The Judicial Committee of the Privy Council (“Privy Council”) in London, which is the highest appeal court for many Caribbean jurisdictions, decided three appeals in 2019 that are of keen interest to the insolvency community. All of the cases concerned preference payments – favoured payments to creditors shortly before the filing of a bankruptcy petition. These payments are typically made by a bankrupt/insolvent company with “an intention to prefer” a creditor or class of creditor over other creditors of the company.
In certain jurisdictions, courts have the power to set aside these payments where they are voidable under legislation. The courts can also make orders to put the company back in the position it would have been in had the payments not been made. The issues raised in these cases include when legislation can be used outside of its own jurisdiction and what elements make up an “intention to prefer.”
Each of the three Privy Council decisions concerns a different jurisdiction with different legislation:
The first, “AWH Fund,” was an appeal from the Court of Appeal of the Commonwealth of the Bahamas (“Bahamas”). In that case, the defendant sought to overturn the decision to allow service out of the jurisdiction in proceedings by a liquidator who attempted to set aside alleged preference payments.1
The second, “Fairfield Sentry,” was an appeal from the Court of Appeal of the Eastern Caribbean Supreme Court of the British Virgin Islands (“ECCA”). This case concerned an attempt to stop BVI liquidators from bringing statutory avoidance claims under BVI legislation in the U.S. Bankruptcy Court for the Southern District of New York.2
The third, “SEB,” where my firm acted for the appellants, was an appeal from the Court of Appeal of the Cayman Islands (“CICA”). It raised issues about whether payments made were unlawful preferences.3
The AWH Decision
The AWH decision involved whether the liquidator for AWH Funds Ltd. could serve proceedings out of the jurisdiction of the Bahamas by asking the court for an order that payments from AWH to ZCM Asset Holdings (“ZCM”), a Bermuda-incorporated company, could be declared void as undue or fraudulent preference payments under section 160 of the International Business Companies Act 2000 (“IBCA”) of The Bahamas. The Liquidator wanted ZCM to repay the money.
Section 160 provides that a transaction is void if it is made within three months of a person becoming insolvent with intent to prefer that creditor. The Liquidator brought proceedings against ZCM in the Bahamas by way of a summons issued within the liquidation proceedings. ZCM appealed against service of those proceedings in Bermuda on the grounds of lack of jurisdiction and lack of a good arguable case on the merits.
The first issue was whether the summons could be served outside the jurisdiction. Having examined the various rules and considered United Kingdom legislation and precedent, the Privy Council said it did not need to identify a “jurisdictional gateway” for the Liquidator to bring a claim that the payment to ZCM was fraudulent. The Privy Council, however, did accept that the Liquidator needed to establish some connection between the foreign respondent, ZCM in Bermuda, and the jurisdiction of the Courts of the Bahamas.
Even without specific reference to legislation or rules to allow a claim to be brought against a company out of the jurisdiction, the Privy Council found that where an international business company is in liquidation in the Bahamas, it is proper in appropriate cases for the Bahamian courts to rely on other sources of jurisdiction to entertain proceedings to enforce a claim vested in the liquidator. The Privy Council said it is desirable that such claims should be heard by the Bahamian courts in the interests of ensuring that the purposes of the winding up of the company are fully achieved.
The Fairfield Sentry Decision
The Fairfield Sentry appeal to the Privy Council came from the Court of Appeal of the Eastern Caribbean Supreme Court, which upheld a lower court decision not to grant an anti-suit injunction that would have restrained Fairfield Sentry Ltd.’s liquidators from pursuing proceedings in the United States under section 249 of the British Virgin Islands Insolvency Act 2003 (“BVI Insolvency Act”). The Privy Council found that BVI insolvency legislation could be applied by a court outside BVI if the foreign court decided that was appropriate. The Privy Council also found that the U.S. proceedings were not unjust, vexatious or oppressive and that an anti-suit injunction to stop them was neither appropriate nor necessary.
Under section 249, the BVI High Court has the power to set aside voidable transactions, such as a preference payment or a transaction at an undervalue (i.e., less than fair market). The section also confers powers on the court to make orders to restore the company in liquidation to the position it would have been in had it not entered into the transactions.
The background to the decision was that in December 2008, the BVI High Court made orders to wind up three BVI-based feeder funds that invested in Bernie L. Madoff Investment Securities (“BLMIS”). One of those funds was Fairfield Sentry. As in other Madoff proceedings, one of the issues raised by the Liquidators was that the Net Asset Value (“NAV”) of redeemable shares in BLMIS holdings were set using fraudulent reports created by BLMIS. Fairfield Sentry’s administrator used the false BLMIS reports to set the value of redemption payments made by Fairfield Sentry when investors who held shares redeemed them. As a result, hundreds of investors redeemed their shares at values based on BLMIS’s fraudulent reports and thus received payments based on a valuation that was fraudulent as a result of external fraud (by BLMIS), rather than fraud which originated within Fairfield Sentry. Those redemption payments are what the Liquidators of Fairfield Sentry were looking to recover.
The U.S. Bankruptcy Court allowed the Liquidator’s statutory avoidance claims under section 249 to proceed. But the potential defendant (“UBS”) applied to the BVI High Court for an anti-suit injunction to stop the Liquidators from proceeding with their claims in the United States. The BVI High Court and the Eastern Caribbean Court of Appeal (“ECCA”) refused to grant the anti-suit injunction, and UBS appealed to the Privy Council.
UBS argued that the section 249 power could not be delegated to a foreign court. To allow such a delegation would be oppressive to the interests of alleged debtors of an insolvent BVI company. UBS suggested that as an alternative to an anti-suit injunction, the Privy Council could declare that only the court charged with supervising Fairfield’s winding up (i.e., the BVI High Court) had the right to exercise the power under section 249.
The Liquidators argued that the U.S. Bankruptcy Court should decide whether to apply BVI insolvency law in dealing with their applications. The Liquidators added that it was not unusual for courts to assist foreign liquidation proceedings by applying the law of those foreign proceedings, including applying a statutory power to adjust or reverse voidable transactions. The Privy Council said that section 249 did not confer an exclusive jurisdiction on the BVI High Court. There was no express prohibition on a foreign court from exercising the powers in section 249 at the request of a BVI liquidator or other office holder, and the Privy Council said it was not necessary to imply such a prohibition. It agreed with the Liquidators that it is not uncommon for the courts in one country to apply the insolvency laws of another when giving assistance to foreign liquidators or other officers.
The SEB decision
In the case of SEB, the Privy Council considered whether redemption payments made by an insolvent company (“Weavering”) were preferences over other creditors of the company under section 145(1) of the Companies Law (2016 Revision) (“Law”) in the Cayman Islands.
The payments had been made to Skandinaviska Enskilda Banken (“SEB”), as a bare nominee, which had passed on payments from Weavering to its principals. It was then discovered that the redemption payments had been based on an incorrectly-set NAV which had been the result of an internal fraud. This differed from the situation in the previous decision of the Privy Council in Fairfield Sentry, where the fraud which gave rise to the incorrect NAV was carried out by others external to the company.
Weavering was an open-ended investment company, established as an exempted company with limited liability under Cayman law. SEB bank held redeemable “Participating Shares” in Weavering as a nominee on behalf of two mutual funds. SEB received payment under two redemption notices. Then, in March 2009, Weavering entered liquidation. The Liquidators appointed to Weavering argued that the redemption payments to SEB were Preference Payments and as such invalid under section 145(1) of the Law. The Liquidators applied to the Cayman Grand Court for an order that SEB repay them. The Grand Court found the redemption payments were invalid as Preference Payments and therefore ordered SEB to repay the Liquidators with interest and costs.
SEB’s appeal to the Court of Appeal for the Cayman Islands (“CICA”) was dismissed, and SEB then appealed to the Privy Council. SEB raised a number of issues, including whether Weavering’s payments to SEB were Preference Payments when there were no other creditors over which it was preferred. This argument followed the line that because the NAV published by Weavering was set incorrectly (as a result of fraud from within Weavering), the NAV was not binding. None of the redemptions had taken place in accordance with Weavering’s Articles of Association, SEB argued, and therefore no redeemers had ever become creditors of Weaving within the meaning of section 145(1). If there were no creditors, then no payment could prefer one creditor over the other.
The Privy Council, however, decided that the payments SEB received were indeed Preference Payments. Section 145(1) of the law renders invalid any transactions, made at a time the company could not pay its debts, and which were made in favour of a creditor “with a view” to giving such a creditor a preference over other creditors. SEB had cited the observations of Lord Justice Greene In re M Kushler Ltd. 4 that an inference of an intention to prefer needed to have at least “a taint of dishonesty.” SEB argued that although at the time the payments were made, Weavering knew that later redeemers would not be paid, the payments to SEB were not made “with a view” to giving a preference. Furthermore, Weavering’s payment policy applied equally to all the shareholders who redeemed in December 2008. SEB argued that mere knowledge that the other redeemers would not be paid was not enough to demonstrate an intention to prefer SEB. But the Privy Council disagreed. It found that whilst there was a valid payment policy in place at Weavering for the December redeemers, that policy was not evenly applied, with the result that some redeemers were preferred.
As in the AWH Fund case, the Privy Council said it was potentially open to SEB to recover the monies from those to whom it had passed them. In SEB’s circumstances, however, that was not possible because the underlying mutual funds no longer existed in their original form. The Privy Council recognised that this situation gave rise to a “harsh result.” It observed that legislation in other jurisdictions had mitigated against this type of result. Without that legislation, it means a harsh result for all nominee shareholders in Cayman companies, who will now be vulnerable to preference claims. They should take advice on ways to protect their position to avoid a similar result.
All three cases show that the Privy Council generally supports the proposition (and the public policy) that a domestic court may in certain circumstances delegate powers to a foreign court by allowing liquidators/receivers to effect an extraterritorial reach as they seek to recover money for investors.
Author - Kai McGriele, Partner Bedell Cristin, Cayman Islands. This article first appeared in The Receiver newsletter, December 2019, issue 9. Published by the National Association of Federal Equity Receivers.
1 AWH Fund Ltd (In Compulsory Liquidation) (Respondent) v ZCM Asset Holding Company (Bermuda) Ltd (Appellant) (Bahamas)  UKPC 37Privy Council Appeal No 0033 of 2018.
2 UBS AG New York and others (Appellants) v Fairfield Sentry Ltd (In Liquidation) and others (Respondents) (British Virgin Islands)  UKPC 20 Privy Council Appeal No 0082 of 2018.
3 Skandinaviska Enskilda Banken AB (Publ) (Appellant) v Conway and another (as Joint Official Liquidators of Weavering Macro Fixed Income Fund Ltd) (Respondents) (Cayman Islands)  UKPC 36.
4 In re M Kushler Ltd  Ch 248, CA.
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