The recent decision in Re Harbinger Class PE Holdings (Cayman) Ltd confirms that the traditional “impossibility” test for loss of substratum will be applied in the context of a Cayman Islands company which is not an open-ended mutual fund. The decision appears, at first glance, to depart from earlier Cayman Islands authorities which deal with the question of what loss of substratum entails in the context of an open-ended mutual fund. Uncertainty remains, however, about the test for loss of substratum of a Cayman Islands open-ended fund, and this decision could be a step toward the traditional test for loss of substratum also being applied in that context.
On 14 May 2015, a petition was presented by “NYROY/RBC Acct# 1583 pledged to Royal Bank of Canada” (the Petitioner) for the winding up of Harbinger Class PE Holdings (Cayman) Ltd (the Company) and the appointment of official liquidators. The Petitioner was a contributory of the Company, holding a 0.2% interest. The winding up was sought pursuant to section 92(e) of the Companies Law (2013 Revision) on the ground that it was “just and equitable” to wind up the Company as there had been a loss of substratum.
The Company was incorporated on 16 December 2008 as a subsidiary of Harbinger Capital Partners Offshore Fund 1 Ltd (the Offshore Fund). The Offshore Fund had been incorporated in the Cayman Islands in 2001 and operated as a feeder fund to Harbinger Capital Partners Masters Fund 1 Limited (the Master Fund). In 2008, the Offshore Fund was faced with substantial redemption requests from its investors which it, and in turn the Master Fund, lacked the liquidity to meet; the Company was therefore formed in order to restructure the illiquid investments which were valued at US$2.4 billion. The Master Fund issued a new class of shares, Class PE Shares, to which it allocated certain private equity-type and other illiquid investments called the “Private Portfolio”. The Class PE Shares were issued by the Master Fund to the Offshore Fund and were ultimately contributed to the Company; participating shares in the Company were then issued to redeeming shareholders in the Offshore Fund as partial in-kind redemption proceeds.