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Industry Practice versus Articles of Association; Directors beware

In the recent decision of the Grand Court of the Cayman Islands in Ardon Maroon Asia Master Fund (In Official Liquidation), the Cayman Islands Court determined the proper approach to the construction of articles of association against a backdrop of industry practice.

The decision is of significance to directors and acts as another reminder for directors to properly consider a company’s articles of association.

In this case, a  proof of debt was submitted by the liquidators of a feeder fund (“Dragon“) to the liquidators of its master fund. Dragon’s proof of debt concerned the alleged redemption by it of shares in its master fund worth US$15 million. Dragon contended that this redemption occurred at master fund level following Dragon receiving and accepting a redemption request from one of its investors. The master fund liquidators rejected Dragon’s proof of debt on the basis, inter alia, they considered that Dragon had not complied with certain requirements that were needed to effect a redemption of Dragon’s shares in the master fund.

Dragon appealed the liquidators’ rejection. The appeal was defended by an investor of a related feeder fund, Maroon Asia Capital Limited (“MACL”).

Dragon contended that the directors of the master fund had no power to issue shares on terms that they were capable of being redeemed without a written redemption notice being served. Dragon advanced the argument that the redemption process between a feeder fund and a master fund was an automatic “back to back” process, and did not require separate redemption notices to be served on both the feeder fund and the master fund. Dragon suggested that this was standard industry practice in the Cayman Islands. Further, Dragon argued that even if a separate notice was necessary, the directors had power to waive that requirement and in fact did so through course of conduct. MACL argued that the process is not automatic and the directors of the master fund had no power to waive the requirement that no redemption notice is required at the master fund level. MACL’s argument was based upon the construction of the company’s articles.

The Court found Dragon’s argument, based on market practice alone, distinctly unpersuasive. Further, and on the basis of a proper construction of the articles, a separate redemption notice was required. Harneys acted for MACL.

 

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