The Extraterritorial Effect of Clawback claims in Insolvency Proceedings – The Bahamas Experience
The world continues to get smaller as a result of globalisation and cross-border insolvency issues are now commonplace. Whilst a debtor company may be subject to insolvency proceedings in one part of the world, its assets may be located in another. Moreover, creditors of the debtor company may be local and foreign, and therefore outside the territorial reach of the court at the seat of the insolvency.
Bahamian insolvency law permits a liquidator to recover or “claw-back” certain transactions made by an insolvent company within a specified period prior to the commencement of its liquidation. And since 2009/2010 the courts of The Bahamas have been engaged in the question of whether the claw-back provision relating preferences payments has extraterritorial effect.
Although there is a dearth of common law jurisprudence on the point, the question is not a novel one. Indeed, the extraterritorial application of claw-back claims under the US Bankruptcy Code was recently considered by the United States Court of Appeals for the Second Circuit in connection with fraudulent transfer clawback claims brought by Irving H. Picard, the trustee for the liquidation of Bernard L. Madoff Investment Securities LLC (“BLMIS”), against non-U.S. transferees who received transfers from foreign funds and entities that had been direct investors in BLMIS. The Second Circuit Court disagreed with previous decisions of lower courts in the United States and held that a transfer made by a domestic debtor in the United States is a “domestic activity,” regardless of where the initial or subsequent transferee is located.
In The Bahamas the question arose for the first and only time to date in the liquidation of AWH Fund Ltd. (“AWH” or “the Fund”), a Bahamian international business company which was placed into liquidation by The Bahamas Supreme Court (“the Court”) in 2002.
AWH was an investment fund whose trading patterns were the subject of disciplinary proceedings commenced in 2002 by the Hong Kong Takeovers and Mergers Panel (“the Hong Kong Regulator”) against AWH’s Asset Manager, Asia Financial (Asset Management) Limited (“AFAM”). At the end of those proceedings the Hong Kong Regulator announced a Public Censure against AFAM for breach of the Hong Kong Takeover Code and issued a cold shoulder order against Anthony Wong (“Wong”), the Chief Executive Officer and director of AFAM, which prohibited him from directly or indirectly dealing in securities for a period of 5 years.
In July 2002, the external auditors of AWH disclosed the decision of the Hong Kong Regulator in their report for the year 2001, and indicated that the trading patters of AWH were such that the value of its investments, and as a result its underlying NAV, might have been artificially inflated. This caused a run on the Fund during which the majority of AWH’s assets were paid to satisfy a redemption request of a single investor, namely ZCM Asset Holding Company (Bermuda) Ltd (“ZCM”). Almost immediately after and consequential to that payment, AWH suspended its trading operations on 18 September 2002, and was placed into liquidation on 17 October 2002.
Therefore, and not surprisingly, the Official Liquidator of the Fund sought to recover the payment to ZCM as a voidable preference.
Bahamian insolvency law provides for the claw-back of certain transactions, including “voidable preferences”. Simply put, a voidable preference is a payment or property transfer in favour of a creditor within six months of the commencement of a liquidation which was made with a view to preferring that creditor over other creditors. In this regard, the relevant claw-back provision provides as follows:
“Every conveyance or transfer of property, or charge thereon, and every payment obligation and judicial proceeding, made, incurred, taken or suffered by any company in favour of any creditor at a time when the company is unable to pay its debts with a view to giving such creditor a preference over the other creditors shall be invalid if made, incurred, taken or suffered within *six months immediately preceding the commencement of liquidation.”
The Liquidator pursued the claim by issuing a Summons (“the Liquidator’s claw-back claim”) in the liquidation and obtaining leave to serve ZCM in the Cayman Islands, outside the jurisdiction of The Bahamas.
After service was effected, ZCM applied to the Court for an order that service of the Liquidator’s claw-back claim be set aside, among other relief. The thrust of one of the grounds on which the application was based, was that the Court did not have jurisdiction to permit service of the Liquidator’s claw-back claim outside The Bahamas.
At first instance, the Supreme Court of The Bahamas found that there was no jurisdiction for the Court to order service outside of the Bahamas in relation to a claw-back claim.
On appeal, the Court of Appeal disagreed with the Supreme Court. It found that service of the Liquidator’s claw-back claim outside The Bahamas was permissible under the particular Supreme Court rule on which the Liquidator relied. In coming to its decision the Court of Appeal noted the statutory duty of the liquidator to take under his custody and control, all property, tangible and intangible, to which the company is or appears to be entitled which would include the claw-back claim.
The Court of Appeal’s decision on this matter has been further appealed to the Privy Council. The appeal was heard on 4 February 2019 and judgment was reserved. Needless to say, insolvency practitioners in The Bahamas are anxiously awaiting the decision of the Privy Council on this important issue. If the appeal is successful, legislative amendments would be required to permit a liquidator’s voidable preference claw-back claim to be served on persons who are outside the jurisdiction of The Bahamas and prosecuted thereafter.
*Due to legislative amendments in 2012, the clawback period was increased to six months. Prior to this, the claw-back period was three months.
About the Author
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.
The information contained in this article is provided for the general interest of our readers, but is not intended to constitute legal advice. Clients and the general public are encouraged to seek specific advice on matters of concern. This article can in no way serve as a substitute in such cases.Copyright ©2019 Higgs & Johnson. All rights reserved.