On 29 July 2019, the Board of the Judicial Committee of the Privy Council confirmed that a fraudulent NAV may only be set aside in proceedings brought for that purpose. A party seeking to avoid a NAV must also repay any sums it has received by reason of that NAV.
The matter before the Board was an appeal by Skandinaviska Enskilda Banken AB (Publ) (SEB) against a judgment of the Cayman Islands Court of Appeal which had confirmed that certain share redemption payments SEB received from Weavering Macro Fixed Income Fund Ltd (Company) were unlawful preferences within the meaning of section 145(1) of the Companies Law (2013 Revision). The Board unanimously rejected the appeal.
SEB had subscribed for shares in the Company as nominee for two underlying investors and had given two separate notices of redemption for its shares in October 2008. SEB’s redemptions were processed on the next “Redemption Day” and SEB received full payment for its first redemption request on 19 December. On 29 December, the Company wrote to unpaid redeemers stating that the Company would soon pay 25% of outstanding redemption payments and the balance by the end of January 2009. SEB received full payment for its second redemption request by mid‑February.
At first instance, Justice Clifford found that the Company was managed and controlled for all relevant purposes by Magnus Peterson, who was a director of the Company’s investment manager. Mr Peterson had fraudulently inflated the Company’s NAV by causing it to enter into interest rate swaps which he knew were worthless. Mr Peterson also made all material decisions regarding redemptions. Justice Clifford found that when the Company wrote to unpaid redeemers on 29 December, Mr Peterson knew that the Company would never be able to pay all of the December redemption debt, let alone the debt that would become due on 2 January. As such, the proper course would have been to put the Company into liquidation.
SEB advanced a number of arguments seeking to defeat the liquidators’ clawback claim. In particular, SEB sought to establish that the Company was not insolvent at the time of the payments and that those payments therefore fell outside the scope of section 145(1). SEB argued that the NAV was not binding on the Company since it was affected by Mr Peterson’s fraud and that as such, no redemptions had ever taken place in accordance with the Company’s Articles of Association and no redeemers had ever become creditors of the Company. In rejecting this argument, the Court of Appeal considered that it was not permissible to reopen a NAV retrospectively on the ground of fraud, whether or not the Company was complicit in it.
A majority of the Board disagreed with the Court of Appeal on this point, concluding that the dishonest valuation of assets could not be binding. However, as noted at the outset, the Board concluded that a party seeking to avoid a NAV must bring proceedings to do so and must repay any sums received by reason of the fraudulent NAV before the Court would set aside a NAV. As such, SEB’s argument on this basis had to fail.
The Board also rejected SEB’s alternative arguments that the Company was not insolvent at the time of the first redemption payment, and its arguments that there was no intention to prefer SEB in making the redemption payments. In a separate post, we explain the Board’s rejection of SEB’s additional argument that it was entitled to rely on common law defences to the liquidators’ claim.