British Virgin Islands: Fairfield Sentry: Privy Council Confirms That New York Courts Can Apply BVI Insolvency law To Void Preference Payments

The Judicial Committee of the Privy Council (the 'Privy Council') delivered its decision in the latest round of Madoff litigation on 20 May 2019. It is the highest court of appeal for the British Virgin Islands ('BVI') and it found that BVI insolvency legislation could be applied by a court outside BVI (in this case the US) if that court decided it should be applied in proceedings before it. The Privy Council also found that the US proceedings were not unjust, vexatious or oppressive and an anti-suit injunction to stop them was neither appropriate nor necessary.

What is the significance for Cayman?

The Privy Council is also the highest court of appeal in the Cayman Islands ('Cayman') and so its willingness to sanction US proceedings by BVI liquidators will interest Cayman insolvency practitioners and creditors. This case concerned the Privy Council considering the preference section from s. 249 of the BVI Insolvency Act 2003 ('BVI Insolvency Act'). A decision in relation to the preference section under the Cayman Companies Law is also expected to be released in the near future which will be instructive on the scope of the section and its application to claw back claims. (N.B. the BVI and Cayman preference sections do have different wording but judgements from either jurisdiction do have persuasive authority in the other.)


The appeal to the Privy Council arose from earlier refusals to grant an anti-suit injunction to restrain the liquidators of Fairfield Sentry Ltd ('Fairfield') ('Liquidators') from pursuing proceedings in the US under s. 249 of the BVI Insolvency Act. The Liquidators' claims arise from the Bernard L Madoff Securities Ltd ('BLMIS') Ponzi scheme.

What does s. 249 of the BVI Insolvency Act provide?

Section 249 of the BVI Insolvency Act gives the BVI High Court the power to set aside voidable transactions, such as an unfair preference or an undervalue transaction, and to make orders to restore the position to what it would have been if the company in liquidation had not entered into such transactions.

Redemptions based on fraudulent NAVs

In December 2008, the BVI High Court made orders to wind up three BVI-based feeder funds into BLMIS, one of which was Fairfield. As in other Madoff proceedings, one of the issues raised by the Liquidators was that the Net Asset Value ('NAV') of BLMIS holdings which were used as the basis of redemption payments to shareholders which held redeemable shares did not reflect the true value of those shares. Fairfield made redemption payments to its shareholders based on the NAV set by its administrator using fraudulent reports created by BLMIS, which did not have assets under its management to support the valuations in the reports.

What are the US Proceedings?

In proceedings in the US Bankruptcy Court in New York, the Liquidators are looking to recover funds paid out to hundreds of investors in Fairfield who redeemed their shares at values based on BLMIS's fraudulent reports. The claims are based on s.249 of the BVI Insolvency Act and common-law grounds. The US Bankruptcy Court has limited the common-law grounds to claims that monies were held on a constructive trust in circumstances where the defendants knew Madoff was a fraud. The statutory avoidance claims under s.249 of the BVI Insolvency Act have been allowed to proceed. Potential defendants to the Liquidators' claims under s.249 ('UBS') applied for an anti-suit injunction from the BVI courts to restrain the Liquidators from proceeding with their claims in the US. This was dismissed in the High Court and the Eastern Caribbean Court of Appeal ('ECCA'). UBS appealed to the Privy Council.

What were the issues?

UBS asked for either an anti-suit injunction, or a declaration which would interpret s.249 of the BVI Insolvency Act in such a way that the only court which could exercise the powers it conferred would be the BVI High Court. They argued that only the BVI High Court had the right to exercise the power under s.249 as it was the court charged with supervising Fairfield's winding up. It had no authority to delegate that power to a foreign court, and were a foreign court allowed to exercise powers under s.249 that would introduce commercial uncertainty and would be oppressive to the interests of alleged debtors of an insolvent BVI company. The Liquidators argued that it was not unusual for courts to assist foreign liquidation proceedings by applying the law of those proceedings, including a statutory power to adjust or reverse voidable transactions. It was up to the US Bankruptcy Court to decide under US rules of private international law whether it would apply BVI insolvency law in dealing with the Liquidators' applications.

What did the Privy Council say?

The Privy Council found the central issue was whether, expressly or by necessary implication, s.249 confers an exclusive jurisdiction on the BVI High Court and precludes a foreign court which is assisting in a BVI liquidation from exercising those powers. Their answer was simply that it does not. There was no express prohibition on a foreign court from exercising those powers at the request of a BVI office holder (such as a liquidator) and no such prohibition arises by necessary implication. It is up to each foreign court from which a BVI office holder seeks assistance to determine whether it can use the statutory tools which BVI insolvency legislation has conferred on the BVI High Court. It agreed with the Liquidators and observed that it is not uncommon for the courts in one country to apply the insolvency laws of another when giving assistance to the latter country. It also found that the BVI legislature must have been expecting foreign courts to be able to apply BVI insolvency law when the legislation was drafted.

Were the US proceedings unjust and oppressive?

Without any express prohibition in s.249 of the Law, the Privy Council found there was no question of vexatious or oppressive litigation such as might justify granting an injunction restraining the Liquidators' action. The Privy Council was also of the view that the BVI High Court would have considered whether it would be unjust and oppressive for the prospective defendants to be sued in New York and whether New York was an appropriate forum for such a challenge when it decided whether to grant permission to the Liquidators to bring those proceedings. It took note of the ECCA's comment in its decision that the public policy of the BVI favours the enforcement of the BVI's insolvency regime overseas.

Caution on anti-suit injunctions

On whether a foreign court should apply BVI law, or whether an anti-suit injunction would be appropriate, the Privy Council followed previous decisions which recognized the need for caution. In principle a decision on whether one jurisdiction is more appropriate or convenient than another jurisdiction could be decided by a court in either jurisdiction. An anti-suit injunction involves interference in the process of a foreign court and it is better that a foreign judge decides whether an action in his or her own court should proceed. In this case it would be up to the US court to interpret chapter 15 of the US Bankruptcy Code and to apply the rules of the applicable US private international law.

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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