{"id":5081,"date":"2019-08-14T09:05:17","date_gmt":"2019-08-14T14:05:17","guid":{"rendered":"https:\/\/www.campbellslegal.com\/?p=5081"},"modified":"2019-08-14T13:41:27","modified_gmt":"2019-08-14T18:41:27","slug":"weavering-preference-claims-upheld-by-privy-council","status":"publish","type":"post","link":"https:\/\/www.campbellslegal.com\/client-advisory\/weavering-preference-claims-upheld-by-privy-council-5081\/","title":{"rendered":"Weavering Preference Claims Upheld by Privy Council"},"content":{"rendered":"
On 29 July 2019, the Judicial Committee of the Privy Council handed down its judgment in Skandinaviska Enskilda Banken AB v Conway & Shakespeare (as joint official liquidators of Weavering Macro Fixed Income Fund Ltd) (Cayman Islands)<\/a><\/em> [2019] UKPC 36.\u00a0 The Privy Council upheld the decisions of the Cayman Islands Grand Court and Court of Appeal in finding that certain redemption payments received by Skandinaviska Enskilda Banken AB (Publ) (\u201cSEB<\/strong>\u201d) from Weavering Macro Fixed Income Fund Ltd (the \u201cCompany<\/strong>\u201d) shortly prior to the Company\u2019s liquidation constituted voidable preferences and requiring SEB to repay those amounts to the Company\u2019s joint official liquidators (\u201cJOLs<\/strong>\u201d).<\/p>\n The Company was an open-ended investment fund, trading mainly in interest rate derivatives.\u00a0 It went into liquidation on 19 March 2009, prompted by the discovery of fraud on the part of the principal of the Company\u2019s investment manager, Magnus Peterson.\u00a0 In 2015 Mr Peterson was convicted and sentenced to 13 years\u2019 imprisonment.<\/p>\n During the course of 2006 to 2008, SEB had subscribed for approximately US$9.5 million of redeemable participating shares in the Company as custodian and nominee for two clients.<\/p>\n Shortly after the collapse of Lehman Brothers in September 2008, many of the Company\u2019s investors sought to redeem their shares. \u00a0This included SEB, which in October 2008 issued redemption notices in respect of all of the shares it held as nominee for its clients, for a 1 December 2008 redemption day.\u00a0 As a result, redemptions totalling US$138.4 million became due to redeeming shareholders on 1 December 2008 (the \u201cDecember Redeemers<\/strong>\u201d).\u00a0 Redeeming shareholders with a 2 January 2009 redemption day (the \u201cJanuary Redeemers<\/strong>\u201d) were owed US$54.7 million.\u00a0 Redeeming shareholders with a 2 February 2009 redemption day (the \u201cFebruary Redeemers<\/strong>\u201d) were owed US$30 million.<\/p>\n The offering memorandum for the relevant shares stated that \u201cRedemption payments are generally made within 30 calendar days after the Redemption Day\u201d.<\/p>\n SEB was paid just over US$1 million by the Company on 19 December 2008.\u00a0 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.\u00a0 In total, SEB received approximately US$8.2 million in redemption payments (the \u201cSEB Redemption Payments<\/strong>\u201d).<\/p>\n 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, with the balance owed to the unsatisfied December Redeemers being about US$50 million.\u00a0 The January Redeemers and the February Redeemers were never paid.<\/p>\n In August 2014, the JOLs issued proceedings against SEB seeking a declaration that the redemption payments were invalid as preferences under section 145(1) of the Companies Law (2013 Revision) (the \u201cLaw<\/strong>\u201d) and an order that the monies be repaid with interest.\u00a0 Section 145(1) provides that:<\/p>\n \u201cEvery conveyance or transfer of property\u2026 made\u2026 by the company in favour of any creditor at a time when the company is unable to pay its debts\u2026 with a view to giving such a creditor a preference over the other creditors shall be invalid if made\u2026 within six months immediately preceding the commencement of the liquidation.<\/em>\u201d<\/p>\n In December 2015, 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 Law and ordered that SEB repay those amounts to the JOLs.<\/p>\n SEB appealed the Grand Court\u2019s decision to the Court of Appeal on several different grounds, none of which succeeded.\u00a0 Our client advisory on the Court of Appeal\u2019s November 2016 decision can be found here<\/a>.<\/p>\n SEB then appealed to the Privy Council on six issues.\u00a0 That appeal was heard in June 2018.\u00a0 The Privy Council\u2019s approach to each of these issues and their conclusions are summarised below.<\/p>\n The six issues before the Privy Council were:<\/p>\n The first three issues concern the question of whether the SEB Redemption Payments were made at a time when the Company was insolvent.\u00a0 The fourth and fifth issues concern the question of whether the SEB Redemption Payments were made with the intention to prefer SEB.\u00a0 The sixth issue concerns the consequences of the application of section 145(1).<\/p>\n In the end, the Privy Council did not need to deal with the third issue (the future debts point) as it was expressly contingent on SEB succeeding on the second issue (the 30 day Point), which it did not.\u00a0 Similarly, the fifth issue (the Amendment Point) did not arise, as SEB did not succeed on the fourth issue (the Intention to Prefer Point).<\/p>\n 1) The Fraud Point<\/strong><\/p>\n SEB contended that the published NAVs, which had assumed that certain swaps had the value fraudulently attributed to them by Mr Peterson, were not valuations within the meaning of the Company\u2019s Articles and that in the absence of any alternative figures stating the Company\u2019s true asset value, there was no material before the Court on which it could conclude that the Company was insolvent at the relevant times.<\/p>\n The Court of Appeal rejected that contention, favouring instead the JOLs\u2019 submission that the reasoning in the Privy Council\u2019s decision in Fairfield Sentry[1]<\/a><\/em> was applicable to this case. \u00a0In the Court of Appeal\u2019s view, the published NAVs were binding in favour of redeemers and conclusive at the time of the SEB Redemption Payments notwithstanding that, because of Mr\u00a0Peterson\u2019s fraud, the NAVs were, in fact, incorrect.<\/p>\n The Privy Council disagreed.\u00a0 It considered the decision in Fairfield Sentry <\/em>to be distinguishable, as in that case the fraud which operated on the assessment of the NAV was external to the fund whereas in Weavering<\/em> the fraud was internal to the Company, having been perpetuated by the Company\u2019s controlling mind, Mr\u00a0Peterson.<\/p>\n The Privy Council concluded that because of the \u2018internal\u2019 fraud, the NAV was not binding on all persons and could therefore be avoided.\u00a0 However, and fatally here, to effect such an avoidance, proceedings would need to be brought against the JOLs by a party which had suffered loss as a result of the fraud.\u00a0 As SEB had not been defrauded in this case \u2013 it had, in fact, received payments based on the inflated NAV substantially in excess of the amounts to which it would have been entitled had the NAV calculation been accurate and honest \u2013 the fraud point was of no assistance to SEB.<\/p>\nBackground<\/strong><\/h2>\n
The Lower Court Decisions<\/strong><\/h2>\n
The Privy Council Decision<\/strong><\/h2>\n
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