The status of redeeming members from a fund can be very important in the event of a fund going into liquidation. Those who have redeemed their shares, but not yet received payment, will outrank continuing members when it comes to distribution of the net assets of the estate (Somers Dublin v Monarch Pointe (HCVAP 2011/040, 11 March 2013)).
However, at what point does a member actually become “redeemed”, i.e. when does the redemption occur? That is an issue currently before the BVI Court. Not all fund Articles of Association make clear exactly when redemption occurs (or is completed: in Culross Global SPC v Strategic Turnaround Master Partnership 2010 (2) CILR 364 the Privy Council (on an appeal from the Cayman Islands) considered that redemption was a process).
In most cases, redemption will (whenever it occurs) trigger the obligation to pay a redemption price, and the redemption price will be based on the net asset value (“NAV”) per share, a figure itself to be determined as at a specified valuation day (e.g. the last day of each calendar month).
In Fairfield Sentry v Migani [2014] UKPC 9 Lord Sumption expressed a view, based on an assumed set of facts that were common ground for the purposes of the particular proceedings (which were concerned with restitution claims rather than ranking for distribution purposes), that the subscription and redemption processes of funds could only be workable if the monthly NAV (and the subscription and redemption prices derived from it) were actually determined by the relevant valuation day. In practice many funds (including Fairfield itself) are not operated on that basis, with the NAV calculations being performed days or even weeks after the relevant valuation day (not least because portfolio and price verification processes take time to complete), although the NAV will be calculated “as at” the relevant valuation day. The subscriptions and redemptions will be “processed” (in the sense of written confirmations of redemption being produced and shareholders being added to/removed from the register) following the determination of the NAV. This may be inevitable for subscriptions: where investments are lump sum amounts (as is often the case), the number of shares to be issued cannot be calculated until the NAV has been determined. In theory, for redemptions, the redemption could take place “at a price to be determined”, though equally (as for subscriptions) the process might be completed only once the NAV has been determined.
As long as the fund is successful the fact that the processing of subscriptions and redemptions may not take place until some time after the relevant valuation day is likely to matter little, and the precise point at which the process of redemption is completed is also unlikely to be material.
However, what happens if, after the relevant valuation day, but before the NAV has been calculated, the directors of the fund suspend the NAV? Suspension of the NAV typically also involves a suspension of all subscriptions and redemptions. If the redemption has occurred/been completed (for example, on the relevant dealing day), the redeeming investor will be a deferred creditor ranking ahead of continuing members (Monarch Pointe). If the redemption has not been completed, the investor remains a member. Should the fund subsequently go into liquidation, the difference is likely to be hugely significant, not only for the particular investor, but possibly also for the continuing members: if the cumulative value of the purported unpaid redemptions is high enough, payments to those investors may exhaust the estate, leaving nothing for a distribution to the continuing members.
Of course, ultimately the question will turn on the construction of the particular fund’s Articles, but as many funds have similar Articles, the answer in one case may at least afford guidance in others. As stated above, the issue is currently before the BVI Court in the Fairfield liquidations, in which certain investors are claiming to be deferred creditors on the basis of redemption requests submitted before the NAV was suspended (and in some cases submitted in time for a valuation day that was before the NAV was suspended). The arguments of the parties were heard in June 2015 and judgment was reserved, likely to be delivered later this year. The outcome will be of interest to all in the offshore fund industry.
