Cayman Clawback Orders Against Weavering Investors Upheld

In November 2016 the Cayman Islands Court of Appeal ("CICA") rejected Skandinaviska Enskilda Banken AB's (Publ) ("SEB") appeal against Mr Justice Clifford's decision to order that redemption proceeds of approximately US$8 million (the "Redemption Payment") should be repaid to the liquidation estate of Weavering Macro Fixed Income Fund Limited ("Weavering").

A copy of our article on the first instance Grand Court's decision can be found here.

Weavering was placed into liquidation in March 2009 when it was discovered that its investment manager, Magnus Peterson, had masked large losses suffered through options trading with worthless swap transactions entered into with affiliated counterparties. Shortly before the liquidation commenced, Mr Peterson directed that redemption proceeds of approximately US$8 million be paid to SEB leaving redemption payments to other creditors unsatisfied.

The Grand Court and CICA both determined that the Redemption Payment was a voidable preference under s.145 of the Cayman Companies Law, that had to be returned to the liquidation estate. A voidable preference is a payment made to a creditor within 6 months of the commencement of a liquidation where the company intended that the creditor be preferred over other creditors.

The appeal

There were a number of issues raised on appeal:-

Is a change of position defence available? Change of position is a defence to a restitutionary claim for the return of funds. The defence is premised on the inequity of a recipient having to return funds which have been spent or passed on in reliance on the payment.

Key to SEB's defence was the contention that, because s.145 of the Companies Law did not expressly provide a remedy in the event a payment was found to be a voidable preference, Weavering's claim was founded in restitution, and therefore SEB could seek to rely on the change of position defence.

The CICA rejected SEB's argument. It held that, despite the fact that the Companies Law did not expressly provide a remedy for a voidable preference, the consequence of such was that the payment is avoided and the recipient has to return the funds irrespective of their change of position in reliance on their entitlement to payment.

This ruling confirms the decision at first instance, and is immensely important for investors in Cayman Islands funds. In the event that an investor or a custodian receives a payment that is found to be a voidable preference, that investor or custodian will...