The Grand Court of the Cayman Islands (the “Court”) has recently handed down a decision on the issue of redemption process that has significance for Cayman Islands’ master-feeder structures.

Background

In the matter of Ardon Maroon Asia Master Fund (in official liquidation)1 , the Court considered the requirements for a valid redemption of the feeder fund’s shares in the master fund where there had been no separate redemption request by the feeder fund.

The liquidators of the feeder fund contended that the receipt of a redemption notice by the feeder fund from the investor triggered an “automatic” back-to-back redemption in the master fund. However, the master fund rejected the feeder fund’s so-called ‘back-to-back’ proof of debt on the basis that the feeder fund had not submitted a written notice to redeem shares in the master fund. The said redemption process was set out in the constitutional documents of the master fund.

A second related issue was whether the directors of the fund were able to make a determination as to the method of redemption and by implication waive the requirements set out in the constitutional documents. The directors of the funds argued that a ‘back-to-back’ redemption at the master fund level is normal industry practice in the Cayman Islands to avoid misalignment of the liquidity profiles between the master fund and feeder fund.

The Court rejected the arguments in favour of a “back-to-back” redemption process. It concluded the feeder fund’s redemption was ineffective on the basis that it had not completed the redemption process by submitting a written notice of redemption, which was required by the constitutional documents of the master fund.

In principle, the Court recognised that redemption at the feeder fund level can amount to a simultaneous redemption at the master fund level without having to serve a separate redemption notice – provided that this was authorised in the master fund’s constitutional documents. However, the Court was unwilling to depart from the agreed contractual terms stated in the constitutional documents on the basis that industry practice was different. Given the redemption procedure set out in the constitutional documents, the Court was unable to accept that the redemption process could be disregarded by the directors without the express power for such a change.

Conclusion

Ardon has highlighted two important points for master-feeder structure funds. First, the importance of ensuring the redemption procedure set out in the master-feeder structure’s constitutional documents is strictly followed in order for a valid and enforceable redemption to take place. Second, it is clear that the Court will not allow industry practice to trump what the parties have contractually agreed. At a minimum, directors would need to be contractually entitled to waive any requirements within the redemption process irrespective of what is reflected in industry practice. The case should encourage fund managers to ensure that the contractual redemption processes are being implemented and carefully documented.

Ardon Maroon Asia Master Fund (in official liquidation), unreported 17 July 2018

Share
Twitter LinkedIn Email Save as PDF
More Publications
27 Sep 2022

Similar but Different

While the basic features of the trust remain, there are some notable differences in how trusts can b...

30 Aug 2022

The Cayman Islands restructuring officer regime comes into force on 31 August 2022

These new proceedings will significantly enhance the Cayman Islands restructuring regime.

28 Apr 2022

Restructuring the offshore debt of Chinese Real Estate Developers

This article sets out how the current regimes in the Cayman Islands and the BVI can assist with rest...

Contributors: Crystal Au-Yeung
28 Apr 2022

Assignment, novation or sub-participation of loans             

Transfers of loan portfolios between lending institutions have always been commonplace in the financ...

21 May 2021

2021 - A Jekyll and Hyde Year for SPACs

In this article we offer our views on why this has happened and look ahead to the future for SPACs a...

Contributors: Dean Bennett
24 Mar 2021

Economic Substance update Q1 2021

Economic Substance update Q1 2021

12 Mar 2021

Material adverse change clauses in light of the Covid-19 pandemic

Experts from each of our key global offices provide jurisdiction specific advice and answer question...

8 Mar 2021

Appleby Celebrates International Women’s Day

International Women’s Day is celebrated annually in support of gender equality and equal participa...

14 Dec 2020

Technology & Innovation Update Q4 2020

Technology & Innovation Update Q4 2020

Contributors: Peter Colegate