Privy Council reverses Court of Appeal in liquidator appeal sanction case

The Privy Council's recent judgement in Kenneth M Krys v Farnum Place LLC [2025] UKPC 43 provides crucial guidance on liquidators' duties and the courts' approach to sanctioning appeals, particularly where material changes in circumstances arise during proceedings.

Background and commercial context

Fairfield Sentry Ltd operated as one of the largest feeder funds for Bernard Madoff's investment scheme before entering BVI liquidation in 2009. The liquidator, Kenneth Krys, had entered into a trade confirmation in December 2010 to sell Sentry's US$230 million claim against Madoff's firm to Farnum Place LLC for approximately US$74 million—a rate of 32.125 cents per dollar.

The transaction's timing proved unfortunate. Within days of signing, a US$5 billion settlement significantly increased the value of claims against Madoff's firm, potentially making Sentry's claim worth US$125 million—some US$50 million more than the agreed price.

The trade confirmation required approval from both BVI and US bankruptcy courts. When the US bankruptcy court initially approved the sale, the liquidator sought to appeal, arguing that section 363 of the US Bankruptcy Code applied and required substantive review of the transaction's fairness.

The contested refusal of sanction

Bannister J in the BVI High Court refused to sanction the second US appeal in July 2013, citing several grounds:

• The appeal constituted a device to frustrate the contract after it became binding
• Pursuing the appeal would breach implied obligations of good faith and fair dealing under New York law
• The liquidator was seeking to defeat accrued rights merely to obtain a windfall
• As an officer of the court, the liquidator should not rely on technicalities to frustrate approved bargains

Despite this refusal, the Eastern Caribbean Court of Appeal granted interim sanction pending appeal. The liquidator successfully pursued the US appeal, with the Second Circuit Court of Appeals ruling in September 2014 that section 363 did apply and remanding for proper review.

The problematic delay

The Court of Appeal heard the liquidator's appeal against Bannister J's refusal in July 2014 but did not deliver judgement until March 2022—over seven years later. Remarkably, the Court of Appeal's judgement made no reference to the liquidator's success in the US appeal or the beneficial results achieved for the liquidation.

Following remand, the US bankruptcy court ultimately disapproved the sale in October 2015, with this decision affirmed through the US appellate system. The liquidator's successful appeal therefore saved the estate approximately US$50 million.

The Privy Council's analysis

The Board found the Court of Appeal's approach fundamentally flawed. Lord Richards, delivering the Board's judgement, held that the US appeal's success represented a clear material change in circumstances that should have been considered.

More significantly, the Board rejected each of Bannister J's original grounds for refusing sanction:

The "frustration" argument was internally contradictory—the trade confirmation expressly contemplated appeals through its definition of "Final Order." The liquidator could not be taking impermissible steps by pursuing procedures the contract itself envisaged.

The alleged breach of good faith and fair dealing similarly failed. Bannister J provided no evidence from New York contract law supporting this position, and Farnum never argued breach of contract in the subsequent US proceedings.

The Ex parte James principle was misapplied. Farnum possessed no accrued rights while appeal deadlines remained open, as completion remained conditional on obtaining a final US court approval.

The Board emphasised that refusing retrospective sanction would produce a "perverse result"—potentially preventing the liquidator from recovering costs for an appeal that benefited the estate by US$50 million.

The Privy Council allowed the appeal and granted sanction for the liquidator's actions, establishing important precedent on material changes of circumstances and the proper application of liquidators' duties when challenging commercially disadvantageous transactions approved by courts.