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Simon Conway and David Walker (as joint official liquidators of Weavering Fund Macro Fixed Income Fund Limited) v Skandinaviska Enskilda Banken AB (Publ) – Cause No. FSD 98/2014 (NRLC): Voidable Preferences in the Cayman Islands
Matthew Crawford, Partner, and Adam Huckle, Associate, Maples and Calder, Cayman IslandsBackground
The Weavering Macro Fixed Income Fund Limited (the 'Fund') collapsed in 2009 after it was revealed as a fraud perpetrated by its investment manager, Magnus Peterson. Mr. Peterson had caused the Fund to enter into OTC interest rate swaps with a related company under his control, Weavering Capital Fund Limited ('WCF'), the purported value of which was intended to conceal the Fund’s losses. The value of the swaps depended entirely upon the creditworthiness of WCF. By March 2009, the vast majority of the Fund’s USD 600m value was said to consist of the swaps, which were in reality worthless. The English High Court held in 2012 that the swaps were never intended to be enforceable instruments but were instead used to manipulate the net asset value ('NAV') figures to give the impression to investors that the Fund was successful. The Fund’s NAV was therefore illusory, and it was unable to meet the substantial redemption requests made upon it during the global financial crisis.
On 19 March 2009, the Fund was placed into voluntary liquidation, and the Plaintiffs were appointed as official (compulsory) liquidators shortly thereafter. The Plaintiffs subsequently issued recovery actions, including against the Defendant ('SEB AB'), which had received over USD 8m in redemption payments in late 2008 and early 2009. The Plaintiffs claimed that such payments constituted voidable preferences under section 145(1) of the Companies Law (2013 Revision) ('section 145'). The Grand Court agreed.
Subscriptions and redemptions
SEB AB acted as custodian for certain beneficial owners and, on their behalf, was a registered shareholder of the Fund. In October 2008, SEB AB sought to redeem its entire holding which, together with other redeeming investors, amounted to USD 138.4m worth of redemptions payable as at the next applicable redemption day in December 2008. Additional substantial redemption requests were received by the Fund for processing in accordance with redemption days in January and February 2009. The usual period for payment of redemption proceeds was within 30 days of the applicable redemption date. The Fund did not have sufficient cash to pay the December 2008 redeemers in full.
However, on 17 December 2008, Mr. Peterson emailed the Fund’s administrator directing that certain December 2008 redeemers be paid the following day because such investors were reinvesting into a related fund. SEB AB was a recipient of such a payment which corresponded to one of its clients’ entire beneficial holding in the Fund. In a letter dated 31 December 2008, the Fund wrote to all investors confirming that the directors had decided to pay 25% of all December 2008 redeemers on a pro rata basis, with the remainder to be paid in instalments thereafter. As a result, SEB AB’s remaining shares held as nominee for its other client were then paid in two instalments (25% and then the remaining 75%). The end result was that certain December 2008 redeemers were paid in full, others partially, and some not at all. The January and February 2009 redeemers received nothing.
The issues
There are two threshold requirements for a voidable preference claim under section 145: First, the Fund must have been unable to pay its debts at the time each redemption payment was made to SEB AB. This test is one of commercial insolvency (a cashflow test) rather than a balance sheet test. It is based on a company’s present inability to pay debts when due. Secondly, the Fund must have made the redemption payments ‘with a view’ to giving SEB AB a preference over other creditors.
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