SV Special Situations Fund Ltd v Headstart Class F Holdings Ltd

JurisdictionBritish Virgin Islands
JudgeJoseph-Olivetti, J
Judgment Date25 November 2008
CourtHigh Court (British Virgin Islands)
Docket NumberCLAIM NO. BVIHCV2008/0239
Date25 November 2008



SV Special Situations Fund Limited
Headstart Class F Holdings Limited

Elspeth Talbot Rice Q.C., Andrew Thorp and Marcia McFarlane of Harney Westwood & Riegels for the Appellant

David Allison and Arabella di lorio for the Respondent

(Application to set aside statutory demand — debt in respect of redemption proceeds of redeemable shares — whether maker a creditor under the Insolvency Act 2003 — whether debt is substantially disputed — Insolvency Act s.9, s.155, 157 and 197)

Joseph-Olivetti, J

[1]—Hedge funds are sophisticated investment vehicles reminiscent of hedgehogs or sea urchins which tend to prick badly if not carefully handled. Perhaps, John C. Bogle in the foreword to his book Bogle on Mutual Funds refers to the risks of dealing with such bodies more elegantly when he adverts to the Surgeon General's caveat on cigarette packages—‘Warning, this product may be dangerous to your health.’ Both SV Special Situations Fund Limited (‘SV’) and Headstart Class F Holdings Limited (‘Headstart’) are funds. Headstart made a substantial investment in SV by subscribing for redeemable shares. Subsequently, it served notice to redeem its shares. The notice was accepted but Headstart has not been paid and it expected to be paid in cash. It waited for some significant time after the payment date and then issued a statutory demand under the provisions of the Insolvency Act 2003 for the sum of US$4 million plus interest. SV has applied to set aside the statutory demand on the primary basis that there is a substantial dispute as to whether a debt is now due and owing to Headstart on the basis that SV is entitled to meet its redemption obligations to Headstart in securities not cash. In addition, it contends by way of preliminary point that Headstart did not have standing to make the statutory demand as it is not a creditor of SV under the Insolvency Act and that the statutory demand should be set aside.


SV was incorporated in the British Virgin Islands (BVI) as an international business company on 19 th June 2007. It is recognised as a professional fund under the BVI Mutual Funds Act 1996. It is a large fund with approximately US$135M under management. Investors invest in it by subscribing for redeemable shares. SV then invests those monies with a view to making returns on those investments for the benefit of its investing shareholders. Only professional investors (as defined under the Mutual Funds Act 1996) were permitted to invest in SV.


Headstart is a professional fund incorporated in the BVI. It is a wholly owned subsidiary and investment vehicle for Headstart Fund of Funds Limited and a part of the Headstart group originating in the United Kingdom. It is in the same business as SV but, broadly speaking, it invests its investors' monies by investing them in other funds rather than in individual stocks, shares or bonds and the like. In October 2007 Headstart invested approximately US$7.886M in SV by subscribing for approximately 7,886 shares. The shares were redeemable on a monthly basis with 30 days notice in accordance with the share subscription agreement (‘SSA’) entered into by the parties. Headstart redeemed US$1.5m of its investment in SV by giving notice on 25 th February 2008 for a dealing date of 1 st April 2008 but it was not paid until sometime in May 2008. On 7 th May 2008 Headstart gave a second notice of its intention to redeem the balance of its shareholding in SV worth approximately US$7M. Under the terms of the SSA it was entitled to redeem in full. However, SV did not wish Headstart to redeem in full immediately and instead desired Headstart to split the redemption request into two portions. Following negotiations SV and Headstart entered into an agreement whereby Headstart compromised its entitlement to payment as provided for in the SSA. This agreement is contained in a letter dated 8 th May, 2008 executed by both parties. Mr. Stagg, the sole director of SV signed on behalf of SV on 14 th May—see Tab 5 Ex HW1 pg. 85–86. The letter in essence provided that US$4million would be paid within 5 days of the 30 th May 2008 dealing date and of the balance of the redemption money 95% would be paid within 5 days of the 30 th June 2008 dealing date and the remaining 5% within 2 days of the said dealing date both to be based on the official net assets value (‘NAV’) for 30 th June 2008 and interest. The letter provided further that Headstart would have the status of a creditor for any amount due and owing.


SV had a not uncommon power contained in Article 3.13 of its Articles of Association (Tab. Ex. HW1) to the effect that on any redemption of a share the directors shall have the power to divide in specie the whole or any part of the assets of SV and appropriate such assets in satisfaction or part satisfaction of the redemption price. In other words, whilst a redemption would ordinarily be paid out in cash, the directors of SV had the power to choose to meet the redemption obligation by appropriating assets in specie. Headstart's attention was specifically drawn to that provision as it was set out in the SSA.


The SSA (Tab 5 Ex HW1 p. 39 para. 2 (g)) expressly states inter alia that Headstart had been given the opportunity to review the Memorandum and Articles and had received all information it required to make an informed investment decision. Further para. (i) states that Headstart understood as described in the Memorandum that the shares it was purchasing would have limited liquidity and that it would not require liquidity of its investment. And in para. (i) Headstart agreed to be bound by the Memorandum and Articles and the explanatory memorandum.


It is Headstart's position that the agreement letter entitled it to be paid its redemption proceeds in cash and it therefore endeavored to ensure payment and to that end entered into correspondence with SV and SV's Administrator, HSBC Bermuda. The summary of the correspondence with the administrator was to the effect that funds had not yet being received by the administrator to enable them to pay out.


The gist of the correspondence with SV is summarized in Mr. Watkinson's affidavit (Tab.5 para. 22–39). It amounted in my view to a case of send the fool (Headstart) further. And, Mr. Watkinson's letter of 8 th July to Mr. Stagg (Tab5 HWI p. 102) expresses Headstart's concerns. He states— ‘…We are extremely worried that this is happening and cannot see how your administrator is to blame when they say there is no money in the account for them to satisfy our outstanding redemption payments. It is your job to fund redemptions not the administrator's’.


The issue of payment by securities instead of cash was apparently first raised by SV's email of 14 th July (see Ex SS 1p76) which indicated—‘…As provided by the Articles of the Fund the Board of Directors has determined that it is in the best interests of shareholders of the fund and the Master Fund that the aforementioned redemptions be made on an in-kind basis by delivery of portfolio securities selected by the fund in accordance with the funds Explanatory Memorandum. We will provide you more detailed notice as to the time of delivery and the securities to be delivered. The Fund shall endeavor to keep you advised of the matter….’ Other than that SV made no offer to Headstart in respect of the debt. Headstart's London lawyers rejected any attempts to meet obligations with securities. See letter of City Law of 17 Sept (SS-1 p.78) Headstart was aggrieved and on 18 th July issued the statutory demand for the sum of $4 Million which it claims it was entitled to receive in cash under the agreement letter within 5days of the 30 th May 2008. SV disputes the debt on the basis that it is entitled to pay redemption monies in assets but has made no offer of specific assets to Headstart to date.


The main questions for the Court, are as follows:

  • a. Whether Headstart is a creditor within the meaning of the Insolvency Act, 2003.

  • b. Whether there is a substantial dispute that there is any debt now due and owing to Headstart in that there is a dispute as to the form in which SV should meet its redemption obligations to Headstart.

  • c. Whether substantial injustice would be caused by the winding up of SV.

Issue 1—Whether Headstart is a creditor within the meaning of the Insolvency Act 2003.

Elspeth Talbot Rice Q.C. of Counsel on behalf of SV argued in essence that Headstart had no standing to make a statutory demand as only a creditor can make such a demand and that Headstart is not a creditor under the Insolvency Act. In particular counsel relied on the definition of creditor in s. 9 of the Act and on ss. 155 and 197.


Mr. Allison, of counsel appearing on behalf of Headstart, contended in summary that Headstart is a creditor, that s.197 has no bearing on the definition of creditor and that in any event it does not apply to claims in a liquidation by past members for redemption proceeds, that the debt arises under the agreement letter and not by reason of Headstart being a member. Further, that for policy reasons the court ought not to interpret s.197 as applying to claims for redemption proceeds by past members as this would be seriously detrimental to the reputation of the hedge fund industry in the BVI. If it were to do so, argued counsel, it would mean that past members of mutual funds who have issued redemption notices and have not been paid will be unable to have recourse to the remedy of winding up, and that such an unfair result ought not to be attributed lightly to the Legislature.

Analysis—Issue 1

The Insolvency Act provides in section 155(1) that ‘ a creditor’ may make a demand on a person for payment of a debt owed by that person to him. And s.2 (1), the definition section,...

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