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The Extraterritorial Effect of Clawback Claims in Insolvency Proceedings

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The Extraterritorial Effect of Clawback Claims in Insolvency Proceedings HIGGS & JOHNSON COUNSEL & ATTORNEYS-AT-LAW | VOLUME 63, ISSUE 2/2019 The Extraterritorial Effect of Clawback Claims WHAT’S INSIDE > Validity of Wills in Insolvency Proceedings – The Bahamas > Bahamian Trusts and Foundations - Experience The Facts Tara Cooper Burnside > Enhancements to the Cayman Islands Trusts Laws > H&J in the News FOCUS EDITORIAL COMMITTEE Karen Brown (Chair) Michele Bryan Wendy Stenning Theominique Nottage he world is shrinking as a engaged in the question of whether the Ally Speirs result of globalisation and claw-back provision relating Corey Brown cross-border insolvency preferences payments has Antonia Burrows issues are now extraterritorial effect. Rachel Bush T commonplace. A debtor company may The question arose for the first and only be subject to insolvency proceedings in time to date in the liquidation of AWH one part of the world, while its assets Fund Ltd. (“AWH” or “the Fund”), a may be located in another. Moreover, Bahamian international business creditors of the debtor company may company which was placed into be scattered across the globe, and liquidation by The Bahamas Supreme therefore outside the territorial reach Court (“the Court”) in 2002. of the court at the seat of the The information contained in this newsletter is provided for the general insolvency. AWH was an investment fund whose trading patterns were the subject of interest of our readers, and is not Bahamian insolvency law permits a intended to constitute legal advice. disciplinary proceedings commenced in liquidator to recover or “claw-back” Clients and the general public are 2002 by the Hong Kong Takeovers and encouraged to seek specific advice on certain transactions made by an Mergers Panel (“the Hong Kong matters of concern. This newsletter can in insolvent company within a specified no way serve as a substitute. For Regulator”) against AWH’s Asset period prior to the commencement of additional copies of FOCUS, please Manager, Asia Financial (Asset contact us at [email protected] its liquidation. And since 2009/2010 Management) Limited (“AFAM”). At or at 242 502 5200. the courts of The Bahamas have been H&J FOCUS • June 2019 the end of those proceedings the other creditors. In this regard, the claw-back claim outside The Bahamas Hong Kong Regulator announced a relevant claw-back provision provides was permissible under the particular Public Censure against AFAM for as follows: Supreme Court rule on which the breach of the Hong Kong Takeover Liquidator relied. In coming to its “Every conveyance or transfer of Code and issued a cold shoulder decision the Court of Appeal noted property, or charge thereon, and order against Anthony Wong the statutory duty of the liquidator to every payment obligation and (“Wong”), the Chief Executive Officer take under his custody and control, judicial proceeding, made, and director of AFAM, which all property, tangible and intangible, incurred, taken or suffered by prohibited him from directly or to which the company is or appears any company in favour of any indirectly dealing in securities for a to be entitled which would include creditor at a time when the period of 5 years. the claw-back claim. company is unable to pay its In July 2002, the external auditors of debts with a view to giving such The Court of Appeal’s decision on this AWH disclosed the decision of the creditor a preference over the matter has been further appealed to Hong Kong Regulator in their report other creditors shall be invalid if the Privy Council. The appeal was for the year 2001, and indicated that made, incurred, taken or suffered heard on 4 February 2019 and the trading patters of AWH were such within *six months immediately judgment was reserved. Needless to that the value of its investments, and preceding the commencement of say, insolvency practitioners in The as a result its underlying NAV, might liquidation.” Bahamas are anxiously awaiting the have been artificially inflated. This decision of the Privy Council on this The Liquidator pursued the claim by caused a run on the Fund during important issue. If the appeal is issuing a Summons (“the Liquidator’s which the majority of AWH’s assets successful, legislative amendments claw-back claim”) in the liquidation were paid to satisfy a redemption would be required to permit a and obtaining leave to serve ZCM in request of a single investor, namely liquidator’s voidable preference claw- the Cayman Islands, outside the ZCM Asset Holding Company back claim to be served on persons jurisdiction of The Bahamas. (Bermuda) Ltd (“ZCM”). Almost who are outside the jurisdiction of immediately after and consequential After service was effected, ZCM The Bahamas and prosecuted to that payment, AWH suspended its applied to the Court for an order that thereafter. trading operations on 18 September service of the Liquidator’s claw-back Tara Cooper Burnside acted as 2002, and was placed into liquidation claim be set aside, among other Counsel for the Liquidator generally on 17 October 2002. relief. The thrust of one of the and in his applications before the grounds on which the application was Therefore, and not surprisingly, the Supreme Court. She may be based, was that the Court did not Official Liquidator of the Fund sought contacted for further information have jurisdiction to permit service of to recover the payment to ZCM as a regarding claw-back claims and other the Liquidator’s claw-back claim voidable preference. insolvency-related matters. outside The Bahamas. Bahamian insolvency law provides for At first instance, the Supreme Court the claw-back of certain transactions, of The Bahamas found that there was *Due to legislative amendments in 2012, the including “voidable preferences”. no jurisdiction for the Court to order clawback period was increased to six months. Simply put, a voidable preference is a Prior to this, the claw-back period was three service outside of the Bahamas in payment or property transfer in months. relation to a claw-back claim. favour of a creditor within six months of the commencement of a On appeal, the Court of Appeal **Article first published in INSOL International - News Update, April 2019. liquidation which was made with a disagreed with the Supreme Court. It view to preferring that creditor over found that service of the Liquidator’s Tara Cooper Burnside is a Partner in the firm’s Insolvency & Restructuring practice group. She has detailed knowledge of the Bahamian insolvency regime and has worked on a number of cross-border insolvencies and restructurings. She is a Fellow of INSOL International and a member of RISA Bahamas. [email protected] PAGE 2 H&J FOCUS • June 2019 Validity of Wills Gina M. Berry and Wendy Stenning The Formal Validity of Wills (Persons testator’s death, the testator was b) a will so far as it disposes of Dying Abroad) Law, 2018 (“the Law”) domiciled or had his or her immovable property that is of the Cayman Islands came into habitual residence; or executed in accordance with the force on 1 February 2019. internal law in force in the iii. in the state of which, at either jurisdiction in which the The Law applies to a will that is of the times in subparagraphs (i) property is situate; executed by a person who dies after or (ii), the testator was a its commencement while domiciled national. c) a will so far as it revokes a will outside the Cayman Islands. The term which under the Law would be The Law defines “internal law”, as the “will” includes any testamentary treated as properly executed or law which would apply (in relation to instrument or act. revokes a provision which under any territory or state) in a case where the Law would be treated as The Law abolishes any rule of the no question of the law in force in any comprised in a properly executed common law governing the formal other territory or state arose. The will, if the execution of the later validity of wills of persons dying term “state” means a territory or will conformed to any law by abroad. Previously the law of the group of territories having its own reference to which the revoked jurisdiction in which the testator was law of nationality and includes the will or provision would be so domiciled at the time of his death Cayman Islands. treated; and would determine the validity of his The rules in relation to wills dealing will as it relates to movable property d) a will, so far as it exercises a with immovable property or any wherever situate. The Law expands power of appointment whose interest in land in the Cayman Islands the ways in which a testator execution conformed to the law remain unchanged. A will which domiciled abroad may validly execute governing the essential validity of deals with immovable property must a will relating to property in the the power. therefore be executed in accordance Cayman Islands. This is particularly with Cayman Islands law. The Law also provides that so far as a important to individuals who are not will exercises a power of domiciled in the Cayman Islands but The Law provides that without appointment, it shall not be treated have movable property situate here prejudice to the above rules, the as improperly executed by reason such as shares in a Cayman Islands following shall be treated as properly only that its execution was not in company. executed: accordance with any formal A will to which the Law applies shall a) a will that is executed on board a requirements contained in the be treated as properly executed if its vessel of any description instrument creating the power. execution conforms to: (including aircraft) where the The Law gives individuals not execution conforms to the a) The internal law of the Cayman domiciled in the Cayman Islands internal law in force in the Islands; or more flexibility in the manner in territory to which the vessel which they may execute a will as far b) The internal law in force – having regard to its registration as it relates to movable property in (if any) and other relevant i.
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