In late 2008, RMF Market Neutral Strategies (Master) Limited (“RMF”) sought to cash in its investments in DD Growth Premium 2X Fund (In Official Liquidation) (the “Company”), a feeder fund incorporated in the Cayman Islands, by exercising its right to have its shares in the Company redeemed. In response, the Company paid US$23 million to RMF (less than 40% owed to RMF by way of redemption) before running out of money and being wound up.
When the Company was wound up it transpired that it had, in effect, become a Ponzi scheme and that the Company was insolvent at the date of the payments. There was no suggestion that any of the redeeming investors, including RMF, knew about the fraud.
The liquidator of the Company sought to claw back the payments made to RMF. Various grounds were relied upon that: the payments were illegal returns of capital; there was an automatic restitutionary right to recover the illegal payments; the payments were fraudulent preferences; and there was a constructive trust/knowing receipt claim.
The clawback claim failed in the Grand Court at first instance and in the Court of Appeal. The Privy Council, in a split 3/2 decision, held that the redemption payments were an illegal return of capital which failed the solvency test. The Privy Council unanimously held that the liquidator had no automatic restitutionary right to the return of the payments and that the knowing receipt claim must be remitted to the Grand Court to find the relevant facts. The rejection by the Grand Court of the fraudulent preference claim was not appealed. The result was that the liquidator did not make the recovery sought and a further trial has to take place.
It is to be noted that as is usual with Cayman Island funds, the nominal or par value of the shares in question was de minimis, being US$0.001 per share. The NAV was substantially higher.