Pearson (in his capacity as Additional Liquidator of Herald Fund SPC (in Official Liquidation)) v Primeo Fund (Cayman Islands)

By majority, section 112(2) confers a limited power to settle and, where necessary, rectify a company’s register of members so that it accurately reflects the members’ underlying legal rights. Rectification corrects or completes the register; it does not authorise a liquidator to replace binding contractual rights with a distribution scheme considered fairer. Adjusting members’ rights identifies their net legal entitlements, including relevant obligations to contribute, but does not override those rights. Where subscription and redemption net asset values are binding, the register cannot be restated merely to equalise the consequences of fraud. Rules addressing non-binding misstated net asset values support that confined construction.

Herald Fund SPC was an open-ended Cayman investment company in solvent liquidation after its investment in Bernard L Madoff Investment Securities LLC became substantially impaired. The additional liquidator proposed the net investment method, which would have restated Herald’s register of members and reduced the valuation attributed to Primeo Fund’s in specie subscription. Jones J held that section 112(2) permitted the proposed alteration. The Court of Appeal of the Cayman Islands held that the power extended only to rectification in accordance with the members’ contractual rights. The central issue before the Board was whether section 112(2) permitted the liquidator to alter members’ legal rights as at the commencement of the liquidation in order to achieve a fairer distribution.

1. Disposition. The appeal was dismissed. Lord Briggs delivered the majority judgment. Lady Arden agreed with the order but adopted substantially different reasoning.
2. Construction of section 112(2). The majority held that the power to settle and, if necessary, rectify the register exists to ensure that it is complete, accurate and reliable for distribution of the surplus. Rectification bears its conventional meaning: correcting the register so that it accords with the underlying legal rights. The words adjusting the rights of members amongst themselves do not authorise alteration or overriding of those rights. They permit identification of the members’ net legal entitlements, including the effect of legal obligations to contribute.
3. Statutory context. The ordinary rectification power in section 46 of the Cayman Companies Law, the evidential effect of the register under section 48, the historical provisions of the Companies Act 1862 and the decisions in In re London, Hamburgh and Continental Exchange Bank (1867) LR 2 Ch App 431 and Sichell’s case (1867) LR 3 Ch App 119 confirmed that rectification is directed to legal rights. Nilon Ltd v Royal Westminster Investments SA [2015] 2 BCLC 1 supported the same understanding.
4. Winding-up rules and application. Order 12 rule 2 of the Cayman Islands Companies Winding Up Rules 2008 addresses non-binding misstated net asset values. It requires reconstruction of true values and correction of the register, with a fair and equitable proxy only where precise reconstruction is impracticable or not cost-effective. It does not establish a general power to impose a distribution scheme overriding binding rights. Since Herald’s relevant net asset values were contractually binding, section 112(2) could not be used to implement the proposed net investment method or disturb Primeo’s binding subscription valuation.
5. Lady Arden’s concurrence. Lady Arden considered that adjustment may extend beyond contractual rights where a member owes an obligation to the company, including repayment of redemption monies unlawfully paid. She considered that individual elements of the proposal might therefore be achievable, but the composite proposal before the Board could not succeed. If individual rights could not be ascertained and a wider redistribution were required, she considered that a scheme of arrangement would be necessary.

• Privy Council: dismissed the appeal.
• Court of Appeal of the Cayman Islands: held that the liquidator’s statutory power to rectify the register extended only to giving effect to the members’ contractual rights.
• Grand Court of the Cayman Islands: Jones J held that section 112(2) permitted alteration of members’ legal rights.