Liquidators of a hedge fund that collapsed in the wake of the 2008 financial crisis scored a major victory last month, when the London-based Judicial Committee of the Privy Council ruled that payments the fund made to investors after it was already insolvent were unlawful.

However, whether the liquidators can recover those payments remains to be seen, as the case was remitted to the Grand Court in the Cayman Islands for further litigation. While it has been determined that the fund acted unlawfully in making the payments to the investors, it still has not been decided whether the investors had the right to redeem their shares.

The case stems from the collapse of the Cayman-registered DD Growth Premium Master Fund, which was controlled by Italian hedge fund manager Alberto Micalizzi. DD Growth suffered losses in excess of $150 million in mortgage-backed derivatives, triggered by the failure of Lehman Brothers in 2008, according to an initial 2011 Grand Court judgment on the case.

Mr. Micalizzi tried to prop up the investment scheme by overvaluing bond purchases he made in 2008, court documents state. He was fined £3 million by the U.K. Financial Services Authority in May 2012 for concealing losses and was barred from the securities industry.

But before that alleged wrongdoing came to light, investors in 2X Fund, a feeder fund for the DD Growth Premium Master Fund, redeemed some US$23 million in shares. After the 2X Fund was placed in liquidation in May 2009, liquidators from Kalo sued the investors in Grand Court in an attempt to recover – or “claw back” – those redemptions.

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The liquidators argued that Mr. Micalizzi gave the investors “fraudulent preference,” claiming that investors who received payments were unfairly preferred over ones who did not. Liquidators also argued that Cayman’s Companies Law prohibits share payments being made from a fund’s capital after the fund is insolvent.

Though he acknowledged that 2X Fund had become a “Ponzi scheme” before the investors redeemed their shares, Chief Justice Anthony Smellie rejected both arguments.

Rather than Mr. Micalizzi engaging in fraudulent preference for the paid shareholders, he likely made payments because they threatened to sue him, wrote Mr. Smellie in his Grand Court judgment.

And while the Companies Law prohibits a fund from making payments from its capital after the fund is insolvent, the shareholders were not paid from the 2X Fund’s capital, but from its share premium fund – an account in which the premiums of sold shares are held. The 2X Fund’s share premium fund was not subject to the same solvency requirements under the Companies Law as it would have been if the fund made the redemption payments from its capital, Mr. Smellie ruled.

The liquidators appealed Mr. Smellie’s judgment on the grounds that share premiums should be classified as capital for a fund – which would require the 2X Fund to be solvent to make payments to redeeming shareholders – but the Cayman Islands Court of Appeal upheld the chief justice’s judgment.

In their latest appeal, the liquidators were successful at the Privy Council. The council ruled that the 2X Fund should have been subject to the Companies Law’s solvency requirements, even though it made its redemption payments from its share premium fund instead of its capital.

Therefore, the US$23 million redemption payments made to investors were unlawful, according to the Privy Council.

However, that does not mean that the liquidators will automatically claw back the money from the shareholders.

While the redemption payments were unlawful on the part of the 2X Fund, the shareholders may have the right to redeem their shares anyway, the Privy Council stated. In order to prove otherwise, the liquidators will have to demonstrate that the shareholders knew that the 2X Fund was insolvent when the redemption payments were made – “but knowledge, especially in relation to apparently routine transactions where lawfulness depends on the internal affairs of the Company, may be hard to prove,” the council noted.

The Privy Council remitted the case to the Grand Court to determine whether the investors had knowledge about the 2X Fund’s insolvency when they made their redemptions.

“Given that the law on knowing receipt (in particular what amounts to the recipient’s knowledge of the breach) is complex, this may mean another trip to the Privy Council for DD Growth’s liquidators,” wrote the law firm Maples and Calder in an article analyzing the decision.

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