After the decision of the  Privy Council in April 2014, the long running Fairfield Sentry case continued today with the new judgment of Leon J. concerning the status of the related US Bankruptcy Court proceedings.

Background

Fairfield Sentry and Fairfield Lambda (the Funds) 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 who redeemed their shares before the fraud was exposed. Redemption payments were made to them pursuant to the Articles of Association. The Liquidators sought to recover the redemption payments in the US proceedings on the basis that the redemption payments were based on a miscalculated NAV and certificates of the NAV 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 (IA).

The previous BVI claim having failed, the Applicants sought orders (i) under section 273 of the IA reversing or modifying the Liquidators' decision to pursue the US proceedings; (ii) to discharge or vary to previous orders authorising the Liquidators to bring the US proceedings; or (iii) injunctions restraining the Liquidators in the US proceedings.

The Liquidators argued that section 273 did not permit these Applicants to make the application as section 273 should be given a restrictive meaning and that the Liquidators should only be restrained if the 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 the Liquidators ought to have raised their arguments on the common law claims at the previous Privy Council proceedings and, as they had not done so, should not be able to continue the US proceedings.

Guidance from the Court

The Court found that when it gives sanction for a liquidator to bring proceedings, the Court's role is limited as these were powers to realise assets. The Court should be slow to substitute its judgment for the decision of the Liquidator. The Court also took a restrictive view of both when the Court could use its power under section 273 of the IA, and only if a person had a legitimate interest in the relief sought could make an application (see Deloitte & Touche v Johnson [1999] BCC 922). Accordingly, it would be difficult to interfere with a liquidator's decision except where there is (i) a legal issue such as competing claims or priorities; (ii) where a liquidator is outside his or her discretion; or (iii) where the applicant had no other recourse to challenge the liquidator's decision.

The Court found that the Applicants did have an alternative recourse which was to allow the US Court decide if it would entertain the claims. Accordingly the Court concluded, the Applicants had other remedies in the US proceedings, even if they might be somewhat different remedies than in the BVI.

The Court further found that it is for the US Court to assess whether there is any scope remaining 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 BVI.

In relation to the IA claims the Court found that it was "difficult to see" the US Court's power to grant statutory relief under section 249 of the IA although this was appropriate for the US Court to consider whether it had the power to make declarations under the IA in respect of the allegedly voidable transactions.

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.