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Primeo: Should a liquidator alter register of members?

The Cayman Islands Court of Appeal (CICA) has held that a liquidator cannot use his statutory power pursuant to section 112(2) of the Companies Law (2013 Revision) (Companies Law) to rectify the register of members where the effect would be to override investors’ proprietary rights.

Both Primeo and Herald are Cayman Islands incorporated open-ended investment companies in liquidation. Almost all of their investments were with Bernard L Madoff Investment Securities LLC (BLMIS) but not all assets were lost and the liquidations were solvent. An additional liquidator was appointed to Herald who sought guidance from the Court as to list of contributories pursuant to section 112(1) and to determine whether Herald’s register of members should be restated pursuant to section 112(2): this in a context where shareholders who had redeemed prior to the discovery of the BLMIS fraud had benefited from a calculation of net asset value (NAV), based upon fictitious profits.

At first instance, the Grand Court held that the additional liquidator had a discretionary power to rectify the member’s register pursuant to section 112(2) in “order to do justice amongst those recorded as members as at the commencement of the liquidation shareholders”. On appeal the Court found that (1) that the purpose of section 112 was to give effect to a member’s existing proprietary rights in accordance with the bargain struck when investing in the shares, and (2) section 112 contemplates rectification when that contract is not binding by reason of ‘fraud or default’ – the intention of the section is not to provide for substitution of incorrect NAV  if, despite its incorrectness, it has been calculated in accordance with a member’s contractual rights.

The CICA followed the approach of the Privy Council in Fairfield Sentry Ltd v Migani (2014) UKPC recognising the importance of certainty and finality in the determination of NAVs, which is a welcome guidance for investors and funds alike.

 

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