In what has been called a decision “of significant interest to the fund industry”, the UK’s Privy Council has upheld a ruling by the Cayman Islands Grand Court which held that redeemed but unpaid investors in failed investment funds managed by Bernard Madoff’s company should be treated as creditors in a liquidation, with their claims ranking ahead of the claims of unredeemed investors.
The decision by the Privy Council, handed down last week, officially brings to an end a long-running court battle involving Primeo Fund and Herald Fund, both Cayman-based investors in Bernard L Madoff Investment Securities (BLMIS) that went into administration after BLMIS’s widely-publicised collapse in 2008.
In an analysis of the case on the Mourant Ozannes website, three Mourant Ozannes legal experts based in Cayman – Peter Hayden, Rocco Cecere and Christopher Levers – argue that that the decision’s significance to the fund industry lies in the fact that it “confirms the prevailing market view on this issue, and ensures that the contractual bargain enshrined in the subscription documentation between the fund and investors is respected”.
They note that the argument “turned on the application of section 37(7) of the Cayman Islands Companies Law (2007 Revision), which states that, in some circumstances, share redemptions cannot be enforced during a liquidation”.
“Primeo argued that the relevant circumstances did not apply, that it was simply a creditor for its unpaid redemption proceeds, and as such it was entitled to make a claim against Herald’s liquidator,” the Mourant Ozannes legal experts add, pointing out that the Cayman Grand Court went on to agree with Primeo.