On 29 July 2019, the Board of the Judicial Committee of the Privy Council confirmed that a “change of position” defence will not defeat a clawback claim made by a liquidator aimed at maximising assets available for distribution to an insolvent company’s creditors.

Skandinaviska Enskilda Banken AB (Publ) (SEB) therefore lost its appeal against the judgment of the Cayman Islands Court of Appeal which had confirmed that certain share redemption payments SEB received from Weavering Macro Fixed Income Fund Ltd (Company) were unlawful preferences within the meaning of section 145(1) of the Companies Law (2013 Revision).

In a separate post, we explain the background to these proceedings and the Board’s rejection of SEB’s argument that the redemption payments were outside the scope of section 145(1).

SEB also argued that if the payments were within the scope of section 145(1), the liquidator’s claim for restitution of those payments arose under common law and was based on unjust enrichment. SEB was therefore entitled to defend the claim on the basis that (1) it had not been enriched, since it had received the payments as “bare trustee” for underlying investors; and (2) it had changed its position by remitting the funds to the underlying investors.

SEB’s argument was rejected at first instance and by the Court of the Appeal. Both Justice Clifford and the Court of Appeal held that the liquidators’ right to repayment arose under statute and not at common law. The Board disagreed with this analysis, observing that section 145 is silent as to the consequences of a determination that a payment is within the scope of that provision and concluded, therefore, that the consequences must be governed by common law.

The Board nevertheless rejected SEB’s defences. SEB argued that it was not enriched since it held the redeemable shares as a bare trustee. The Board observed, however, that a trustee acts as a principal in transactions with third parties, and is the proper defendant to a claim for unjust enrichment — the common law ignores the equitable interest of beneficiaries. As the registered holder of redeemable shares, it was SEB and not the underlying investors who was entitled to be paid the redemption proceeds, and it was the person to whom, in law, the payment was made.

In relation to SEB’s change of position defence, the Board concluded that in the context of a claim by a liquidator for the restitution of money paid in contravention of section 145 of the Companies Law, the common law gives priority to the operation of the statutory scheme of distribution in a liquidation over the detrimental impact which recovery may have upon the creditor against whom a claim under section 145 is made. The Board acknowledged in its judgment that the rejection of this defence is capable of leading to harsh results. In other jurisdictions, this is avoided by providing statutory defences to unlawful preference claims akin to change of position. The Board observed that this is a matter worthy of further consideration, but that it was not a matter for the Board.