Skandinaviska Enskilda Banken AB (Publ) v (1) Simon Conway

• Jurisdiction: Cayman Islands
• Judge: Morrison JA,Martin JA
• Judgment Date: 18 November 2016
• Court: Court of Appeal (Cayman Islands)
• Docket Number: CICA NO 2 OF 2016
• Date: 18 November 2016

In the Matter of the Companies Law (2013 Revision)

And in the Matter of Weavering Macro Fixed Income Fund Limited (In Liquidation)

Between:

Skandinaviska Enskilda Banken AB (Publ)

Appellant

and

(1) Simon Conway

(2) David Walker (as Joint Official Liquidators of Weavering Macro Fixed Income Fund Limited)

Respondents

Before:

The Hon John Martin QC, JA

The Hon Dennis Morrison, JA

The Hon Sir Richard Field, JA

CICA NO 2 OF 2016

FSD 98 OF 2014 (NRLC)

IN THE CAYMAN ISLANDS COURT OF APPEAL

FINANCIAL SERVICES DIVISION

Appearances:

David Chivers QC instructed by Sam Dawson and Kai McGriele of Solomon Harris appeared for the Appellant. Jeremy Goldring QC and Shaun Folpp instructed by Mourant Ozannes appeared for the Respondents.

JUDGMENT

Martin JA

Introduction

1. This is an appeal against an order dated 5 January 2016 of Clifford J. By that order, he declared that certain payments (amounting in total to US $8,217,761.54) made by Weavering Macro Fixed Income Fund Ltd (“the Company”) to the appellant Skandinaviska Enskilda Banken AB (Publ) (“SEB”) were invalid as preferences over the other creditors of the Company; and he ordered SEB to pay an equivalent amount to the respondents (who are the joint official liquidators of the Company – “the JOLs”), together with interest and costs.

2. The order was made pursuant to section 145 (1) of the Companies Law (2013 Revision) (“the Law”). That subsection is in the following terms:

“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”.

3. The Company went into liquidation (initially voluntary liquidation, but subsequently subject to the supervision of the Court) on 19 March 2009. The payments were made on 19 December 2008, 2 January 2009 and 11 February 2009, and so were made within six months of the commencement of the liquidation. The judge found that the Company was unable to pay its debts when the payments were made, and that they were made with a view to giving SEB preference over the other creditors. He held that the appropriate remedy was repayment to the Company, and rejected defences raised by SEB based on unjust enrichment, change of position, illegality and public policy.

4. SEB challenges the judge's conclusion that the Company was insolvent when the redemption payments were made. It asserts that he calculated the Company's liabilities by reference to valuations that were the product of fraud and so did not accurately state the amount of the liabilities; that he failed to recognise that the Company had a 30 day period, or a reasonable time, in which to make redemption payments, and accordingly took into account liabilities that were not yet due; and that he wrongly took into account future debts without considering future assets. It challenges the judge's conclusion that the Company intended to prefer SEB on the basis that the judge misinterpreted the law; that he failed to have proper regard to uncontradicted evidence and drew impermissible inferences of fact; and that he wrongly included future creditors in the class of those he held the Company intended to prefer. Finally, SEB challenges the judge's rejection of its defences.

Background

5. The Company was incorporated in the Cayman Islands on 2 April 2003. It carried on business as an open-ended investment company trading mainly in interest rate derivatives. It had two directors, Stefan Peterson and Hans Ekstrom. It was part of a group of companies that included Weavering Capital (UK) Limited (“WCUK”), an English company that was the Company's investment manager and undertook its trading activities; and Weavering Capital Fund Limited (“WCF”), a BVI company that was counterparty to interest rate swaps entered into by the Company. There were other corporate entities within the Weavering group, including a Swedish investment vehicle into which investors could invest.

6. The chief executive officer and principal investment manager, and a director, of WCUK was Magnus Peterson, the brother of Stefan Peterson and the stepson of Hans Ekstrom. The judge found that it was Magnus Peterson who was the controlling mind of the Company, both generally and specifically in relation to the payments made to SEB, and there is no appeal against that conclusion.

7. The judge also found that the interest rate swaps conducted between the Company and WCF were, to the knowledge of Magnus Peterson, worthless. He said this (judgment paragraph [35]):

“i. The Swaps were worthless paper transactions entered into with WCF, which was never in a position to honour its obligations pursuant to them. WCF … had no realisable assets and did not trade other than as counterparty to the Swaps. ii. Magnus Peterson used the existence of the Swaps to show a sustained growth over the life of the Company. Large monthly adjustments were made to Swaps exposures through the full or partial closing out of existing Swaps and the opening of new Swaps so as to avoid generating the impression of too large profits that the Swaps would otherwise have showed on paper, but not in reality, and to avoid defeating the impression of the Company as relatively low risk. The result was that the Company was able to show the relatively modest but positive month on month performance expected by its investors.

iii. No gains were ever realised by the Company in relation to the Swaps (even when some of the Swaps were closed out). They were simply used to present a picture of a fund showing sustained growth when in fact the unrealised gains represented by the Swaps were fictitious.

iv. The reality was that the Company was suffering large losses through its options trading (that were masked by the Swaps) and expending considerable sums on management and performance fees and brokerage fees largely to WCUK.”

8. Persons wishing to invest in the Company acquired redeemable Participating Shares in it. SEB, a Swedish financial institution, acquired such shares. It did so as custodian for, among others, two Swedish mutual funds: HQ Solid (“HQ Solid”) and Catella Stiftelsefond (“Catella”). Between April 2006 and November 2007, SEB subscribed for US$8.5 million Participating Shares on behalf of HQ Solid, and the Company issued 56,836.96 Participating Shares to “SEB Merchant Banking as nominee for HQ Solid”. In March 2008, SEB subscribed for US$1 million Participating Shares on behalf of Catella; and the Company issued 5,926.98 Participating shares to “SEB Merchant Banking as nominee for Catella Stiftelsefond”. The Company subsequently issued equalisation shares to SEB, again as nominee, so that SEB's total holding on behalf of Catella increased to 5,953.99 Participating Shares. Despite the reference to nomineeship, SEB was registered as the holder of all the shares in the Company's register of members.

9. Under the terms of the Company's offering memoranda (the latest of which was published on 24 September 2008), Participating Shares could be redeemed as follows:

“Redemption of Company Shares

Shareholders can redeem their Shares, in whole or in part, in a minimum amount of US$50,000 (subject to the discretion of the Board of Directors to redeem lesser amounts), on one calendar month's prior written notice (subject to the discretion of the Board of Directors to waive such notice), on each Redemption Day. To effect a redemption, a Request for Redemption of Shares, obtained from the Company must be received by the Company by 5pm Dublin time one calendar month before any Redemption Day, accompanied by the share certificates, if any, duly endorsed and in a form for redemption acceptable to the Board of Directors.

Redemptions are made at a price per Share equal to the NAV per Share of the Company, as of the close of business on the relevant Valuation Date, to the nearest whole US cent (the “Redemption Price”).

Payment of Redemptions

Redemption payments are generally made within 30 calendar days after the Redemption Day. No interest is paid from the Redemption Day to the payment date. Payment is made by telegraphic transfer (with transfer charges to the account of the recipient) to the Remitting Bank/Financial Institution or to another account in the name of the shareholder.”

“Redemption Day” meant the first business day of each calendar month, and “Valuation Day” meant the business day immediately preceding each Redemption Day.

10. On 9 October 2008 SEB gave notice of redemption in accordance with these provisions of all the shares it held as nominee for Catella, and on 28 October 2008 it gave notice of redemption of all its unredeemed shares held as nominee for HQ Solid. The Redemption Day first occurring one month after these notices was 1 December 2008, and the relevant Valuation Day was 30 November 2008. On 19 December 2008 the Company paid SEB US$1,096,903.58 in respect of the first notice (“the First SEB Redemption Payment”); on 2 January 2009 it paid SEB 25% of the amount due in respect of the second notice, US$1,780,214.29 (“the Second SEB Redemption Payment”); and on 11 February 2009 the Company paid SEB the remaining 75% due in respect of the second notice, US$5,340,643.47 (“the Third SEB Redemption Payment”).

11. The redemption notices given by SEB were far from being the only notices of redemption received by the Company in October 2008 and subsequent months. This was a time of turmoil in the financial markets following the collapse of Lehman Brothers in September 2008. Notice was given for 1 December 2008 in respect of shares totalling (at the 30 November 2008 NAV) US$138.4 million (of which the...