- Corporations, Globalisation and the Law series
Chapter 6: Recent cases on the winding-up of hedge funds on treasure islands
Lehman Brothers filed for Chapter 11 bankruptcy protection on 15 September 2008. While the aftershocks of that cataclysmic event are still being felt, one of its immediate effects was that many open-ended investment funds for sophisticated investors experienced a very high level of redemption requests by members who had completely lost confidence in their fund’s investment model, at the very same time that the fund’s liquidity collapsed. Two popular jurisdictions for the establishment of such funds, or feeder funds to such funds, were the low tax off-shore financial services centres in the Caribbean, particularly the Cayman Islands and the British Virgin Islands (BVI). The laws of both jurisdictions draw heavily on the law of England, including its company and insolvency law, although there are significant differences in some respects. For example, the Cayman Islands does not have the unfair prejudice remedy, although since 2009,1 the courts there, once satisfied that there are sufficient grounds for winding up a company on the just and equitable basis, have the same wide range of powers in a petition for such a remedy as an English court would have in an unfair prejudice petition. The BVI laws are closer to the UK: there is an unfair prejudice remedy, as well as a statutory derivative action, but the details of their respective insolvency laws diverge. The Cayman Islands is popular with funds set up by US investment managers. Frequently, there will be an on-shore, usually Delaware-based, fund for US investors, with the Cayman Islands vehicle acting as an off-shore feeder for non-US investors.
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