A recent judgment of the Grand Court of the Cayman Islands1 (Grand Court) has raised a number of important issues for the processing of redemptions in master-feeder structures. In Ardon Maroon, the Grand Court held that "industry practice" is not a relevant consideration in determining whether a back-to-back redemption by a feeder fund has been validly effected - rather, the Grand Court found that master and feeder funds must strictly follow the redemption mechanics set out in their constitutional and operational documents in order to ensure that back-to-back (or automatic) redemptions are ultimately effective as a matter of law.
This decision serves as a timely judicial reminder that the practice which is ultimately adopted by managers, administrators and transfer agents must accurately reflect the actual redemption procedure set out in the constitutional and operational documents of master-feeder structures (or vice versa).
In Ardon Maroon, the Grand Court was tasked with determining the enforceability of a claim for unpaid redemption proceeds submitted by the feeder fund in the liquidation of the master fund. The claim had initially been rejected by the liquidators of the master fund on the basis that the redemption had not been validly effected in accordance with the procedure set out in the master fund's governing documents and the feeder fund sought to appeal that determination.
Whilst the facts are particular to this case, the constitutional documents of both the master and feeder funds required written notice for a redemption to be validly effected. Upon the receipt of a redemption request into the feeder fund, the feeder fund's liquidators argued that an "automatic" back-to-back redemption into the master fund was triggered by the administrator and transfer agent via entries in back-office systems. The directors and third-party service providers subsequently proceeded on the assumption that the redemption by the feeder fund into the master fund had been validly effected. The master fund subsequently experienced liquidity issues and entered into liquidation before any redemption proceeds were paid to the feeder fund.
The Grand Court was invited to consider what the correct redemption procedure was at both the master and feeder fund level by reference to expert evidence as to standard industry practice for the processing of master/feeder redemptions in an attempt to establish that an alternative, automatic redemption procedure had been adopted by the directors which only required written notice at the feeder fund level.
Whilst the Grand Court considered commercial common sense and business efficacy when analysing what redemption procedures were actually put in place by both funds, the Grand Court was ultimately unpersuaded by these arguments and found that the assumed "automatic" procedure which was thought to apply in this case was insufficient to constitute written notice within the meaning of the master fund's governing documents. In reaching this conclusion, the Grand Court placed significant weight on the natural and ordinary meaning of the words used, which outlined the parties' clear contractual intention as to how the redemption procedure was to operate i.e. express written notice was required at both master and feeder level in this instance (which will not necessarily be the case in every structure).
Whilst, in principle, the Grand Court did not consider that there is anything inherently "amiss" with the concept of an "automatic" back-to-back redemption (i.e. a redemption that is automatically triggered by the receipt of a redemption notice at feeder fund level), any such procedure must be constitutionally authorised in clear terms.
This decision is presently on appeal by the feeder fund's liquidators to the Cayman Islands Court of Appeal.
1 Ardon Maroon Asia Master Fund (In Official Liquidation), unreported (McMillan J), 30 July 2018.
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