Stanford International Bank Ltd ((in Liquidation)) (Acting by and through its Joint Liquidators Mark McDonald and Hugh Dickson) (Antigua and Barbuda)
| Jurisdiction | UK Non-devolved |
| Judge | Lady Arden,Lord Briggs,Lord Carnwath,Sir Andrew Longmore,Lord Wilson |
| Judgment Date | 16 December 2019 |
| Neutral Citation | [2019] UKPC 45 |
| Date | 16 December 2019 |
| Docket Number | Privy Council Appeal No 0075 of 2018 |
| Court | Privy Council |
[2019] UKPC 45
Lord Wilson
Lord Carnwath
Lord Briggs
Lady Arden
Sir Andrew Longmore
Privy Council Appeal No 0075 of 2018
Privy Council
Michaelmas Term
From the Court of Appeal of the Eastern Caribbean Supreme Court (Antigua and Barbuda)
Appellant
Justin Fenwick QC
Nicole Sandells QC
(Instructed by Gowling WLG (UK) LLP)
Respondent
Prof Mark Watson-Gandy
Lenworth Johnson
(Instructed by Edwin Coe LLP)
Heard on 23 and 24 July 2019
( with whom Lord Wilson and Sir Andrew Longmore agree)
This appeal is about the rights of creditors, under the laws of Antigua and Barbuda, who have suffered loss by investing, through an Antiguan bank, in what turned out to have been a Ponzi scheme. Giving the advice of the Board in Fairfield Sentry Ltd v Migani [2014] UKPC 9, Lord Sumption said this, at para 3:
“It is inherent in a Ponzi scheme that those who withdraw their funds before the scheme collapses escape without loss, and quite possibly with substantial fictitious profits. The loss falls entirely on those investors whose funds are still invested when the money runs out and the scheme fails.”
This uneven (some might say capricious) distribution of the loss occasioned to the victims of what might be described as a common misfortune has given rise to anxious consideration by the courts of Antigua and by the Board as to the remedies which might be available to the joint liquidators of the vehicle for this Ponzi scheme, namely Stanford International Bank (“SIB”), so as to enable them to achieve a re-adjustment of that loss among the bank's depositors which would accord with the liquidators' perception of fairness, justice and equity. They achieved limited success at first instance but suffered a comprehensive defeat in the Court of Appeal.
Central to the analysis of the relevant legal issues is the fact that SIB was incorporated as an Antiguan International Business Corporation (“IBC”) under the Antiguan International Business Corporations Act (“the IBC Act”). As will be explained in more detail below, the IBC Act prescribes a rather unusual insolvency regime for the winding up of an IBC but it also contains, at section 204, a generously worded provision of discretionary remedies which may be sought from the court, both by shareholders and creditors, where there has been oppressive or unfairly prejudicial conduct, in order to rectify the matters complained of. This may conveniently be labelled “section 204 relief”.
Three main issues have emerged from this litigation, which was initiated by an application to the court by the joint liquidators for directions. The first, which only emerged in the Court of Appeal, but which takes logical precedence over the others, is whether section 204 relief is available at all in respect of the affairs of an IBC in liquidation. The second issue, which arises only if (contrary to the judgment of the Court of Appeal) the first is answered in the affirmative, is whether section 204 provides a realistic basis for a claim by the joint liquidators to recover, for the benefit of the creditors generally, amounts paid by SIB to depositor creditors before its liquidation (“claw-back claims”). The third issue is whether section 204 provides a basis for the liquidators to re-adjust the claims of creditors in the liquidation so as to allocate the net proceeds of recoveries in favour of those depositors who have not been paid at all, as against those who have been partly paid prior to liquidation, otherwise than as would be achieved by a pari passu distribution of the proceeds of the liquidation in accordance with the insolvency scheme applicable to SIB. The judge's directions to the liquidators effectively answered the second issue in the negative and the third in the affirmative.
By way of summary, the Board has concluded:
(a) by a majority, that section 204 relief is not available in relation to an IBC in liquidation, so that this appeal should be dismissed;
(b) unanimously that, if section 204 relief had in principle been available, the judge was right to conclude that claw-back claims should not be pursued;
(c) unanimously, that re-adjustment of creditors' claims in the liquidation should not have been permitted, even if section 204 relief was in principle available.
While it may be said that the first of those three conclusions is sufficient to dispose of this appeal, the other issues were very fully argued and the Board thinks it appropriate to deal with them, out of respect for the quality of the competing submissions, the careful judgment of the judge, and because of the general importance of the legal issues at stake.
SIB started operations in Antigua under the IBC Act in 1990, having moved from Montserrat, where it was called Guardian Bank. Throughout its operations in Antigua it was controlled by Robert Allen Stanford. The liquidators say that Mr Stanford ran SIB throughout its operations in Antigua as a Ponzi scheme, so that it was probably insolvent for the whole of the period from 1990 onwards. Mr Stanford is now serving a 110 year prison sentence in the United States of America.
SIB's modus operandi was to seek investments by the sale of certificates of deposit (“CDs”), promising repayment of capital together with contractual interest upon maturity, with provision for early redemption at a discount. The relationship thereby created between SIB and its depositors was therefore that of debtor and unsecured creditor rather than, for example, trustee and beneficiary.
From about September 2008 there began a run on SIB, during which depositors sought to recover capital and interest, to the extent that US$1.3 billion of withdrawals were made prior to SIB being placed in receivership, and its operations being suspended, by the Antiguan Financial Services Regulatory Commission in February 2009. The appointment of receiver-managers was confirmed by the High Court of Antigua on 26 February 2009 and, on 15 April, the High Court converted the receivership into a liquidation, re-appointing the receiver-managers as liquidators. There have been some changes in the identity of the liquidators since then, but they are immaterial.
Since for many years Mr Stanford had been misappropriating incoming payments from depositors rather than investing them in appropriate securities, there was by early 2009 only a fraction of the funds within SIB required to repay creditors in full. Leaving aside trade creditors, the depositors in SIB may, from a viewpoint in February 2009, broadly be divided into three classes. First, those who had been paid their contractual entitlements (capital and interest) in full prior to the onset of liquidation. Secondly those who had been paid part of their contractual entitlement before liquidation, who could therefore claim as creditors for the unpaid balance in the liquidation. Thirdly, those depositors who had received no part of their contractual entitlement.
The liquidators applied to the court for directions in October 2013 and in May 2014 sought the appointment of the first respondent as amicus curiae, to present all arguments which might reasonably be advanced by creditors who would stand to be disadvantaged by the claims which the liquidators sought authority to pursue. In summary, the steps which the liquidators invited the court to authorise them to take were as follows:
(a) The pursuit of claims, without limit of time, for disgorgement by depositors of any sums received from SIB in excess of their respective capital deposits. This sought disgorgement of amounts paid out as contractual interest from a class which the liquidators labelled “net winners”. This was said to be justified on the basis that those amounts could only have been taken from other depositors' capital, since at no time had SIB generated any investment profits sufficient to pay interest. Some US$200m was estimated to have been paid out in this way.
(b) Claims against all depositors who had received payments during the run on the bank from September 2008 until it ceased trading. These payments were estimated to have amounted to US$1.3 billion. The basis upon which a claw-back of these payments was said to be justified was that, if SIB had been placed in liquidation before the run on the bank commenced, then these payments would not have been made, and they ought to be regarded as having amounted to wrongful preferences. The depositors thereby repaid were labelled by the liquidators “preference creditors”.
(c) Re-adjustment of depositors' claims within the liquidation, so as to disallow the claims of partly paid depositors in favour of depositors who had not been paid at all. This claim did not involve any element of claw-back. Rather, it sought to treat part-payments prior to liquidation as having been wrongful so that the amount of them could be, in effect, set off against what those depositors might otherwise have received from the liquidation proceeds on account of that part of their debts which remained unpaid.
With one exception, all these proposed claims were put forward by the liquidators upon the basis that they could be acceded to by the court as a form of section 204 relief for oppressive or unfairly prejudicial conduct, namely the conduct of SIB's affairs as a Ponzi scheme to the detriment of its depositors generally. The exception relates to claim (b), against the preference creditors. In addition to being put forward as a form of section 204 relief, it was also pursued as a common law preference claim, upon the basis (which will be explained in more detail below) that because the IBC Act excluded the statutory regime for avoiding fraudulent preferences applicable to...
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