Privy Council hands down judgment on the extra-territorial jurisdiction of cross-border clawback claims in a Bahamian Mutual Fund Liquidation
A judgment of the Privy Council in an important case affecting the insolvency law of The Bahamas in which Lennox Paton Partners Brian Simms QC and Sophia Rolle-Kapousouzglou appeared has been handed down. The judgment of the JCPC was delivered on 29th July 2019 following an appeal from The Court of Appeal of The Bahamas. The JCPC held that the Liquidator of a Bahamian Mutual Fund, AWH Fund (In Compulsory Liquidation) was entitled to serve a fraudulent preference claim outside the jurisdiction. The Liquidator brought proceedings in an attempt to restore to the insolvent mutual fund (which had been in liquidation for over seventeen (17) years) funds paid away to a third party within the period of three months commencing with the date when the company entered liquidation.
The judgment raises important issues of international cross-border jurisprudence as well as issues for the Bahamian legislature concerning the jurisdictional reach of clawback claims in winding up proceedings. The effect of the judgment is that although The Bahamas does not have express statutory provisions governing the jurisdictional scope of clawback claims; nonetheless a liquidator may (with leave of the Court) serve an interlocutory summons within the Bahamian winding up proceedings under Order 11 Rule 8(4) of the Rules of the Supreme Court (‘the Rules’), on a party outside the jurisdiction if the alleged fraudulent preference was paid within three months of the commencement of the company’s Liquidation.
The JCPC reached this conclusion despite the express provision in the preamble to the Rules that they“do not apply to bankruptcy proceedings and proceedings relating to the winding up of companies”. This exclusion is not surprising because the winding up of companies and bankruptcy each have their own statutory rules governing the procedure and jurisdiction relating to such proceedings. In the case of companies, however, although there are express statutory rules which govern the winding up of Companies Act companies, the rules do not apply to International Business Companies Act (“IBC Act”) companies.
It is of note that the jurisdictional reach of clawback claims was confirmed in England in 1986 by the introduction of Rule 12.12 of the Insolvency Rules 1986 which expressly permitted the service out of the jurisdiction of claims made under the Insolvency Act 1986.. No equivalent or similar provisions are to be found in the International Business Companies, Act, the Companies Winding Up Rules, the Bankruptcy Act rules , the Rules (the equivalent to the English 1978 Rules of the Supreme Court) , or the Bahamian Companies (1974 Winding-Up Rules). The Privy Council had to consider each of these legislative provisions in addition to the 1870 Bankruptcy Act as well as numerous cases decided prior to the change of the legislative landscape in the England. In order to reach its determination the JCPC painstakingly wove a needle through the difficult procedural landscape and determined that Order 11 rule 8 (4) of the Rules, which provides that an interlocutory summons can be served out of the jurisdiction, applied in existing winding up proceedings. The JCPC did not consider that the jurisdiction was constrained by Order 11 rule (1) which sets out the general gateway rules pursuant to which a writ can be served out of the jurisdiction (which make no mention of claw back claims). The Privy Council also held that the Companies (Winding Up Rules) (now repealed) did not apply to the winding up of an IBC Act company. The Companies Liquidation Rules 2012 do not provide for service of a claim out of the jurisdiction and the JCPC did not address this lacuna in the law relating to these Companies Act companies as the issue was not before them. As a consequence, on their Lordships’ reasoning it would appear that in so far as the Rules are disapplied in relation to Companies Act companies it might successfully be argued that a claw back claim in the liquidation of a Companies Act company cannot be served out of the jurisdiction, whereas a claw back claim in the liquidation of an IBC Act company can.
Ultimately, the decision in AWH permits the Bahamian courts to exercise an extra-territorial jurisdiction in relation to insolvency claims which is not obviously provided for by Bahamian statute law. The JCPC has made a policy choice in favour of universalism which has not been expressly endorsed by (and was not necessarily the intention of) the Bahamian legislature.
The new Chief Justice of the Bahamas has recently appointed a committee tasked with updating the long out of date Bahamian Court rules. It is hoped that the committee’s recommendations will go a long way towards clarifying, and where appropriate, rectifying the procedural rules applicable to claims. If the committee recommends a universalist approach it will be for the Bahamian Legislature to make it clear in any subsequent legislation whether it approves of universalism or not. Either way, clarification and rectification will be welcome in order to avoid further appeals to the JCPC.
Another point considered by the JCPC in AWH was the form of recovery if a payment was found to be a fraudulent preference. The JCPC examined long-standing English case law which addressed wording which was similar to the wording found in the claw back provisions in all the Bahamian Companies and Bankruptcy legislation, the JCPC agreed consistently with this case law that a secondary restitutionary claim would be necessary in order for the funds to be returned, where a payment is found to have been a fraudulent preference. As this secondary claim is restitutionary it would be open to a defendant to raise restitutionary defences in response to the claim for the return of the funds.
However, in Skandinaviska Enskilda Banken AB v. Conway (as Joint Official Liquidators of Weavering Macro Fixed Income Fund Ltd  UKPC 36, on appeal from the Cayman Islands Court of Appeal, the JCPC held in a judgment handed down on the same date as the AWH Ruling, that restitutionary defence of ‘change of position’ was not available in response to a claw back claim under Cayman Islands law. Rather, the JCPC treated fraudulent preferences as being an issue of public policy. Applying the reasoning found in English consumer credit cases, viz Orakpo v. Manson Investments Ltd  AC 95, Dimond v. Lovell  1 AC 384 and Wilson v. First County Trust Ltd (No 2)  1 AC 816, which deny a creditor the right of recovery from a debtor when the creditor has loaned money in breach of consumer legislation, the JCPC held that similar principles applied to a preferred creditor because the payment is made in “fraudem legis” (in fraud of the law).
Finally, in the BVI case connected with the liquidation of the Madoff Funds, UBS AG New York and others (Appellants) v Fairfield Sentry Ltd. (In Liquidation) and others (Respondents) (British Virgin Islands)  UKPC 20 the JCPC considered whether the BVI court was right to refuse to grant an anti-suit injunction against the liquidator of a BVI company in liquidation in the BVI to restrain the liquidator from pursuing in the US courts a claw back claim under the BVI Insolvency Act 2003. The Privy Council took the view that it was for the US court to determine whether to accept jurisdiction and whether to apply the law of the BVI to the claim brought before it by the liquidator.
The JCPC has adopted a universalist and purposive approach to claw back claims in this trio of cases. It appears to be determined to equip liquidators with the broadest extra-territorial reach and to make it more difficult for recipients of preferences to raise defences however equitable they might be.
A full copy of the judgment can be found here: download pdf