Cayman Islands: Cayman Islands Clawbacks: Another Brick In The Wall

The recent decision of the Cayman Islands Grand Court in RMF Market Neutral Strategies (Master) Limited v DD Growth Premium 2X Fund (unreported, 17 November 2014) is a further reminder of the serious challenges associated with bringing clawback actions against "innocent" third party fund investors who have received redemption proceeds from a Cayman Islands fund in the period leading up to the fund's collapse.  It is a decision which should be welcomed by fund investors who are seeking certainty in this area – and in that regard, it is a useful companion-piece to the Privy Council's recent decision in Fairfield Sentry v Migani and others.1 

DD Growth 2X ("2X Fund") was an open-ended feeder fund incorporated in the Cayman Islands.  As with many funds, it encountered serious difficulties in late 2008 and early 2009, and was faced with large redemptions.  2X Fund's difficulties were compounded as a result of the NAV having been massively overstated as a result of a fraud:  in order to cover up losses, the manager had acquired certain debt instruments (the "Asseterra bonds") for cents on the dollar, but had then reported them in the NAV at face value (for example, one bloc had been purchased for $5 million, but then marked in the NAV at $190 million).  As the Court put it, the result was that the fund in effect became a Ponzi Scheme. 

The 2X Fund had a number of investors who redeemed in December 2009.  There was no suggestion that any of the redeeming investors knew anything about the fraud.  Some of those redeemers, including RMF, were paid in part, while others received nothing.  There was no suspension of NAV or of redemptions.  The 2X Fund was then wound up in around May 2009 and the full extent of the fraud was uncovered.

The 2X Fund liquidators threatened a clawback action against RMF.  RMF sued for a negative declaration and was met with a counterclaim.  The 2X Fund liquidators principally claimed: 

(a)    The payments were unlawful as they were a breach of s.37(6)(a) of the Companies Law, being payments made out of capital at a time when the company was insolvent, such that they were unlawful and void; and/or 

(b)    The payments were voidable preferences under s.168 of the Companies Law.  

Chief Justice Smellie comprehensively rejected both of those claims.  

Although the Chief Justice readily accepted that the 2X Fund was insolvent (in every sense) at the time of the payments, the Chief Justice dismissed the s.37 claims, essentially on the basis that the payments were not made out of "capital".  He rejected as "strained and tortuous" the liquidators' construction of s.37(6), as it then stood, to the effect that "capital" included not just the nominal par value of the shares, but also the share premium (and, as he noted, the statute has since been amended to clarify this point in any event).  The Chief Justice confirmed that "payments out of share premium for the redemption of shares when a company has become cash flow insolvent, are not prohibited as being a payment out of capital by s.37(6)(a)".  

The Chief Justice further noted that such an interpretation should not be regarded as surprising.  He observed that (as is common) the constitutional documents of the fund allowed for redemption on a "first come first served" basis and, further, that it was clear that redemptions of shareholders form part of the ordinary course of business of a Cayman Islands mutual fund.  In a particularly robust passage which should give additional comfort to innocent redeemers concerned about clawback risk, the Chief Justice held: 

"... the right to payment of redeemed shares was not contingent upon the ability of the 2X Fund to pay other redeemed shareholders, still less other shareholders who had not redeemed their shares. 

This does not mean that the 2X Fund should not have taken other steps which might have proven more equitable or contractually fair to all shareholders.  Mr Micalizzi [the principal of the manager, key decision maker and fraudster] should certainly have suspended NAV calculations in keeping with the Articles and OM and disclosed the true state of hopeless insolvency, rather than perpetrate the fraudulent use of the Asseterra bonds.

It is also regrettable that by means of that fraud, it appears that late subscribers' funds (ie: the proceeds of fresh issues) became available and were used to pay dividends back to the 2X Fund from the master Fund and those funds used to pay some of the December Redeemers, including RMF." 

The Chief Justice went on to acknowledge that the results had been "grossly unfair to the December redeemers who were not paid, and even more so to those shareholders who had not yet sought to redeem their shares in the 2X Fund".  However, drawing on the recent dicta of the Privy Council in Fairfield Sentry v Migani, the Chief Justice concluded: "such are the unfortunate consequences when an investment fund becomes a Ponzi Scheme".  

The Chief Justice also rejected the preference claim under s.168 of the Companies Law, essentially on the basis that the liquidators were unable to discharge their burden of showing that the 2X Fund's dominant purpose in making the payment was to prefer RMF.  Demonstrating such dominant purpose remains a critical (and regularly, the most forensically difficult) aspect of any preference claim under that legislation.  The judgment reaffirmed and clarified the following principles: 

(a)    The Court must be satisfied that the dominant motive of the payer was to prefer the particular creditor. 

(b)    The Court can infer an intention to prefer from the circumstances (although the burden remains on the JOLs). 

(c)    It is essential that payer knows or believes that the company is or will become insolvent: there can be no intention to prefer if the payer honestly believes all the creditors will be paid. 

(d)    However, and critically, knowledge or belief of the payer that the company is or will become insolvent is not enough: "There is no basis for reading [the authorities] as saying that the very fact of making the payment being aware of the state of insolvency was sufficient to make it a fraudulent preference".  In other words, it is not enough to show that the payer knew that the net effect of the payment would be to prefer that creditor, if that was not also the motivation behind the payment.  The real question is "whether the dominant intention was to prefer (in the sense of deliberately paying out of turn being aware of the consequences for those other creditors not paid) or whether payment may have been motivated by other concerns typically of the debtor himself, which are not impelled predominantly by an intention to prefer the creditor, even if the preference is the consequence of that payment". 

After a careful analysis of the background and chronology, the Chief Justice found the payment was made not with an intention to prefer, but in response to "unrelenting and escalating pressure being applied by RMF and an equally consistent effort at prevarication and evasiveness on the part of [2X Fund]".  The Chief Justice found that 2X Fund had paid, in effect, only because it had a gun to its head – that in the absence of payment, RMF would have insisted in regulatory intervention by the FSA and would have taken legal action.  That was not a payment made with the intention to prefer.  In echoes of what is perhaps not a unique story, the Chief Justice held:

"Apart from hoping to postpone or avoid the evil day, Mr Micalizzi had no demonstrated motive for wishing to pay RMF ahead of any other of the December redeemers.  Having papered over the catastrophic losses with the Asseterra bonds, it appears he was stalling for time in the futile hope that the Funds under his management could recover." 

Overall, this judgment reflects what we would suggest is an entirely orthodox approach to preference claims under Cayman Islands law.  It brings further helpful clarity to the area, and in particular, emphasises the benefits of certainty in the context of funds which permit redemptions on a "first come first served" basis.  It is a decision which should rightly give additional comfort to innocent third party redeemers of Cayman Islands funds who may otherwise be concerned about the possibility of being subject to clawback actions many years after they have (through no fault of their own) been caught up in a fraudulent investment scheme.


1. [2014] UKPC 9.  See our 7 May 2014 update entitled The End of the Fairfield Clawback Claims?

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions