RIFIN Redemption of Shares in BVI Investment Funds

BRIEFING Redemption of Shares in BVI Investment Funds

APRIL 2013 This Client Briefing examines a number of which shares must be held before they can
issues which arise on the redemption of be redeemed, others provide penalties for
For more briefings visit shares by an investor in a BVI investment early redemption; most prescribe minimum
mourantozannes.com fund which may lead to disputes between periods in which notice must be given
the investor, the fund, and other investors. before a redemption may be effected, and
This briefing is only This note also includes an examination of an all will prescribe the day or days on which
intended to give a investor's status in the investment fund once a redemptions may be made ("Redemption
summary and general redemption request has been submitted, the Day"). Whatever is contained in the
overview of the subject right to enforce payment of the redemption constitutional documents of any particular
matter. It is not intended proceeds, standing to seek the liquidation fund, those terms are of a contractual nature,
to be comprehensive and of the fund on the grounds of non payment, and are capable of being enforced as such.
does not constitute, and and the distribution of a fund's assets upon its
should not be taken to be, liquidation. Assuming that the redemption terms within
legal advice. If you would a fund's constitutional documents have been
like legal advice or further Introduction followed, an investor who has requested the
information on any issue redemption of his shares will cease to be a
raised by this briefing, Companies domiciled in the BVI are often member of the company upon the passing
please contact one of your the vehicles of choice used by investment of the relevant Redemption Day, and will
usual Mourant Ozannes managers, and the promoters of investment be a creditor in an amount equal to the
contacts. funds, as part of their investment structure, redemption proceeds owed to him, which
and are often the corporate entity in which is generally calculated in accordance with
Contacts: investors directly invest and hold shares. the fund's net asset value ("NAV"). When
Shaun Folpp those redemption proceeds become due
Partner, BVI Central to any investment fund is an and payable will be a term of the contract
Marie-Claire Fudge investor's right to the return of capital, by between the fund and the investor, again set
Head of Funds, BVI way of a redemption of his shares. Principally, out in the fund's constitutional documents;
For contact details, those rights are set out within the fund's for example, the constitutional documents of
please see the end of this constitutional documents, most relevantly many funds contain provisions to the effect
briefing. the fund's memorandum and articles of that redemption proceeds will be paid within
association, and offering memorandum; 30 days of the relevant Redemption Day.
mourantozannes.com however, those documents must be read in
conjunction with a number of statutory and Status of the Redeeming Investor
common law principles which are particular
to the BVI. These principles can catch an As set out above, upon the passing of the
ill-advised investor off-guard, particularly relevant Redemption Day, an investor seeking
in circumstances where the redemption the redemption of his shares ceases to be
process is interrupted by the fund's insolvency a member of the company and, in turn,
and/or liquidation. becomes a creditor with respect to the unpaid
redemption proceeds. However, the rights
The Redemption conferred on him in his status as a creditor
are limited, particularly within any liquidation
A fund's constitutional documents represent of the fund, and do not resemble those that
the contract between the fund and its would vest in a third party creditor, such as a
investors, and will set out the terms on which trade creditor.
an investor may request the redemption,
either in part or in full, of his shares. Some
funds require minimum periods of time in

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BRIEFING Redeemed Investors Can Not Seek the There are three possible answers:
Liquidation of the Fund
1. as creditors, although ranking behind
A redeemed investor can not seek the third party creditors of the fund, claims
liquidation of the fund, even if the time for for unpaid redemption proceeds will rank
payment of his redemption proceeds has ahead of the claims of members;
passed – any recovery action will need to be
by way of ordinary court proceedings, for the 2. surplus assets should be distributed
recovery of a debt. This is the effect of s197 rateably between redeemed investors
of the Insolvency Act 2003 (the "Act"), which and members; or
provides:
3. having no admissible claim, and no longer
A member, and a past member, of a being members, those with claims for
company may not claim in the liquidation outstanding redemption proceeds have
of the company for a sum due to him no right to share in any surplus assets.
in his character as a member, whether
by way of dividend, profits, redemption This issue recently fell for consideration by
proceeds or otherwise, but such sum is the courts; at first instance the court held that
to be taken into account for the purposes the answer was (2) – a rateable distribution;
of the final adjustment of the rights however, on appeal, the court of appeal held
of members and, if appropriate, past that the answer was (1) – subordinated priority.
members between themselves.
In Somers Dublin Ltd A/C KBCS and Others
Redemption proceeds constitute a debt due v Monarch Pointe Fund Limited2 Bannister J
from a company to a member in his character rejected the notion that those with claims for
as such, and are thus caught by s197. The redemption proceeds, being former members
provision operates to exclude members who of the fund, would be precluded from sharing
have claims for outstanding redemption in any distribution on the basis that they were
proceeds from being creditors for the not members within the meaning of s207 of
purposes of the company's liquidation – the Act, holding that s207(3) must be read
at least in their capacity as former members as covering past members, and the sums
(and subject to what follows below). Given due to them in their character as members.
that no claim will exist in any liquidation, such In dealing with (1) above, the Learned Judge
members are thus precluded from seeking rejected any notion that the relevant statutory
the liquidation of the company on the basis provisions within the Act envisaged any
that they do not fall within the definition system of priorities as between redeemed and
of "creditor" contained in s9.1(a) of the Act, continuing members and, in the absence of
and thus lack standing to do so under s162, any statutory provisions to the contrary, held
on the basis that, although being a creditor that equity required the application of the pari
in the literal sense, they would not have an passu principle, thus directing that the surplus
admissible claim within any liquidation.1 assets be divided equally between (i) the
debts owed by the company to the redeemed
Claims for Outstanding Redemption members, and (ii) the capital contributions of
Proceeds: Priorities in a Liquidation the remaining members.

Given that redeemed investors are creditors, The Court of Appeal, however, took a different
but with no admissible claim within a view, holding that the purpose of s197 was to
liquidation of the fund, it necessarily falls for subordinate the claims of redeemed investors,
consideration what rights, if any, do those as former members of the company, to those
who fall within this class have to share in the of ordinary third-party creditors, but otherwise
surplus assets of the fund once creditors with did not operate to preclude such claims from
admissible claims have been paid in full. being made within the liquidation.3 The effect

1 See generally Westford Special Situations Fund Ltd. v Barfield Nominees Limited and Ors, unreported, Eastern Caribbean Supreme Court,
Virgin Islands, Court of Appeal, March 2011.

2 Unreported, November 2012, Eastern Caribbean Supreme Court, Virgin Islands, Bannister J.

3 Unreported, February and March 2013, Eastern Caribbean Supreme Court, Court of Appeal, Pereira CJ, Blenman JA and Mitchell JA [Ag.]

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BRIEFING of the Court of Appeal's decision is that, redeemed his interest? These questions
although redeemed investors are precluded fell for consideration in the Fairfield Sentry
from claiming within the liquidation as an litigation. For a detailed discussion of this
ordinary unsecured creditor, claims for unpaid litigation, please click here. In short, the
redemption proceeds are able to be made, but redemption by an investor of his shares gives
will rank behind those of ordinary unsecured rise to a debt obligation on the part of the
creditors. Although subordinated in this way, fund, whatever the value of the shares may
as a creditor claim, redeemed investors will still be, and the surrender of the shares by the
enjoy priority over continuing members. investor, and the rights that attach thereto,
is good consideration for the redemption
Clawbacks of Redemption Proceeds proceeds which the fund pays. In the event
the fund seeks restitution based on a mistaken
Some funds, as part of their constitutional overpayment, such a claim is capable of being
documents, will include provisions by which defeated by a good consideration defence.
an investor who receives an overpayment There are obvious limits to this, for example,
of redemption proceeds (by mistake or knowledge of the overpayment by the
otherwise) must repay the excess amount investor at the time the redemption proceeds
to the fund. Where those provisions exist, are received and, ultimately, clawback claims
they will form part of the contract between will always turn on their own facts, together
the investor and the fund, and the obligation with an examination of the constitutional
to repay will be enforceable as a matter of documents of the particular fund.
contract. Alternatively, and if the investor
retains an investment in the fund, the fund Contacts:
will generally have the power to adjust the
investor's interest, and make the necessary Shaun Folpp, Partner, BVI
changes to the number of shares he holds +1 284 852 1777
based on the overpayment. [email protected]

But what if a contractual obligation to repay Marie-Claire Fudge, Head of Funds, BVI
is not included within the constitutional +1 284 852 1708
documents, or if the investor has fully [email protected]

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