Hidden Treasures: The Long-Term Benefit of a Liquidating Trust

Daniel McGrath

 - 23 July 2021

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Trapped assets, in particular those with limited value, are on the rise and as volatility continues to grip the stock markets and the world in general, we are seeing more and more open-ended and closed-ended funds who wish to proceed with dissolution but remain in limbo, with no end in sight. Not only does a prolonged wind-down result in unnecessary time spent by management but can also result in excessive service provider costs, to the detriment of investors.

We have found that when paired with a solvent voluntary liquidation, the establishment of a liquidating trust for the assignment of trapped assets can be an effective solution for any fund wishing to seek long-term asset realisation. The objective of a liquidating trust is to expedite the wind-down process and to create efficiencies, allowing investors to receive proceeds in an orderly manner and removes the potential of liability claimed against the funds and/or its directors.

This pairing is not only beneficial to the fund but, where relevant, can also provide cost savings with existing management, its principals and directors as the trustee can engage with existing management, its principals, and directors in a consulting role so that asset background and understanding is not lost during the process. Alternatively, existing management can also choose to remove themselves entirely from the process should they wish not to assume any significant role overall.

Why a liquidating trust?

A liquidating trust can be established for the benefit of any asset type, save there being no restrictions or contingent litigation, and can be established specific to the requirements of the settlor. Asset types that we have assisted to structure into a liquidating trust recently include a potential class action claim which has yet to be consummated, shareholding in an African mining company, a portfolio of small to mid-cap publically listed equities, litigation stubs and illiquid investment portfolios with limited secondary market opportunities.

The form of liquidating trust can vary in both structure (standalone or umbrella) and type (discretionary, revocable, irrevocable trusts, etc.) although usually, a discretionary STAR trust is best suited to situations of prolonged wind-down due to the flexibility of the objects i.e. the trust can be set up for a purpose or for persons or indeed a mix of both. Investors may be named as discretionary beneficiaries and would not have entitlement to the assets, other than on a realisable event. This means that investors not only benefit from future asset realisations, which could have been disclaimed or written-off prior to commencing voluntary liquidation, but also from the cost efficiencies in pairing the establishment of a liquidating trust with a solvent voluntary liquidation.

A regulated trust company, would act as trustee and have absolute discretion over the management and administration of the STAR trust. Although, where relevant, the trustee may also seek the assistance of liquidation professionals to manage the assets realisation, be it asset auctions or sales in the secondary market, as well as those principals or directors who wish to remain engaged as a consultant. Furthermore, a STAR trust requires the appointment of an enforcer who will ensure that the trustee fulfils their fiduciary obligations in accordance with the trust instrument. This role may be delegated to a third party and further provides comfort to investors that the liquidating trust is being administered for their benefit.

R&H Restructuring, are experienced in delivering successful wind-downs and offer a wide range of flexible services to open-ended and close-ended funds in the Cayman Islands that are wanting to close out their affairs. We can guide clients through the process, ensuring that the scope of our engagement and timeline are specific to their requirements.

Daniel McGrath

Danny is a Senior Manager in R&H Restructuring (Cayman) Ltd and leads the solvent wind-down business line, providing liquidation, wind-down management and liquidating trust services to a wide range of companies and investment vehicles, including hedge funds, trusts, private equity funds, multi-manager funds and emerging market funds across the Cayman Islands, Germany, Italy, Switzerland, the…