FIA Leveraged Fund: the Cayman Court takes a strict approach to distributions in kind

The Cayman Islands Court of Appeal has recently handed down its written reasons for dismissing the FIA Leveraged Fund’s appeal from a judgment of the Grand Court, which ordered that the Fund be wound up on the petition of three redeeming investors whose redemption requests had purportedly been met by distributions in kind. Although the decision turned on the specific facts of the case, the Court’s judgment emphasises once again the primacy of the investment agreement between the fund and its investors, as well as the importance of valuation and timing issues when a fund is considering paying out a redeeming investor other than in cash.

In April 2012 the Grand Court heard the winding-up petition in respect of the FIA Leveraged Fund which had been presented by three creditors, which were US public employee pension Plans. The fund was a typical Master/Feeder structure, comprised of the Fund as feeder and another Cayman exempted limited company as the Master Fund. The Fund and Master Fund were managed by an investment manager in Bermuda and were members of the wider Fletcher funds group. The terms of the series of shares of the Fund into which the Plans had made their investments as to redemption provided that shares were redeemable at the end of each calendar month on sixty days’ prior written notice and that 90% of the redemption amount was payable with a true-up of the balance when the Fund had finally determined the redemption price of each share. Also, and in respect of this series of shares, a supplement to the offering memorandum provided that the Fund was obliged to pay 90% of the redemption amount in cash or in kind within 15 calendar days of the redemption date, with up to 10% being retained until no later than 30 days after the completion of the Fund’s audit for the year in which the redemption amount was payable…

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