Court rules in favour of Walkers' client in major hedge fund dispute

Date: Monday, March 29, 2010
Author: HedgeWeek

The Cayman Islands Court of Appeal has sent a clear message that winding up petitions should not be used to place undue and improper pressure on companies to accede to investor demands, according to a briefing by law firm Walkers.

The Court of Appeal struck out two winding up petitions presented against a solvent hedge fund and ordered that the investor which had petitioned should pay the fund’s costs on an indemnity basis.

Walkers says this case is important as the Court of Appeal has clarified the very limited circumstances in which a dissentient investor may properly invoke the class remedy which is a contributory’s winding up petition (a form of originating process filed by a shareholder which seeks the involuntary liquidation of a company).

The fund was a substantial Cayman Islands domiciled feeder fund specialising in investments in credit markets and distressed assets. The investor requested the redemption of all of its shares on a redemption date of 30 September 2008. During August and September 2008 the fund received a number of redemption requests amidst the unprecedented and well publicised global market turmoil and, to alleviate that pressure, offered a restructuring proposal or “exchange offer” to all investors.

Ultimately, the investor was the only investor which refused to enter into some form of the exchange offer and sought, instead, to enforce its redemption request against the fund. Before the date upon which the fund was required to make payments to redeeming investors, the fund imposed a suspension of voluntary redemptions (including the right to receive redemption proceeds).

In April 2009 the investor commenced proceedings against the fund in the Cayman Islands by way of originating process seeking, amongst other things, declarations that the redemption price was USD27,227,268.80, that at least 15 per cent of that amount had to be paid in cash and certain other declarations in respect of any in specie distribution proposed to be made by the fund.

In July 2009 the investor threatened to present a contributory’s winding up petition against the fund unless the full amount claimed was paid within 14 days. An undertaking not to present a petition was sought from the investor, but refused. The fund sought an injunction to restrain presentation. Argument was heard over two days as to whether or not the investor should be entitled to present a petition. During the course of those proceedings the investor through its counsel undertook not to present a petition until the matter had been determined.

On 15 September 2009 the judge at first instance provided counsel with a draft written ruling which was marked on each page with the words “Unapproved Version: No Permission is granted to publicise, copy or use in court.”

On 16 September 2009, before there had been an opportunity to fix a hearing for the handing down of the judgment and consequential orders, the investor presented a contributory’s winding up petition against the fund. The fund immediately sought an urgent hearing seeking that the petition be struck out as an abuse of the Court’s process. The judge declined to provide that relief and, on 18 September 2009, his order was sealed and perfected.

Apparently hedging its bets as to the prematurity of the first petition, the investor presented a second identical petition on 22 September 2009 but without withdrawing the first.

The fund appealed to the Cayman Islands Court of Appeal. As a consequence of presentation of the petitions, the fund was obliged to seek a number of validation orders from the Grand Court in order to enable it to carry on its day to day business and make distributions to other investors. As part of this process, it was ultimately agreed that the fund deposit the sum of USD27.4m into Court as security for the investor’s claim.

During the hearing of the Appeal, the Court of Appeal observed that, as two winding up petitions had been presented against the fund by that time, the real issue for determination was whether or not those petitions should be struck out as an abuse of the Court’s process.

The main ground of appeal relied upon by Walkers as counsel to the fund was that there was an alternative, more suitable, remedy available to the investor (i.e. ordinary litigation) and that it had acted unreasonably by not pursuing that alternative remedy in preference to a winding up petition. The Court of Appeal accepted this argument.

Walkers says the clear message is that disputes between an investor and a hedge fund should ordinarily be litigated in the usual way. It is inappropriate and likely to be an abuse of the Court’s process for an investor to seek to use the threat of a winding up petition as a means of placing undue and improper pressure on a company or fund to accede to its demands.