Michael Pearson (in his capacity as Additional Liquidator of Herald Fund SPC [in Official Liquidation] Appellant v Primeo Fund (in Official Liquidation) Respondent

JurisdictionCayman Islands
JudgeThe Hon John Martin JA,The Hon Sir Richard Field JA
Judgment Date19 July 2016
Judgment citation (vLex)[2016] CIGC J0719-1
Docket NumberCICA NO 17 OF 2015
CourtGrand Court (Cayman Islands)
Date19 July 2016

In the Matter of the Companies Law (2013 Revision)

And in the Matter of the Herald Fund SPC (In Official Liquidation)

Michael Pearson (In his capacity as Additional Liquidator of Herald Fund SPC [in Official Liquidation]
Primeo Fund (In Official Liquidation)
[2016] CIGC J0719-1

The Hon John Martin QC, JA

The Hon Sir Richard Field, JA

The Hon (Cecil) Dennis Morrison, JA

CICA NO 17 OF 2015
The Hon Sir Richard Field JA
The issue in the appeal

The issue raised in this appeal is whether a previous holder of redeemable shares redeemed in accordance with the company's Articles of Association but without payment of the redemption proceeds has a claim for the sum due in the liquidation of the company only by virtue of section 37 (7) (a) of the Companies Law (2003 Revision) and not otherwise.


The answer to this question depends on whether the words ‘… shares which … are liable to be redeemed have not been redeemed’ in s. 37 (7) (a) mean: (1) ‘shares in respect of which the company's prospective liability to pay redemption proceeds has arisen but has not been discharged’, as argued by the Appellant; or (2) ‘shares which have not been redeemed in accordance with the company's Articles of Association but as to which the shareholder has an accrued right to enforce the terms of redemption,’ as argued by the Respondent.

The factual background

Herald Fund SPC (‘Herald’) was incorporated as an exempted segregated portfolio company under the Companies Law (2003 Revision’) on 24 March 2004 and was registered as a mutual fund under the Mutual Funds Law (2003 Revision). As is common with such open-ended investment funds, investors in the fund received participating non-voting redeemable shares in exchange for the monies they invested in the fund with a right under the Articles of Association to redeem those shares for a sum based on the fund's NAV established at a specified date (‘the Valuation Point’) close to the date of the applicable Redemption Day.


Article 20 (1) provided:

‘Subject to the provisions of the Statute and as hereinafter provided and except as otherwise agreed or determined by the Directors, the Company shall on receipt by it or its duly authorized agent of a written request … from a Shareholder for the redemption of all or any Participating Non-Voting Shares held by him … redeem or repurchase such [Shares] for an amount equal to the Net Asset Value per Participating Non-Voting Share of the relevant Separate Class …’


Under Article 22 (1), a redeeming shareholder was entitled to receive the redemption proceeds as soon as reasonably practicable subject to any suspension of payment of redemption proceeds decided on by the Directors under Article 19. The Offering Memorandum stated that redemption proceedswould normally be paid within 20 Business Days of the relevant Redemption Day.


Article 23 provided:

‘Upon the redemption of a Participating Non-Voting Share being effected the Shareholder shall cease to be entitled to any rights in respect thereof … and accordingly his name shall be removed from the Register of Shareholders with respect thereto and the Share so redeemed shall be available for re-issue and until re-issue shall form part of the unissued capital of the Company’.


From the outset, Herald placed funds for investment with Bernard L Madoff Investment Securities LLC (‘BLMIS’), a limited liability company incorporated under the laws of New York.


One of the investors in Herald was another open-ended investment fund incorporated under the Companies Law, Primeo Fund (‘Primeo’).


Prior to 1 December 2008, redemption requests from two different groups of Herald shareholders—‘the December Redeemers’ and the ‘KYC Redeemers’—were received on Herald's behalf by its administrator, HSBC Securities Services (Luxembourg) SA. The relevant Valuation Point for the Redemption Day of 1 December 2008 was 28 November 2008 and Herald accepted these redemption requests providing these redeemers with a NAV per Share for that Valuation Point of US$1,386.20 per USD class Share and €1,328.74 per EUR Share in respect of their shares (respectively ‘the December Shares’ and ‘the KYC Shares’). Accordingly, in accordance with Articles, the December Shares and the KYC Shares were redeemed on 1 December 2008 and removed from Herald's share register notwithstanding that no redemption proceeds had yet been received.


On 11 December 2008, Mr Madoff confessed that BMLIS was a fraud and on the following day, 12 December 2008, Herald's board resolved to suspend the calculation of the NAV per Participating Non-Voting Shares and the issue, redemption and conversion of such shares with immediate effect and until further notice.


On 24 December 2008, Herald's board resolved:

‘…to the extent not expressly contemplated by the Suspension, the payment of redemption proceeds to investors in respect of redemption requests in Herald USA for value 26 November 2008 (but in respect of which [Herald] is not ordinarily obliged to pay redemption proceeds until or about 28 December 2008) is hereby suspended with immediate effect and until further notice.’


The December Redeemers were not paid their Redemption Proceeds. The KYC Redeemers were also not paid for the additional reason that ‘Know Your Client’ documentation was outstanding.


On 23 January 2009, Primeo was voluntarily wound up and on 8 April 2009, the Grand Court ordered that Primeo's winding up should continue under the supervision of the court. On 11 May 2012, the original Joint Official Liquidators, Mr James Cleaver and Mr Richard Fogerty, were replaced by Mr Gordon MacRae and Ms Eleanor Fisher respectively.


On 16 July 2013, Herald was ordered to be wound up by the Grand Court and on 23 July 2013, Mr Russell Smith and Mr Niall Goodsir-Cullen were appointed as Joint Official Receivers. Also, Mr Michael Pearson was appointed as Additional Official Liquidator with the functions of settling the list of contributories pursuant to section 112 (1) of the Companies Law and determining related issues.


The December Redeemers and the KYC Redeemers claimed that they were entitled to claim in Herald's liquidation as creditors for the Redemption Proceeds they say are due following Herald's acceptance of their Redemption Requests as of 1 December 2008. They also contend that such claims rankpari passu with Herald's other creditors and in preference to any claims that Herald's shareholders may have in the liquidation in their capacity as shareholders.


The Liquidators of Herald dispute these claims. They contend that the claims are caught by section 37 (7) (a) of the Companies Law and that both provisos to that paragraph apply, with the result that the December Redeemers and the KYC Redeemers have no entitlement to present claims for the Redemption Proceeds.


On 24 November 2014, the Grand Court directed that the issue arising out of these competing contentions be determined in aninter partes proceeding pursuant to Order 11, rule 3 of the Companies Winding Up Rules, with Primeo acting as representative of both the December Redeemers and the KYC Redeemers (the claims of both groups being legally indistinguishable) and Herald's Additional Liquidator acting as representative of all contributories who did not serve Redemption Notices for the Redemption Day of 1 December 2008.


In its Amended Points of Claim, the Respondent sought a declaration not only that subsection 37 (7) (a) did not apply to the shares redeemed by Primeo (‘the Primeo Shares’) and the shares redeemed by the KYC Redeemers' (‘the KYC Shares’) but also that Primeo and the KYC Redeemers have claims against Herald for payment of the Redemption Proceeds which are admissible for proof and rankpari passu with the claims of other ordinary unsecured creditors of Herald.

Section 37 of the Companies Law

It is regrettably necessary to set out most of section 37.

37. (1) Subject to this section, a company limited by shares or limited by guarantee and having a share capital may, if authorised to do so by its articles of association, issue shares which are to be redeemed or are liable to be redeemed at the option of the company or the shareholder and, for the avoidance of doubt, it shall be lawful for the rights attaching to any shares to be varied, subject to the provisions of the company's articles of association, so as to provide that such shares are to be or are liable to be so redeemed.

(2) Subject to this section, a company limited by shares or limited by guarantee and having a share capital may, if authorised to do so by its articles of association, purchase its own shares, including any redeemable shares.

(3) (a) No share may be redeemed or purchased unless it is fully paid.

(b) A company may not redeem or purchase any of its shares if, as a result of the redemption or purchase, there would no longer be any issued shares of the company other than shares held as treasury shares.

(c) Redemption or purchase of shares may be effected in such manner and upon such terms as may be authorised by or pursuant to the company's articles of association.

(d) If the articles of association do not authorise the manner and terms of the purchase, a company shall not purchase any of its own shares unless the manner and terms of purchase have first been authorised by a resolution of the company.

(da) For the avoidance of doubt –

(i) a company's articles of association; or (ii) a resolution of the company, may authorise the company's directors to determine the manner or any of the terms of, any such redemption or purchase not being inconsistent with such articles of association or resolution and subject to such restrictions (if any) as may be...

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