Skandinaviska Enskilda Banken AB (Publ) v Conway and another (as Joint Official Liquidators of Weavering Macro Fixed Income Fund Ltd)

JurisdictionUK Non-devolved
JudgeSir Donnell Deeny,Lord Wilson
Judgment Date29 July 2019
Neutral Citation[2019] UKPC 36
CourtPrivy Council
Docket NumberPrivy Council Appeal No 0022 of 2017
Date29 July 2019
Skandinaviska Enskilda Banken AB (Publ)
(Appellant)
and
Conway and another (as Joint Official Liquidators of Weavering Macro Fixed Income Fund Ltd)
(Respondents) (Cayman Islands)

[2019] UKPC 36

before

Lord Reed

Lord Wilson

Lord Lloyd-Jones

Lord Briggs

Sir Donnell Deeny

Privy Council Appeal No 0022 of 2017

Privy Council

Trinity Term

From the Court of Appeal of the Cayman Islands

Appellant

David Chivers QC

Ben Shaw

(Instructed by Harcus Sinclair LLP)

Respondents

David Lord QC

Shaun Folpp

(Instructed by Lipman Karas LLP)

Heard on 25 and 26 June 2018

JUDGMENT OF THE BOARD:
1

This is the judgment of the Board, to which all its members have contributed. The Board is unanimous in its advice to Her Majesty with regard to the outcome of the appeal. It is also unanimous in its reasons for arriving at its conclusions, except to the extent that Sir Donnell Deeny (with whom Lord Wilson agrees) has reached his conclusion on the first issue in the appeal, which we shall describe as the fraud point, for different reasons from the majority of the Board. Those reasons are set out in Sir Donnell's concurring judgment, which also expresses reservations about the majority's reasoning concerning an aspect of another set of issues, which we shall describe as the repayment issues, relating to a potential defence of change of position.

Introduction
2

This appeal from the Court of Appeal of the Cayman Islands concerns certain share redemption payments made by Weavering Macro Fixed Income Fund Ltd (“the Company”) to the appellant, Skandinaviska Enskilda Banken AB (Publ) (“SEB”), between December 2008 and February 2009. On 19 March 2009 the Company went into liquidation. The central issue in this appeal is whether these payments constituted unlawful preferences over the other creditors of the Company within the meaning of section 145(1) of the Cayman Islands' Companies Law (2013 Revision). The respondents (“the liquidators”) have brought these proceedings in their capacity as joint official liquidators of the Company.

3

The Company was incorporated in April 2003 as an open-ended investment company pursuant to the law of the Cayman Islands. It traded mainly in interest rate derivatives. Its two directors were Stefan Peterson and Hans Ekstrom, but its investment manager was an English company known as Weavering Capital (UK) Ltd (“WCUK”). The director of WCUK, and also its Chief Executive Officer and Principal Investment Manager, was Magnus Peterson, the brother of Stefan Peterson and the stepson of Hans Ekstrom. As the Company's investment manager, WCUK undertook the Company's trading activities. Clifford J, who heard this case at first instance, found that: “Magnus Peterson directly, and through his company WCUK, managed and controlled the Company for all purposes relevant to these proceedings. He controlled the investments and he made the material decisions about redemptions”. There was no appeal against that finding.

4

Those who wished to invest in the Company acquired redeemable participating shares in it. SEB, a Swedish financial institution, was such an investor. Between 2006 and 2008 SEB subscribed for shares on behalf of, amongst others, two Swedish mutual funds, HQ Solid and Catella Stiftelsefond (“Catella”). Between April 2006 and November 2007 SEB subscribed for US$8.5m of participating shares on behalf of HQ Solid. In March 2008 it subscribed for US$1m of participating shares on behalf of Catella. In each case, the Company issued such participating shares to “SEB Merchant Banking as nominee for [HQ Solid/Catella]”. SEB was registered as the holder of the shares in the Company's register of members.

5

In September 2008 Lehman Brothers collapsed, and this prompted a wave of redemption requests from some of the Company's participating shareholders, including SEB. Unfortunately, however, it ultimately transpired that the Company had been the subject of a significant fraud perpetrated by Magnus Peterson. The judge found that he had been fraudulently inflating the net asset value (“NAV”) of the Company by entering into interest rate swaps which he knew to be worthless. These swaps were concluded between the Company and a BVI company called Weavering Capital Fund Ltd (“WCF”) which he knew was not in a position to honour its obligations under the swaps. The swaps were simply used to give the impression of sustained growth when in reality the Company was suffering large losses from on-exchange trading in futures and options. The fraud was not discovered by the directors of the Company until March 2009, by which time redemption requests of over US$220m had been received. The Company was unable to pay these in full.

6

The mechanism by which participating shares could be redeemed was set out in articles 48–58 of the Company's Articles of Association and was summarised in the Company's Offering Memorandum (OM) (the latest version of which was dated 24 September 2008) in the following terms:

“Redemption of Company Shares

Shareholders can redeem their Shares, in whole or in part, in a minimum amount of US$50,000 (subject to the discretion of the Board of Directors to redeem lesser amounts), on one calendar month's prior written notice (subject to the discretion of the Board of Directors to waive such notice), on each Redemption Day. To effect a redemption, a Request for Redemption of Shares, obtained from the Company must be received by the Company by 5pm Dublin time one calendar month before any Redemption Day, accompanied by the share certificates for Shares redeemed, if any, duly endorsed and in a form for redemption acceptable to the Board of Directors.

Redemptions are made at a price per Share equal to the NAV per Share of the Company, as of the close of business on the relevant

Valuation Date, rounded to the nearest whole US cent (the ‘Redemption Price’).”

“Payment of Redemptions

Redemption Payments are generally made within 30 calendar days after the Redemption Day. No interest is paid from the Redemption Day to the payment date. Payment is made by telegraphic transfer (with transfer charges to the account of the recipient) to the Remitting Bank/Financial Institution or to another account in the name of the Shareholder.”

As defined in the OM, “Redemption Day” was the first business day of each calendar month, and the “Valuation Day” was the business day immediately preceding the Redemption Day. Articles 30–37 of the Company's Articles of Association provided for the determination of the NAV by the directors on the Valuation Day.

7

On 9 October 2008 SEB gave notice of redemption in accordance with these provisions for all the shares it held as nominee for Catella. On 28 October 2008 it gave the same notice in relation to the shares it held as nominee for HQ Solid. These redemption requests were processed on the 1 December 2008 Redemption Day, being the next Redemption Day following the requisite 30-day notice period, and were calculated in accordance with the Company's published NAV per share. This NAV was markedly inflated as a result of Magnus Peterson's fraud. Redemption payments were expected, in accordance with the OM, “generally” to be made within 30 calendar days of the 1 December Redemption Day.

8

The Company received other redemption requests from other participating shareholders in October 2008, totalling US$138,361,002.62 at the published NAV, which fell to be processed on the December 2008 Redemption Day (the “December Redeemers”). Additional redemption requests were also received by the Company in November and December 2008 which fell to be processed on the January and February 2009 Redemption Days (the “January Redeemers” and the “February Redeemers”). The redemption obligations incurred by the Company on these latter Redemption Days were US$54.7m in January and US$30m in February. On 17 December 2008 Magnus Peterson sent an email to the Company's Administrator, a company called PNC Global Investment Servicing (Europe) Ltd (“PNC”), based in Dublin, in the following terms:

“Hi Gillian,

We have a few Swedish investors that have switched into our SEK based Fund as at 1 December.

We need to pay them value tomorrow please.

On the attached spreadsheet I have highlighted those investors in yellow. It is approximately US$7.6m that needs to be paid.

SEB are sending funds today to [PNC] so there should be no problem executing it.

Best regards

Magnus.”

9

The email attached a spreadsheet which identified “SEB Merchant Banking as nominee for Catella Stiftelsefond” as one of the Swedish redeemers due to be paid. Accordingly, on or about 19 December 2008, SEB received payment of US$1,096,903.58 in respect of Catella's shareholding which it duly credited to Catella's cash account with itself. Five other Swedish redeemers received full payment on that date but no other December Redeemers received their redemption payments from the Company in December. As the end of December approached, recognising that the Company did not have enough cash to pay the other December Redeemers, WCUK took legal advice on its cash-flow position. On the same day, 29 December 2008, Magnus Peterson proposed that a letter be sent to the unpaid December Redeemers stating that a decision had been made to pay them 25% of their redemption payment, and envisaging that the remaining moneys would be paid by the end of January. The judge found that Magnus Peterson must have known by this time that the Company would never be in a position to pay all the December Redeemers, let alone pay the January 2009 redemption debt which was to fall due on 2 January. The proper course would therefore have been to suspend the redemption payments or liquidate the Company.

10

In the end the proposed letter was not sent until 7 January, by which time SEB had already received, on 2 January, another redemption payment of US$1,780,214.49. This represented 25% of the redemption proceeds due to HQ...

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