BVI Statutory Avoidance Claims in Foreign Courts

Background

Fairfield Sentry Limited (Sentry) was the largest offshore feeder fund for Bernard L Madoff Investment Securities LLC (BLMIS), which was used to operate Mr Madoff’s Ponzi scheme. There were also two sub-funds, Fairfield Sigma Limited and Fairfield Lambda Limited, which invested with BLMIS via Sentry (together with the sub-funds, collectively referred to as ‘Fairfield’).

Investors in Fairfield purchased redeemable shares at a price based on the net asset value per share of the relevant fund. Investors could also redeem shares by giving notice and would receive a redemption payment, again based on the net asset value per share.

At the time when the Ponzi scheme was revealed, following the arrest of Mr Madoff in December 2008, some investors had not redeemed their investments and were left with shares that were potentially worthless. Other investors, however, had redeemed their investments and been paid redemption payments, making a substantial profit. Of course, being a Ponzi scheme, the assets purportedly held by BLMIS had never, in fact, existed, and so both the assets – and the supposed profits made by BLMIS – were entirely fictitious.

Following the revelation of the fraud in December 2008, Fairfield suspended redemption of shares by its investors, and all three Fairfield funds were placed into liquidation by the BVI courts in 2009. 

The Fairfield liquidators subsequently brought claims in the US Bankruptcy Court in New York (and elsewhere), seeking to recover the redemption payments made to those who had redeemed their shares in Fairfield. The liquidators relied, amongst other things, on statutory avoidance provisions contained in the BVI Insolvency Act 2003 (the Act). In particular, the liquidators claimed that the redemption payments constituted unlawful preferences and/or that the redemptions were transactions at an undervalue.

Some of the defendants in the New York proceedings brought applications in the BVI courts seeking to prevent the liquidators from continuing to pursue the New York claims. The applicants sought orders under the Act as well as anti-suit relief. The applicants (along with the other US defendants) also brought motions to dismiss in the US Bankruptcy Court.

Both at first instance in the BVI courts and also on appeal to the Eastern Caribbean Court of Appeal (ECCA), the applicants were unsuccessful and their applications were dismissed. Some of the applicants appealed further to the Privy Council. By that stage, only the application for anti-suit relief was maintained, and the sole argument pursued was that the power to set aside transactions under section 249 of the Act was expressed to be conferred on the BVI High Court alone and so could not be exercised by a foreign court. The appellants alleged that this rendered the New York claims oppressive, vexatious and/or contrary to BVI public policy, such as to justify the grant of anti-suit relief. The appellants also sought, in the alternative, declaratory relief including that the power to set aside transactions in section 249 of the Act could not be exercised by a foreign court, obviously intending to use any such declaration to seek to persuade the US Bankruptcy Court to dismiss the New York claims.

The Decision

In dismissing the appeal, the Privy Council noted that section 249 of the Act conferred a discretion on the court, once it had set aside a voidable transaction, to make such order as it thought fit to restore the position of the company. The existence of that discretion to devise remedy did not, however, cast any light on whether the power to unravel transactions was conferred solely on the BVI High Court.

The central question on the appeal was one of statutory interpretation. In short, the Privy Council decided that section 249 of the Act did not, either expressly or by necessary implication, confer an exclusive jurisdiction on the BVI High Court and so did not preclude foreign courts from exercising the powers. It was a provision of domestic insolvency law and contained no express prohibition on a foreign court from exercising the powers. The reference to “court” within the section, taken with section 2 of the Act, merely identified the BVI High Court (as opposed to the magistrates’ court) as being the correct venue within the BVI. It was a question for the relevant foreign court as to whether it was able to use the statutory tools conferred in the avoidance provisions of the Act.

The Privy Council noted that this conclusion was supported by other provisions of the Act, including section 467, which allowed a foreign representative to apply to the BVI court for an order in aid of foreign proceedings. The BVI court was expressly enabled to apply the law of the BVI or the law of applicable in respect of the foreign proceeding (section 467(5)). The existence of that power to assist a foreign proceeding strongly militated against any implication of exclusivity in section 249; on the contrary, the BVI legislature must have been expecting foreign courts to be able to apply BVI insolvency law.

It was also observed that it was not uncommon for the courts in one country to apply the insolvency laws for another when giving assistance to the latter country, and the Privy Council cited the example of England v Smith [2001] Ch 419, where the English Court of Appeal had applied the insolvency law and practice of the requesting Australian court, and not the practice of the English courts, in relation to an application for examination.

Whilst it was true that the foreign court invoking section 249 would not be vindicating pre-existing property rights, and would instead be exercising a discretionary power to adjust concluded transactions, and there was a possibility that different courts might exercise the discretion in different and possibly inconsistent ways, those considerations did not militate against the conclusion that section 249 did not prohibit the foreign court from exercising the powers it conferred.

The Privy Council held that the application for anti-suit relief was misconceived. The New York proceedings had been commenced with the authority of the BVI court and all that would have been necessary, had there been grounds to prevent their continuance, would have been for the BVI court to revoke its permission. It had not done so. Considerable weight was attached to the view of the ECCA that BVI public policy favoured the enforcement of the BVI’s insolvency regime overseas. There was also no ground for departing from comity’s requirement that the foreign judge should normally decide whether an action in his own court should be allowed to proceed. Further, given the lack of prohibition in section 249 on a foreign court using the powers, there was no question of vexation or oppression.

Finally, the Privy Council declined the applicants’ request for declaratory relief and questioned whether it was the task of the BVI courts to give advisory opinions to the US courts at the request of defendants to proceedings in the latter courts.

The Practical Implications

The decision supports cross-border co-operation and confirms that insolvency practitioners have a wider choice of forum in which to seek remedies. This is important for office-holders representing offshore funds, since the defendants to claims will often be based in onshore jurisdictions, and the ability to seek avoidance remedies in the local courts for those defendants will often be of significant benefit when considering enforcement.

The decision will therefore be extremely interesting to those dealing with distressed investment funds and assisting asset recovery exercises following the collapse of such funds.

Alistair Abbott
Alistair Abbott is a Partner in Litigation and Insolvency at Forbes Hare in the Cayman Islands. He also practises BVI law and regularly appears in the courts there. He specialises in investment-related disputes, shareholder and warranty actions, fraud claims, and insolvency.