The repercussions of Bernard Madoff’s multi-billion-dollar Ponzi scheme are still being felt throughout the offshore and insolvency worlds, over 10 years after the fraud was exposed in 2008.
Its latest appearance came in an appeal to the Privy Council from the BVI courts in UBS AG New York v Fairfield Sentry Ltd (In Liquidation)  UKPC 20. The judgment clarifies important points about BVI insolvency law in cross-border cases.
Mr Madoff’s fund, operated by his company Bernard L Madoff Investment Securities LLC (‘BLMIS’), secured large amounts of its investments from ‘feeder funds’. Three such funds are in liquidation in the BVI (‘the feeder funds’) and together invested some US$7.2 billion in BLMIS between 1997 and 2008.
Investors purchased redeemable shares in the feeder funds. They could withdraw their investment by redeeming their shares and paying for them at a value calculated on the day of redemption. The valuations were based on fraudulent reports created by BLMIS, based on fictitious assets and fictitious profits. As with other Ponzi schemes, BLMIS investors who withdrew their money early made significant profits (which were paid using money from later investors) while those who invested later or maintained their investment lost everything.
The liquidators of the feeder funds brought proceedings in the US Bankruptcy Court in New York to recover funds paid out to investors who redeemed their shares early for inflated values which had no relation to their actual value – to seek to recover money for the company to share amongst all investors. One group of such investors was the UBS banking group. The liquidators sued UBS under (amongst other claims) section 249 of the BVI Insolvency Act 2003 (‘the BVI Act’), which allows the court to set aside transactions including unfair preferences and undervalue transactions. The BVI High Court granted the liquidators permission to bring the proceedings in the US.
UBS sought an anti-suit injunction in the BVI courts to retrain the US proceedings. Its application was refused at first instance in the High Court and on appeal to the Eastern Caribbean Court of Appeal and appealed again to the Privy Council.
UBS’s core submission was that section 249 of the BVI Act grants only BVI High Court the power to set aside transactions, and so the power cannot be exercised by a foreign court. The bank argued that the High Court was the court charged with supervising the winding up of insolvent BVI companies. If a foreign court used these powers it would misapply the BVI insolvency regime and be oppressive, vexatious or contrary to BVI public policy. The BVI courts were also the natural forum for the claims and there was no reason that they were brought in the US.
The liquidators argued that section 249 did not have this meaning. It was common for courts to assist foreign liquidations by applying the law of those proceedings, including in reversing voidable transactions. This supported BVI public policy in applying BVI insolvency law to cross-border co-operation involving an insolvency BVI company.
The Privy Council rejected UBS’s appeal. Giving the judgment of the Board, Lord Hodge held that section 249 did not give an exclusive jurisdiction on the High Court, so as to preclude foreign courts from exercising the power. The section only concerned which domestic court in the BVI would have jurisdiction. The section did not prevent a foreign court from applying BVI insolvency law in cases relating to insolvent BVI companies, and there was no reason why the BVI legislature would want to do so. It was a question for the foreign court to decide under its own rules whether it would apply BVI law.
This view was supported by the fact that BVI insolvency law permitted foreign liquidators to apply for orders in the BVI High Court in aid of foreign insolvencies. In such a case the BVI court could decide whether to apply BVI law or the law of the foreign state: section 467 of the BVI Act. This power is exercised on the basis of a series of policy goals set out in section 468. This regime for assisting foreign liquidators shows that the BVI legislature must have intended a BVI liquidator to be able to do the same: seek assistance in a foreign court and ask the court to apply either BVI law or the law of the foreign state, as appropriate. It is also the public policy of the BVI to favour the enforcement of the BVI insolvency regime abroad, as held by the Court of Appeal.
This mirrors the position in the US and the UK, where a foreign liquidator requests assistance in the US and UK, the court can choose to apply local or foreign insolvency law – as was the case in the US under the former section 304 of the US Bankruptcy Code (on which sections 467-8 of the BVI Act were based) and in the UK under section 426(5) of the UK Insolvency Act 1986.
As Lord Hodge noted, there may be differences in how foreign courts applied BVI insolvency law, depending on their view of public policy, but that did not mean that only the BVI High Court had exclusive jurisdiction to apply BVI law. In this case, it was a matter for the US court as to how to apply BVI law and in December 2018 it had already granted the liquidators’ section 249 claims against UBS. There was no basis to grant an anti-suit injunction – the proceedings were not vexatious or oppressive and the BVI High Court had expressly permitted the liquidators to bring them in the US courts.
The liquidators were represented before the Board by Gabriel Moss QC, who very sadly died before judgment was handed down. The Board paid tribute to his ‘intellect and humanity and … his unrivalled contribution to corporate insolvency law’.