By Ross Munro - Various recent cases have highlighted issues relating to the winding up of funds domiciled in the British Virgin Islands and the right or otherwise of investors to demand that control over the process be taken away from the directors and the funds’ managers and given to court-appointed liquidators. They also reflect apparent differences between the approach taken by courts in the BVI and those in the Cayman Islands.

The case of Aris Multi-Strategy Lending Fund Ltd v Quantek Opportunity Fund, Ltd, decided by the Commercial Court of the British Virgin Islands in December 2010, was the most recent in the jurisdiction involving an investor wanting to put a fund into liquidation on the ground of loss of substratum – the fund’s reason for existence.

The facts of the case concerned the Quantek Opportunity Fund, a BVI-domiciled feeder fund, which announced in October 2008 that due to the level of requests for return of capital, it would be suspending redemptions. The manager obtained shareholder approval to undertake an orderly liquidation of the assets held by the master fund.

However, some two years later, when around 35 per cent of the master fund’s assets had been distributed to investors in the feeder fund, Aris, a minority shareholder, sought to have liquidators appointed on the grounds that since the fund was no longer accepting new investments or making formal redemptions, it had lost its substratum.

However, the court decided that the fact the Quantek fund had suspended subscriptions and redemptions did not make it impossible to carry out its business, in this case to hold investments in the master fund for the benefit of its shareholders. It ruled that the mere fact a company intends to wind down its business does not necessarily justify the appointment of a liquidator.

The ruling follows another BVI case involving an investor seeking the winding up of a fund. In September 2010 the Court of Appeal of the Eastern Caribbean Supreme Court set aside a winding-up order made in the case of Westford Special Situations Fund Ltd. v. Barfield Nominees Limited and another, and dismissed liquidators appointed over Westfield at the application of an investor that had not received redemption proceeds.

These decisions have been made on the merits of each case; in other circumstances the courts might decide to appoint a liquidator. However, they run counter to a series of cases where the Cayman court has been willing to put a fund in the process of wind-down into liquidation against the wishes of the manager and to appoint a formal liquidator in place of the manager to handle the disposal of the assets and the return of capital to the investors. Comments from the judge suggested this would be the normal course of action in cases where the manager has acknowledged that the vehicle will not re-open as a functioning fund.

This is a point of considerable importance to both investors and managers, one that puts clear water between the judicial approaches in the two jurisdictions. Beyond the impact on existing funds that are winding down, it has prompted a fresh look at the provisions to be incorporated into the offering documents of new funds. More appropriate disclosure of how managers anticipate that the fund might eventually wind down its affairs and return capital to investors could subsequently prevent a liquidator being appointed against the manager’s wishes.

Ross Munro is a partner and head of BVI investment funds and regulatory with Harney, Westwood & Riegels

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