Winding down wind-ups?

The Cayman Islands has long been seen as an investor-friendly jurisdiction, but as Peter Hayden explains, winding up funds has become a whole lot trickier since the downturn

Following the financial crisis a number of issues have arisen in the Cayman Islands ­surrounding the ability of an investor to wind up a fund. The issues have tended to arise in the context of a fund that has a suspended redemption and has failed to make payment to a redeeming investor.

The principal authority is Re Strategic Turnaround Master Partnership Ltd (2008), a decision of the Cayman Islands Court of Appeal (CICA) delivered on 12 December 2008. The CICA found that redemption is a process that can be ­suspended at any stage until it has been completed by payment and removal of the investor from the register of members.

This approach has already been the subject of much discussion and has been ­criticised heavily by some commentators. It appears to be inconsistent with decisions in other ­jurisdictions, which envisage a redeeming investor ceasing to be a member and ­simply becoming a creditor as from the ­redemption date or date on which ­payment becomes due. The Privy Council granted special leave for an appeal in February 2010 and is due to hear the appeal on 3-4 November 2010.

Turnaround upshot

It is also worth noting that the position for petitioning on a debt has changed since Strategic Turnaround. It was previously a cashflow test, which did not take into account contingent and future liabilities. Based on that test, the CICA held that the ­petition could not proceed on the basis that the fund was unable to pay its debts, because the suspension had the effect of making the debt a contingent liability (contingent on the lifting of the suspension). However, ­Section 94(1)(b) of the Companies Law (2009 ­Revision) now allows creditors to petition for contingent and future liabilities.

The Camulos redemption

The CICA considered related issues in Re ­Camulos Partners Offshore Limited (18 March 2010, unreported). In that case, the investor placed a redemption request, but before it was processed the fund put ­forward a restructuring proposal. Despite rejecting the restructuring proposal the investor did not receive payment. After the time for ­payment had passed the fund purported to suspend payment of redemptions. The investor initially issued ­proceedings against the fund seeking declarations as to its ­entitlement. It ­subsequently presented a winding-up petition based on the debt and on the just and equitable basis. The fund applied to strike out the petition.

The CICA carried out an extensive review of the authorities and found that the ­position in Cayman is the same as that in England. Applying Parmalat Capital Finance Limited v Food Holdings Limited (2008), the CICA said that if the ­petitioner’s debt is bona fide disputed on substantive grounds, the normal practice is for the court to dismiss the petition and leave the ­creditor to establish their claim. The Privy Council decision in CVC Opportunity Equity ­Partners Limited v Demarco (2002) was cited as authority that there is no difference in principle in relation to just and equitable petitions. The reason why just and ­equitable petitions may be allowed to proceed was said to follow from the fact that it would often be found, on the facts, that the ­petitioner had no alternative ­remedy. The court needs to consider whether there is an alternative remedy ­available to the ­petitioner and whether the petitioner is ­acting unreasonably in not ­pursuing that alternative remedy. In ­Camulos there was an alternative remedy, namely the proceedings seeking ­declaratory relief.

The decision in Camulos is unsurprising, but it is likely to deter investors from ­pursuing winding-up proceedings. It ­contrasts with the traditional perception of Cayman as an ’investor-­friendly’ ­jurisdiction and seeks to strike an ­appropriate balance between investor ­protection and fund ­stability.

Freestanding remedy?

In Camulos, as an alternative to winding up, the petition sought orders under Section 95(3) of the Companies Law (2009 ­Revision). Traditionally, Cayman has not had any freestanding remedy for unfair ­prejudice. However, the introduction of ­Section 95(3), which gives the court more flexibility in terms of the range of orders that can be made on a petition, led some observers to believe that the position had changed. The CICA rejected this argument, finding that, properly construed, the statute provided that the gateway to relief under that section was that the court should be ­satisfied that it is just and equitable to make a winding-up order.

There remain a number of cases pending that raise similar issues and there are ­likely to be further developments in this saga. The decision of the Privy Council in Strategic Turnaround is likely to go some way towards clarifying the position and is ­eagerly awaited. In the meantime, funds and investors would be well-advised to be cautious in their approach to these matters.

Peter Hayden is a partner and head of ­litigation and insolvency at Mourant Ozannes in Cayman