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BVI court considers registration of foreign arbitration awards

In a recently handed down decision of Re Kirkland Intertrade Corp (BVIHCM 2019/0149), the BVI Commercial Court has confirmed that the BVI Arbitration Act 2013 (the "Arbitration Act") does not require an award made by a foreign Arbitration Tribunal to be registered in the BVI before the award creditor can proceed with an application to wind up. The decision of the Privy Council (on appeal from the BVI) in Vendort Traders Inc v Evrostroy Grupp LLC [2016] UKPC 15 which dealt with the position prior to the coming into force of the Arbitration Act 2013, therefore remains good law.


The application to wind up Kirkland Intertrade Corp ("Kirkland") was made on the basis of a debt created by a partial final award (the "Award") made in an arbitration between (inter alios) the Applicant, Daselina Investments Ltd ("Daselina") and Kirkland before the London Court of International Arbitration ("LCIA"). Under the terms of the Award, Kirkland was liable to pay Daselina US$26 million principal plus interest. Daselina served a formal letter of demand on Kirkland on 23 September 2019 and, no payment being made, on 4 October 2019 filed an application seeking the appointment of liquidators in the BVI Commercial Court.

At the hearing of the winding up application, Kirkland argued that the BVI Court has no jurisdiction to make an order winding up a BVI company on the strength of a foreign arbitration award unless and until the award is registered in the BVI in accordance with the New York Convention. The Privy Council's decision in Vendort was to be distinguished as having decided only the position which prevailed prior to the coming into force of the Arbitration Act, which had changed the law. Vendort had concerned an application to set aside a statutory demand based on a debt arising under a foreign arbitration award made at a time prior to the coming into force of the Arbitration Act. It was argued in Vendort that the award needed to be registered under section 28 of the Arbitration Ordinance, the legislation which was then in force, before a statutory demand could be served in respect of it. That argument was rejected and it was held that it was not necessary for the award to be registered before the creditor could serve a statutory demand in respect of the debt created by it. Kirkland argued that the law had changed: under the old law, it submitted, it was not possible to register a foreign arbitration award under the New York Convention[1]. However, the Arbitration Act had changed that with the consequence that registration was now the required, and only method of enforcing an award. Daselina's application to wind up was therefore fatally flawed because the Award had not been registered in the BVI and the Court should not entertain the application.

The Judge rejected Kirkland's submissions. He held that seeking to appoint liquidators is not properly to be regarded as a method of enforcement (citing PT Ventures SGPS SA v Vidatel Ltd BVIHC (Com) 2015/0117 per Gerard Farara QC), that recognition under the New York Convention is not the only means by which the Court can take cognisance of the debt created by the award, and that registration of an award is not a necessary precondition to an application to wind up a BVI company on the strength of the debt created by the award. Accordingly, Daselina was entitled to file a winding up application without first registering the Award and, in the absence of a genuine dispute as to the debt credited by the Award, it had a proper basis for seeking the appointment of a liquidator.

Cayman Islands: Adjusting the Rights of Shareholders Amongst Themselves

Privy Council Provides Guidance, But Questions Remain

Further to our advisory issued in March 2018, a recent judgment of the Judicial Committee of the Privy Council (“Privy Council”), the ultimate appellate court of the Cayman Islands, has provided important guidance as to the exercise by an official liquidator of the power to adjust the rights of shareholders in a solvent winding up of a Cayman Islands investment fund, where the rights of shareholders have been distorted by the effects of a pervasive, but external fraud. However, questions remain as to the precise scope of that power.

The Privy Council decision is the most recent in the ongoing liquidation proceedings of Herald Fund SPC (“Herald”), a segregated portfolio company incorporated in the Cayman Islands which was one of the largest so-called feeder funds into the Madoff Ponzi scheme.

This aspect of the proceedings involved an important and novel point of statutory construction, namely whether a liquidator has a statutory power under section 112(2) of the Companies Law to rectify (or, in other words, adjust) a share register so as to override the existing legal rights of investors in the winding up of a Cayman Islands investment fund. Notwithstanding that this power has been exercised previously by official liquidators on at least one occasion (of which we are aware) in very similar factual circumstances without opposition, this was the first time the question of its scope and application had been considered at the highest appellate level.

 

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Cayman Islands: Withdrawal of Fifteen Investor Exemption

On 8 January 2020, the Mutual Funds (Amendment) Bill, 2020 was published (the "Bill"). We expect the Bill will become law by the end of January 2020.

The Bill amends the Mutual Funds Law to remove the 'fifteen investor exemption', which permits funds with fifteen or fewer investors to avoid registration as a mutual fund, subject to certain conditions.

Funds currently relying on the fifteen investor exemption will therefore need to register with the Cayman Islands Monetary Authority ("CIMA") in due course, although the timing by which they will need to do so has not yet been confirmed. Where these funds have master funds established in the Cayman Islands, these master funds may also be required to register with CIMA.

Directors of registered mutual funds are required to be individually registered or licensed under the Director Registration and Licensing Law.

For further information about the consequences of being a registered mutual fund for the fund and its directors, please see the following Client Memoranda:

If you manage or operate a fund that is currently relying on the fifteen investor exemption, or if you have any other questions, please do get in touch with your usual Walkers contacts to discuss the next steps.

ABS Market Flying High

The number of lessors accessing the aircraft ABS market and the issuance of aircraft ABS has surged in recent years and this trend continued in 2019. Ongoing strength in air traffic growth, continued credit performance and syndicated equity transaction structures has increased investor sponsorship of aircraft ABS.

 

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Cayman: Introduction of Registration Regime for Closed-Ended Funds Summary

2020 heralds the introduction in the Cayman Islands of the registration and regulation of closed-ended funds. As the jurisdiction of choice for the establishment of such funds outside of the US, the Cayman Islands remains at the forefront of legal and regulatory developments in this area. We expect fund sponsors, investors and regulators to benefit from the alignment of law and best market practice in this regard.

On 7 February 2020, the Cayman Islands government enacted the Private Funds Law, 2020 (the “Law”), which followed the publication in January of the consultation draft of the Law. Whilst certain points of detail remain to be confirmed by regulations and guidance, the key provisions relevant to fund sponsors and investors are now sufficiently settled for clients to begin to make the substantive arrangements necessary for compliance with the new regime. Funds have until 7 August 2020 to register under the Law, with the registration portal to facilitate these registrations being made available in the coming weeks.

In addition to this summary, we have published a more detailed client advisory that describes the scope and application of the new regime. Please click here to access that advisory.

Walkers will continue our work with the Cayman Islands government, the Cayman Islands Monetary Authority (“CIMA”) and other key local professionals, and will provide updated summaries and client advisories as matters progress.

Which funds does this apply to?

The Law applies to ‘private funds’, by which it means only the primary investor-facing vehicle offered to investors in closed-ended funds, including most private equity, infrastructure and real estate fund structures.

Alternative investment vehicles are recognised as not requiring duplicative oversight or reporting, and the Law exempts more structural entities and certain other ‘non-fund arrangements’ from its application. The exact scope of these non-fund arrangements is expected to be clarified in further rules and/or guidance issued by CIMA in due course.

The key features of the Law
  • New private funds will be required to register with CIMA prior to calling capital for purposes of investment, and to pay a modest annual fee (the Cayman Islands government has confirmed that they will waive registration fees for funds registering before 7 August 2020).
  • Existing private funds will be required to register with CIMA by 7 August 2020.
  • We expect that registration will follow the well-established online submission procedure that is applicable to open-ended hedge funds.
  • Audited accounts will have to accompany an annual return to CIMA, which accounts will require confirmation by a local audit firm. Composite “whole fund” audits should be acceptable. The Cayman Islands government has confirmed that the local audit requirement and submissions will not take effect until the next reporting period (for most funds with a 31 December financial year end, this will mean their first filing will be in 2022, in respect of the year ended 31 December 2021)
  • Private funds will be subject to requirements in relation to:
    • valuation
    • custody
    • cash management and the identification of certain securities

In practice we expect that most fund sponsors will be able to discharge these obligations with minimal impact on their existing operations, relying on their internal capabilities and making certain straightforward disclosures to investors.

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