4 19 July 2016, unreported.
5 Justice Andrew Jones QC, at first instance, analysed section 37(7) of the 2013 Revision of Cayman Islands Companies Law, whereas the Cayman Islands Court of Appeal referred to the 2003 Revision, presumably in error. Nothing turns on this as the subsections appear to be in the same terms in various revisions to the Companies Law throughout that period. There has since been a 2016 Revision, where section 37(7) is again in the same terms.
6 At para 44.
7 Judgment handed down on 12 June 2015, unreported, at para 20.
8 At para 20.
9 At para 58.
10 H Broom, A Selection of Legal Maxims (London, Sweet & Maxwell Limited, 10th edn, 1939).
11 6 Geo II c 28.
12 The New South Sea Annuities were brought below that level over the period 1786–1830, but the trading stock was not redeemed until 1853. Public Income and Expenditure: Gross Accounts of the United Kingdom, 1801–1869. Appendices 1–13: Vol II of Public Income and Expenditure: Return to an Order of the Honourable House of Commons, dated 24 July 1866, Treasury Chambers, 9 March 1867 (Great Britain, Treasury, 1869), 525–30.
13 G Spence, The Equitable Jurisdiction of the Court of Chancery (London, V&R Stevens, 1849), 705. See also JW Smith, A Manual of Equity Jurisprudence (London, Stevens & Sons, 11th edn, 1873), 321.
14 Even where there is an initial period where the shareholders are locked-in, they can redeem albeit on payment of a penalty fee.
15 At paras 53–56.
16 [1998] AC 298.
17 At 323.
18 An example identified by Lord Millett, writing extra-judicially, to illustrate the power of appropriation vested in an equitable mortgagee of shares, who, in possession of an executed and partially completed share transfer need not register as the legal owner before selling the shares. See Millett, “The Remedy of Appropriation under a Share Mortgage” (2008) 2 Law and Financial Markets Review 333, 337.
19 [2001] UKPC 28; [2001] 2 AC 710.
20 [2009] EWCA Civ 1161; [2010] 1 BCLC 496.
21 See also RMF Market Neutral Strategies (Master) Limited v DD Growth Premium 2X Fund, a decision of Smellie CJ in the Grand Court of the Cayman Islands (17 November 2014, unreported), at para 148.
22 (1887) 12 App Cas 409.
23 RMF Market Neutral Strategies (Master) Limited v DD Growth Premium 2X Fund, a decision of Smellie CJ in the Grand Court of the Cayman Islands (17 November 2014, unreported) at para 60.
24 Per Lord Macnaghten at 432.
25 See Progress Property Co Ltd v Moore [2010] UKSC 55; [2011] 1 WLR 1 at [para 15], cited with approval in RMF Market Neutral Strategies (Master) Limited v DD Growth Premium 2X Fund, a decision of Smellie CJ in the Grand Court of the Cayman Islands (17 September 2014, unreported), at para 58.
26 Companies Act 1981, s 45.
27 The Interim Report on the Financing of Small Firms, Cmnd 7503 (1979).
28 At para 60.
29 RMF Market Neutral Strategies (Master) Limited v DD Growth Premium 2X Fund, at para 63.
30 [2005] 2 AC 680.
Additional information
Notes on contributors
Daniel Harris
Daniel Harris, Solicitor. Email: [email protected]