Bernard L. Madoff Investment Securities LLC (referred to in the judgment as "BLMIS") was a New York-based fund manager controlled by Bernard Madoff. Over a period of at least seventeen years Madoff operated what was probably the largest Ponzi scheme in history, accepting sums variously estimated between $17 billion and $50 billion for investment. From at least the early 1990s there appear to have been no trades and no investments. Reports and returns to investors were fictitious and the corresponding documentation fabricated. On 11 December 2008, Mr Madoff was arrested, and in March 2009 pleaded guilty to a number of counts of fraud.
Funds for investment were commonly entrusted to BLMIS by "feeder funds". The largest of these was Fairfield Sentry Ltd, an offshore fund incorporated in the British Virgin Islands. Its liquidators stated that as at 31 October 2008 about 95% of its assets, amounting to some US$7.2 billion, were invested with BLMIS. Investors participated indirectly in these investments by acquiring shares in Fairfield Sentry at a price dependent on the net asset value per share published from time to time by the directors. Investors were entitled to withdraw funds by redeeming their shares under the provisions of the Articles of Association.
Stichting Shell Pensioenfonds (called simply "Shell" in the judgment), is a Dutch pension fund incorporated in the Netherlands. Between 2003 and 2006, it subscribed US$45m for 46,708.1304 Fairfield Sentry shares, under five successive subscription agreements. These agreements were governed by New York law and contained submissions to the exclusive jurisdiction of the New York courts.
The Dutch proceedings
On 12 December 2008 (the day after Mr Madoff's arrest) Shell applied to redeem its shares in Fairfield Sentry. However, no redemption payment was received and, six days later (on 18 December 2008), the directors of Fairfield Sentry effectively suspended share redemptions.
Four days later, on 22 December 2008, Shell applied in the Amsterdam District Court for permission to obtain a pre-judgment garnishment or conservatory attachment over all assets of Fairfield Sentry held by Citco Bank up to a value of US$80m. An order in those terms was made on the following day. In accordance with that order, three separate attachments were made totalling about US$71m. The initial application for authority to attach was made ex parte. However, Fairfield Sentry was entitled to apply inter partes to lift the attachment and did so; that application was rejected by the District Court of Amsterdam on 16 February 2011.
Shell had a four-month deadline for the commencement of substantive proceedings; this was extended several times, and the proceedings were ultimately commenced on 19 March 2010. The principal claim made was for US$45m damages for the alleged breaches of the representation and warranties contained in a side-letter.
The BVI winding-up proceedings
On 21 July 2009, Fairfield Sentry was ordered by the High Court of the British Virgin Islands to be wound up and Mr Kenneth Krys and Ms Joanna Lau were appointed as its joint liquidators. Shell submitted a proof of debt in the liquidation for US$63,045,616.18. This amount was said to represent the redemption price of Shell's shares, calculated by reference to the NAV per share published by the directors of Sentry at 31 October 2008. It was claimed as a debt due under Shell's redemption notice of 12 December 2008. The joint liquidators rejected Shell's proof on 21 August 2014, as a result of Bannister J's direction of 14 August, subject to Shell's right if it objected to the assets being distributed in accordance with that direction to put forward its objection in writing by 17 October 2014.
Accordingly, the effect of the attachments is that if Shell was to succeed in its substantive claim in the Dutch courts, it is likely to be able to satisfy its judgment-debt in full out of Fairfield Sentry's assets frozen by the garnishee order, whereas others who have claims in the liquidation ranking with or ahead of theirs may recover only a dividend.
On 8 March 2011, shortly after the District Court of Amsterdam rejected Fairfield Sentry's challenge to the attachments, the joint liquidators applied in the High Court of the British Virgin Islands for an anti-suit injunction restraining Shell from prosecuting its proceedings in the Netherlands and requiring it to take all necessary steps to procure the release of the attachments. The application was heard inter partes by Bannister J in July 2011, who rejected it in a judgment delivered on 9 August. His main reason, in summary, was that as a matter of principle the BVI court would not prevent a foreign creditor from resorting to his own courts, even if he was amenable to the BVI court's jurisdiction. The Eastern Caribbean Court of Appeal allowed the appeal and made an order in substantially the terms which the joint liquidators had asked for in their notice of appeal. The order restrained Shell from taking any further steps in the existing Dutch proceedings against Fairfield Sentry or commencing new ones, but did not refer in terms to the attachments. The Court of Appeal's reasons, in summary, were (i) that Shell was subject to the personal jurisdiction of the BVI court by virtue of having lodged a proof in the liquidation, (ii) the assertion by the Dutch courts of a jurisdiction to attach assets on the sole ground that it consisted in a debt owed to the insolvent company by a Dutch entity was exorbitant; and (iii) Shell should not be allowed to avail itself of that jurisdiction so as to gain a priority to which it was not entitled under the statutory rules of distribution applying in the British Virgin Islands.
Their Lordships noted that under British Virgin Islands insolvency law (as in England), the making of an order to wind up a company divests it of the beneficial ownership of its assets, and subjects them to a statutory trust for their distribution in accordance with the rules of distribution provided for by statute.[1] This applies not just to assets located within the jurisdiction of the winding up court, but all assets world-wide. This, they held, necessarily excludes a purely territorial approach in which each country is regarded as determining according to its own law the distribution of the assets of an insolvent company located within its territorial jurisdiction.
The Privy Council then recapped the fundamental principle applicable to all anti-suit injunctions, as stated at the outset of the history of this branch of law by Sir John Leach V-C in Bushby v Munday.[2] The court will not interfere directly with any foreign court, but may act personally upon a defendant by restraining him from commencing or continuing proceedings in a foreign court where the ends of justice so require. Their Lordships noted that the 'ends of justice' is a deliberately imprecise expression, but referred to the three main categories identified by Lord Cranworth LC in Carron Iron Company Proprietors v Maclaren[3] These were:
simultaneous proceedings in England and abroad on the same subject-matter;
foreign proceedings which were being brought in an inappropriate forum to resolve questions which could more naturally and conveniently be resolved in England; and
where foreign proceedings are "contrary to equity and good conscience".
Their Lordships referred to the case of Re Oriental Inland Steam Company[4] where a creditor proved in the liquidation of the Oriental Inland Steam Company in England but attempted to obtain priority to other creditors by attaching property of the company in India. He was restrained by injunction from proceeding in India, but obtained the value of his debt from the liquidator in return for lifting the attachment, without prejudice to the question whether he should be allowed to retain it. The Court of Appeal affirmed an order requiring him to repay it. Sir William James LJ said:
All the assets there would be liable to be torn to pieces by creditors there, notwithstanding the winding-up, and there would be an utter incapacity of the Courts there to proceed to effect an equitable distribution of them. The English Act of Parliament has enacted that in the case of a winding-up the assets of the company so wound up are to be collected and applied in discharge of its liabilities. That makes the property of the company clearly trust property. It is property affected by the Act of Parliament with an obligation to be dealt with by the proper officer in a particular way… One creditor has, by means of an execution abroad, been able to obtain possession of part of those assets. The Vice-Chancellor was of opinion that this was the same as that of one cestui que trust getting possession of the trust property after the property had been affected with notice of the trust. If so, that cestui que trust must bring it in for distribution among the other cestuis que trust. So I, too, am of opinion, that these creditors cannot get any priority over their fellow-creditors by reason of their having got possession of the assets in this way. The assets must be distributed in England upon the footing of equality.
The Privy Council noted that in Re North Carolina Estate Co Ltd[5]Chitty J applied the same principle, and did Millett J in Mitchell v Carter[6] The Privy Council also noted that the same principle had been upheld by the United States Supreme Court in Cole v Cunningham.[7]
Anti-suit injunctions
The Privy Council reviewed the leading modern case on the jurisdiction to restrain foreign proceedings, Société Nationale Industrielle Aérospatiale v Lee Kui Jak.,[8] and noted that in that case Lord Goff, also sitting in the Privy Council, noted that insolvency cases involved different considerations and proceeded on a different principle. They were based not specifically upon protecting litigants against vexation or oppression, but on the protection of the court's jurisdiction administer fairly and equally between claimants to an insolvent estate:
One such category of case arises where an estate is being administered in this country, or a petition in bankruptcy has been presented in this country, or winding up proceedings have been commenced here, and an injunction is granted to restrain a person from seeking, by foreign proceedings, to obtain the sole benefit of certain foreign assets. In such cases, it may be said that the purpose of the injunction is to protect the jurisdiction of the English court.[9]
Their Lordships felt that it was clear from Lord Goff's formulation that he was making the same distinction as Lord Cranworth had made in Carron Iron between cases such as the insolvency cases, in which there is an equitable jurisdiction to enforce the statutory scheme of distribution according to its terms, and cases in which the court intervenes on the ground of vexation or oppression. The Privy Council also reflected upon its recent decision in Singularis Holdings Ltd v PriceWaterhouseCoopers[10] where it was held that there is a broader public interest in the ability of a court exercising insolvency jurisdiction in the place of the company's incorporation to conduct an orderly winding up of its affairs on a world-wide basis, notwithstanding the territorial limits of its jurisdiction. In such cases "the court is not standing on its dignity", but it intervenes because the proper distribution of the company's assets depends upon its ability to get in those assets so that comparable claims to them may be dealt with fairly in accordance with a common set of rules applying equally to all of them, and there is no jurisdiction other than that of the insolvent's domicile in which that result can be achieved.
Accordingly, the Board felt in principal that an injunction was justifiable. But two further subsidiary issues needed to be considered. Firstly, whether Shell, as a foreign entity, is subject to the court's jurisdiction. And secondly, whether, even on the footing that an anti-suit injunction is available in principle, it is right to make one as a matter of discretion.
Jurisdiction
The Privy Council followed the recent decision of the United Kingdom Supreme Court in Rubin v Eurofinance SA.[11] Shell argued that it had not submitted to the jurisdiction of the British Virgin Islands courts for all purposes; it accepted that it had submitted only for the purpose of claims under the Insolvency Act and Rules, and not for the purpose of claims governed by the general law. The Privy Council rejected that submission, stating "[i]n the Board's opinion, there is no such principle."
Discretion
As with any injunction, their Lordships noted this is subject to the court's discretion to refuse relief if in the particular circumstances it would not serve the ends of justice. Their Lordships noted that in the present case, the Judge at first instance having concluded that the issue of an injunction would be contrary to principle, the Court of Appeal were entitled to overrule him and to exercise their own discretion. They exercised it in the liquidators' favour, and the Board should not interfere unless it is shown that they were guilty of some error of principle or misconception of fact, or that they were plainly wrong. Accordingly, the Privy Council declined to disturb the exercise by the Court of Appeal of their discretion in favour of the injunction.
Commentary
Commentary on the decision was generally positive, one commentator noting that "The judgment can be seen as a further endorsement of the restrained brand of the modified universalism developed in the Privy Council's recent decision in Singularis Holdings Ltd v PricewaterhouseCoopers", and "[i]t also clearly signals the BVI Court's willingness to intervene to protect the statutory scheme of distribution by means of anti-suit injunctions whilst providing useful guidance as to how the courts will exercise their equitable jurisdiction."[12] Another added "The judgment of the Privy Council provides clear guidance to litigants who have claims against insolvent companies in the BVI and who are considering whether to pursue other remedies in a foreign jurisdiction in addition to filing a claim in the liquidation."[13]
Liquidation is the process in accounting by which a company is brought to an end in Canada, United Kingdom, United States, Ireland, Australia, New Zealand, Italy, and many other countries. The assets and property of the company are redistributed. Liquidation is also sometimes referred to as winding-up or dissolution, although dissolution technically refers to the last stage of liquidation. The process of liquidation also arises when customs, an authority or agency in a country responsible for collecting and safeguarding customs duties, determines the final computation or ascertainment of the duties or drawback accruing on an entry.
In accounting, insolvency is the state of being unable to pay the debts, by a person or company (debtor), at maturity; those in a state of insolvency are said to be insolvent. There are two forms: cash-flow insolvency and balance-sheet insolvency.
Wrongful trading is a type of civil wrong found in UK insolvency law, under Section 214 Insolvency Act 1986. It was introduced to enable contributions to be obtained for the benefit of creditors from those responsible for mismanagement of the insolvent company. Under Australian insolvency law the equivalent concept is called "insolvent trading".
In law, a liquidator is the officer appointed when a company goes into winding-up or liquidation who has responsibility for collecting in all of the assets under such circumstances of the company and settling all claims against the company before putting the company into dissolution. Liquidator is a person officially appointed to 'liquidate' a company or firm. Their duty is to ascertain and settle the liabilities of a company or a firm. If there are any surplus, then those are distributed to the contributories.
United Kingdom insolvency law regulates companies in the United Kingdom which are unable to repay their debts. While UK bankruptcy law concerns the rules for natural persons, the term insolvency is generally used for companies formed under the Companies Act 2006. "Insolvency" means being unable to pay debts. Since the Cork Report of 1982, the modern policy of UK insolvency law has been to attempt to rescue a company that is in difficulty, to minimise losses and fairly distribute the burdens between the community, employees, creditors and other stakeholders that result from enterprise failure. If a company cannot be saved it is "liquidated", so that the assets are sold off to repay creditors according to their priority. The main sources of law include the Insolvency Act 1986, the Insolvency Rules 1986, the Company Directors Disqualification Act 1986, the Employment Rights Act 1996 Part XII, the Insolvency Regulation (EC) 1346/2000 and case law. Numerous other Acts, statutory instruments and cases relating to labour, banking, property and conflicts of laws also shape the subject.
Buchler v Talbot[2004] UKHL 9 is a UK insolvency law case, concerning the priority of claims in a liquidation. Under English law at the time the expenses of liquidation took priority over the preferred creditors, and the preferred creditors took priority over the claims of the holder of a floating charge. However, a crystallised floating charge theoretically took priority over the liquidation expenses. Accordingly the courts had to try and reconcile the apparent triangular conflict between priorities.
The British Virgin Islands company law is the law that governs businesses registered in the British Virgin Islands. It is primarily codified through the BVI Business Companies Act, 2004, and to a lesser extent by the Insolvency Act, 2003 and by the Securities and Investment Business Act, 2010. The British Virgin Islands has approximately 30 registered companies per head of population, which is likely the highest ratio of any country in the world. Annual company registration fees provide a significant part of Government revenue in the British Virgin Islands, which accounts for the comparative lack of other taxation. This might explain why company law forms a much more prominent part of the law of the British Virgin Islands when compared to countries of similar size.
British Virgin Islands bankruptcy law is principally codified in the Insolvency Act, 2003, and to a lesser degree in the Insolvency Rules, 2005. Most of the emphasis of bankruptcy law in the British Virgin Islands relates to corporate insolvency rather than personal bankruptcy. As an offshore financial centre, the British Virgin Islands has many times more resident companies than citizens, and accordingly the courts spend more time dealing with corporate insolvency and reorganisation.
Cayman Islands company law is primarily codified in the Companies Law and the Limited Liability Companies Law, 2016, and to a lesser extent in the Securities and Investment Business Law. The Cayman Islands is a leading offshore financial centre, and financial services form a significant part of the economy of the Cayman Islands. Accordingly company law forms a much more prominent part of the law of the Cayman Islands than might otherwise be expected.
Cayman Islands bankruptcy law is principally codified in five statutes and statutory instruments:
The anti-deprivation rule is a principle applied by the courts in common law jurisdictions in which, according to Mellish LJ in Re Jeavons, ex parte Mackay, "a person cannot make it a part of his contract that, in the event of bankruptcy, he is then to get some additional advantage which prevents the property being distributed under the bankruptcy laws." Wood VC had earlier observed that "the law is too clearly settled to admit of a shadow of doubt that no person possessed of property can reserve that property to himself until he shall become bankrupt, and then provide that, in the event of his becoming bankrupt, it shall pass to another and not to his creditors."
Modified universalism or modified universality is a legal concept relating to the general principle that in relation to corporate insolvency national courts should strive to administer the estate of insolvent companies in the spirit of international comity. The broad concept is that it is desirable for cross-border insolvencies to be managed by a single officeholder as a single estate rather than a series of piecemeal and unconnected proceedings in different countries, and that this should be recognised globally. In practice, whilst many countries will recognise foreign bankruptcy proceedings, in many instances the courts have set some limits on the recognition of insolvency proceedings, such that the courts apply this principle of modified universality whereby the courts retain a discretion to assess whether the overseas proceedings are consistent with their own principles of justice and public policy. But, subject to that safeguard, the courts will generally defer to the proceedings which are regarded as the "main proceedings" for the purposes of getting in and distributing assets of the insolvent company. The principal is referred as to modified universalism in that it strives to find a balance between purely territorial bankruptcy systems, and entirely universal international bankruptcy system.
Cross-border insolvency regulates the treatment of financially distressed debtors where such debtors have assets or creditors in more than one country. Typically, cross-border insolvency is more concerned with the insolvency of companies that operate in more than one country rather than bankruptcy of individuals. Like traditional conflict of laws rules, cross-border insolvency focuses upon three areas: choice of law rules, jurisdiction rules and enforcement of judgment rules. However, in relation to insolvency, the principal focus tends to be the recognition of foreign insolvency officials and their powers.
Hague v Nam Tai Electronics refers to a pair of legal decisions of the Privy Council on appeal from the British Virgin Islands. The first was a unanimous decision given by Lord Hoffman, reported at [2006] UKPC 52, which focussed upon the anti-deprivation rule and secured creditor's rights. The second was a unanimous decision given by Lord Scott, reported at [2008] UKPC 13, and concerned the liability of a company liquidator. The second decision was much more widely reported.
Provisional liquidation is a process which exists as part of the corporate insolvency laws of a number of common law jurisdictions whereby after the lodging of a petition for the winding-up of a company by the court, but before the court hears and determines the petition, the court may appoint a liquidator on a "provisional" basis. Unlike a conventional liquidator, a provisional liquidator does not assess claims against the company or try to distribute the company's assets to creditors, as the power to realise the assets comes after the court orders a liquidation.
Hong Kong insolvency law regulates the position of companies which are in financial distress and are unable to pay or provide for all of their debts or other obligations, and matters ancillary to and arising from financial distress. The law in this area is now primarily governed by the Companies Ordinance and the Companies Rules. Prior to 2012 Cap 32 was called the Companies Ordinance, but when the Companies Ordinance came into force in 2014, most of the provisions of Cap 32 were repealed except for the provisions relating to insolvency, which were retained and the statute was renamed to reflect its new principal focus.
Ayerst v C&K (Construction) Ltd [1976] AC 167 was a decision of the House of Lords relating to revenue law and insolvency law which confirmed that where a company goes into insolvent liquidation it ceases to be the beneficial owner of its assets, and the liquidator holds those assets on a special "statutory trust" for the company's creditors.
Brooks v Armstrong[2016] EWHC 2289 (Ch), [2016] All ER (D) 117 (Nov) is a UK insolvency law case on wrongful trading under section 214 of the Insolvency Act 1986.
Defender Limited is an investment fund. It was incorporated in the British Virgin Islands in 2007. Defender funneled clients' funds to Bernard Madoff's firm as part of a Ponzi scheme run by Madoff. Madoff was arrested in December 2008, and pleaded guilty to fraud in 2009. He is serving a 150-year prison term.
Sevilleja v Marex Financial Ltd[2020] UKSC 31 is a judicial decision of the Supreme Court of the United Kingdom relating to company law and the rule against reflective loss.
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