Vol 14 (2017) - Issue 2

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Sharpening the Claws? Developments in the Law of Voidable Preferences following the Cayman Islands Court of Appeal Decision in Skandinavska Enskilda Banken AB

Key facts
Skandinavska Enskilda Banken AB ('SEB') was a shareholder in the Weavering Macro Fixed Income Fund Limited (the 'Fund'), acting as custodian and nominee for various underlying investors. In the midst of the financial crisis of October 2008, SEB placed redemption requests for the entirety of that investment, payable in December 2008. At the same time, further substantial redemption requests were made by other investors, amounting to a total of USD 138.4 million and those were supplemented by further requests in respect of the January and February 2009 redemption days amounting to USD 84.7 million.
Unfortunately for all concerned, the Fund proved to have been an outrageous fraud, perpetrated by its CEO and investment manager Magnus Peterson. He had entered into a series of what were ostensibly interest rate swaps with a counterparty under his control, but whose purported value was in reality merely a device to prop up the NAV of the Fund. In fact, those transactions were entirely worthless, and the Fund was sustaining heavy losses through options trading whilst also paying significant sums to Mr Peterson in his role as investment manager. Consequently, the Fund was not in a position to fully meet the redemption requests due in December 2008, let alone those payable in January and February 2009.
In mid-December, Mr Peterson directed that certain redemption requests be paid immediately because the investors in question had committed to reinvest into another fund under his control. Subsequently, the Fund announced that 25% of the amount due to the December redeemers would be paid initially, with the remainder to be paid in instalments thereafter. Further payments were made on a haphazard basis thereafter and by the end of February 2016 approximately USD 90 million had been paid, leaving over USD 48 million of the December redemption requests unsatisfied in addition to the entirety of those submitted in January and February.
In early March, Mr Peterson’s fellow directors became aware of the true nature of the interest rate swaps and therefore the scale of the difficulties facing the Fund. Determination of the NAV and redemptions was suspended immediately, and on 19 March 2009 the Fund was placed into voluntary liquidation, with official liquidators appointed almost immediately afterwards.

The clawback claims
Mr Peterson’s just deserts arrived in January 2015 when he was convicted of fraud in England and sentenced to 13 years imprisonment. However, the process of dealing with the consequences of his wrongdoing continued unabated: in the meantime, the Liquidators had commenced proceedings against SEB (and subsequently a number of other investors) seeking to claw back the redemption payments made to them in December 2009 pursuant to Section 145(1) of the Companies Law. That section provides that: 'Every conveyance or transfer of property, or charge thereon, and every payment obligation and judicial proceeding, made, incurred, taken or suffered by any company in favour of any creditor at a time when the company is unable to pay its debts ... with a view to giving such creditor a preference over the other creditors shall be invalid if made, incurred, taken or suffered within six months immediately preceding the commencement of a liquidation'