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

JurisdictionUK Non-devolved
JudgeLord Briggs
Judgment Date27 January 2020
Neutral Citation[2020] UKPC 3
Date27 January 2020
Docket NumberPrivy Council Appeal No 0064 of 2018
CourtPrivy Council

[2020] UKPC 3

Privy Council

Hilary Term

From the Court of Appeal of the Cayman Islands


Lord Kerr

Lord Carnwath

Lady Black

Lord Briggs

Lady Arden

Privy Council Appeal No 0064 of 2018

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


Francis Tregear QC

Matthew Goucke

Chris Keefe

Maximilian Schlote

(Instructed by Walkers and Stephenson Harwood LLP)


Tom Smith QC

Adam Al-Attar

Peter Hayden

Christopher Levers

(Instructed by Mourant Ozannes and Enyo Law LLP)

Heard on 29 October 2019

Lord Briggs
The Issue

This appeal raises a short but important issue as to the interpretation and application to particular facts of section 112(2) of the Companies Law of the Cayman Islands (“Cayman Companies Law”) (2018 Revision). It was newly inserted so as to come into force on 1 March 2009 and reads as follows:

“(2) In the case of a solvent liquidation of a company which has issued redeemable shares at prices based upon its net asset value from time to time, the liquidator shall have power to settle and, if necessary rectify the company's register of members, thereby adjusting the rights of members amongst themselves.”


The issue, which has divided the courts below, may be summarised as follows:

“Is the liquidator's power to rectify the company's register of members confined to an alteration which brings the register into line with the members' underlying legal rights as at the commencement of the liquidation? Or is it wide enough to enable the liquidator to amend the register of members in a way which alters the members' legal rights, as at the commencement of the liquidation, so as to do what the liquidator conceives to be substantial justice as between the members, in a case in which, in the liquidator's view, justice would not be achieved by a distribution of the surplus assets of the company in accordance with their legal rights, as stated in the register?”


The judge, Jones J, decided that section 112(2) did give the liquidator power to rectify the register so as to alter the members' legal rights. The Court of Appeal (Goldring P, Martin and Newman JJA) concluded that it did not.


It will be immediately apparent from the text of section 112(2) that the extent of the new power of rectification which it contains is confined within narrow boundaries, namely the solvent liquidation of a company “which has issued redeemable shares at prices based upon its net asset value from time to time”. This formula describes a characteristic feature of a Cayman Islands open-ended investment company, in which investments are made by subscribing for the issue of redeemable shares, and then realised by the redemption of those shares, in each case at prices determined by reference to the net asset value (“NAV”) of the company (or of a segregated fund within the company) from time to time, as declared by the company pursuant to its articles of association. Open-ended investment companies are common in the Cayman Islands, as a familiar and economically important vehicle for the establishment and conduct of mutual investment funds, since the subscription monies received by the company from its investors are pooled and used for the acquisition of one or more investment portfolios.


The solvent liquidation of an open-ended investment company may be regarded as less unusual than in relation to the liquidation of companies generally. This is because its incoming funds take the form of subscription for shares rather than forms of debt, secured or otherwise. Its external creditors may typically be modest in amount, save (perhaps) where the company goes into liquidation owing, but not yet having paid, redemption monies to investors who have recently redeemed their shares. In such a solvent liquidation, once all creditors have been paid, and liquidation expenses provided for, the usual task of the liquidator is to distribute the surplus rateably among the members of the company in accordance with the amount of their shareholdings, as recorded in the company's register of members, and applicable as at the date of the commencement of the liquidation. The register of members is therefore the governing document in determining how the net surplus realised by the conduct of the solvent liquidation of an open-ended investment company is to be distributed.

The Facts

Before examining section 112(2) in its legislative context it is convenient briefly to describe the facts which made it necessary for its meaning and effect to be determined. Herald Fund SPC (“Herald”) is an open-ended investment company being wound up by order of the Grand Court made on 16 July 2013 on the petition of its principal investor, the respondent Primeo Fund (“Primeo”), by then also in liquidation. Herald is in solvent liquidation.


Herald was founded in March 2004 as an exempted segregated portfolio company and registered as a regulated mutual fund, to act as a feeder fund for investment in Bernard L Madoff Investment Securities LLC (“BLMIS”), the investment vehicle of the now notorious Bernard Madoff. BLMIS was from the outset operated as a fraudulent Ponzi scheme. While soliciting investments on the basis that he was operating an actively managed portfolio, Mr Madoff never made any such investments of BLMIS's funds at all. Rather, he accumulated them and used them from time to time to pay off departing investors, while at the same time publishing entirely fictitious reports of an apparently endlessly profitable portfolio. Mr Madoff is now serving a very long prison term in the USA.


As Lord Sumption put it in Fairfield Sentry Ltd v Migani [2014] UKPC 9; [2014] 1 CLC 611, para 3:

“It is inherent in a Ponzi scheme that those who withdraw their funds before the scheme collapses escape without loss, and quite possibly with substantial fictitious profits. The loss falls entirely on those investors whose funds are still invested when the money runs out and the scheme fails.”


Both Herald and its investors were victims of Mr Madoff's Ponzi scheme, since Herald invested all its funds in BLMIS, and was still a substantial investor when BLMIS collapsed, and the fraudulent scheme was revealed, in December 2008. But it is common ground that Herald was in no sense a participant in the fraudulent scheme. It issued and later redeemed its investors' shares pursuant to NAVs calculated and declared in accordance with its articles, based in all innocence upon the fraudulent portfolio valuations published by BLMIS. It is common ground that, pursuant to its articles, the NAVs which it issued, and the results of which are reflected in its register of members, were binding as a matter of contract between Herald and its investing shareholders, both for the purposes of subscription and redemption of shares.


Primeo was, by 2007, a substantial investor in BLMIS, both directly and through Herald. As a result of a reorganisation of its portfolio in May 2007, Primeo re-routed its then direct investment in BLMIS through Herald. This was achieved by an assignment by Primeo to Herald of Primeo's investment in BLMIS, and its acceptance by Herald as a subscription in specie for redeemable shares in Herald, at a valuation (based upon BLMIS's fraudulent portfolio valuation) determined by Herald of US$465m odd. Primeo was allotted redeemable shares in Herald in accordance with Herald's then prevailing NAV of US$1,246.90 per USD class share.


It is now common ground, after an unsuccessful challenge rejected at first instance and not appealed, that the valuation of Primeo's in specie subscription in May 2007 is binding as between Primeo and Herald, as is the NAV which determined the number of redeemable shares in Herald which Primeo thereby received, for reasons already given.


BLMIS crashed in December 2008, shortly after the Lehman failure, because accumulated monies coming in from new investors were no longer sufficient to pay those realising their investments. It had, in short, run out of cash. But recoveries subsequently made by its liquidators mean that Herald stands to receive a substantial sum on account of its investment in BLMIS, albeit of course very much less than the amount reflected in BLMIS's fraudulent portfolio valuations. The liquidators of BLMIS admitted a net equity claim of Herald in the sum of US$1,639,869,943. To date Herald has received distributions from the BLMIS liquidation in excess of US$580m. That is why Herald's liquidation is proceeding on a solvent basis.


Herald suspended the publication of NAVs and the issue and redemption of shares in December 2008, upon the discovery of the Madoff fraud. By December 2008 some of its investors had redeemed their investments in full, obtaining both a return of capital invested and supposed profits represented by the rising level of Herald's published NAVs between 2004 and 2008. Those investors, who may be supposed to be the main beneficiaries of the Ponzi scheme, are no longer recorded as members of Herald in its register of members.


Some investors in Herald had redeemed their investments in part, but remained members of Herald in respect of the balance. Those included Primeo, which was the biggest single investor in Herald. There remain other investors in Herald who (or which) have not redeemed any part of their investments, and who may therefore be regarded (within the Herald family of investors) as the principal victims of the BLMIS Ponzi scheme. Furthermore, within that class, those who invested late may be regarded as having suffered more grievously than those who invested early, due to the rising level of Herald's published NAVs, and therefore the smaller number of shares per cash invested which they received.


On 23 July 2013 the Grand Court appointed Mr...

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2 cases
  • Primeo Fund (in Official Liquidation) v Bank of Bermuda (Cayman) Ltd and another
    • United Kingdom
    • Privy Council
    • 9 August 2021
    ...subscription price assessed by reference to Herald's NAV at the assignment: the transaction is described in Pearson v Primeo Fund (No 2) [2020] UKPC 3, para 10. From that date, Primeo no longer had any direct investments with BLMIS; all its investments in BLMIS thereafter were indirect inv......
  • The Companies Act (2021 Revision) and Herald Fund SPC (in Official Liquidation)
    • Cayman Islands
    • Grand Court (Cayman Islands)
    • 1 April 2021
    ...determined by the Judicial Committee of the Privy Council on January 28, 2020: Herald Fund SPC v Primeo Fund (in Official Liquidation) [2020] UKPC 3. Jones J held that section 112(2) of the Companies Act did empower liquidators to rectify the register of members, as the Principal Liquidato......
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