Rights of BVI hedge fund investor upheld

25/03/2009

BVI: SV Special Situations Fund Limited v Headstart Class F Holdings Limited (2008)

The High Court of Justice in the British Virgin Islands has ruled that in certain circumstances, a redeeming member of a fund can be classed as a creditor. This decision upholds the right of a redeeming member to issue a statutory demand and, if necessary, petition for liquidation.

One BVI Fund (the Defendant), made a substantial investment in SV, a hedge fund based in the British Virgin Islands. The Defendant later sought to redeem its shares by way of two redemption requests, the first of which was paid albeit somewhat late, prompting the Defendant to issue a further and final redemption request. On receipt of this request SV successfully sought the Defendant's agreement to split the redemption into two payments, delaying the Defendant's exit from the Fund for a short time. This agreement was recorded in a side letter.

After the deadline for the first payment (of $4 million) passed without receiving payment, the Defendant issued a statutory demand. SV applied to the Court to have the demand set aside, principally on the basis that, as a redeeming member, the Defendant did not have sufficient standing as a creditor under the Insolvency Act 2003 (BVI) (the "Act").

Section 155 of the Act states that a creditor may issue a statutory demand, and section 9 of the Act defines a creditor as someone who has a claim that is, or would be, admissible in the liquidation of a company. SV's argument was based on these provisions and on section 197 of the Act, which states that a redeeming member of a company does not have a claim admissible in the liquidation of a company for "a sum due to him in his character as a member", whether by way of redemption proceeds or otherwise.

In declining to set aside the demand, the Court noted that the debt due to the Defendant arose under the side letter which recorded the agreement reached with SV in relation to the payments to be made to the Defendant. The debt was not, therefore, due to the Defendant in its "character as a member" and section 197 of Act did not operate to exclude the Defendant from the definition of a creditor.

Notably, however, the Court went on to deal with the position in the event that the side letter did not render the debt as not being due to the Defendant in its "character as a member".

The Court found that section 197 only applied after a liquidation had commenced when a liquidator was considering what claims to honour. It followed then that section 197 could not be considered when determining whether the Defendant was a creditor for the purposes of making a statutory demand under section 155.

The learned Justice also considered the questions of whether there was a substantial dispute as to whether that there was a debt owing and whether substantial injustice would be caused by the winding up of SV. In both questions, she found in the negative. SV argued it had a right under the Articles of Association of SV to make good a redemption request by the transfer of assets, rather than the payment of cash. The Court found that in the circumstances SV had clearly made an election in this regard, to pay in cash. Further, the court noted that no evidence of substantial injustice had been put forward by SV.

The Defendant was represented by City Law, with Maples and Calder, and SV was represented by Harney Westwood & Riegels.

For a PDF of the full judgment click here.

Contact: simonmunro@city-law.net

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