SEB V Weavering Court Of Appeal Judgment

FIRST WEAVERING PREFERENCE CLAIM UPHELD BY COURT OF APPEAL

Earlier this year, the Cayman Islands Court of Appeal ("CICA") heard the appeal of Skandinaviska Enskilda Banken AB (Publ) ("SEB") against the 5 January 2016 order of Mr Justice Clifford of the Grand Court in Conway and Walker (as joint official liquidators of Weavering Macro Fixed Income Fund Limited) v SEB1. Justice Clifford had held that payments received by SEB from Weavering Macro Fixed Income Fund Ltd (the "Company") shortly prior to the Company's liquidation constituted voidable preferences and required SEB to repay those amounts to the Company's joint official liquidators ("JOLs").

The CICA handed down its judgment on 18 November 2016, unanimously dismissing SEB's appeal on all issues and taking the opportunity to comment on a number of principles of Cayman insolvency law in a way that is likely to have implications far beyond the world of voidable preferences. In early December, SEB filed notice of its intention to appeal the CICA's decision to the Privy Council.

BRIEF BACKGROUND

The Company was an open-ended investment company, trading mainly in interest rate derivatives, that went into liquidation on 19 March 2009. The liquidation was prompted by the discovery of fraud on the part of the principal of the Company's investment manager, Magnus Peterson. In 2015 Mr Peterson was convicted and sentenced to 13 years' imprisonment.

During the course of 2006 to 2008, SEB had subscribed for approximately US$9.5 million in redeemable participating shares in the Company as custodian and nominee for a number of clients.

Shortly after the collapse of Lehman Brothers in September 2008, many of the Company's investors sought to redeem their shares. This included SEB, which issued redemption notices in respect of all of its shares in October 2008 for a 1 December 2008 redemption day. As a result, redemptions totalling US$138.4 million became due to redeeming shareholders on 1 December 2008 (the "December Redeemers"). Redeeming shareholders with a 2 January 2009 redemption day (the "January Redeemers") were owed US$54.7 million. Redeeming shareholders with a 2 February 2009 redemption day (the "February Redeemers") were owed US$30 million.

The offering memorandum for the relevant shares stated that "Redemption payments are generally made within 30 calendar days after the Redemption Day".

SEB was paid just over US$1 million by the Company on 19 December 2008. It received a second payment of 25% of the balance of the redemption amounts owing to it on 2 January 2009 and a third and final payment of the remaining 75% on 11 February 2009. In total, SEB received approximately US$8.2 million in redemption payments (the "SEB Redemption Payments").

All but three large December redeemers had been paid their redemption claims in full by the time the Company went into liquidation on 19 March 2009. The January Redeemers and the February Redeemers were never paid.

THE FIRST INSTANCE DECISION

The Grand Court held that the SEB Redemption Payments were each invalid as a preference over the other creditors of the Company pursuant to section 145(1) of the Companies Law (the "Law") and ordered that SEB repay those amounts to the JOLs.

THE APPEAL

SEB appealed the Grand Court's decision on several different grounds, none of which succeeded. The CICA was asked to rule on three distinct issues:

The Solvency Issue - At the time that the Company made each of the SEB Redemption Payments, was the Company unable to pay its debts within the meaning of s93 of the Law? The Preference Issue - Were the three SEB redemption payments made with a view to giving SEB a preference over the other creditors? The Repayment Issues - Are common law defences available to SEB (such as the absence of unjust enrichment and change of position) or is the JOLs' claim against SEB contrary to public policy due to being founded on illegality, such that SEB should not be required to repay the claimed amounts? The Solvency Issue

It is a condition of the application of section 145(1) of the Law that for a payment to be held to be preferential the Company must have been insolvent within the meaning of section 93 of the Law at the time that the relevant payment was made.

The CICA upheld the first instance judge's finding that the JOLs had discharged their burden of proving that on the date of each of the SEB Redemption Payments the Company was unable to pay its debts. The Company was therefore insolvent within the meaning of section 93(c) of the Law. Each of the three points on which SEB had appealed the court's decision on solvency was rejected.

The Fraud Point

SEB contended that the published NAVs, which had assumed that certain...