The Tribune

By NEIL HARTNELL

Tribune Business Editor

nhartnell@tribunemedia.net

A fund liquidator is unable to ‘claw back’ an alleged $13.148 million “fraudulent preference” because the International Business Companies (IBCs) Act does not allow proceedings to be served on creditors outside the Bahamas.

The Supreme Court, in a ruling that sources said would cause a stir in the Bahamian financial services industry, found that the original leave granted to serve proceedings on a Bermuda-based asset manager should be set aside because of the ‘gap’ in the IBC legislation and other deficiencies.

Justice Rhonda Bain, in her November 12 ruling, also found that Alan Bates, liquidator for the Bahamas-domiciled AWH Fund, had failed to make “a good and arguable case” that Zurich Capital Management (ZCM)Asset Holding Company (Bermuda) had received a preferential payment from the fund.

Yet it is the finding on the service of overseas ‘preferential creditors’ that is likely to be of most interest to the financial services industry, especially Bahamian liquidators (mainly accountants) and their attorneys.

One source said of Justice Bain’s decision: “The ruling has a profound impact on winding-up proceedings. The court found that the section in our International Business Companies Act, which allows liquidators to claw back preferential payments to creditors, did not allow a liquidator to serve proceedings outside the Bahamas.

“So, in any liquidation of an IBC, the liquidator cannot go after preferential creditors outside the jurisdiction. It will probably take an amendment of the Act to correct the problem, and should cause some discussion in the financial community.”

Investment funds are often structured as IBCs, and most corporate/investment structures that are either Bahamas-domiciled, or use Bahamian entities, usually employ them as key vehicles in the structure. So the Supreme Court ruling could have widespread ramifications.

Justice Bain’s judgment stems from the AWH Fund’s compulsory liquidation in 2002, and Mr Bates’s determination that ZCM received a “fraudulent preference” because its investment in the fund was redeemed – upon its request – within two months of the fund’s winding-up announcement.

Leave to serve ZCM and two former AWH Fund directors was granted on July 1, 2008, with the liquidator seeking, via amended summons, declarations and orders that the $13.148 million payment was a “fraudulent preference” and that it should be repaid.

ZCM, though, applied to set the permission to serve it aside. Its attorney, Brian Simms QC of Lennox Paton, argued that since the liquidation involved winding-up a Bahamas-domiciled IBC, “there is no provision for these proceedings to be served out of the jurisdiction”.

“Counsel submitted that there is no power under the Bankruptcy Act or the International Business Companies (IBCs) Act to serve proceedings against a third party out of the jurisdiction,” Justice Bain recorded. “The application was brought pursuant to Section 160 of the IBC Act and Section 72 of the Bankruptcy Act.”

Justice Bain said the Companies (Winding-Up) Rules were implemented in 1953, and employed for winding-up IBCs under the IBC Act. She added that neither the Act, nor the Companies Winding-Up Rules, “provide specifically for service of any document outside the jurisdiction”.

While the UK’s Insolvency Rules enabled winding-up proceedings to be served in other jurisdictions, Mr Simms argued “that there is no statutory provision in the Bahamas to allow service of the liquidator’s claim outside the jurisdiction” unless the claim was brought under the Supreme Court Rules’ Order 11.

However, Mr Simms said the Order 11 rules did not apply to company winding-ups and bankruptcy proceedings, And the action initiated by the AWH Fund liquidator was an amended summons, not a writ or originating summons as required by Order 11.

Tara Burnside-Cooper, acting for the liquidator, argued that Order 11 still applied to winding-up proceedings even though the Companies Winding-Up rules made “no specific provision for service of process out of the jurisdiction”.

Justice Bain, though, agreed with Mr Simms that Order 11 did not apply to the AWH situation.

“While Rule 101 of the Companies Winding-Up Rules enables the Rules of the Supreme Court to be used to fill in the gaps, there is no similar provision in the Bankruptcy Rules,” she found.

“Section 160 of the IBC Acts specifically states that a fraudulent preference will only be so if it was under the Bankruptcy Act. The Bankruptcy Rules do not adopt the Supreme Court Rules.”

Meanwhile, Mr Simms also argued that the liquidator had provided “no direct evidence” to show the $13.148 million payment to ZCM was a preference over other creditors.

He pointed out that other AFM Fund shareholders received payments in August 2002, after the time in which ZCM redeemed the shares it held on a client’s behalf.

Mr Bates’ affidavit said merely that ZCM received its monies within two months of the fund collapsing into insolvent liquidation, and Justice Bain held that he had “not disclosed a good and arguable cause of action”.

She also found that the liquidator should have initiated proceedings via a Notice of Motion under the Companies Winding-Up Rules, rather than an originating summons.