New provisions to provide the Cayman Islands with a comprehensive, flexible, self-contained, creditor friendly regime for corpo­rate liquidation and cross-border co-operation have just come into force.
The provisions of the Companies (Amendment) Law 2007 of the Cayman Islands came into full force on 1st March 2009, following the formulation of the new Companies Winding Up Rules 2008, and Insolvency Practitioners Regulations 2008.
That law repeals the entirety of the current Part V of the Companies Law (2007 Revision), which covers winding up by the Court, voluntary winding up, winding up subject to the supervision of the Court, and various ancillary provisions.
It also substitutes new provisions implementing wide ranging and detailed changes, and adds much needed clarification of the current law.
Also coming into force on 1st March 2009 are the Foreign Bankruptcy Proceedings (International Cooperation) Rules 2008 and the Grand Court (Amendment No. 2) Rules 2008.
Before the introduction of these provisions, it was necessary to resort to the UK Insolvency Rules, which although workable were proving increasingly unsatisfactory.
Looking to hedge funds, the Cayman Islands Court of Appeal found, in the Matter of Strategic Turnaround Master Fund Partnership, that the construction of a fund's constitutional documents and offering memorandum determine whether it has the power to suspend redemption payments and that upon the redemption date, the redeeming shareholder becomes a creditor of the fund.
Notwithstanding that it has become creditor, the shareholder remains a member (and is therefore subject to the power of fund to exercise its right to suspend the payment of redemption proceeds) until such time as the fund's register of members has been amended to reflect the redemption.
In the instance that there has been such an amendment, the member would have standing to bring an action against the fund as a creditor for winding up on the ground that the fund is unable to pay its debts as and when they fall due.
This judgement is one of which funds and investors alike should be aware and is particularly relevant given the current climate of the global hedge fund industry, which, it has been reported, sustained redemptions amounting to US$152bn, or 9%, in the fourth quarter alone of last year.
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