Re Weavering Macro Fixed Income Fund Ltd ((in Liquidation))

• Jurisdiction: Cayman Islands
• Judge: (Martin, Morrison and Field, JJ.A.)
• Judgment Date: 18 November 2016
• Court: Court of Appeal (Cayman Islands)
• Date: 18 November 2016

Court of Appeal

(Martin, Morrison and Field, JJ.A.)

IN THE MATTER OF WEAVERING MACRO FIXED INCOME FUND LIMITED (in liquidation)

SKANDINAVISKA ENSKILDA BANKEN AB (PUBL)

and

CONWAY and WALKER (as joint official liquidators)

D. Chivers, Q.C., S. Dawson and K. McGriele for the appellant;

J. Goldring, Q.C. and S. Folpp for the respondents.

Attorneys: Solomon Harris for the appellant; Mourant Ozannes for the respondents.

Cases cited:

(1) BNY Corp. Trustee Servs. Ltd. v. Eurosail-UK 2007-3BL plc, [2013] UKSC 28; [2013] 1 W.L.R. 1408; [2013] 3 All E.R. 271; [2013] BCC 397; [2013] 1 BCLC 613, referred to.

(2) Charles Terence Estates Ltd. v. Cornwall Council, [2011] EWHC 2542 (QB); [2012] P.T.S.R. 790; [2012] 1 P. & C.R. 2, referred to.

(3) Cutts (a bankrupt), In re, ex p. Bognor Mut. Bldg. Socy. v. Trustees of T.W. Cutts, [1956] 1 W.L.R. 728; [1956] 2 All E.R. 537, referred to.

(4) DD Growth Premium 2X Fund, In re, 2013 (2) CILR 361, referred to.referred to.

(5) Ernst & Young Inc. v. Anderson (1997), 147 D.L.R. (4th) 229; [1997] 7 W.W.R. 336, referred to.

(6) European Life Assur. Socy., In re, (1869), L.R. 9 Eq. 122, referred to.

(7) Fairfield Sentry Ltd. v. Migani, [2014] UKPC 9; [2014] 1 C.L.C. 611, applied.

(8) Herald Fund SPC, In re, 2015 (1) CILR 482, distinguished.distinguished.

(9) Lewis v. Hyde, [1998] 1 W.L.R. 94; [1997] BCC 976; [1998] BPIR 726, applied.

(10) M. Kushler Ltd., In re, [1943] Ch. 248, distinguished.

(11) Patel v. Mizra, [2016] UKSC 42; [2016] A.C. 467; [2016] 3 W.L.R. 399; [2016] 2 Lloyd's Rep. 300, referred to.

(12) Patrick & Lyon Ltd., In re, [1933] Ch. 786, referred to.

(13) Rose v. AIB Group (UK) plc, [2003] EWHC 1737 (Ch); [2003] 1 W.L.R. 2791; [2004] BCC 11; [2003] 2 BCLC 374, referred to.

(14) Socimer Intl. Bank Ltd. v. Standard Bank London Ltd., [2008] 1 Lloyd's Rep. 558, referred to.

(15) Strategic Turnaround Master Partnership Ltd., In re, 2008 CILR 447; on appeal, sub nom.Culross Global SPC Ltd. v. Strategic Turnaround Master Partnership Ltd., 2010 (2) CILR 364, applied.applied.

(16) WestLB AG v. Nomura Bank Intl. plc, [2010] EWHC 2863 (Comm); on appeal, [2012] EWCA Civ 495, referred to.

Legislation construed:

Companies Law (2013 Revision), s.93(c): The relevant terms of this paragraph are set out at para. 18.

s.145(1): The relevant terms of this sub-section are set out at para. 2.

Companies Winding Up Rules 2008, O.12, r.2: The relevant terms of this rule are set out at para. 22.

Companies — compulsory winding up — creditors — redeeming shareholders become “creditors” for purposes of Companies Law (2013 Revision), s.145 on date redemption request submitted to company and immediate debt then created — grace period for payment in articles of association irrelevant

Companies — compulsory winding up — creditors — voidable preference — party alleging voidable preference contrary to Companies Law (2013 Revision), s.145 to establish, by direct evidence or inference, that company appreciated “unable to pay its debts” and dominant intention had been to make preferential payment (rather than payment due to another motivation, e.g. duress) — no need to demonstrate fraud or dishonesty

The joint official liquidators of a company had applied to the Grand Court for a declaration that a number of redemption payments made to the appellant were invalid as they constituted preferential payments contrary to s.145(1) of the Companies Law (2013 Revision).

The company was an investment fund incorporated in the Cayman Islands. It was administered by PNC, and its trading activities were managed by WCUK, whose director and chief executive officer was Magnus Peterson. His stepfather and brother were the company's directors, though previous proceedings (reported at 2015 (1) CILR 45) had established that they played a negligible role in managing the company and merely approved decisions made by Magnus Peterson concerning the company's affairs. WCUK was also investment manager to WCF, the counterparty to a number of interest rate swaps with the company.

The appellant subscribed for a number of participating shares in the company as a nominee for two other funds (Catella and HQ Solid). It subsequently became apparent that the swaps between the company and WCF were worthless, and had merely been intended by Magnus Peterson to give the false impression that the company was profitable; it was inreality suffering large losses, and became cash-flow insolvent following a number of share redemption requests. The company went into liquidation in March 2009.

The appellant had made a number of redemption requests amounting to approximately US$8.2m. Following an email sent to PNC by Mr. Peterson in December 2008, a redemption payment of US$1.1m. had been paid to the appellant (on December 19th, 2008) and a number of payments had been made to some of the additional redeemers, but nothing had been paid to other redeemers as the company had insufficient funds to do so. In January 2009, a second redemption payment of US$1.8m. had been made to the appellant, together with ad hoc payments to a number of other redeemers, and further redemption obligations were incurred by the company; in February 2009, a third redemption payment of US$5.3m. had been made to the appellant while the company continued to owe significant sums to other redeeming shareholders. The appellant had therefore received all of the sums due to it.

In the Grand Court, the joint official liquidators submitted that these payments constituted voidable preferences contrary to the Companies Law (2013 Revision), s.145 and that the sums paid to the appellant should therefore be repaid to the company. Section 145(1) stated 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 within the meaning of section 93 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.”

The Grand Court (Clifford, J.) granted the application. It declared that the redemption payments to the appellant were invalid as preferences over other creditors of the company. The appellant was ordered to pay an equivalent amount to the joint official liquidators, with interest and costs. The court found inter alia that Magnus Peterson's principal intention throughout the period in which the redemption payments were made had been to pay the appellant in order to allow it to subscribe to another Swedish fund. The court found that the company had been unable to pay its debts at the date of the first redemption payment (December 19th, 2008) as on that date it could not pay all of the redemptions processed in early December. The 30-day period for payment referred to in the company's offering memorandum and articles was irrelevant. Magnus Peterson's fraudulent conduct did not enable the company to avoid being bound by the NAV at the time of redemption. The NAV remained binding for the purpose of determining the value of the shares on redemption. The principle of unjust enrichment and the defence of change of position were not applicable and the defence of illegality did not apply so as to allow the appellant to avoid liability to repay the sums.

On appeal, the appellant submitted that (a) the court failed to take into account that the NAVs were the product of fraud, were not valuations within the meaning of the company's articles, that none of the redeeming shareholders had been entitled to be paid by reference to those NAVs and therefore there was no material on which the court could be satisfied that the company had been unable to pay its debts on any of the relevant redemption dates; (b) as it was part of an investor's contract with the company that the company would be allowed 30 days in which to make redemption payments, the first redemption payment was not a preference as the company had until the end of December to make the redemption payments to the December redeemers and there was no basis on which the court could be satisfied that the company had been unable to pay its debts at the time of the first redemption payment; (c) the court had erred in considering the company to have been insolvent at the date of the first redemption payment because it had no prospect of paying debts (the December redemptions) that did not become due until the end of that month; (d) there was no evidence to support the court's inference that there had been a continuing intention to prefer the appellant- the first redemption payment related to shares held by the appellant as nominee for Catella, which Magnus Peterson thought would reinvest in a Swedish fund, but the second and third redemption payments related to shares held for HQ Solid and there was nothing to suggest that Magnus Peterson expected that there would be reinvestment in the Swedish fund; (e) it was necessary that an intention to prefer under s.145(1) should have an element of dishonesty; (f) the court should have held that the appropriate remedy for a preference was a common law claim for unjust enrichment; (g) it had a change of position defence, as it had paid the proceeds in good faith to Catella and HQ Solid; and (h) the claim for repayment was barred by illegality as it effectively required the other creditors to be paid according to the company's fraudulent NAV.

Held, dismissing the appeal:

(1) The Grand Court had correctly held that Magnus Peterson's fraudulent conduct did not enable the company to avoid being bound by the NAVs at the time of redemption. The company's articles provided that any valuation of the company's assets made in accordance with the articles was to be binding on all persons. Such a provision was fundamental to the mechanism by which investors in the company acquired and redeemed...