Grand Court Orders The Repayment Of Redemption Monies: Preferences And Clawing Back Redemption Payments

In Conway and Walker (as joint official liquidators of Weavering Macro Fixed Income Fund) v SEB1 the Grand Court of the Cayman Islands has, for the first time, ordered the re-payment of redemption proceeds paid by a fund to an investor shortly before the commencement of the fund's liquidation on the basis that the payments constituted voidable preferences.

Facts

Weavering Macro Fixed Income Fund (the Fund) was placed into liquidation in March 2009 after it was revealed that the Fund's main asset, being a basket of interest rate swaps entered into with a related entity, were worthless (the Swaps). The Swaps were the tool used by the Fund's principal investment manager, Mr Magnus Peterson, to perpetrate a massive fraud, for which he is now serving 13 years in prison.

The Swaps which, by the end of the Fund's life were valued at over US$600 million, had the effect of masking huge trading losses which the Fund was actually suffering through its true trading activities (principally options and futures). Whereas the true position was that the Fund was never profitable, through the use of the Swaps, and attributing fictitious values to them, the Fund was able to report a steady growth in its net asset value (NAV).

In October 2008 the Fund received a large number of redemption requests from investors (the December Redeemers). The Fund offered monthly redemption days, being the first business day of each month, subject to a 30 day notice period. Redemption requests received during October 2008 were thus payable in accordance with the 1 December 2008 redemption day. Based on the reported NAV these redemption requests totaled approximately US$138.4 million. Although at this time the Fund's reported NAV was approximately US$583 million, the value attributed to the Swaps was approximately US$626 million. Given that the Swaps were worthless, upon the US$138.4 million of redemption obligations becoming a liability of the Fund, the Fund was rendered hopelessly insolvent - on both balance sheet and cash flow bases.

Notwithstanding, on 19 December 2008 the Fund paid out over US$7.5 million to six of the December Redeemers. These payments represented the totality redemption sums due to these investors (or, in the case of the defendant, the totality of the redemption sums due with respect to one of its accounts: see below) and were paid out on the express instruction of Mr Magnus Peterson on the basis that these investors were, at least in his eyes, to re-invest in a related fund within the Weavering family.

Having insufficient cash from which the balance of the redemption proceeds could be paid, on or about 31 December 2008 the Fund purportedly implemented a policy by which the December Redeemers would receive an initial payment of 25 per cent of their redemption proceeds, with the balance paid over time. This saw most, but not all, investors (save for those who had already received their redemption proceeds, in full, on 19 December 2008) receive 25 per cent of the sums due to them on 2 January 2009, with additional sums being paid during the months of January and February 2009. By the end of February 2009 all but three of the December Redeemers had received their redemption proceeds, in full. The outstanding sums due to these...