Cayman Islands Grand Court Rules That Hedge Fund Investor Is Entitled to Court-Supervised Liquidation of Fund, Even Though Fund Managers Were Conducting “Ad Hoc” Liquidation With the Support of a Majority of Fund Investors

In yet another case that highlights the importance of carefully drafted hedge fund organizational documents, the Cayman Islands Grand Court has granted a request by hedge funds Aris Multi-Strategy Lending Fund Limited and Aris Africa Fund Limited (together, Aris) to have a court-supervised liquidator appointed for hedge fund Heriot African Trade Finance Fund Limited (Heriot or Fund).  In or around March 2009, as a result of the 2008 credit crisis, Heriot’s managers suspended redemptions in the Fund indefinitely.  In June 2009, Aris commenced litigation seeking to wind up the Fund on the grounds that the Fund had failed to file timely financial statements and had failed to comply with its stated investment policy.  Over a year later, it amended that petition to add a critical additional ground for winding up: The Fund had lost its “substratum,” which, under Cayman Islands law, means that the Fund’s business purpose could no longer be carried out.  Heriot, in opposing the winding up order, argued that, with the approval of a majority of its investors, it was already liquidating in an orderly fashion.  The Court ruled that, because Heriot’s organizational documents did not specifically contemplate an informal, self-supervised liquidation process, Aris was entitled to a winding up order and the appointment of a liquidator.  This article summarizes the Court’s decision.  For more on Aris, see "Why Are Most Hedge Fund Investors Reluctant to Sue Hedge Fund Managers, and What Are the Goals of Investors that Do Sue Managers? An Interview with Jason Papastavrou, Founder and Chief Investment Officer of Aris Capital Management, and Apostolos Peristeris, COO, CCO and GC of Aris," Hedge Fund Law Report, Vol. 2, No. 52 (Dec. 30, 2009); "New York State Supreme Court Dismisses Hedge Funds of Funds’ Complaint against Accipiter Hedge Funds Based on Exculpatory Language in Accipiter Fund Documents and Absence of Fiduciary Duty 'Among Constituent Limited Partners,'" Hedge Fund Law Report, Vol. 3, No. 7 (Feb. 17. 2010); "New York Supreme Court Rules that Aris Multi-Strategy Funds’ Suit against Hedge Funds for Fraud May Proceed, but Negligence Claims are Preempted under Martin Act," Hedge Fund Law Report, Vol. 2, No. 51 (Dec. 23, 2009).

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