NAV And Other Financial Determinations: Implications Of Fairfield Sentry Limited (In Liquidation) V Migani And Others

In this alerter, we discuss the wider implications of the recent Privy Council decision in Fairfield Sentry Limited (In Liquidation) ("Fairfield") v Migani and others (the "Defendants")1. The court decided that investors were entitled to keep redemption amounts, even though they were calculated on the basis of determinations of NAV which used data that was subsequently found to be fictitious.

Whilst the case is directly applicable to investments in funds, it has indirect application also to fund-linked derivatives and fund-linked notes linked to fund assets and has potential wider application in CDOs and other transaction structures with market value triggers. It may influence how provisions relating to determinations are drafted in transaction documentation in the future.

The facts

Between 1997 and 2008, the BVI mutual fund Fairfield placed investor funds with Bernard L. Madoff Investment Securities LLC ("BLMIS"). Investors participated indirectly in these placements by subscribing for shares in Fairfield at a price dependent on Fairfield's net asset value per share ("NAV") and were entitled to withdraw funds by redeeming their shares under the provisions of Fairfield's Articles of Association (the "Articles").

In December 2008, after BLMIS was discovered to be a Ponzi scheme, the directors of Fairfield (the "Directors") suspended the determination of Fairfield's NAV per share, which effectively terminated the redemption of the shares. Fairfield was subsequently wound up. Investors who had redeemed their shares prior to December 2008 recovered the NAV which the Directors determined to be attributable to their shares based on fictitious BLMIS reports.

Fairfield's liquidators tried to claw back monies paid to investors (including the Defendants) who had redeemed their shares prior to December 2008 when the Madoff fraud was uncovered, intending that losses be distributed rateably between all Fairfield investors, irrespective of when and whether their shares had been redeemed.

The decision

The court allowed the appeal and found in favour of the Defendants.

The court noted that the Articles stated that "Any certificate as to the Net Asset Value per Share as to the Subscription Price or Redemption Price therefor given in good faith by or on behalf of the Directors shall be binding on the parties".

The court held:

As a matter of language, a "certificate" ordinarily meant no more than (a) a statement in writing, (b) issued by an authoritative...