When a fund fails, the disappointed investors’ sole hope of recompense often rests on the fund’s liquidators gathering in and distributing pari passu as many of the fund’s assets as possible. On the other hand, those investors who successfully redeemed shortly before the fund’s collapse might regard the liquidators’ efforts with a degree of concern.
The judgment of the Cayman Islands Court of Appeal in Skandinaviska Enskilda Banken AB (Publ) v Simon Conway and David Walker (CICA 2 of 2016), delivered on 18 November 2016, considered aspects of the liquidators’ power to claw back certain types of redemption payments made shortly prior to liquidation as voidable preferences under s. 145 of the Companies Law. The Court of Appeal decision confirms that there is no need for the redemption payments to be tainted with any dishonesty for them to be recoverable and that common law defences, such as change of position by a custodian who transmits the redemption proceeds to a client, are not available in a s. 145 claim.
This will be welcome news for liquidators and frustrated creditors, but may cause some concern for investors in Cayman Islands funds, particularly custodians, because such investors will potentially now face a six month exposure horizon on any redemption proceeds they might receive and dissipate. Investment funds and their managers, in the meantime, will pay close attention to the Court of Appeal’s finding that the cash flow test of insolvency in the Cayman Islands is not limited to debts that are immediately due and payable but can extend to debts that will become payable in the reasonably near future. Click here for a full note on the judgment given by the Court of Appeal