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Maples Group Welcomes US Bankruptcy Courts Decision on the Rights of Investors in Cayman Islands Funds

20 Aug 2019

In recognising the Cayman Islands liquidation proceedings of Ascot Fund Ltd ("Fund"), a Cayman Islands incorporated company, the US Bankruptcy Court (the "Bankruptcy Court") held that investors in Cayman Islands funds had a legitimate expectation that their rights are to be determined by Cayman Islands law. 
Fund's principal asset was its limited partner interest in a Delaware partnership, Ascot Partners L.P. ("Partners"). Partners invested all of its assets with BLMIS through which Madoff ran his Ponzi scheme. When BLMIS collapsed Partners, directly, and Fund, indirectly, lost their investments. Following distributions from BLMIS and possible future distributions, Partners had a substantial amount of money to distribute to its investors. A New York receiver (the "Receiver") had been appointed over Partners' assets. A shareholder of Fund (the "Shareholder") was concerned that any distribution methodology used by Fund would be less favourable than a New York court may adopt. The Shareholder commenced an action in the New York Supreme Court seeking, among other things, a declaration as to the distribution methodology that Fund should utilise (arguing that the methodology should be New York law based).  The Shareholder was attempting to use New York proceedings to end run around the Cayman Islands liquidation.
Finding that Fund's centre of main interests was in the Cayman Islands (as its headquarters and management had at all times been in the Cayman Islands) the US Bankruptcy Court rejected the Shareholder's arguments. The Shareholder should not be able to avoid the effect of a Cayman Islands liquidation by commencing proceedings before the New York court. The Shareholder had invested in a fund incorporated in the Cayman Islands whose articles of association and subscription agreements were governed by Cayman Islands law. Further, each investor agreed to submit to the exclusive jurisdiction of the Cayman Islands courts in relation to the subscription agreement and disputes in relation thereto. Therefore, while Delaware or New York law would determine how the Receiver would distribute Partner's assets to Fund, Cayman Islands law would determine how Fund's assets would be distributed to its shareholders. This was consistent with Fund's documents and the expectation of its shareholders. These factors militated in favour of the Bankruptcy Court acceding to the request from one of the Cayman Islands liquidators, Michael Penner of Deloitte, that those Cayman liquidation proceedings should be recognised in the US pursuant to chapter 15 of the US Bankruptcy Code. From the perspective of investor certainty in Cayman Islands funds, the approach of the Bankruptcy Court is to be welcomed.
The Maples Group team is led by partner James Eldridge and associate Malachi Sweetman, acting as Cayman Islands counsel to the Fund. Davis Polk & Wardwell LLP act as New York counsel for the Fund.

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