As fees are squeezed and investors become more selective it seems perhaps inevitable then that a rise in fund liquidation should follow.
The latest report from Hedge Fund Research (HFR), Market Microstructure, details how these market conditions are weighing heavily on funds and potentially having an influence on the growth in the number hedge fund liquidations seen in the final quarter of last year (2015). Year on year it is estimated that liquidations increased by 13% globally, with 2015 seeing the largest amount since the 2009 recession.
In line with this global trend, the Cayman Islands Monetary Authority also reports a decline in the number of Cayman-registered funds, albeit at a lesser rate of 0.6%. It seems unavoidable to draw a link between market conditions and the direct impact on whether directors deem a fund to be viable or if it should be terminated by way of a voluntary winding up. It is also true that CIMA used to allow registered funds the option to apply for a part-year audit waiver when initial termination filings were made. This policy changed in October 2015 which also expedited the process for managers as they looked to terminate these vehicles to avoid additional fees.
The Cayman Islands voluntary liquidation regime provides a formal statutory process designed to ensure that all outstanding and potential claims are settled, while maximising the return to the shareholders. In a voluntary liquidation, the Fund will be deregistered from CIMA by the liquidator and subsequently voluntarily liquidated as a Cayman Islands company. The completion of the voluntary liquidation process results in the entity being permanently removed from both the Cayman Islands Monetary Authority (CIMA) if necessary, and the Companies Register.
Whatever the reason, where voluntary liquidation is decided upon managers need to seek a time and cost efficient method for winding up the fund. We have put together a step by step guide to voluntary liquidation to shed some transparency on the process.
Step by Step Guide to Fund Liquidation
Step 1 – SUITABILITY: Firstly, the directors of the Company need to agree that the Company is suitable for a voluntary liquidation. To determine suitability, the Directors should satisfy themselves as to whether Company is solvent. To pass the test for solvency in the Cayman Islands specifically, the Company must be able to pay its debts in full as they fall due, for a period of no more than twelve months. If the Company is not able to pay its debts, it is possible for the Company to receive support from another entity (the Investment Manager, for example) to enable the Company to pass the test for solvency.
Step 2 – DECLARATION OF SOLVENCY: At Apex we suggest that the Board of Directors hold a meeting to formally document the fact that the Directors have satisfied themselves that the Company is indeed solvent. The Directors will then sign a Declaration of Solvency to be filed with the Registrar of Companies.
Step 3 – SPECIAL RESOLUTION: After the Directors have declared the company solvent, the voting/management shareholder of the Company will pass a Special Resolution to:
- Resolve to wind up the Company
- Appoint voluntary liquidator (Apex)
- Approve liquidator's fee
Once the shareholder resolution has been passed, the Company will be in formal voluntary liquidation. In some instances, the Company being liquidated may not have issued a voting/management share, or the voting/management share may have been repurchased. When this is the case, Apex Cayman will draft the necessary Board resolution to issue a single voting share so that the Special Resolution can be passed allowing the Company to enter into voluntary liquidation; Apex will draft this resolution at no additional cost.
Step 4 – LIQUIDATOR’S CONSENT: The Liquidator will sign a consent form (to be filed with the Registrar of Companies) notifying the Registrar of the appointment. The Consent will be filed along with a Notice to the Registrar of the liquidation and shareholders resolution to liquidate voluntarily.
Step 5 – NOTICE TO CREDITORS: A Notice to Creditors is then submitted in the Cayman Islands Gazette, advertising that the Company has been placed in to voluntary liquidation. The Liquidator’s contact information will also be advertised at this time allowing any potential creditors the opportunity to submit any outstanding claims. In some instances it may be necessary to advertise notices in other jurisdictions.
Step 6 – NOTICE OF FINAL GENERAL MEETING: Notice of the Final General Meeting of the Company will be published in the Cayman Islands Gazette. Creditors are advised to submit evidence of any outstanding claims/invoices to the Voluntary Liquidator within the Notice Period advertised. Typically, the Notice Period is at least 21 days from the date of publication of the Gazette. The notice will also advertise the date of the Final General Meeting.
Step 7 – SETTLEMENT OF CLAIMS: Any invoices/claims submitted to the Voluntary Liquidator will be reviewed for authenticity. The Voluntary Liquidator will work with the Company's other service providers to determine whether the claim is genuine.
Step 8 – LIQUIDATOR’S REPORT AND ACCOUNT: The Voluntary Liquidator will prepare a Report and Account of the liquidation process from the point of formal liquidation (Step 3), to the date of the Final General Meeting as advertised in the Notice (Step 6).
Step 9 – FINAL GENERAL MEETING: The Final General Meeting will be held on the advertised date. At the meeting, the Voluntary Liquidator will table the Report and Account for approval by the voting/management shareholder. The voting/management shareholders can be represented at the meeting by proxy.
Step 10 – FINAL MEETING: A Final Notice will be filed with the Registrar of Companies within 7 days of the Final General Meeting.
Final Thoughts
The entire Voluntary Liquidation Process can be completed from start to finish in as little as 5 weeks, though most take between 2 to 3 months. For Companies that are registered as mutual funds with the Cayman Islands Monetary Authority, the process will take a bit longer. Apex Cayman will draft all necessary documents to accomplish a smooth and successful voluntary liquidation at no additional charge; including any documentation necessary to deregister with CIMA.
By Rosie Guest of Apex Fund Services.
