The decision is an important one – it confirms whether the loss caused by fund failure can be re-distributed among investors by the fund’s liquidator if that loss has otherwise fallen disproportionately on some compared to others.

Herald is a Cayman Islands company that operated as an open ended investment fund with a substantial investment in Bernard L Madoff Investment Securities (BLMIS). Herald was placed into liquidation shortly after BLMIS was revealed as a Ponzi scheme. Typical of investment vehicles conducted through a company structure, Herald’s investors were shareholders (not creditors) of Herald. After payment of Herald’s relatively minor debts, the question for Herald’s liquidator was how he should distribute Herald’s remaining assets among its shareholder investors.

Usually, a liquidator distributes surplus assets to shareholders in proportion to their shareholding as evidenced by what is recorded in the company’s register of members. Herald’s liquidator considered this would be unfair to some investors in circumstances where Herald falsely appeared to increase in value over time (reflecting the apparent value of its underlying investment in BLMIS) but was, in truth, at all times worthless. Investors who had invested earlier would fare better than those who invested later because the same investment amount could buy relatively fewer shares as time went on (meaning a relatively smaller distribution for those later investors). Investors who had cashed out part of their investment fared better because they had received back their initial investment and a return on it, whereas those investors who had not cashed out would receive neither.

To address these perceived inequities, Herald’s liquidator proposed to use his power under the Cayman Islands companies legislation to change Herald’s register of members as a means to achieve (in his view) a fairer distribution that took into account cash paid in and any cash received by each investor.

The question for the Privy Council was whether the liquidator’s power was confined to making changes to the register of shareholders to give effect to the legal rights of the shareholders or whether (much more ambitiously) it permitted a liquidator to make changes that departed from those legal rights.

The Privy Council decided against the more ambitious interpretation, meaning that the losses fall where they lie among the Herald investors and Herald’s liquidator is left to distribute to the investors in proportion to their shareholding. This brings welcome clarity to the funds industry in the jurisdiction.