Fund liquidation

Looking to voluntarily liquidate your investment fund

Christophe Vandendorpe, Partner, Strategy and Transactions Leader and John Tan, Senior Manager, Strategy and Transactions EY Luxembourg

Christophe Vandendorpe, Partner, Strategy and Transactions Leader and John Tan, Senior Manager, Strategy and Transactions EY Luxembourg

Fund liquidation is a complex process that requires careful planning and execution to ensure that the solvency of the fund is maintained, and investors' interests are protected. What are the key considerations for managing fund liquidation effectively?

A liquidation process involves various technical steps, including confirming the fund's solvency, obtaining regulatory approval, managing outstanding liabilities and making interim distributions. Christophe VandendorpeChristophe Vandendorpe, Partner, Strategy and Transactions Leader and John Tan, Senior Manager at EY, share their checklist:

Solvency assessment

Confirm the fund will remain solvent throughout the liquidation process, to avoid potential liability on management or the liquidator if the fund is subsequently declared insolvent. Sufficient cash reserves should be maintained. Factor in any guarantees, contingent liabilities, tax risks, unfunded commitments or representations and warranties.

Regulatory approval

For regulated funds, prior approval from the Commission de Surveillance du Secteur Financier (CSSF) for the liquidation must be obtained.  

Anticipation of the liquidation duration

A fund liquidation with only cash remaining will normally be completed within six to nine months, taking into account various steps, i.e., notices to stakeholders and creditors, audit of opening liquidation accounts, termination of contracts/employees (if any), resolution of all outstanding matters and audit of the closing liquidation accounts. However, the existence of illiquid assets which are difficult to realize or other outstanding issues, such as contingent liabilities or litigation (among others), could prolong the liquidation. 

Interim distributions

Timing and quantum of interim distributions are made at the liquidator’s sole discretion. Typically, the liquidator only authorizes first distributions once they have a comprehensive view on outstanding liabilities and how they can be managed. The audit sign-off on the opening liquidation accounts (covering the last financial year-end to liquidation commencement date) is a critical step for such considerations. The audit’s purpose is to provide reasonable assurance on the accounts relied upon by the liquidator when authorizing distributions.

Service provider management

Typically, it is efficient to maintain the services of the existing fund manager, administrator, depository and transfer agent, auditor etc. throughout the liquidation. Any change in existing providers should take into consideration possible efficiency losses and impact on liquidation momentum.

Nomination of an external liquidator

While a liquidation process may seem intimidating, the services of a professional, independent liquidator will save valuable time for fund managers, letting them focus on their core competency of fund management.

Engaging a professional, independent liquidator is highly recommended to ensure the timely return of capital to investors, avoid potential conflicts of interest and manage complex situations.

EY Luxembourg acts as an external liquidator for various regulated funds and unregulated entities, including commercial companies and SPVs. A dedicated restructuring and liquidation team, comprising members of reputable international insolvency and turnaround associations, can provide trust that value will be transformed, created, preserved or recovered by leadership teams in critical and complex situations. For more details, please visit our website here.