'Eagerly Awaited $13m Claw Back Verdict Upheld


Tribune Business Editor


A Bahamian liquidator’s bid to “claw back” a $13.148m pay-out by serving the recipient outside this jurisdiction was yesterday upheld by the London-based Privy Council.

The highest court in the Bahamian judicial system found that Alan Bates, court-appointed liquidator for the AWH Fund investment fund, was able to use legal channels provided in law to serve ZCM Asset Holding Company (Bermuda) Ltd with proceedings that aimed to recover the allegedly “undue or fraudulent preference” it had received.

The verdict is likely to be greeted with relief by some Bahamian insolvency practitioners given that it clears up an area of legal uncertainty, and seemingly means that existing laws will not have to be changed to enable the service of “claw back” proceedings on parties outside this nation.

Tara Cooper-Burnside, the Higgs & Johnson attorney who represented Mr Bates in the case before the Supreme Court, wrote in the June edition of the law firm’s Focus magazine that the Privy Council verdict was being “anxiously awaited” by the local insolvency industry.

She wrote: “The [Privy Council] 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.”

The Privy Council had been asked to determine whether Bahamian law enabled Mr Bates to serve ZCM outside this jurisdiction at the time he did so, and if his claim “satisfies the merits threshold” for this to be permitted.

ZCM, a subsidiary of Zurich Bank, acts as custodian of funds in agreements between its parent and other parties. The latter included American Express Offshore Alternative Investment Fund (AMEX), which deposited a significant amount of shares in AWH in January 2002.

AWH, a Bahamian-incorporated International Business Company (IBC), had been formed as an investment fund to trade in listed Asian stocks. AMEX subsequently instructed ZCM to redeem its shares in the fund, a process that it completed in July 2002.

However, AWH was soon thereafter placed under court-supervised compulsory liquidation by the Supreme Court following an investor petition alleging on October 17, 2002, that the fund was insolvent. Its investment manager, and that firm’s chief executive, had been sanctioned by Hong Kong regulators, with the latter subjected to a “cold shoulder” order barring him from trading.

Mr Bates, appointed as AWH’s liquidator, initiated legal proceedings in The Bahamas to reclaim the $13.148m on the basis that it represented “an undue or fraudulent preference” under the IBCs Act due to it being paid to ZCM just two months prior to the liquidation.

He obtained Supreme Court permission to serve ZCM outside The Bahamas because it was incorporated in Bermuda. ZCM challenged this on the basis of “lack of jurisdiction” and absence of “a good arguable case on the merits”. It succeeded at the Supreme Court, but this was overturned by the Court of Appeal, prompting ZCM to head to the Privy Council.

The Privy Council said it “confusingly” had to account for three sets of Bahamian rules in deciding the case - the Bankruptcy Rules, Companies (Winding Up) Rules and Rules of the Supreme Court - plus “the complete absence of a ‘custom-made’ set of rules”.

“At the material date, the legislature of The Bahamas had not made any rules specifically to govern the winding up of an IBC,” it added, although The Bahamas’ liquidation and insolvency legal framework has subsequently been upgraded and modernised.

Brian Simms QC, senior partner at Lennox Paton, argued that the “well-established presumption against the extraterritorial effect of legislation” applied to the then-IBC Act, meaning that it did not apply to his client, ZCM, outside The Bahamas.

But Carolyn Walton, representing the liquidator, countered “that in the case of an IBC it would make no sense if there was no extraterritorial jurisdiction and the liquidator could not make claims against foreign creditors. The vehicle is intended to attract foreign investors”.

She added that “the creditor cannot reap the benefits of the IBC without being subject to its law. There was, therefore, sufficient connection between ZCM and The Bahamas”.

Mr Simms, meanwhile, argued that the liquidator could not use the Supreme Court rules to effect service because they did not apply to bankruptcies or windings-up. This, though, was opposed by Ms Walton who outlined various procedural routes that were open.

Finding in favour of the liquidator, the Privy Council ruled: “In the judgment of the Board, the wording of section 160 of the IBC Act tends to indicate that it is capable of having extraterritorial effect.... It would make no sense to restrict [it] to Bahamian dispositions, particularly in the case of an IBC.”

It added that while the pay-out took place outside The Bahamas, it involved shares of a Bahamian company, making this nation the “natural place” to hold proceedings and establishing a sufficient connection to ZCM.

The Privy Council also rejected Mr Simms’ argument that the liquidator had used the wrong process, finding the Supreme Court was empowered to give leave to serve ZCM.

The Lennox Paton partner also argued that it should not be the respondent in the case, since it only held the AWH shares as a “bare trustee” for AMEX and was effectively acting as the latter’s agent.

This, though, was also rejected with the Privy Council saying it was “open” to Mr Simms’ client to seek any necessary legal remedies against AMEX for the monies paid over to it.

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