Jurisdictional reach of clawback claims in winding up proceedings (AWH Fund Ltd (in compulsory liquidation) v ZCM Asset Holding Co (Bermuda) Ltd (Bahamas))

What are the practical implications of this case?

Applications to set aside clawback claims or fraudulent preference claims concerning payments made to investors in international business companies within the statutory period preceding winding up are to have extra-territorial effect.

The judgment of the Judicial Committee of the Privy Council (JCPC) was delivered on 29 July 2019 following an appeal from a decision of the Court of Appeal of The Bahamas. The JCPC held that the liquidator of a Bahamian mutual fund, AWH Fund (AWH) 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 17 years) funds paid away to a third party within the period of three months commencing with the date when AWH 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 of The Bahamas (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.

What was the background?

A sub-custodian ZCM Asset Holding Company Bermuda Ltd (ZCM) invested as agent on behalf of American Express Alternative Offshore Fund (AMEX) in AWH incorporated under the International Business Companies Act 2000 of The Bahamas (IBCA 2000). ZCM redeemed shares invested in the sum of approximately $13m in July 2002 and AWH approved the redemption requests. AWH subsequently went into liquidation in October 2002 and it was claimed by the liquidator that since the payment was made at a time within three months prior to the commencement of AWH’s insolvency, the payment made in favour of ZCM should be set aside. Almost six years after AWH went into liquidation, AWH’s liquidator filed a summons seeking a declaration that the payment made to ZCM was a fraudulent preference and should be declared void. ZCM objected to the service of the summons outside the jurisdiction on various grounds including that such claims are not capable of being served outside the jurisdiction as there is no statutory jurisdiction to do so under the Bankruptcy Act, Bankruptcy Rules, the IBCA 2000, the Companies (Winding Up) Rules nor the Rules which do not apply to proceedings relating to the winding up of companies.

It was also argued by ZCM that since ZCM was an agent there had to be a proper claim for restitution in order to permit service outside of a jurisdiction, therefore ZCM was not a proper party to the proceedings given that the payment had been paid to its principal AMEX. ZCM submitted there was no evidence of an intent to prefer ZCM over other creditors and that the relief sought by the liquidator was restitutionary in nature, and that such claims do not fall within Order 11 of the Rules. It was argued that the liquidator adopted the wrong procedure and that service of the summons on ZCM should not stand.

What did the court decide?

The JCPC held that AWH’s liquidator was entitled to serve a fraudulent preference claim outside the jurisdiction pursuant to Order 11 Rule 8(4) of the Rules. The JCPC adopted a universalist approach that IBCA 2000 was intended to have extraterritorial effect given that overseas investors would be expected to be made subject to winding up proceedings in The Bahamas and that there was sufficient connection for the court to entertain the claim for avoidance of the payment if the respondent is outside of its jurisdiction.

Brian Simms QC is the senior partner of Lennox Paton Partners and the head of its Litigation and Insolvency and Restructuring Groups. He is one of The Bahamas’ leading advocates and he has vast experience in the Supreme Court and the Court of Appeal in addition to having appeared a number of times in the Privy Council.

Sophia Rolle-Kapousouzoglou is a partner in the commercial litigation department of Lennox Paton Partners. She appears regularly as lead counsel and junior counsel before the Bahamian Supreme Court and Court of Appeal. She has acted in several prominent cross-border insolvency cases and also has experience in shareholder and company disputes and trust litigation.

Interviewed by Evelyn Reid.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.