After the decision of the Privy Council in April 2014, the Fairfield Sentry saga continued recently with the new judgment of Justice Leon concerning the status of related US Bankruptcy Court proceedings.
Fairfield Sentry and Fairfield Lambda were BVI feeder funds that invested in Bernard Madoff's fraudulent enterprise. The funds were wound up after the fraud was discovered. The applicants were former registered shareholders of the funds which had redeemed their shares before the fraud was exposed. Redemption payments were made to them pursuant to the articles of association. The liquidators of the funds sought to recover the redemption payments in the US proceedings on the basis that they were based on a miscalculated net asset value and the certificates of the net asset value were not binding because they were not given in good faith. Secondly, the US proceedings sought declaratory judgment that the redemption payments were voidable transactions under the BVI Insolvency Act.
The previous BVI claim having failed, the applicants sought:
- orders under Section 273 of the Insolvency Act reversing or modifying the liquidators' decision to pursue the US proceedings;
- orders to discharge or vary to previous orders authorising the liquidators to bring the US proceedings; or
- injunctions restraining the liquidators in the US proceedings.
The liquidators argued that Section 273 did not permit the applicants to make the application, since it should be read restrictively, and the liquidators should only be restrained if their actions were "so utterly unreasonable and absurd that no reasonable person would have done it". Nor, the liquidators argued, could the US proceedings be seen as so "vexatious and oppressive" that an injunction would be appropriate.
The applicants submitted that Section 273 was not restrictive and that the liquidators should have raised their arguments on the common law claims at the previous Privy Council proceedings; as they had not done so, they should not be able to continue the US proceedings.
The court held that when it gave sanction for a liquidator to bring proceedings, its rule was limited since these were powers to realise assets. It held that a court should be slow to substitute its judgment for the decision of the liquidator. It also took a restrictive view of when it could use its power under Section 273 of the Insolvency Act, holding that only if a party had a legitimate interest in the relief sought could it make an application (see Deloitte & Touche v Johnson  BCC 922).
Accordingly, it held that it would be difficult to interfere with a liquidator's decision, except where:
- there was a legal issue such as competing claims or priorities;
- the liquidator was outside his or her discretion; or
- the applicant had no other recourse to challenge the liquidator's decision.
The court found that the applicants had an alternative recourse, which was to allow the US court to decide whether it would entertain the claims. Accordingly, the court concluded that the applicants had other remedies in the US proceedings, even if they might be different remedies than in the British Virgin Islands.
The court further found that it was for the US court to assess whether any scope remained for the liquidators to pursue the claims in the US proceedings that were or could have been brought in the BVI proceedings or should more appropriately be brought in the British Virgin Islands.
Regarding the Insolvency Act claims, the court found that it was "difficult to see" the US court's power to grant statutory relief under Section 249, although it was appropriate for the US court to consider whether it had the power to make declarations under the Insolvency Act regarding the allegedly voidable transactions.
For further information on this topic please contact Claire Goldstein or Phillip Kite at Harney Westwood & Riegels' Tortola office by telephone (+1 284 494 2233) or email (firstname.lastname@example.org or email@example.com). Alternatively, contact Victoria Lord at Harney Westwood & Riegels' London office by telephone (+44 20 7842 6080) or email (firstname.lastname@example.org). The Harney Westwood & Riegels website can be accessed at www.harneys.com.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.