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Martin KenneyManaging Partner at Martin Kenney & Co., Solicitors
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What a View - the Latest Weavering Clawback Claims

January 14, 2015 by Martin Kenney

   

 As published on this site, in late December the liquidators of Cayman Islands-domiciled Weavering Macro Fixed Income Fund Limited (the Company) filed a series of summonses in the Grand Court in which they claim that redemption payments made by the Company to a number of investors in the six months immediately preceding the commencement of the liquidation of the Company are 'invalid preferences.'  In these claims the Liquidators rely upon s.145 (1) of the Companies Law 2009 (as Amended), as opposed to Section 37(6)(a) of the Companies Law, and Section 168 (the predecessor to Section 145) which were relied upon by the Liquidators in RMF Market Neutral Strategies (Master) Limited v DD Growth Premium 2X Fund (In Official Liquidation), in that case the Grand Court of the Cayman Islands held that payments made by insolvent companies out of share premium to redeemed shareholders cannot be clawed back by a liquidator using section 37(6) of the Companies Law which provides that: “A payment out of capital by a company for the redemption or purchase of its own shares is not lawful unless immediately following the date on which the payment out of capital is proposed to be made the company shall be able to pay its debts as they fall due in the ordinary course of business.“  The Court also rejected the claims that the payments were a voidable preference under section 168 of the Companies Law claims on the basis that it was not proved that the dominant purpose of the payment to the redeemed investors was to prefer those creditors. 

 

Claw back claims have suffered a series of set backs in recent years, and not just in Cayman. In the Fairfield Sentry liquidation, the BVI Commercial Court rejected the liquidator's claw back claims on the basis that the redeemers had given good consideration for the payments they received.  The Commercial Court's judgment was affirmed by the Eastern Caribbean Court of Appeal, and ultimately the Privy Council earlier last year.  In that case the Liquidators claimed that the redemeption payments could be recovered as having been made under a mistake of fact – that of the solvency of the fund – at the time of payment.  However Lord Sumption in the Privy Council ruled that a payment made to discharge a contractual debt cannot be recovered even if made under a mistake, unless the mistake is such as to void the contract.  

In the U.S. meanwhile, Irving Picard the Madoff Bankruptcy Trustee suffered a series of setbacks in his attempts to secure justice for defrauded investors, not the least of which are a series of decisions in which the New York District Court, and most recently the Court of Appeals for the Second Circuit in New York held that Picard could not claw back monies paid to certain investors as the payments were made under a securities contract that was not vitiated notwithstanding the absence of good faith on the part of the Broker.   

These Decisions are of course welcome news to the fund industry, the Courts in each decision mentioned above took a commercial approach, acknowledging that the operation of investment funds requires certainty regarding subscription and redemption, investors who redeem can be secure in the knowledge that they cannot be pursued to contribute to the pot in the case of a liquidation where they have validly redeemed pursuant to a valid securities contract, certificate or other contract document.  It is too early to speculate how the Cayman Grand Court will view the claim of the liquidators in the Weavering Macro liquidation, the Writs of Summons do not give any indication of the facts being relied upon. The Defendants are based in Sweden, Bermuda, Canada, Cayman, Curacao, France, Guernsey, Hong Kong, Ireland, Jersey, Luxembourg, Singapore, and Switzerland. It will be interesting to see how the claims will be defended, regardless, the liquidators must show that at the time at which the redemption payment was made the Company was unable to pay its debts, and that the payment was made with a view to giving each Defendant a preference.  Notwithstanding the amendment to the Companies law since the decision in RMF, the Liquidators still must show that the dominant purpose of the payment to the redeemed investors was to prefer those creditors.  

  

  

  

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