Cayman Islands Court of Appeal decision on Suspension of Redemptions

On 12 December 2008, in a landmark decision, the Cayman Islands Court of Appeal settled the questions of (1) the meaning of redemption in an Investment Fund context and at what point a Member is actually redeemed from an Investment Fund; (2)  when a Member becomes a creditor of an Investment Fund following service of a redemption notice; (3) whether a Member continues in his capacity as Member after a redemption date has passed; and (4) whether an Investment Fund is able to validly suspend the payment of redemption proceeds even after the applicable redemption date has passed and the Member has become a creditor of the Fund.

Given the investment climate and the rush by Investors to redeem their investments, the Cayman Islands Court of Appeal’s decision is important to Directors, Administrators, Auditors, legal advisers and other third parties involved in the determination of the rights and liabilities of Investment Funds and their Investors alike.

Upon a forensic examination of the Articles of Association, the Court of Appeal found that redemption did not take place as at the redemption date but rather was a process which would not be completed, so that the Member was redeemed, until the Member’s name was removed from the Register of Members and the Member’s shares were available for re-issue.

Although an Investor with an existing redemption request was properly classified as a creditor of the Investment Fund after the expiry of the redemption date, its right to receive the proceeds of redemption was subject to the fact that even after the redemption date the Investor remained a Member of the Investment Fund. As such, the investor was bound by the terms and powers stipulated by the Articles of Association and, where expressly incorporated, the Offering Document which included the broad based powers of the Directors to suspend redemptions in times of extreme volatility and market uncertainty.

In those circumstances and pursuant to the powers stipulated by the Articles of Association, as read together with the Offering Memorandum, the Court of Appeal affirmed that the express right to suspend redemptions included the right to suspend the payment of redemption proceeds in respect of extant or pre-existing redemption requests even after the applicable redemption date had passed.

Accordingly, although a creditor of the Investment Fund, the Investor was unable (based simply on the non-payment of redemption proceeds) to issue a petition for the winding up of the Investment Fund on the grounds that the Investment Fund was unable to pay its debts and was thereby insolvent.  In the Court of Appeal’s judgment, the liability to pay the redemption proceeds was, by virtue of the suspension of redemptions, a future or prospective debt which did not entitle the Investor to seek to wind up the Investment Fund on the grounds of insolvency pursuant to section 94 of the Companies Law (2007 Revision).

In order to succeed, the Investor would have to prove that the debt was absolutely due, which, in the particular circumstances of a valid exercise, by the Investment Fund, of its power to suspend redemptions, the Investor would not be able to establish. Important, in this context, was the Court of Appeal’s affirmation of the principle, in the absence of clear evidence to the contrary, that the exercise by the Investment Fund of its powers was presumed to be bona fide and in the Investment Fund’s interests as a whole.

The Court of Appeal drew a distinction between the Cayman Islands statutory provision on winding up applying the cash flow test for insolvency and the balance sheet test for insolvency. Whilst the Cayman Islands statutory regime allows for the cash flow test only, investors had sought to utilize, by analogy, section 123 (2) of the English Insolvency Act 1986, which permits a balance sheet test as a test of insolvency.  This decision affirmed that, under Cayman Islands law, the balance sheet test is currently irrelevant for the purposes of determining the solvency or otherwise of a Cayman Islands Investment Fund.

If Investors are to avoid winding up proceedings being struck out as an abuse of process, they and their legal advisers will need to take special care when analysing their strategy in response to an exercise by an Investment Fund of its power to suspend redemptions.

With at least 9,500 of the world’s Investment Funds being registered in the Cayman Islands the importance of the Cayman Island’s Court of Appeal’s judgment cannot be overstated. This Press Release is intended to provide a summary only of the matters described herein and should not be regarded as specific legal advice applicable to any particular circumstances. 

Anthony Akiwumi (Head of Litigation) and Richard Annette (Senior Associate) of the Cayman Islands law firm Stuarts Walker Hersant successfully appeared on behalf of the Investment Fund. Please contact This e-mail address is being protected from spambots. You need JavaScript enabled to view it or This e-mail address is being protected from spambots. You need JavaScript enabled to view it for further information.