Redemption Clawback Claims Get Green Light From Privy Council

Claims by funds against investors who have successfully redeemed have hitherto enjoyed limited success in the Cayman Islands. Successful claims have been limited to those where a fairly strict test for fraudulent preference is met. The fund has had to show that there was an intention to prefer the particular creditors over the general body. Today's decision in the Privy Council bucks that trend. The decision overturns decisions of the Cayman Grand Court and Court of Appeal and in doing so opens the door to clawback claims based in constructive trust resulting from the unlawful character of the redemption payment itself.

In a decision1 that overturns the Cayman Islands Court of Appeal and the Chief Justice of the Cayman Islands at first instance, the Privy Council has declared that redemption payments made at a time when a Cayman Islands investment fund was unable to pay its debts as they fell due were unlawful pursuant to section 37(6)(a) of the Companies Law (2007