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29 Aug 2019

No defence available to nominee shareholder in receipt of unlawful preference


In Skandinaviska Enskilda Banken AB v Conway & another [2019] UKPC 36, the Privy Council upheld the decision of the Court of Appeal of the Cayman Islands that the appellant bank, SEB, was required to repay redemption payments held to be preferences notwithstanding that it had received the funds in the capacity of nominee, and had already distributed the funds to the beneficiaries without any ability to recover them. 


Weavering Macro Fixed Income Fund Ltd (the “Company”) was a Cayman open-ended investment company that traded mainly in interest rate derivatives. The collapse of Lehman Brothers in September 2008 prompted a number of redemption requests from the Company’s shareholders, including SEB (who held shares for and on behalf of, inter alia, two Swedish mutual funds).

It subsequently transpired that the controlling mind of the Company, Magnus Peterson, had been fraudulently inflating the net asset value (“NAV”) of the Company by entering into interest rate swaps which he knew to be worthless. The fraud was not discovered by the directors of the Company until March 2009, by which time redemption requests had been received in an amount far greater than the Company could afford to pay. The Company went into liquidation on 19 March 2009.

The case concerns redemption requests made by SEB between December 2008 and February 2009 on behalf of the two Swedish funds for whom it was holding shares. Various redemption requests were made in this period by a number of different participating shareholders, but the key points to note are that (a) SEB was paid in full ahead of other redeeming shareholders in circumstances where it was clear that it would not be possible to repay all redeeming shareholders in full and (b) the amount received was significantly greater than what it would have been but for the fraudulently inflated NAV (which had not at this point been discovered).

The Company’s liquidators brought proceedings to recover the redemption payments from SEB on the grounds that they constituted unlawful preferences under Cayman company law. Similar to the position in England and Wales (s.239 of the Insolvency Act 1986), the Cayman insolvency regime provides that a payment made by an insolvent company to a creditor shall be invalid if made in the 6 month period prior to the onset of the liquidation and “with a view to giving such creditor a preference over the other creditors”.

The liquidators succeeded at first instance in the Grand Court and in the Court of Appeal of the Cayman Islands. SEB appealed to the Privy Council and argued, inter alia, that:

  • the Company was not insolvent at the relevant time because the inflated NAV was not binding as a result of the fraud, with the result that no redemptions had in fact taken place in accordance with the Company’s Articles of Association, and therefore the redeemers had not become creditors of the Company within the meaning of the insolvency regime (and in any event the Company could only be liable to the extent of the actual, significantly lower, NAV);
  • there was no intention to prefer, at least in respect of the redemption of shares held for one of the Swedish funds; SEB did accept that it had been preferred ahead of other creditors as far its shareholding for the other fund was concerned (an email sent by Peter Magnuson left little doubt that certain Swedish investors were to be preferred); and
  • in any event, even if the payments were unlawful preferences, SEB was entitled to rely on the defences to a common law claim for unjust enrichment, specifically that it had not been enriched, as it merely received the payments in the capacity of a nominee and had already remitted the funds to the ultimate beneficiaries, i.e. the two Swedish funds, and that, by remitting the funds, it had changed its position.


The appeal failed on all grounds.

The ‘fraud’ point

The Court of Appeal had held that it was not permissible to reopen a NAV retrospectively on the ground of fraud, even if the company concerned had been complicit in the fraud. Whilst the Privy Council agreed that, as a general rule, it was important that valuations were definitively ascertained at the time of the relevant transaction and not liable to be varied retrospectively, it accepted that where the fraud was ‘internal’ (as it was in this case, having been perpetrated by the Company’s controlling mind), the fraudulent determination could not bind redeeming shareholders.

This did not, however, assist SEB. In order to avoid the NAV on the basis that there had been an internal fraud, proceedings would need to be brought by an affected party and notice would need to be given to those who would be affected by a decision that the NAV was voidable. Not only had SEB not been defrauded (it had received substantially in excess of its entitlement had the NAV been honest), but it would be a condition of any order setting aside the fraudulent NAV on SEB’s application that SEB repay the sums received under that NAV.

The ‘intention to prefer’ point

The Privy Council accepted that it was necessary to show a “dominant intention to prefer”. However, it found that the Court of Appeal was correct to find that there was such an intention on the evidence available: SEB was the fourth largest creditor and was paid in full, whereas the three largest creditors were not; there was evidence of an intention to prefer certain Swedish investors on the basis that it was thought they might reinvest their funds with the Company; SEB was paid in full in circumstances where there could be no doubt that other redeemers would not be paid in full; and Magnus Peterson himself was a former employee of SEB.

The ‘common law defences’ point

The Court of Appeal had held that the liquidators’ claim to restitution arose under statute, and so the common law defences were not available. SEB argued that the liquidators’ claim to restitution arose under common law and was based on unjust enrichment, and SEB was therefore entitled to defend the claim on the basis that it had not been enriched, and even if it had been it had changed its position.

It was common ground that the effect of the relevant Cayman law (s.145 of the Companies Law) was to render a payment falling within its scope voidable, rather than void ab initio. In contrast to s.239 of the Insolvency Act 1986, which requires the Court, on an application by the relevant office-holder, to “make such order as it thinks fit for restoring the position to what it would have been if the company had not given that preference”, the Cayman law invalidates payments falling within its scope but is silent as to the consequences of such invalidation.

The Privy Council therefore disagreed with the Court of Appeal that the cause of action was statutory in nature and concluded that it arose at common law. It then proceeded to consider the availability of any common law defences to SEB.

(i) ‘No enrichment’

SEB argued that it held the redeemable shares as bare trustee for the two Swedish funds; whilst it was legal owner of the shares, it had no beneficial interest in them, and was therefore not enriched by the receipt of the money. The Privy Council rejected this argument. Had SEB received the monies as agent for the Swedish funds, the outcome would have likely been different, but there are material differences between a trustee and an agent; the Company was entitled (indeed obliged) to deal with SEB as the legal owner of the shares, and had no dealings with the underlying funds or obligation to make any payments to them. At common law, a trustee who is not acting as agent is enriched by the payments it receives, as the common law ignores the equitable interest of the beneficiaries. The Privy Council also considered that there were practical reasons that this was the correct outcome; otherwise, the beneficiaries would have to be joined as Defendants to a claim for repayment, and this may not always be possible (e.g. because they are numerous or cannot all be ascertained).

(ii) Change of position

The Privy Council then proceeded to consider whether a change of position defence was in principle available to SEB. It ultimately held that it was not. It considered a number of English and other commonwealth decisions and concluded that there was no established basis for the availability of a defence of change of position in these circumstances and that allowing such a defence would undermine the purpose of the statutory provision, namely to recover voidable preferences for the benefit of the creditors as a whole.

SEB was therefore required to repay the redemption monies out of its own funds, having no effective right of indemnity against the two Swedish funds to whom it had already remitted the monies. This may be a harsh result, but that was simply the nature of the regime.

The Privy Council briefly considered in a postscript that, in England, the statutory insolvency regime did make some concessions in recognition of the fact that the rejection of a change of position defence could lead to harsh results. The Insolvency Act 1986, for example, provided a defence of bona fide purchase in order to protect third parties dealing with persons who obtained property from a company in cases of transactions at an undervalue, preferences and transactions defrauding creditors. However, there was no such statutory defence available in the Cayman regime; whilst it may be an issue worthy of consideration in due course, it was not a matter for the Privy Council.  


It should be borne in mind that the decision concerns the Cayman insolvency regime. Investments in Cayman investment funds are often made via custodians or nominees, who will need to be careful to ensure that their contracts include a right to recover from the underlying investors any funds which they have already remitted to the investors and which they are subsequently required to repay (for example in the event of a subsequent insolvency of the fund).  

Of wider significance, the case also reinforces the principle that a trustee (rather than an agent) can be the subject of an unjust enrichment claim even if it had no beneficial interest in the property received.



Chris Pettett

Chris Pettett
Managing associate

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