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In ruling of wide significance, Privy Council decides on Fairfield case

Thursday, April 17, 2014
Opalesque Industry Update - On 16 April 2014, the Privy Council ruled in the claims brought by the liquidators of Fairfield, one of the largest feeder funds to have invested into Bernard Madoff’s investment company. The company filed hundreds of claw back claims against investors who had redeemed shares before the Madoff fraud was uncovered, both in the British Virgin Islands (BVI) and New York. The total value of these claims is in the region of US$7.5 billion.

The BVI Commercial Court and the Eastern Caribbean Court of Appeal had dismissed the claims on the basis that the redeemers had given good consideration for the payments they received. Not only did the Privy Council unanimously agree with the courts below on good consideration, it also indicated the claims failed on additional grounds under Fairfield’s articles of association. Delivering the judgment Lord Sumption found that the subscription agreement bound the investor and was primarily concerned with representations and warranties on the investments but did not deal with redemptions which were dealt with in the articles of association.

“This Privy Council ruling cements the decisions taken by the BVI Commercial Court and the Eastern Caribbean Court of Appeal dismissing the Fairfield liquidators’ claims,” said Harneys’ Global Head of Litigation and Insolvency Phillip Kite. “This test case has implications for liquidators of funds in all common law jurisdictions.”

Harneys has acted for a lead group of defendants in the claw back claims brought by the liquidators of Fairfield throughout the years-long process in the BVI courts.

Lord Sumption also reviewed the articles and the redemption procedure together with the information provided by the professional administrator. These included information concerning the Net Asset Value (NAV) from the following:-

  • An investor website;
  • Investor e-mails each month;
  • Contract notes; and,
  • Summary account details.

The Privy Council stated that the good consideration and defence under the articles were closely related and in approving Barclays Bank Limited v. W.J. Simms Son & Cooke (Southern) Ltd (1980) QB 677, said that if a payment made under a mistake discharges a contractual debt of a payee, that sum cannot be recovered unless the mistake is such as to avoid the contract.

Lord Sumption reasoned that Fairfield’s claim to recover the redemption payment would depend on whether it was bound by the redemption terms to make payment which it did make. This in turn depends on whether the effect of those terms is that Fairfield was obliged upon redemption to pay either,

  • The true NAV per share, ascertained in the light of information which subsequently became available about Madoff’s funds, or
  • The NAV per share which was determined by the directors at the time of redemption.

Lord Sumption said that (ii) was the only reasonable conclusion and continued that a certificate had no standard meaning and what constitutes a certificate would depend on the commercial context in which it appeared. A certificate would mean a statement or writing, issued by an authoritative source, communicated to a recipient, in a form which showed it intended to be definitive and the Privy Council found that the monthly e-mails, contract notes and monthly statements would all be certificates within the meaning of the articles.

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