The issue of how redemptions by a feeder fund from a master fund are treated in a liquidation scenario has prompted a great deal of discussion in the Cayman Islands, after a notable ruling from the Grand Court of the Cayman Islands, the world's biggest offshore fund centre, write Ronan Guilfoyle and Casey McDonald from fund governance firm Calderwood.
The decision means that the practice of allowing automatic, back-to-back redemptions in a master feeder structure, can't necessarily be relied upon, especially where there are no such provisions embedded into fund documents. The case was of special interest to Calderwood, as co-founder Ronan Guilfoyle was asked to provide independent expert witness testimony as to the practice adopted by the fund industry with respect to the processing of redemptions in master-feeder structures.
In the case of Ardon Maroon Asia Master Fund (in Official Liquidation) ("Master Fund"), it was argued by the liquidators of the Ardon Maroon Asia Dragon Feeder Fund (in Official Liquidation) ("Feeder Fund"), that upon the receipt of a redemption request into the Feeder Fund, an "automatic" back-to-back redemption into the Master Fund was triggered by entries in back-office systems made by the administrator and transfer agent. The difficulty in this case is that the governing documents of both the Master Fund and the Feeder Fund required written notice for a redemption to be validly effected.
Prior to the payment of any redemption proceeds as between the Master Fund and the Feeder Fund and the Feeder Fund and its redeeming investor, the Master Fund and the Feeder Fund experienced liquidity issues and entered into liquidation.
The investor in the Feeder Fund submitted a claim in the liquidation of the Feeder Fund seeking payment of its unpaid redemption proceeds, while the Feeder Fund submitted a corresponding claim in the liquidation of the Master Fund seeking payment of the redemption proceeds it considered were due and payable as a result of the "automatic" back-to-back redemption. The liquidators of the Master Fund rejected the Feeder Fund's claim on the basis that no written redemption notice had been received. The Feeder Fund appealed the Master Fund liquidators' rejection of the claim to the Grand Court.
Despite arguments advanced by the Feeder Fund, including that the receipt of a redemption notice by the Feeder Fund triggered an "automatic" back-to-back redemption in the Master Fund, and that this is precisely what was intended by the directors in accordance with what was stated to be standard industry practice, the Grand Court was ultimately unpersuaded by these arguments. Whilst the Grand Court was cognisant of the commercial realities in the investment fund business, it found that the "automatic" procedure which was thought to apply in this case was insufficient to constitute written notice in accordance with the requirements set out in the Master Fund's governing documents.
Importantly, the Grand Court appeared to recognise that, in specific instances, "automatic" back-to-back or "silent" redemptions could be permissible; however, the procedure to be adopted or followed must be clearly set out in the fund's governing documents.
Based on years of experience both as a fund director and administrator, Guilfoyle's (and Calderwood's) opinion was ultimately consistent with the conclusions reached by the Grand Court i.e. that despite what may have been done in practice ("automatic" back-to-back redemptions), the correct approach is to follow the redemption procedures set out in a fund's governing documents.
This is clearly an important issue for those involved in master-feeder structures and highlights the need for a thorough understanding of the redemption processes contained in fund documents, particularly at Board level. Boards should discuss this decision with their trusted advisors to determine whether any appropriate action is required. Please get in touch with your usual Calderwood contact should you wish to discuss this decision in more detail.
Feeder Fund, Calderwood, Cayman Islands, Investment funds, Grand Court, Ronan Guilfoyle, Casey McDonald