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Fairfield Sentry Limited v Alfredo Migani and others

1 January 2013

The world is well aware of the catastrophic financial effects of Ponzi scheme fraud perpetuated by Bernard Madoff through his company Bernard L Madoff Investment Securities LLC (BLMIS). A BVI feeder fund named Fairfield Sentry Limited (Fairfield) had invested substantial sums into BLMIS and a number of Fairfield’s shareholders had redeemed from Fairfield in December 2008. The liquidators who were appointed over Fairfield initiated a claim seeking to recover the approximate sum of $7.5 million which had been paid out in redemption proceeds to investors in December 2008. The liquidators claimed that the redemption proceeds were paid in the mistaken belief that the funds placed with BLMIS had the values stated by BLMIS whereas they were in fact worthless.
The liquidators’ claim was heard by Honourable Edward Bannister J, QC, in April 2011 in the BVI Commercial Court where the court had to determine two main issues. Harneys acted for a lead group of defendants who had redeemed from Fairfield in December 2008. The first issue concerned whether certain documents issued by Fairfield’s administrator recording the NAV per share or redemption price were binding under article 11 of the articles of association of Fairfield which deals with the effect of certain ‘certificates’ (the first issue). The second issue concerned whether the redeeming shareholders by surrendering the shares gave good consideration for the payment made by Fairfield of the redemption price and if so whether it precluded Fairfield from asserting that the money paid to that member on redemption exceeded the true redemption price and is to be recoverable as to the excess from such redeeming members (the second issue).

On the first issue, Bannister J decided that the documents issued by Fairfield’s administrator were not binding documents pursuant to Fairfield’s articles of association. On the second issue however, Bannister J decided in favour of the defendants that they had provided good consideration. Fairfields’ liquidators appealed Bannister J’s decision which was heard in April 2012 before the Honourable Justices of Appeal, Madame Janice Pereira, Mr Don Mitchel and Mr Geoffrey Bell where the Court of Appeal upheld the commercial court’s decision on both the first and second issue. The parties proceeded to appeal to the Privy Council in 2014. The defendants appealed the Court of Appeal’s decision of the first issue and Fairfield’s liquidators appealed the Court of Appeal’s decision on the second issue. Justices Lord Neuberger, Lord Mance, Lord Clarke, Lord Sumption and Lord Toulson of the Privy Council dismissed the Fairfield liquidators’ appeal on the second issue and allowed the defendants’ appeal on the first issue finding that three of the documents which were issued by Fairfield’s administrator constituted certificates for the purpose of Article 11 of Fairfield’s Articles of Association and were therefore binding on Fairfield. The Privy Council defined certificates as (i) a statement in writing, (ii) issued by an authoritative source, (iii) communicated by whatever method to a recipient intended to rely on it and (iv) conveys information (vi) in a form or context which shows it is intended to be definitive. The Privy Council therefore found that the monthly email, monthly statement of account sent to all clients as well as the contract note sent to subscribing or redeeming clients in respect of subscriptions or redemptions were all certificates as they communicated information in documentary form to members, were issued by the Administrator under the authority of the directors and the context in which they were issued, plainly demonstrated they were intended to be definitive.
The liquidators were therefore unsuccessful in their attempts to claw back the sums that were redeemed by investors in December 2008.

Harneys lawyers involved in this case include Phillip Kite, Andrew Thorp, Claire Goldstein and Marcia McFarlane.