British Virgin Islands Court Finds that Western Union, which Sought Redemption of its Reserve Fund Shares Prior to a Redemption Freeze, is a Creditor of the Fund and May Appoint a Liquidator, Over Opposition of Hedge Fund Manager Caxton Associates
Hedge Fund Law Report
Respondent Reserve International Liquidity Fund, Ltd. (Fund) is a “money market daily liquidity fund” organized under the laws of the British Virgin Islands (BVI). Applicant Western Union International Limited (WU) owned approximately 298 million shares of the Fund (i.e., approximately $298 million of holdings). On September 15, 2008, Lehman Brothers filed for bankruptcy and the 2008 liquidity crisis accelerated. On that day, WU submitted redemption requests for its entire interest in the Fund, which still had a net asset value of $1 per share. Days later, the Fund and its affiliate, The Reserve Primary Fund, “broke the buck” and suspended redemptions and the daily calculation of net asset values. Litigation against the Fund in the United States commenced within weeks by various investors seeking redemptions of their interests and determination of the value of those interests. WU commenced an action in the BVI seeking liquidation of the Fund under BVI law. The fundamental issue considered by the court was determining when WU’s redemption of its Fund shares was completed and when, therefore, a shareholder became a creditor of the Fund with respect to the redemption proceeds, which would then entitle the shareholder to apply for the appointment of a liquidator. WU argued that its redemption was complete on the date of its redemption request, and that it became a creditor of the Fund on that date. The BVI High Court of Justice agreed, relying heavily on the language contained in the Fund’s Articles of Association. We summarize the Court’s reasoning and the implications of this decision.