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The fallout from Maddoff continues; claw back of redemption proceeds

The Privy Council’s recent decision in UBS AG New York v Fairfield Sentry Ltd (In Liquidation) denied UBS’s appeal to stop Fairfield’s liquidators from pursuing claw back claims in the United States under section 249 of the BVI Insolvency Act 2003. That section empowers the BVI High Court to set aside voidable transactions and to make orders to restore the position of the company had it not entered into the transactions.

This was another line of cases in the ongoing fallout of the collapse of Bernie Madoff’s Ponzi scheme in 2008. The liquidators represent certain feeder funds which made redemption payments to investors based on NAVs that later proved to be based on fraudulent reports created by Mr Madoff’s investment company.

With leave of the BVI court, the liquidators commenced proceedings in the United States under section 249 and on common law grounds seeking to recover funds paid out to investors in Sentry who redeemed their shares at falsely inflated valuations.

In December 2018, a United States Bankruptcy Judge dismissed the liquidators’ claims at common law against all defendants except to the extent that the claims alleged a constructive trust against defendants who had knowledge of the Madoff frauds, but allowed the statutory avoidance claims under section 249. This was essentially in line with the Board’s judgment in Fairfield Sentry Ltd (in liquidation) v Migani [2014], relating to other redemptions of Sentry’s shares, which rejected the liquidators’ claims for unjust enrichment based on mistakenly calculated NAVs. Harneys acted for the successful parties in the Privy Council common law actions.

UBS, as a potential debtor of the liquidators’ claims under section 249, sought an anti-suit injunction from the BVI court to restrain the liquidators from proceeding with their United States claims.

The central question was whether section 249 either expressly or by necessary implication confers an exclusive jurisdiction on the BVI High Court so as to preclude foreign courts, which assist in a BVI liquidation, from exercising such powers.

The Board answered no for the following reasons:

  1. BVI law contains no express prohibition on a foreign court from exercising those powers at the request of a BVI office holder and no such prohibition arises by necessary implication. It is a question for each assisting foreign court to determine whether it can use the statutory tools conferred on the BVI court by BVI insolvency legislation.
  2. The existence of the domestic regime to assist foreign insolvency proceedings in Part XIX of the Insolvency Act strongly militates against any implication of exclusivity in section 249.

The Board found the anti-suit application misconceived because:

  1. The liquidators commenced the United States proceedings with leave of the BVI Court. The Board gave considerable weight to the Court of Appeal’s view that BVI public policy favours the enforcement of the BVI’s insolvency regime overseas.
  2. It was now a question for the United States Courts whether they should apply BVI law as the liquidators’ request.
  3. Absent a prohibition in section 249 on a foreign court from using the powers which it conferred, there is no question of vexatious or oppressive litigation such as might justify the grant of an injunction.
The fallout from Maddoff continues; claw back of redemption proceeds

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