Privy Council provides certainty to hedge funds
On 16 April 2014, the Privy Council issued a welcome decision in the Fairfield Sentry case, providing greater certainty as to the finality of the subscription price, redemption price and calculation of net asset value for hedge funds generally.
Fairfield Sentry, a British Virgin Islands business company, was the largest feeder fund into Bernard L Madoff Investments Securities (BLMIS). On 18 December 2008, the directors of Fairfield Sentry suspended the determination of its net asset value, thereby suspending the redemption of shares. On 21 July 2009, the High Court of the British Virgin Islands placed Fairfield Sentry into liquidation.
The liquidators of Fairfield Sentry brought an action to recover the proceeds of redemption from some of the largest shareholders who had redeemed their shares prior to the suspension of net asset value. Fairfield Sentry argued that the redeemers were paid out based on a mistake that the assets of the company were as stated by BLMIS, when there were in fact no such assets. The liquidators of Fairfield Sentry wished to treat the redeemed shareholders pari passu with the shareholders remaining in Fairfield Sentry…
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The Supreme Court has now “clarified”, in reality re-formulated, the applicable test for determining whether a particular contractual provision should be struck down as being a penalty.
An appeal to claw back redemption payments has been opposed.