Somers Dublin Ltd A/C KBCS v Monarch Pointe Fund Limited (In Liquidation)

Having applied to redeem your shares in a fund, but before being paid your redemption monies, you discover the fund is being wound up. Where do you stand in the creditors' line?

Why is there a question?

Last November a decision at first instance in the British Virgin Islands High Court ranked continuing and former members equally. This decision was overturned on appeal in the East Caribbean Supreme Court, which confirmed the BVI's position was that on distribution of the fund’s assets, external creditors come first, followed by former fund members, who have priority over continuing members before the distribution of any residual surplus.  Although the appeal resolved the matter in line with other jurisdictions, whilst waiting for the appeal in BVI there had been some uncertainty.

So what would happen with a Cayman fund?

The Companies Law  provides, at s 37 (7) (a) that if you had applied to redeem shares or the company had agreed to buy your shares back before the winding up began, then you can hold the company to the terms of your redemption or sale agreement. If you do so you do not continue as a member of the company, your shares are cancelled. This gives you priority over continuing members, but not over those who hold shares which have preferences which come before the capital rights of your shares.

There are some provisos:

  • The date when the redemption or purchase was to take place must precede the start of the winding up process;
  • All external creditors are paid first;
  • All shares which carry preferred rights (compared to the shares being redeemed) - whether capital or income - are paid up to the amount of those preferred rights;
  • The fund could not have made a lawful distribution equal to the redemption or purchase price at any time between the redemption date and the start of the winding up.

Conclusion

The Cayman rules apply the logic that an agreement for redemption or buy back of shares is honoured where it was due to take place before any insolvency proceedings started. The shareholder with such an agreement stays behind external creditors, and preferred shareholders, but they are given preference over continuing members with equivalent shares. The recent BVI Court of Appeal decision means that the situation is the same in BVI and Cayman so if a Fund moved from BVI to Cayman the creditors and shareholders' rights in this situation would remain the same.

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