Europe: EU / UK regulatory roundup
A round up of recent regulatory developments in the EU and UK.
In UBS AG New York and others v. Fairfield Sentry Ltd (In Liquidation) and others ("Fairfield"), the Judicial Committee of the Privy Council in London ("Privy Council"), sitting as the highest UK appellate court for certain British Overseas Territories, held that section 249 of the British Virgin Islands Insolvency Act 2003 (the "Act"), which concerns setting aside preferential transactions, may be applied by a non-BVI court since the Act "does not prohibit a foreign court from exercising the powers which it confers." The Privy Council held that whether such a foreign court could, in fact, exercise the powers under section 249 was a matter for that foreign court to decide.
The Privy Council, therefore, rejected an application for an anti-suit injunction that sought to halt the liquidators of a BVI-based investment fund from asserting preference claims in a United States Bankruptcy Court under section 249 of the Act to recover funds paid out to investors.
The Privy Council's decision and reasoning could have implications beyond the BVI, including in relation to UK insolvency cases and certain other offshore jurisdictions that continue to use the Privy Council as the court of final appeal.
The "claw back" actions by the trustee of the Madoff fund and its various feeder funds continue to reverberate through the courts. Fairfield involved a trio of BVI-based investment funds—Fairfield Sentry Ltd ("Sentry"), Fairfield Sigma Ltd, and Fairfield Lambda Ltd—that were "feeders" to the Madoff fund, to the tune of approximately US$7 billion. When the Ponzi scheme was revealed for what it was, the BVI feeder funds were left exposed to billions of dollars of losses and, following Mr Madoff's arrest in 2008, the BVI High Court made orders to wind-up each of them.
Before being wound-up, the feeder funds had issued redeemable shares to investors, the redemption value of which was allegedly based upon fraudulent valuation reports prepared by the Madoff fund. The Sentry liquidators asserted that UBS AG New York ("UBS") and other investors redeemed their shares "at valuations which, as hindsight reveals, bore no relationship to the actual value of their shares." The liquidators commenced litigation to claw back the funds paid out to hundreds of investors in Sentry, including UBS, on common law grounds and under the preference provisions of section 249 of the Act. Despite relying upon the BVI insolvency statute, the litigation was not commenced by the liquidators in the BVI courts, but rather in the US Bankruptcy Court for the Southern District of New York in the Fairfield Chapter 15 ancillary proceeding.
UBS went back to the BVI and sought an anti-suit injunction from the BVI courts to prevent the liquidators from proceeding with their claims in the United States. The application was dismissed at first instance by the BVI High Court, which was upheld by the Court of Appeal of the Eastern Caribbean Supreme Court and, ultimately, made its way to the Privy Council in London.
Before the Privy Council, UBS argued that section 249 "conferred a right to grant relief only on the [BVI] High Court which was a domestic court charged with the supervision of the winding up" and that, as a result, "no foreign court was empowered to grant such relief." UBS also maintained that the BVI court had no authority to delegate its powers under section 249 to any foreign court and had not purported to do so.
The liquidators submitted that, in essence, section 249 did not restrict its use by a foreign court and that "it was for the US Bankruptcy Court to decide under US rules of private international law whether it would apply BVI insolvency law in dealing with the liquidators' applications." The liquidators also noted that UBS had made the same or similar arguments to the US Bankruptcy Court, which had declined to dismiss the claims asserted by the liquidators under section 249 of the Act.
The Privy Council found in favour of the liquidators and in the critical passage of the panel's reasoning, the panel held that section 249 "contains no express prohibition on a foreign court from exercising those powers [under Section 249] at the request of a BVI office holder and no such prohibition arises by necessary implication." The panel continued: "In short, the section does not address the matter of the powers of a foreign court; one would not expect it to do so. On the contrary, it is a question for each foreign court from which a BVI office holder seeks assistance to determine whether it can use the statutory tools which BVI insolvency legislation has conferred on the BVI court."
In reaching this conclusion the Privy Council identified in the Act an overarching concern to assist foreign insolvency proceedings. This concern militated against any implication that claims under section 249 could only be asserted by liquidators in a BVI court. The Privy Council was also mindful of the regularity with which courts in one country apply the insolvency laws of another when giving assistance to the latter country. With that in mind, the Privy Council considered it to be all the more appropriate to interpret section 249 so as to permit a foreign court to exercise the claw back powers which section 249 conferred.
As noted at the outset, the Privy Council distinguished the liquidators' ability to commence proceedings in the US from the US courts' decision whether to apply BVI law as the liquidators requested. This distinction reflects a careful balance struck between three objectives: first, encouraging cooperation between jurisdictions in international insolvencies; second, empowering liquidators in one country to take steps in another country as necessary to fulfil their mandate; and, third, respecting the autonomy and competence of other countries' courts to decide issues of law for themselves.
Fairfield confirms the willingness of US, BVI, and UK courts to assist insolvency office holders appointed by foreign courts and, if necessary, to apply the insolvency law of that foreign jurisdiction. Although there may be differences in the various insolvency statutes, the policy and reasoning behind the Privy Council's decision has relevance to foreign courts' abilities to use the claw back tools contained in the insolvency laws of the UK, certain British Overseas Territories (e.g. BVI, Bermuda, and Cayman Islands), and those Commonwealth countries (e.g. The Bahamas) that still designate the Privy Council in London as their highest appellate court.
On July 16, 2020, the Court of Justice of the European Union (CJEU) published its decision in the landmark case Data Protection Commissioner v Facebook Ireland Ltd, Maximilian Schrems and intervening parties, Case C-311/18 (known as the Schrems II case).
On July 7, 2020, the Commission de Surveillance du Secteur Financier (CSSF) issued an FAQ document on Circular 02/77 concerning the protection of investors in case of NAV calculation errors and the correction of the consequences resulting from non-compliance with the investment rules applicable to undertakings for collective investment (the FAQ).