Craig Cordle
Partner
Guernsey
The process of winding up a Guernsey fund involves several important considerations that boards, fund managers, investment advisers and administrators must navigate carefully. This article explores six aspects which we consider to have primary importance, alongside one key message – proactive planning can safeguard interests of the fund parties, reduce risks posed by dissatisfied investors and save costs regardless of whether or not a wind-up is distressed or "in the ordinary course".
When to surrender
Investment funds in Guernsey must formally surrender their authorisation or registration with the Guernsey Financial Services Commission (GFSC).
Until fairly recently, the GFSC has only granted its consent for the surrender of an investment fund's authorisation of licence where the fund can demonstrate that it has fully completed its formal liquidation or winding up process (in the case of a company) or the dissolution process (in the case of a limited partnerships). Pursuant to updated guidance issued in December 2024, the GFSC may be prepared to consent to surrender of an authorisation or registration if a liquidation process has not yet completed buts meets various criteria. This means that funds can apply to surrender their authorisation or registration even if they are not yet fully dissolved but they meet the relevant criteria. Given this provides a possible opportunity to save costs it may be worthwhile considering the criteria and weighing up against investor sentiment with respect to surrender etc.
Realistic realisation process
The process for realising and distributing a fund’s assets must be clearly outlined within, and executed in accordance with, the fund's governing documents (such as the articles of incorporation for a company or the limited partnership agreement where the fund is a limited partnership) and applicable laws. This requires determining upfront how assets will be liquidated and distributed among investors in a manner which will allow the fund sufficient flexibility to meet final obligations and minimise disruption to remaining investments, whilst aligning with investor expectations and regulatory requirements. This is, of course, a fine balance but one which experienced legal advisers can help you to achieve.
With current market volatility, the timing for the realisation of assets is an issue of significant importance for investors when investing and throughout the life of a fund. Managers should be realistic with their timelines for divestment and communicate these to the investors in line with requirements under the fund's governing documents. If immediate realisation is proving difficult it is not uncommon for the following alternatives to be explored:
- extending the fund's life (this will of course depend upon the constitutional documents and may require investor approval)
- follow on / continuation funds
- making in specie distributions to investors
Where acceptable to investors, we recommend that fund documentation is drafted to be facilitative of these options at the outset.
AWOL investors
The GFSC has recently issued new guidance on "Unclaimed Investor Money". If the fund is authorised or registered in Guernsey (PIFs are excluded) and continuing to accept subscriptions then to ensure compliance with the guidance and prevent unclaimed distribution and redemption proceeds slowing down or increasing the costs of liquidation, the fund board will need to have approved an "Unclaimed Investor Money Policy" and have followed it in relation to such unclaimed monies (surprisingly there are always some!). Note that the guidance provides that policies must require contact attempts with the lost investor over a minimum timeframe of six years before a determination can be made as to the appropriate treatment of the unclaimed amounts. The intention of this is not, however, to prolong a liquidation for the sole purpose of reaching that six year timeframe.
Communication, communication, communication
Effective communication with investors throughout is crucial. Fund managers should provide clear updates regarding the status of the fund, the timeline for liquidation, and how distributions will be handled. Transparency helps maintain trust and can mitigate potential disputes. Where investor approval is sought for prescribed decisions, the fund should ensure that it is following the applicable laws, GFSC requirements and governing documents.
Risk mitigation
Directors and managers should anticipate potential risks or complications in the winding-up process and prepare accordingly. Key elements include setting aside contingency reserves to cover potential (or unforeseen) expenses and liabilities, having a process for addressing third-party claims as they arise and purchasing directors' and officers' (D&O) liability insurance throughout the wind-up period to protect against any claims.
Pre-emptive tax planning
Finally, understanding the tax implications of winding down a fund is vital. Directors and managers should work with advisers to address exit tax strategies to ensure capital gains taxes on asset sales (the jurisdiction in which the asset is sited will be relevant here) are minimised and ensuring that all tax obligations are met before final distributions are made to investors.
While winding-up may seem like a distant concern at a fund's inception, addressing these considerations early can save time, resources and help maintain a good relationship with investors. Whilst it might be said that the prudent fund director and service provider will consider these matters well in advance of dissolution and even at establishment stage, we would go so far as to say that pre-emptive planning for the end is essential
