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Cayman Court of Appeal - clarity on rankings for unpaid redemption creditors

11 August 2016

In the case of Primeo Fund (in official liquidation) v Herald Fund SPC (in official liquidation), the Cayman Islands Court of Appeal considered an appeal by Herald from the Grand Court’s first instance decision that investors who have redeemed their shares but remain unpaid at the start of a company’s liquidation are entitled to prove in the liquidation as a creditor for their redemption proceeds.

The Court of Appeal held that as a matter of common law, an investor transitions from a member to a creditor of a company when it redeems its shares pursuant to the company’s articles of association. As Primeo had redeemed its shares before Herald’s liquidation, the Court of Appeal had to decide whether Primeo’s redemption claim was enforceable under s37(7)(a) of the Companies Law (2013 revision) or otherwise.

If the claim fell within s37(7)(a), then it would have been subject to the prohibition on the enforcement of a redemption claim in a liquidation unless the company could have lawfully made a distribution of that amount to the investor between the date of redemption and the commencement of the winding up. It would also impact upon the order of priority of creditors.

The Court of Appeal held that s37(7)(a) does not apply to an investor whose shares were redeemed in accordance with the company’s articles of association before the commencement of its liquidation and upheld the first instance decision, with redemption creditors ranking behind the company's general creditors but ahead of its shareholders.

This case provides some useful clarity on the status and rankings of claims for unpaid share redemption proceeds in the liquidation of Cayman Islands funds.

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