British Virgin Islands: BVI Court Of Appeal Dismisses Madoff Feeder Fund Claw Back Claim


Fairfield Sentry Limited was one of a number of feeder funds into the now infamous Bernard L Madoff Investment Securities LLC. The Liquidators brought proceedings in the British Virgin Islands (and elsewhere) against a number of international financial and banking institutions, claiming to be entitled to "claw back" redemptions amounting to in excess of US$1bn. They alleged that the net asset value at which the shares were redeemed was inflated by the fraud of Bernard Madoff. It followed, on the Liquidators' hypothesis, that the redemptions had been paid at inflated sums by mistake of fact, and that the investor Defendants had been unjustly enriched as a consequence.

Inevitably Defendants in such a position are likely to have remitted the redemption sums to their own policyholders and account holders shortly after receipt. The Defendants defended the actions, raising matters which "if a full trial had been held of all the matters raised in the defences it would have been a lengthy and expensive exercise." In its judgment, the Court of Appeal acknowledged that these issues gave rise to stark conflicting interests - does the need for certainty in business transactions trump the right (perhaps this would have been better expressed as the interest) of the person who has mistakenly paid excessive sums? Or should a feeder fund be entitled to recover from investors duped into investing in a fraudulent scheme all sums which it paid out to its investors, so that it might repay the investors pro rata, after all of the Liquidators costs and expenses have been discharged?

A trial of four preliminary issues was directed, amongst them whether:-

  • A certificate had been given by the Fund's directors as to the Net Asset Value per share. If so, Article 11 of the Articles of Association of the Fund provided that any such certificate given in good faith by or on behalf of the directors of the Fund should be binding upon it (the "Certificate Argument");
  • The investors gave good consideration for the redemption sums, so as to defeat a claim for unjust enrichment or restitution based on a mistake of fact (the "Good Consideration Argument").

At first instance, Bannister J rejected the Certificate Argument but held that the Investors were entitled to succeed on the Good Consideration Argument. He held that Barclays Bank v. Simms and Aiken v. Short were "authority for the proposition that a party will not be able to recover a payment made by mistake where the payer has received consideration from the payee." The Judge concluded that it was "not open to Sentry now to seek to recover the price which it paid for the purchase of the shares of redeeming investors simply because it calculated the NAV upon information which has subsequently proved unreliable for reasons unconnected with any of the redeemers." The basis for this decision was that it was difficult to see how the subsequently discovered fact that BLMIS was a Ponzi scheme could be said to have vitiated the bargain.

The Court of Appeal (Pereira JA giving the judgment of the Court on this issue) upheld Bannister J on this issue. It did so by a slightly different route. It concluded that the Articles of Association (Article 10) created a debt in favour of the subscribing shareholder, which had by then performed all of its obligations required by the contract (the Articles) to complete the redemption of its shareholding. That disposed of the Fund's argument that no debt was due because the value of the shares was nil, or at least a nominal sum.

The investors met with less success on their Certificate Argument. Before the Judge it was common ground that the administrators of the Fund were obliged to calculate and publish the Net Asset Value per share and to deal with correspondence and communications in relation to the redemption of the shares. The investors argued that contract notes issued by the administrators constituted certificates for this purpose. Bannister J held, in essence, that the word "certificate" implies a degree of formality, which was absent. The contract notes and other documents were not described as certificates, they were unsigned, and their purpose was not to certify a determination by the directors but to evidence the terms upon which Sentry was itself purchasing shares.

Mitchell JA (Ag), giving the judgment of the Court on this issue, agreed. He did so principally on the basis that the contract notes were not certifications of a determination given by the directors.

What's Left?

Shortly after delivery of Bannister J's decision of the 16th September 2011, ABN Amro Bank NV succeeded on an application for summary judgment. The Liquidators sought in vain to adjourn that application on the basis that some evidence of bad faith might turn up, which would negate the good consideration defence. But Bannister J dismissed that attempt and stated that:-

"Applicants for summary judgment are entitled to have their applications dealt with on the facts as they are, not as they might be, and I have never heard of a summary judgment application being adjourned to give the unsuccessful party an opportunity to improve his position by searching for material upon which to make fresh allegations."

The Court of Appeal agreed.


The Court of Appeal's judgment will provide useful guidance to other Courts in common law jurisdictions which are asked to determine claw back claims issued by liquidators of funds against investors that have redeemed their shareholdings. The Courts have become increasingly occupied with these claims in the years following the 2008 global economic crisis. It is clear from this decision (if followed elsewhere) that a fund will not be able to claw back payments made to investors simply because the redemption payments were calculated without knowledge that the investments had actually gone into a fraudulent scheme. In addition, the decision gives useful guidance as to what exactly constitutes a "certificate" of net asset value, for the purpose of binding investors to NAV calculations.

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.

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