Unpaid Redeemed Investors Rank Ahead of Continuing Members

2013年 5月 2日

Unpaid Redeemed Investors Rank Ahead of Continuing Members

In an important clarification of British Virgin Islands ("BVI") insolvency law of relevance to investors in BVI hedge funds as well as the active secondary market in Madoff related redemption claims, the Court of Appeal has confirmed the status and ranking of redeemed but unpaid investors in a BVI company under the Insolvency Act 2003 (the "BVI Act").  In summary, redeemed but unpaid investors will have their redemption amounts paid out before members are paid any distribution in respect of shares that had not been redeemed by the company at the time the company went in to liquidation. The decision opens the way for liquidators of funds for whom this has been an open question to make distributions.


Under general principles of company and insolvency law, creditors of a company rank ahead of members when a company's assets are being distributed on a liquidation. Under BVI law, this principle is reflected in section 207 of the BVI Act.

There are also specific provisions addressing the order of priority between members and past members when the member is owed a sum of money by the company by virtue of having been a member.  Such claims include unpaid dividends and other distributions as well as redemption proceeds.  It was the commonly held view that the overall effect of the BVI Act was that such debts should be paid in full before a division of the surplus assets between the remaining members.  However, section 197 of the BVI Act provides for an "adjustment" between members and past members for such claims and neither it nor the "waterfall" provisions of the BVI Act expressly states the order in which such payments should be made.  This question is clearly of critical importance to redeemed investors in corporate funds where the fund is put into liquidation before all redemption sums are paid in full.  

The question came before the BVI courts in Monarch Pointe Fund Limited v Somers Dublin Ltd & Others.  

At first instance, the BVI's Commercial Court held that the payments in respect of unpaid redemption amounts should be paid ratably with the amounts due to remaining members and was reluctant to interpret the word 'adjustment' to imply a preferential right to payment.

The Court of Appeal overturned the Commercial Court’s first instance decision.  As a result, it has now been confirmed that in the liquidation of a BVI corporate fund, unpaid but redeemed investors will rank ahead of remaining members but behind "ordinary" creditors.  The members continuing to hold shares at the commencement of the liquidation will, consequently, share in the surplus assets of the fund following the payment in full of ordinary creditors and all sums owed to members and past members incurred prior to the commencement of the liquidation in respect of their shares.  This clarification corresponds with the industry's expectation and the speedy resolution of the question by the Court of Appeal is good news for the jurisdiction, as it ends a period of uncertainty and concern following the first instance decision.  

It is anticipated that the BVI Act will be amended to clarify the priority of creditors, members and past members in accordance with the Monarch Pointe decision.


The decision of the Court of Appeal in Monarch Pointe clarifies that redeemed unpaid investors will be paid before any surplus assets of the company are paid to the remaining members, bringing certainty to the question of priority among creditors, members and past members.

For further information, please speak with your usual Maples and Calder contact or one of the individuals listed above.

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