Re AJW Master Fund

• Jurisdiction: Cayman Islands
• Judge: (Jones, J.)
• Judgment Date: 30 May 2011
• Court: Grand Court (Cayman Islands)
• Date: 30 May 2011

Grand Court, Financial Services Division

(Jones, J.)

IN THE MATTER OF AJW MASTER FUND II LIMITED

G. Halkerston and Ms. J. Collett for the offshore feeder fund;

J.G. Manning for KPMG.

Legislation construed:

Insolvency Practitioners” Regulations 2008, reg. 6(1): ‘A qualified insolvency practitioner shall not be appointed by the Court as official liquidator of a company unless he can be properly regarded as independent as regards that company.’

Companies-liquidators-appointment-upon liquidation of master/feeder fund structure, usual to appoint same liquidators in respect of master fund and feeder fund-if different liquidators accidentally appointed, e.g. because proceedings wrongly assigned to different judges, court to act to remove one and replace with other

A master fund and its offshore feeder fund were in official liquidation in the Grand Court.

The master fund and the offshore feeder fund were component companies of a typical and solvent master/feeder structure. An investor in the offshore feeder fund-acting by its liquidator, Kinetic-presented a winding-up petition in respect of the offshore feeder fund on the just and equitable ground, apparently with the ultimate aim of securing the liquidation of the master fund. By the petition, Kinetic sought to have itself appointed as liquidator. The winding-up petition was assigned to Henderson, J. The funds” managers decided not to oppose the winding-up petition, but opposed the appointment of Kinetic as liquidator, and instead proposed the appointment of KPMG.

Subsequently, the managers put the master fund into voluntary liquidation, and appointed KPMG as liquidator, although they failed to inform the petitioning investor of this until almost a month later. With the managers” consent, KPMG presented a supervision petition in respect of the master fund under s.124 of the Companies Law, the hearing of which was assigned to Quin, J. The supervision petition disclosed that an investor”s winding-up petition had been presented in respect of the offshore feeder fund and was due to be heard by Henderson, J. the following week, but did not disclose the fact that the matter being disputed on that petition was the proposed appointment of KPMG-and not Kinetic-as liquidator. The Grand Court (Quin, J.) made an ex parte supervision order on the papers appointing KPMG as liquidator, without hearing the investors” views regarding the identity of the liquidator.

At the hearing of the winding-up petition, at which KPMG did not appear and were not represented, the Grand Court (Henderson, J.) ordered the winding up of the offshore feeder fund without further argument. The court ruled against appointing Kinetic as liquidator. After hearing further submissions, the court ruled against appointing KPMG as liquidator, on

the basis of a conflict of interest due to its relationship with FTI, a consulting firm which had done valuation work in respect of the funds, and therefore did not meet the independence requirement of reg. 6(1) of the Insolvency Practitioners” Regulations. The court appointed PwC as liquidator of the offshore feeder fund.

PwC subsequently issued a summons for the removal of KPMG as liquidator of the master fund. In response, KPMG carried out a poll of the investors, of which a majority indicated that they were not in favour of the proposed removal.

The offshore feeder fund, acting by its liquidator, PwC, applied to remove KPMG as liquidator of the master fund and appoint PwC, submitting that (a) for the purposes of the liquidations, there was no relevant difference between the two funds; (b) it was in the investors” interests that the liquidator of the offshore feeder fund be the same as the liquidator of the master fund, as having separately-appointed liquidators was costing an extra US$50,000 per month; (c) as the court had previously ruled that KPMG did not meet the independence requirement of reg. 6(1) of the Insolvency Practitioners” Regulations in respect of the offshore feeder fund, KPMG were not a suitable candidate to liquidate either fund; (d) the court should not vary or discharge its previous ruling on the basis that it was an ex parte order, as all interested parties, including KPMG, had notice and the opportunity to appear and express a view; (e) KPMG”s findings regarding claims against FTI were not a material change in circumstance justifying varying the ruling; and (f) the poll of investors” views was not a material change in circumstance justifying varying the ruling as it was taken after the event and wrongly concerned the removal, rather than the (continued) appointment, of KPMG.

KPMG submitted in reply that (a) the court should vary or discharge its ruling that KPMG were insufficiently independent, which could be characterized as ex parte on the basis that KPMG had not been given the opportunity to appear, had not appeared and had not been represented; (b) the fact that KPMG had found that it was unlikely that a claim could be sustained against FTI was a material change in circumstance justifying departing from the previous ruling; and (c) the results of the poll of the investors, which indicated that the investors were in favour of the continued appointment of KPMG, justified departing from the previous ruling.

Held, granting the removal application:

(1) The court would remove KPMG as liquidator of the master fund and appoint PwC in its place. When making winding-up and/or supervision orders in respect of the component companies of a master/feeder structure, it would normally be in the investors” interests-and the court would seek to ensure-that the same professional insolvency practitioners were appointed as official liquidators in respect of each company. In these circumstances, there was nothing to suggest that there should be different liquidators in respect of each fund, or that the outstanding issues on the

petitions were different. The appointment of different liquidators had been accidental-a result of the unfortunate allocation of the closely-related winding-up and supervision petitions to different judges-and was currently costing the investors some US$50,000 per month. The court would therefore act to ensure that the same liquidator was appointed in respect of each fund (para. 9; paras. 38–39).

(2) As there was no reason to treat the two funds differently, if KPMG failed to meet the independence requirement of reg. 6(1) of the Insolvency Practitioners” Regulations in respect of one it also failed to meet it in respect of the other. The court had previously determined that KPMG did not meet the independence requirement in respect of the offshore feeder fund. It would only be open to the court to discharge or vary that ruling if it could be characterized as an ex parte order, or if there had been a material change in circumstance (para. 28).

(3) The ruling could not be characterized as an ex parte order as all interested parties had notice of the hearing and the issue to be decided, by way of the circular letter to the investors, the letter from the offshore feeder fund”s attorneys to the petitioner”s attorneys, and the fact that all the insolvency practitioners involved had consented and sworn the requisite affidavit. All interested parties had the opportunity to appear, to express a view and/or to request an adjournment. The fact that KPMG did not appear and were not represented on the petition did not alter this (paras. 29–32).

(4) Nor had there been a material change in circumstance affecting the April 6th decision. The fact that it currently appeared to KPMG-as a result of its ongoing investigation-that it was unlikely that a claim could be sustained against FTI was not relevant, as the April 6th decision concerned whether KPMG should conduct the investigation at all. Moreover, the outcome of the poll was not a material change in circumstance, since it was taken ‘after the event’ in response to the removal application, with the result that the investors were asked the wrong question. The legislature had intended, by its 2007 amendments to the Companies Law, Part V, that creditors and/or contributories should not be given the opportunity to choose liquidators after a winding-up or supervision order was made, but rather that their only opportunity to express a view about the identity of the chosen liquidators would be at the hearing of the petition. The question should therefore have been whether KPMG should be appointed as liquidators, and should have been asked before a final decision was made. Alternatively, had the application been presented as a review of the supervision petition ruling-as would have been more expedient-the investors could have been asked about the continued appointment of KPMG. It would have been open to the court to conduct-and to closely control-such a poll (paras. 33–37).

(5) Therefore, as the application was presented as a summons for the removal of KPMG, the court would order that KPMG be removed from

office, that PwC-which the court had already determined met the reg. 6(1) independence requirement-be appointed as successor liquidators, and give consequential directions. Had the application been presented as a review of the supervision petition ruling, the court would have set aside the ex parte order and appointed PwC instead of KPMG (paras. 40–44).

1 JONES, J.: The AJW Group originally comprised (amongst other entities) a master fund and two feeder funds whose sole purpose was to invest their capital into the master fund-in other words, to ‘feed’ the money subscribed by investors into the master fund. These funds were promoted and subsequently managed by various entities in the NIR Group LLC, which is substantially owned and controlled by Mr. Corey Ribosky. I shall refer to Mr. Ribosky and the various management entities generically as ‘management.’

2 For present purposes, it is sufficient to describe the investment strategy by saying that it involved...