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Loss of Substratum: Steps to Ensure a Fund’s Soft Wind-Down Does Not Result in a Winding-Up Order (Part Two of Two)

Conflicting cases in the Cayman Islands mean that funds intending to operate during a soft wind-down are susceptible to an investor petition for a court-appointed liquidator to commence a winding-up of the fund due to loss of substratum (i.e., its purpose for existence). For more on soft wind-downs of Cayman funds, see “Cayman Hedge Funds, Soft Wind-Downs and Disclosure” (Feb. 25, 2011). Fund managers and their advisers are forced to navigate conflicting statements in the case law on this issue, while recent cases have further highlighted the need for the Cayman Islands Court of Appeal to finally resolve this issue. In this guest article, the second in a two-part series, Tony Heaver-Wren and Sebastian Said, partner and counsel, respectively, at Appleby (Cayman), detail the competing Cayman standards for considering a fund’s business when identifying loss of substratum, as well as practical steps that fund managers can take to avoid having a court reach such a determination when conducting a soft wind-down. The first article set forth the history of the Cayman Islands law on loss of substratum, as well as the divergent standards – the “impossibility test” and the “non-viability test” – currently being used by the Cayman Islands courts. For Cayman court considerations concerning loss of substratum, see “Cayman Islands Grand Court Rules That Investor in Hedge Fund Wyser-Pratte EuroValue Fund Is Entitled to Court-Imposed Liquidation of Fund, Even Though Fund Is Solvent, but Gives Fund Time to Complete Liquidation on Its Own” (Nov. 19, 2010).

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