“Devil Take the Hindmost” Anti-Suit injunction to maintain historic investment adage rejected by Privy Council

In May 2019 the Privy Council delivered its Judgment in UBS AG New York v Fairfield Sentry Ltd (In Liquidation) (British Virgin Islands).

The appeal, with leave of the Court of Appeal of the Eastern Caribbean Supreme Court (“the ECCA”), was an appeal against the judgment of the ECCA dated 20 November 2017 which dismissed the “UBS” appeal against the first instance Judge’s refusal to grant an anti-suit injunction to restrain the liquidators of Fairfield Sentry Ltd (“the liquidators”) from pursuing proceedings in the United States under section 249 of the British Virgin Islands’ Insolvency Act 2003 (“the IA 2003”). This section empowered the High Court of the BVI (“the High Court”) to set aside voidable transactions, such as an unfair preference or an undervalue transaction, and to make orders to restore the position to what it would have been if the company had not entered into such transactions.

The dispute arose out of the multi-billion dollar Ponzi scheme which Bernard L Madoff operated through his company Bernard L Madoff Investment Securities LLC (“BLMIS”). Fairfield Sentry Ltd (“Sentry”), was a “feeder” fund. Between 1997 and 2008 Sentry invested some US$7.2 billion in BLMIS. After Mr Madoff’s fraud came to light following his arrest in December 2008, the High Court made orders to wind up each of Sentry, Sigma and Lambda.

Ponzi schemes have in common with many asset bubbles that those who invest early and realise their investment before the crash can make significant profits, while those, who invest later or otherwise retain their investment in the scheme when it crashes, lose everything. As an anonymous pamphleteer during the South Sea Bubble of 1720 stated, a case of “devil take the hindmost”.

The liquidators’ claims were an attempt to modify that historic adage and share the pain among investors irrespective of when they exited the feeder fund. The liquidators did this by raising proceedings in the United States under section 249 of the IA 2003 and on common law grounds sought to recover funds paid out to investors in Sentry who redeemed their shares at valuations which, as hindsight reveals, bore no relationship to the actual value of their shares. Proceedings were commenced against several hundreds of defendants in the United States and they are currently before the US Bankruptcy Court in New York. By order dated 6 December 2018 United States Bankruptcy Judge, Bernstein J, dismissed the liquidators’ claims at common law against all defendants except to the extent that the claims alleged a constructive trust against defendants who had knowledge of the Madoff frauds but allowed the statutory avoidance claims under section 249 of the IA 2003 to proceed.

The dispute between the liquidators and investors who redeemed their investments before the crash had been strenuously undertaken both in the BVI, and in the United States. UBS as a potential debtor of the liquidators’ claims under section 249 of the IA 2003 sought an anti-suit injunction from the BVI courts to restrain the liquidators from proceeding with their claims in the United States. After Leon J dismissed UBS’s application for an anti-suit injunction and the ECCA dismissed its appeal, UBS appealed to the Board with the leave of the ECCA.

The Privy Council in a firm judgment rejected the appeal and found that the anti-suit injunction was misconceived as (1) the liquidators were officers of the BVI High Court and they raised the proceedings in the United States with the authority of the High Court. If there were grounds for preventing the liquidators from proceeding with the US claims, the High Court would not need to grant an injunction but could revoke its permission for the proceedings to continue. The High Court had not done so. (2) It was a question for the US courts whether they should apply BVI law as the liquidators requested but that it was perfectly open for them to do so.


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