On 16 April 2014 the Judicial Committee of the Privy Council (which is the highest court of appeal for the British Virgin Islands (“BVI”)) allowed certain appeals brought by investors in Fairfield Sentry Limited (“Sentry”), effectively bringing to an end the proceedings commenced in the BVI by Sentry’s Liquidator attempting to recover redemption proceeds paid to investors of Sentry prior to its liquidation.


Sentry was a BVI mutual fund that invested almost exclusively with Bernard L. Madoff’s company, BLMIS. The fund’s exposure to the Madoff fraud exceeded US$7billion over the operative life of the fund. As we first reported in 2011, Sentry’s Liquidator had commenced proceedings in the BVI against certain investors and former investors of the fund who had received redemption payments during the fund’s operative life. The Liquidator was seeking to recover all redemption payments made to these investors prior to 18 December 2008 (the date the fund suspended redemptions), alleging that, as Sentry invested most of its assets in BLMIS, the true net asset value (“NAV”) of Sentry shares was $0, and not the NAV struck at the time that the redemptions in question were made. The Liquidator therefore claimed that investors who had received redemption payments throughout the life of Sentry had received the payments under a mistake and had been unjustly enriched. Accordingly, the Liquidator contended that the redemption payments ought to be returned to Sentry.

Several defendant investors applied to the BVI Commercial Court (the “BVI Court”) for the determination of preliminary issues: first, whether the documents issued by or on behalf of Sentry as to its NAV meant that the NAV struck each month was binding (the “certification point”); and secondly, whether a redeeming investor in surrendering its shares gave good consideration for payment by Sentry of the redemption payments made (the “good consideration point”). The investors reasoned that, if the answer to either of these preliminary issues was determined in their favour, the Liquidator could not successfully claim that any redemption payments made to the investors were capable of being recovered and this was an absolute defence to the BVI proceedings.

The certification point - were the valuations binding?

Determination of the certification point turned on the construction of Sentry’s articles of association. Pursuant to the Articles, investors of Sentry subscribed for and redeemed shares in the usual way. The Articles contained the following provision:

“Any certificate as to the Net Asset Value per share or as to the Subscription Price or Redemption Price therefor given in good faith by or on behalf of the Directors shall be binding on all parties.” (our emphasis)

The use of similar language relating to “certificates of NAV” is sometimes, but certainly not invariably, found in the constituent documents of comparable investment vehicles domiciled in the BVI or other offshore jurisdictions such as the Cayman Islands.

In practice, Sentry delegated to its administrator the task of processing redemptions, calculating and publishing NAV, and processing and dealing with all correspondence relating to redemptions (as it was entitled to do so under the constituent documents). The BVI Court had to determine whether any of the documents or information made available by the administrator to investors in respect of Sentry’s NAV amounted to a “certificate” pursuant to the Articles, resulting in the NAV struck being binding on Sentry (at least pursuant to the express terms of its Articles). On this point, for technical reasons, the BVI Court held that the information made available to investors did not amount to the giving of a “certificate … by or on behalf of the Directors”. Thus the Liquidator was successful on the first preliminary issue.

However, the BVI Court did find that the documents produced by or on behalf of Sentry as to its NAV constituted “compelling evidence of the NAV determined by the Directors as at particular Valuation Days…”

Had the redeeming investors given consideration for the redemptions?

The other preliminary issue considered by the BVI Court focused on whether the investors had given good consideration when receiving redemption payments upon surrender of their shares and their shareholder rights in Sentry. The BVI Court held that, as it was no longer possible for the redeemed investors to be restored to their original condition (i.e. restored to being shareholders of Sentry), Sentry could not seek to recover the redemption payments made even though Sentry had become aware that the information upon which its administrator calculated NAV was unreliable for reasons unconnected to the redeemers. Accordingly, the investors prevailed and the BVI Court subsequently ordered that the Liquidator’s restitutionary claims be summarily dismissed.

The Court of Appeal

The Liquidator appealed the BVI Court’s finding on the good consideration point and the investors appealed the Court’s findings on the certification point. The Court of Appeal upheld the BVI Court’s decision; the parties subsequently appealed to the Privy Council.

The Privy Council’s Decision - the Death Knell of the Redeemer Claims

The Privy Council has upheld the decision on the good consideration point (albeit applying different reasoning to the Court below) but has also ruled against the Liquidator on the certification point (and in doing so overturned the Court of Appeal (and hence the BVI Court’s) decision on this point.

It was noted that BVI law, which governs the interpretation of the fund’s Articles, was entirely consistent with English law when considering claims for restitution. A payee of money (in this case the investors who had received redemption payments) is not unjustly enriched if he was entitled to receive the sum paid to him. Accordingly, for Sentry’s claim to succeed the Liquidator had to show that the investors had no entitlement to receive the redemption money paid to them, or that the payment received exceeded that which they were entitled to receive. If the investors were entitled to be paid redemption proceeds based on the NAV struck and received only the amount due to them, then the Liquidator’s claim must fail.

The Privy Council adopted a more pragmatic approach to the interpretation of what a “certificate” meant in this context than the Courts below; the Privy Council held the proper function of the fund as constituted by its Articles, depended on the NAV price being definitively ascertained on each relevant dealing day (as defined in the Articles of the fund) and being known by the relevant parties soon thereafter. The Articles of Sentry envisage that subscription and redemption prices are to be definitively ascertained at the time of the subscription or redemption and therefore the NAV per share must be determined at the same time. The provision for certification contained in the Articles was included as part of the ordinary mechanics of the subscription and redemption process and as such did not speak to a special document to be issued at the discretion of the directors, but rather referred to the ordinary communication prepared by the fund’s administrator which advised the value of the NAV on each dealing day.

Accordingly, the Privy Council was satisfied that the monthly email and statement of account that was routinely sent to all investors, as well as the contract note sent to new subscribers or redeeming investors, were all “certificates” within the meaning of the Articles.

Points to take away

Sentry’s Liquidator has also commenced similar proceedings in the US seeking to recover redemption proceeds paid to investors in Sentry, in part, based on the BVI voidable transaction legislation contained in Part VIII of the Insolvency Act, 2003. In summary, to succeed on these claims the Liquidator must show that the redemption proceeds paid (a) were not paid in the ordinary course of business and (b) there was no consideration provided or that the consideration provided was significantly less than it should have been. Given the decision by the Privy Council the Liquidator may be anticipated to face considerable difficulty in prevailing on such claims as good consideration has been established.

The decision emphasises the importance of correctly interpreting a fund’s articles in conjunction with the governing legal principles. In this case, the Privy Council had little difficulty in determining that the Articles of the fund provided a clear and logical process for the payment of redemption proceeds, underscored by the need for all of those dealing with the fund to have certainty in the process. As the Privy Council noted, any other interpretation would be unworkable. The reference in the fund’s Articles to a “certificate” to be provided at the discretion of the directors was not intended to import a special process into the fund’s normal operations, but merely spoke of the ordinary and routine process undertaken each month for the processing of redemptions and subscriptions. Following this decision, it is difficult to see how a BVI liquidator, faced with a similar contractually imposed process for redemptions and subscriptions, could seek to recover redemption proceeds based on mistake as to an “improper” or “inflated” NAV from investors who were unaware of the underlying fraud. It should be noted that the antecedent avoidance legislation of the BVI differs from that of other jurisdictions in certain significant regards, including that of the Cayman Islands. BVI law only empowers a liquidator to revisit NAV calculations if this is expressly provided for in the fund’s constituent documents. However, the Cayman Islands now have a specific statutory regime (under Order 12 of the Companies Winding Up Rules 2008 (as amended)) which empowers a liquidator to restate NAV in certain circumstances. This provision has yet to be judicially tested, but may be anticipated to come before the Cayman Courts in the short to medium term. This notwithstanding, the Privy Council’s decision largely turns on common law principles and matters of general contractual interpretation and it may therefore have wider implications for other Madoff exposed funds in other offshore jurisdictions (as well as funds exposed to other frauds or other circumstances resulting in an inflated NAV which has been paid in good faith to “innocent” investors).

For a copy of the judgment please click on this link.