14 Oct, 2011

Ogier discusses follow up judgement on Fairfield Sentry

By Robert Foote, Managing Associate at Ogier BVI 

On 10 October 2011 Justice Bannister QC (“the Judge”) of the Commercial Court (“the Court”) in the British Virgin Islands (“the BVI”) handed down a judgment dismissing the vast majority of claims that the liquidators (“the Liquidators”) of Fairfield Sentry Limited (“Sentry”) had commenced against investors that had historically redeemed their investments out of Sentry (“the Redeemers”).  Ogier BVI acts for over 15 clients that are defendants to claims being brought by the Liquidators and represented 5 of the preliminary issues applicants.


The claim


The Liquidators issued over 175 claims in the BVI against the Redeemers for in excess of US$1.4 billion.  The Liquidators asserted two claims on behalf of Sentry:


(i)      First, they said that the payment of the redemption monies to the Redeemers was made by Sentry under a mistake of fact because, they alleged, 95% of the monies contributed by its members had been invested by Sentry with Bernard L Madoff Investment Securities LLC (“BLMIS”) and because, unbeknown to Sentry, BLMIS was being used to facilitate a massive Ponzi scheme.  On this basis Sentry sought to argue that when the Redeemers were paid, Sentry’s Net Asset Value (“NAV”) was actually nil or of a nominal value as a result of the fraud and that the Redeemers had therefore been unjustly enriched and should repay the redemption proceeds they had received (the “Restitutionary Claim”); and


(ii)    Secondly and relying on the same facts, they said that Sentry was entitled to set aside the redemptions on the grounds that the payment of the redemption monies had been effected under a mutual mistake (the “Mutual Mistake Claim”).

The preliminary issues

In April 2001 certain of the Redeemers applied to the Court to have two issues determined at a preliminary issues hearing.  The two issues that were identified as being suitable for preliminary issues determination, were as follows:

(i)      First, whether certain documents that had been distributed by Sentry amounted to certificates of NAV for the purposes of regulation 11 of the Sentry’s articles of association, given by or on behalf of the directors of Sentry, and whether, therefore, they precluded Sentry from asserting that the NAV was other than that stated by those documents (“the Certificates Argument”); and


(ii)    Secondly, whether by surrendering their shares, the Redeemers gave good consideration for the redemption monies they received and whether that precluded Sentry from subsequently asserting that the monies paid to the Redeemers on redemption exceeded the true redemption price and, as such, was recoverable as to the excess from the Redeemers (“the Good Consideration Argument”).

The preliminary issues judgment

Following the hearing of the preliminary issues on 28 and 29 July 2011, the Judge handed down his judgment on 16 September 2011. The Judge found the first preliminary issue, (the Certificates Argument) in Sentry’s favour but held that in surrendering their shares in consideration for payment of the redemption monies, the redeeming members had given good consideration (the Good Consideration Argument).  The Judge found that it was accordingly not open to Sentry to seek recovery of the price that it paid for the purchase of the shares of redeeming investors simply because it had calculated the NAV upon information which has subsequently proved to be unreliable for reasons unconnected with any of the Redeemers.

At the hearing on 16 September 2011 and following the Court having found for them on the Good Consideration Argument, the Redeemers asked the Court for judgment to be entered in their favour.  The Court was reluctant to do this because of concerns it had that the Mutual Mistake Claim had not been determined at the hearing of the preliminary issues and therefore remained outstanding.  Largely because of this concern and at the Judge’s invitation, the Redeemers decided that one of their number would make a formal application for summary judgment. 

On 20 September 2011, ABN Amro Fund Services (Isle of Man) Nominees Limited (“ABN Amro”) applied for final judgment based on the Court’s finding, in its favour on the Good Consideration Argument or, alternatively, for summary judgment.  That application was heard at short notice on 26 September 2011 and the judgment was handed down on 10 October 2011.

Judgment on the summary judgment application

Counsel for ABN Amro advanced the following principal arguments in support of his client’s application: 

(i)      The determination of the Good Consideration Argument as a preliminary issue in ABN Amro’s favour was finally determinative of the proceedings.  In support of this contention, Counsel argued that Sentry’s payment of the redemption proceeds pursuant to the redemption contract was irrecoverable unless Sentry could establish that the contract was void; and


(ii)    The fact that consideration passed from Sentry to ABN Amro in the form of redemption proceeds meant that the redemption contract could not be void (because the payment was made) and that by deciding the Good Consideration Argument in ABN Amro’s favour, it followed by necessary implication that the Court had made this finding.   

The Judge interpreted the first argument to mean that in the absence of facts in Sentry’s claim supporting a claim for the rescission or avoidance of the contract, Senty’s only hope was to establish that the contract never had binding effect.  He found that this argument was too widely formulated and found that a payment could be recovered if an otherwise valid contract could be rescinded or avoided. 

Although the Judge said that there was a superficial attraction to the second submission, he was not, ultimately, persuaded by it.  This is because he found that the Good Consideration Argument must have proceeded at the preliminary issues stage on the basis that the contracts were effective when, in fact, that question, which was a question raised by the Mutual Mistake Claim, had not been before the Court at the preliminary issues stage and remained outstanding.  It was because of this that the Judge found that he was not in a position to enter judgment in favour of ABN Amro based on the Good Consideration Argument and moved on to consider whether he was in a position to enter judgment on the basis of ABN Amro’s application for summary judgment in respect of the Mutual Mistake Claim.

Mutual mistake

In order to establish its claim in mutual mistake, Sentry needed to establish that the redemption contracts were void.  Having considered Sentry’s pleading the Judge determined that Sentry was seeking to establish that the redemption contracts were void based on the fact that the payment of the redemption monies had been effected under a mutual mistake.  Although the Judge found that Sentry’s pleading in this regard might amount to a claim that the redemption contracts were liable to be rescinded, he did not consider that it supported a claim that the redemption contracts were void.  As such he found that Sentry’s pleading was inadequate to establish a claim in mutual mistake.

Irrespective of this determination, given that ABN Amro’s Counsel had argued the application on the basis that it was being alleged by Sentry that the redemption contracts were void, the Judge proceeded on the basis that Sentry’s pleading was effective to make good a claim that the redemption contracts were void for common mistake.

Having reviewed what the Judge said was the most recent authority on common mistake, namely Great Peace Shipping Ltd v Tsavliris Salvage (International) Ltd [2002] EWCA Civ 1407 and Bell v Lever Bros [1932] AC 161, the Judge concluded that the question was whether the fact (contrary to the assumed understanding of both parties) that BLMIS was a Ponzi scheme meant that Sentry was unable to perform the contract which arose when a redemption notice was served in accordance with its articles of association. 

In answer to that question the Judge found that Sentry contracted to invest its members’ money and pay them the return from this investment when demanded on the basis of a rateable proportion of Sentry’s NAV.  The fact that a fund that Sentry and its investors believed to be genuine but which subsequently turned out to have been run fraudulently, had no impact whatsoever on Sentry’s ability to perform its obligations to its investors.  The Judge found that the fact, if true, that the directors should have declared a nil NAV when ABN Amro redeemed its shares did not make the contract void, it merely meant that that the money contributed by ABN Amro had been lost.  On this basis he said that, to his mind, Sentry’s claim in common mistake confused (i) a shared assumption the truth of which is a necessary condition for the performance of a particular contract with (2) a shared mistaken assumption about the background against which it was expected that the contract would be performed.  The Judge found that it was only in the first case that there would, as a matter of law, be no contract. 

Further and as mentioned above, the Judge said that the way in which Sentry’s mutual mistake claim was pleaded appeared to treat the contract between Sentry and the Redeemers as liable to be rescinded rather than void and that the Great Peace case was clear authority that the Court had no jurisdiction in equity to rescind a contract binding in law on the grounds of common mistake.  Finally, the Judge said that rescission would not be available in any event in circumstances such as were being argued by Sentry, where restitutio in integrum (the parties being put back to their original pre-contractual position) was not possible.


The Judge concluded that on any view Sentry’s mutual mistake claim could not succeed and that coupled with his finding in respect of the Good Consideration Argument, he concluded that Sentry would be bound to fail at trial on its claim, as presently formulated.  In light of his findings the Judge dismissed all of the eight claims in which the applicants for the preliminary issues hearing had been parties.

The ultimate result following the preliminary issues judgment and the judgment entered on ABN Amro’s summary judgment application, but subject to any appeal, is that Sentry cannot now claim back the redemption proceeds that it historically paid to the Redeemers.  This conclusion was reached on the following bases:

i)       Sentry’s restitutionary claim for unjust enrichment could not succeed as the Redeemers had provided good consideration because in return for the payment of the redemption proceeds, they had given up their shares in Sentry (and therefore the rights attaching to those shares).  The Redeemers had therefore not been unjustly enriched;

ii)      Sentry could not claim that the redemption contracts were void for mutual mistake because the redemption contracts were capable of performance.  The mistake that Sentry was relying on was merely a valuation mistake; and

iii)     Sentry had no basis for arguing that the redemption contracts should be rescinded because the Court had no jurisdiction in equity to rescind a contract binding in law on the grounds of common mistake and in circumstances where it would not, in any event be position to return the parties to the position they were in before the redemption contracts had been concluded.

This judgment is, of course, good news for the Redeemers but it is also good news for insolvency practitioners, legal practitioners and the funds industry generally in the jurisdiction (and in other offshore jurisdictions) in so far as it provides clarification on a number of issues that have not before been judicially determined.  In particular but depending on the circumstances of each case, it means that investors will now be able to redeem out of BVI funds safe in the knowledge that it is unlikely that the fund will be able subsequently to make a claim for the recovery of redemption proceeds that were paid under a mistake as to the correct NAV.

It is not clear at this stage whether the Liquidators will appeal the preliminary issues judgment or the summary judgment but the general view is that they will. 




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