Are the Courts sealing the fate of struggling hedge funds too early or should they be given further time to recover and realize their potential for investors?
According to an article by international offshore law firm Harneys, published recently in Legal Week, Courts in the Cayman Islands and the British Virgin Islands are taking very different views as to whether hedge funds suffering with liquidity issues, should be allowed to continue independently or whether liquidators should be brought in to wind-up their portfolios.
The law firm observes that following the race to redeem by investors in the aftermath of the global financial crisis, fund managers in the BVI have been given greater protection from the Court to wind down asset holdings in a responsible manner without the immediate threat of liquidation proceedings. In the Cayman Islands, however, unhappy investors are having more success having liquidators appointed.
BVI litigation and insolvency partner Andrew Thorp, who co-authored the article with Thomas Williams, a litigation and insolvency associate based in Cayman, explained that the contractual suspensions deployed after the liquidity crisis were “designed to avoid a run of redemptions on the fund that might normally have created a fire sale of assets, leading ultimately to insolvency. It also gave fund managers breathing space in which to operate, without the investors making formal demands for outstanding payments.”
Over time however, investors have become frustrated with waiting and have turned to the Courts for redress. Expounding on the differences between the two jurisdictions, Thorp explained that, in the BVI, “suspended funds and their managers enjoy more room to wind down their asset holdings in an orderly and responsible manner without the immediate threat of a disgruntled investor seeking the appointment of a liquidator. They gain further comfort through, what is likely to be determined as, a statutory bar on investors advancing liquidation proceedings based on unpaid redemption proceeds. In turn, investors who are content for the current management to utilize their skills and experience in realising assets, without an additional tier of costs being added by a liquidator, need not be dictated to by an agitating minority.”
In Cayman, on the other hand, Williams stated that “the case law so far has proved to be more supportive of investors, some of whom, unhappy at the continued drawing of fees by investment managers and the sluggish realisation of assets, have successfully appointed liquidators to oversee the process.”
Williams said that the rulings in five recent Cayman cases demonstrated that this tactic has met with some success: “[T]he Cayman Court has taken the view that, where a fund has ceased to operate as an open-ended investment vehicle, the fund has lost its commercial purpose, its substratum has thus been lost, and it should therefore be wound up compulsorily on the just and equitable ground.”
Explaining the difference of approach in the BVI, Thorp said that the BVI Court preferred “the well established English common law test of "impossibility" when considering whether a fund was able to continue or had lost its substratum. The fact that a fund had contractually suspended redemptions did not necessarily mean that it was impossible for it to carry on its business.”
There is a combined total of more than 15,000 open-ended investment funds in the BVI and Cayman.