Madoff Securities International Ltd v Raven & Ors

A director’s duty to act in good faith is judged by the director’s honest view, but each director must inform himself and exercise independent judgment. Reasoned deference to a dominant shareholder or more experienced colleague is permissible; total abdication is not. In assessing company interests, known funding which made payments cash-neutral could not be ignored. Unanimous informed shareholder approval could ratify breaches of good-faith or care duties, subject to solvency and ultra vires limits. Loss must reflect benefits received from the same transaction. A payment discharging a valid company obligation was not improper merely because a third party chose the recipient. All claims arising from payments, loans and lifestyle expenditure failed.

The liquidators of Madoff Securities International Ltd sued former directors and Sonja Kohn and related companies. The claims concerned payments to entities connected with Mrs Kohn, interest on subordinated loans, and expenditure for Bernard Madoff and his family. The liquidators alleged breaches of directors’ duties, unlawful distributions, dishonest assistance, knowing receipt and unjust enrichment.

The court considered whether the directors acted in MSIL’s interests, exercised powers for proper purposes, exercised reasonable care, and whether shareholder ratification, causation, loss, limitation, illegality and relief from liability defeated the claims.

All claims against every Defendant were dismissed.

1. Directors’ duties. The duty to act in good faith is subjective. A director must act in what he honestly considers to be the company’s interests. Each director must nevertheless inform himself and exercise independent judgment. A director may reasonably defer to a fellow director or shareholder with substantially greater expertise, provided that he does not surrender his responsibilities altogether. Where a director fails to address his mind to the issue, the court asks whether an honest and intelligent director in that position could reasonably have believed that the transaction benefited the company.
2. MSIL Kohn Payments. The payments were made under a valid contract for introductions, advice, information and research. The agreement was not a sham. The directors reasonably believed that the payments were funded by BLMIS and were cash-neutral for MSIL. That funding was relevant to the directors’ state of mind and to loss. Mr Raven and Mr Flax honestly and reasonably considered the payments to be in MSIL’s interests. Mr Toop and the Madoff brothers failed to address that question, but an honest and intelligent director in their position could reasonably have reached the same conclusion. Their care breaches were ratified under the Duomatic principle. The payments were also made for the proper purpose of discharging MSIL’s contractual obligations and were not unlawful distributions of capital. The funding and payments formed one transaction and left MSIL with no loss.
3. Interest Payments. The subordinated loans were commercial, regulator-approved and reasonably connected with planned expansion. MSIL was highly capitalised, but not thereby improperly overcapitalised. The directors were not in breach in entering into the loans or making the contractual interest payments. The funding meant that MSIL suffered no recoverable loss.
4. Illegality, limitation and ancillary claims. The ex turpi causa defence failed because the Ponzi scheme was not an ingredient of MSIL’s causes of action. The claims were nevertheless time-barred to the extent they concerned payments before 8 December 2004, absent dishonesty or deliberate concealment. The claims against Mrs Kohn also failed because the payments were made under a valid contract, were reasonable remuneration, caused MSIL no loss and were not unconscionably received. The Lifestyle Payments discharged MSIL’s debt under Bernard Madoff’s director’s loan account and therefore involved no breach.

not stated in the judgment.