A fundamental principle of insolvency law is that, subject to statutory priorities given to certain creditors, an insolvent’s assets should be distributed equally between its creditors on a pari passu basis so that each creditor recovers the same proportional amount (and, therefore, suffers the same proportional loss). This principle may be contravened when an insolvent entity makes a distribution to a creditor, leaving insufficient funds to pay its remaining creditors. To remedy such mischief, the Grand Court of the Cayman Islands has powers under the Cayman Islands Companies Law (as revised) to claw back such preferential distributions, and the proper exercise of these powers was recently the subject of a decision of the Cayman Islands Court of Appeal in Re Weavering Macro Fixed Income Fund Limited (in liquidation) (unreported, 18 November 2016).
Weavering Macro Fixed Income Fund Limited (the “Fund”) was an open-ended investment fund, in which investors were able to subscribe for redeemable participating shares. The Appellant, Skandinaviska Enskilda Banken AB (Publ) (“SEB”), was one such subscriber. From around October 2008, the Fund began receiving large volumes of redemption requests from investors, which included two requests by SEB that would result in the redemption of its entire shareholding. What the investors did not know at the time was that the Fund’s NAV was hugely inflated, and the Fund had entered into a number of sham transactions significantly impacting on the true value of the Fund. Despite these perilous circumstances, the Fund had paid SEB under its first redemption notice in full, and under its second notice in two tranches. While some other investors were also paid out pursuant to their redemption requests, others were never paid out at all. Ultimately, the Fund ran out of cash and entered liquidation, leaving many investors severely out of pocket.
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Weavering Macro Fixed Income Fund Limited (in liquidation) (Unreported, 18 November 2016)