Conyers Offshore Case Digest (Issue No.11 April - December 2015)

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CAYMAN ISLANDS After a review of the common law position and applying the modern test for apparent bias, Mr. Justice Rix came to the conclusion that as at the time when the winding up order was made, the fair-minded and informed observer would have concluded that it was not uncommon for a judge to have to deal with litigation in which the government of the country in which he was a judge was interested. However, in these circumstances, where the litigation was brought in a different country from that of the government interested in that litigation, it was unnecessary for the litigation to be conducted by a judge who was also a judge of that government’s country. When the litigation was commenced, Mr. Al Emadi was not Minister of Finance and chairman of the Council of Ministers in Qatar. The conclusion was that the fair-minded and informed observer would not have concluded that the Judge’s independence and impartiality were compromised at that point. However, the position changed when Mr. Al Emadi became Minister of Finance and Chairman of the Council of Ministers. At that point Mr. Al Emadi had a direct interest in claims that BTU had made against Mr. Wael Almazeedi and in defeating the proofs of debt that Mr. Wael Almazeedi had brought against BTU. The fair-minded and informed observer, knowing of the role of Mr. Al Emadi, would consider that there was a danger that the Judge’s independence and impartiality were compromised and in that sense that there was a danger of bias. It was held that all Orders of the Judge in the proceedings after Mr. Al Emadi was appointed on 26 June 2013 should be set aside. Judges should therefore disclose their connection with any relevant jurisdiction and consider recusing themselves if appropriate, such as if a judge is closely connected with the government of that jurisdiction and the judge’s status as a judge may depend on that government. SECTION 37 OF THE COMPANIES LAW (2007 REVISION) - STATUTORY CONSTRUCTION - SHARE CAPITAL - CLAW-BACK CLAIMS DD Growth Premium 2X Fund (in official liquidation) -v- RMF Market Neutral Strategies (Master) Limited (Unreported 20 November 2015) In this case, the Cayman Islands Grand Court clarified that redemption proceeds paid to investors by insolvent companies out of share premium cannot be clawed back by a liquidator under Section 37(6) of the Companies Law (2007 Revision) (the “Law”). The liquidators of DD Growth Premium 2X Fund (the “Fund”) sought an appeal to claw-back redemption payments to RMF Market Neutral Strategies (Master) Limited (“RMF”) made at a time when the Fund was insolvent. The Fund was a feeder fund incorporated in the Cayman Islands, which fell into difficulties in late 2008 and early 2009 and faced a large number of redemption requests. One such investor was RMF whose request gave rise to a liability of more than US$62 million, which was paid in part at a time when the Fund was cash flow insolvent. When the Fund was subsequently wound up it transpired that it had, in effect, become a Ponzi scheme. There was no suggestion that any of the redeeming investors knew about the fraud. The Fund’s liquidators instigated proceedings seeking to recover redemption payments in the amount of US$22 million paid to RMF at the end of 2008. Due to the timing of the redemption payments, it was the construction of the Law that fell to be considered. The Liquidators’ argument was based upon Section 37(6)(a) of the Law which provides that: “A payment out of capital by a company for the redemption or purchase out 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 liquidators sought to argue that the payments made to RMF were payments made out of capital at a time that the Fund was insolvent and that, in effect, payments out of either share capital or share premium were impermissible. At first instance, the Chief Justice dismissed this argument and found that the provisions of Section 37(6)(a) had not been breached as only a, de minimis, amount of US$1/1000 per share represented share capital, with the remainder representing share premium, the use of which was permissible pursuant to the Law. This is the position that is found in the current version of the Law. On appeal, the Court of Appeal held that Section 37 of the Law must be read in conjunction with Section 34 of the Law, which provides that: payments by a company out of share premium for the redemption or purchase of its own shares are not payments out of capital and as such are not subject to any solvency requirement. The Court of Appeal attached particular importance to Section 34(2)(f), which refers to the use of share premium “for providing for” the premium payable on redemption which is held to cover payment for the premium due. It is now clear that for the purposes of Section 37(6), share capital is given its natural meaning and represents only the par value of shares. 16
CAYMAN ISLANDS The Judgment of the Court of Appeal makes sound commercial common sense and comes as a relief to many investors, as well as a disappointment to many liquidators. SECTION 145 COMPANIES LAW - PREFERENCE - SECTION 93 COMPANIES LAW - SOLVENCY In the Matter of Weavering Macro Fixed Income Fund Limited (In Liquidation) -v- Skandinaviska Enskilda Banken AB (Publ) (Unreported, 4 December 2015) The Plaintiffs were the Joint Official Liquidators (the “JOLs”) of a Cayman fund, Weavering Macro Fixed Income Fund (the “Company”). In the months prior to its liquidation, the Company made three redemption payments to the defendant, Skandinaviska Enskilda Banken AB (Publ) (“SEB”), a Swedish financial institution and investor in the Company. In these proceedings the JOLs sought a declaration that these three payments were invalid pursuant to Section 145(1) of the Companies Law (the “Law”) and an order that those monies be returned. Magnus Peterson, the Company’s controlling mind in the payment of the relevant redemptions, made a decision to pay a number of investors, including SEB, in priority, on the basis that those investors were switching to another fund within the Weavering group. Section 145(1) of the Law provides: “Every conveyance or transfer of property, or charge thereon, and every payment obligation and judicial proceeding, made, incurred, taken or suffered by any company in favour of any creditor at a time when the company is unable to pay its debts within the meaning of section 93 with a view to giving such creditor a preference over the other creditors shall be invalid is made, incurred, taken or suffered within six months immediately preceding the commencement of a liquidation”. Before determining whether the payments were made with a view of giving a preference under Section 145(1), Clifford J was required to establish whether the Company was “unable to pay its debts within the meaning of Section 93”, when each such payment was made. The test of inability to pay debts under Section 93(3) is one of commercial insolvency, a so-called cash flow test rather than a balance sheet test. It is based on a Company’s present inability to pay debts as they fall due. Clifford J was satisfied that the JOLs had discharged the burden of proving the Company was unable to pay its debts on the relevant redemption dates. His Lordship was then required to determine whether the relevant redemption payments were made with a view of giving a preference under Section 145(1). It is important to note that the Cayman Islands legislature has not followed the UK in replacing its voidable preference regime. Therefore, the English authorities in the former regime there continue to be relevant in the Cayman Islands. The Chief Justice reviewed the applicable case law in RMF Market Neutral Strategies (Master) Limited -v- DD Growth Premium 2X Fund [2011] 2 CILR 61 (“DD Growth”). Prior to DD Growth there was limited Cayman authority on the relevant test to be applied to determine the question of preference. The Chief Justice summarised the principals as follows: “The onus is on the person alleging a fraudulent preference to prove to the satisfaction of the court that the payment impugned was made by the bankrupt with the intention of preferring the payee over his other creditors; It is competent for the court to draw the inference of an intention to prefer from all the facts of the case; The intention to prefer, which must be proved, must be the principal or dominant intention; there might, however, be a valid distinction between an intention to prefer and the motive for that intention”. The principles set out by the Chief Justice in DD Growth were determined to be applicable to the current case. Therefore, it was necessary to show that the intention to prefer SEB was the principal or dominant intention when making the redemption payments. Clifford J was satisfied that each of the SEB redemption payments were made with the principal or dominant intention of preferring SEB as a member of a particular class of creditors, the Swedish Redeemers. In this case, there was not mere selection, but the added dimension of conscious decision making resulting in a particular section for payment. An Order was made that SEB repay the sums received from the three redemption payments to the JOLs. 17
Page 1 and 2: APRIL 2015 - DECEMBER 2015 ISSUE NO
Page 3 and 4: ABOUT THE DIGEST The Offshore Case
Page 5 and 6: BERMUDA the parties involved can be
Page 7 and 8: BERMUDA apply to many cases, and as
Page 9 and 10: BRITISH VIRGIN ISLANDS INTERLOCUTOR
Page 11 and 12: BRITISH VIRGIN ISLANDS INTERLOCUTOR
Page 13 and 14: BRITISH VIRGIN ISLANDS standing, ot
Page 15 and 16: CAYMAN ISLANDS On 18 September 2012
Page 17: CAYMAN ISLANDS J (applying Section
Page 21 and 22: INDEX Arbitration 7 BVI - CIVIL APP

Conyers Offshore Case Digest (Issue No.11 April - December 2015)

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