British Virgin Islands: Fairfield Sentry Fails Before The Privy Council

Last Updated: 30 April 2014
Article by Andrew Willins

Until his arrest and subsequent imprisonment Bernard Madoff operated what is thought to have been the biggest Ponzi scheme in history. Redemptions were funded by incoming investments. Those fortunate enough to withdraw their money in good time lost nothing; indeed, many exited with substantial returns. But as all Ponzi schemes ultimately do, the scheme came crashing down.

Fairfield Sentry ("the Fund") was a BVI feeder fund, having 95% of its assets invested with Bernard L Madoff Securities (Madoff). Following Madoff's arrest, the Fund suspended redemptions. It was placed into liquidation in the British Virgin Islands on 21 July 2009.

Amongst the investors in the Fund were a large number of institutional investors holding positions in the Fund as intermediaries for their own customers. The Fund alleged that the Net Asset Value at which those investors, amongst others, had redeemed was based upon a mistake: that being a mistaken reliance upon statements made by Madoff as to the value of the Fund's shares in Madoff. The liquidators of the Fund therefore sought the return of redemption payments made prior to the collapse of Madoff's venture. They alleged that the investors had been unjustly enriched at the Fund's expense, and that orders for restitution should be made as a result of that mistake.

In the BVI Commercial Court, Bannister J ordered the trial of a series of preliminary issues. Amongst those issues were two key questions: firstly, on the basis of the Fund's articles, was the Fund bound by the net asset value ("NAV") that it recorded in emails and redemption documents at the time that redemption payments were made? Pursuant to the articles, it would be so bound if these documents constituted "certificates" under those articles ("the Certificate Issue"). Secondly, did the redeemed former members have good defences to the Fund's claims in unjust enrichment on the basis that they had given good consideration for the redemption payments? ("the Good Consideration Issue").

Bannister J decided the Certificate Issue in favour of the Fund, and the Good Consideration Issue against it. He was upheld in both respects by the Eastern Caribbean Court of Appeal.

The matter came before the Privy Council in March 2014 with the Board's Opinion delivered by Lord Sumption on 16 April.

The Privy Council dealt with the Good Consideration Issue first, approaching it as follows. If the Fund was obliged to pay the true value of the shares upon redemption, as calculated when the real nature of its investments with Madoff was discovered, then the excess paid to redeemers was paid by mistake and would be recoverable as unjust enrichment. If, however, on the true construction of the Fund's articles, the Fund was obliged to pay whatever NAV was calculated by its managers on the relevant redemption date, and the redeemers were entitled to receive such sums (regardless of the "true" worth of the shares), then the claim in unjust enrichment must fail, since a person cannot be unjustly enriched by a sum he is contractually entitled to receive.

The Privy Council agreed with Bannister J and the Court of Appeal that the Fund's construction of the articles was misconceived. An obligation to pay the "true" value of the shares – even when that differed substantially from the value calculated by the Fund's managers – would result in intolerable uncertainty. An essential term of the redemption would not be ascertained at the time that the transaction took effect. Exiting members would have either open-ended liabilities for overpayments (if the NAV were revised down) or open-ended claims for underpayments (if revised up). Accordingly, the appeal on this element was dismissed.

As to the Certificate Issue, the Privy Council held that "certificate" is not a legal term of art. Its meaning depends on the commercial context. "As a matter of language, 'certificate' ordinarily means (i) a statement in writing, (ii) issued by an authoritative source, which (iii) is communicated by whatever method to a recipient or class of recipients intended to rely on it, and (iv) conveys information, (v) in a form or context which shows that it is intended to be definitive."

The Privy Council held that a series of emails, contract notes and monthly statements fulfilled all of the above criteria. The context in which they were delivered supported the conclusion that they were intended to be definitive. The consequence was that since those documents constituted certificates under the Articles, the NAV certified by them was binding and conclusive. The Board left open the question as to whether statements made on the Fund's website could amount to a certificate. Since the Fund was liable to pay the redemption sums, no question of mistake or unjust enrichment could therefore arise.

We have suggested before that the Privy Council's decision is likely to be closely watched, not just by the many hundreds of investors subject to claw back actions in the British Virgin Islands and elsewhere, but also by funds lawyers keen to see what lessons can be learned in relation to the drafting of offering documentation. A key lesson is surely that investors in the future will wish to see well drafted clauses, which not only provide for certifications to be conclusive, but are also clear about the circumstances in which that clause will engage.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions