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Pandemics and Pursuing Principled Practice: Avoiding the Pitfalls in Troubled Times

As governments and economies respond to the macroeconomic impact of the latest global pandemic COVID-19, so too companies and individuals must respond to the microeconomic impact, making decisions that will affect both decision-makers and stakeholders alike.

During times of uncertainty, anxiety and financial pressures officers of a company making financial and operating decisions may enter into transactions that could ultimately become subject to claw-back claims in an insolvency situation or could find themselves digging into their own pockets to make contributions to the company’s assets for its creditors.
The challenges facing directors who might be making choices about which creditors/suppliers to pay and decisions relating to production and ongoing operations is that they could later find those being viewed through a lens of insolvent trading.

So too, stakeholders (including creditors) ought to be alert to sins that could be committed by the minds behind the companies in which they have an economic interest, as there are certain remedies available to stakeholders through the appointment of an official liquidator.

Thou shalt not make payments that prefer certain creditors over others: a cause for voidable preference claims [The Companies Law (2020 Revision) (the “Law”), sec.145]

At a time when a company is unable to pay its debts within the meaning of section 93 of the Law, every conveyance or transfer of property, or charge thereon, and every payment obligation and judicial proceeding, made, incurred, taken or suffered by that company in favour of any creditor with a view to giving such creditor a preference over other creditors will be invalid if made, incurred, taken or suffered within six months immediately preceding the commencement of its liquidation.

In such circumstances, a liquidator may be able to claw-back transfers made during those six months prior to commencement of the liquidation by way of a voidable preference claim enforced through the Cayman Grand Court for the benefit of aggrieved stakeholders.

Preference in this context also captures related parties. In that, any payment made to a related party of that company will be deemed to have been made with a view to giving such creditor a preference. For the purposes of section 145 a creditor is treated as a “related party” if it has the ability to control the company or exercise significant influence over the company in making financial and operating decisions.

The decision of the Privy Council in Skandinaviska Enskilda Banken AB (Publ) (Appellant) v Conway and another (as Joint Official Liquidators of Weavering Macro Fixed Income Fund Ltd  (Respondents) (Cayman Islands)1 strengthened the position of liquidators considering pursuing voidable preference claims and reiterates the underlying policy of a pari passu distribution amongst creditors in an insolvent company.

Here the liquidators succeeded with a voidable preference claim against a redeemed investor. The liquidators successfully contended that the payment to the redeemed investor ahead of other shareholders entitled to receive redemption monies amounted to an unlawful preference and was set aside under section 145 (1) of the Law. The Privy Council agreed with the assertion of the liquidators that the company was insolvent when the redemption payments were made and that the transactions constituted preferential payments and distorted the pari passu principle of equal distribution between creditors. 2 As a result there is no reason why a liquidator should not be able to pursue common law remedies in the event that a transaction is rendered voidable by the operation of section 145.

 

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Pandemics and Pursuing Principled Practice: Avoiding the Pitfalls in Troubled Times

 


Ben Hobden
Partner

Cayman Islands   +1 345 814 7366


Róisín Liddy-Murphy
Attorney

Cayman Islands   +1 345 814 7371


1 [2019] UKPC 26
2 These principles were applied by Smellie CJ in RMF Market Neutral Strategies (Master) Limited v DD Growh Premium 2X Fund  (unreported, 17.xi.2014)

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