An “unheralded” change

Does Cayman Islands law allow a liquidator of a solvent investment fund to rectify a company’s register of investors, so as to adjust the existing legal rights of those investors?


Yesterday, the Privy Council heard arguments in a case that tests the scope of a liquidators’ powers and the meaning of rectification pursuant to section 112(2) of the Cayman Islands Companies Law.


By way of background, Herald Fund SPC – in official liquidation (Herald) is a Cayman Islands open-ended fund which invested the majority of its funds in Bernard L. Madoff Investment Securities LLC (BLMIS). Primeo Fund – in official liquidation (Primeo), similarly a Cayman Islands investment fund, was one of Herald’s principal investors.


BLMIS, controlled by Bernard Madoff (Madoff), purported to carry on business as a securities firm. On 11 December 2008 Mr Madoff was arrested by authorities for running the largest Ponzi scheme in US history and as a result, on 12 December 2008, Herald suspended redemptions and subscriptions.


Herald argues that section 112(2) empowers the appointed Additional Liquidator, at his discretion, to vary or adjust the investors’ shareholdings in an attempt to unwind the effects of the Madoff fraud, with the intention to achieve justice as between the unredeemed investors. Further, in relation to an in-specie subscription made by Primeo in May 2007, whereby Primeo acquired shares in Herald in exchange for the assignment of one of Primeo’s BLMIS accounts, that this subscription should also be varied so as to reflect the net cash position of Primeo’s BLMIS account, instead of the statement value of the account at the time of the transfer.


Primeo disputes the Additional Liquidator’s interpretation of the meaning of rectification, in summary, contending that the Additional Liquidator does not have the power to disturb investors pre-existing rights as at the commencement of the liquidation. In these proceedings, Primeo has been directed by the Cayman Islands Court to represent certain investors of Herald who argue that the “rectification issues” should be answered in the negative.


At first instance, the Grand Court held that the Additional Liquidator has the power and should, in these circumstances, exercise such power under section 112(2). However, the Court directed that in relation Primeo’s in-specie subscription that the contract of subscription was duly performed and could not be varied by the Additional Liquidator.


Upon Primeo’s appeal, the Court of Appeal, ruled in favour of Primeo, finding that section 112(2) did not empower the Additional Liquidator to adjust the investors’ shareholdings which were pre-existing and binding on Herald.


Herald appealed the Court of Appeal’s decision to the Privy Council and the proceeding was heard before the Privy Council on 29 October 2019.

The Privy Council’s judgment will bring finality to the dispute between Herald and Primeo (and the represented parties) regarding the rectification of Herald’s share register. 


Kalo’s Gordon MacRae, assisted by Paula Richmond and Cassandra Ronaldson, is one of the appointed joint official liquidators of Primeo. Peter Hayden and Christopher Levers, of the law firm Mourant, along with Tom Smith QC and Adam Al-Attar of South Square Chambers, represented Primeo in the proceedings.