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www.southsquare.comMAY 2014

SOUTH SQUAREDIGESTA REGULAR REVIEW OF NEWS, CASES AND ARTICLES FROM SOUTH SQUARE BARRISTERS

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‘A WORLD CLASS SERVICE’

May 2014

DIGESTSOUTH SQUARE

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MAY 2014 SOUTH SQUARE DIGEST

MAY 2014

In this issue

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where, as in this case, the allegedwrongful acts took place before 11January 2009 the position is governedby the Private International Law(Miscellaneous Provisions) Act 1995.Under that Act, the general rule is thatthe applicable law is the law of thecountry in which the eventsconstituting the tort in question occur2.But where elements of those eventsoccur in different countries3, theapplicable law under the general ruleis to be taken as being the law of thecountry in which the most significantelement or elements of those eventsoccurred4.

In this case, elements of the relevantevents had taken place in both England

and Germany. The relevant English lawcauses of action were in the torts ofunlawful means conspiracy andcausing loss by unlawful means. Thedefendants argued that the mostsignificant of the elements constitutingthese alleged torts was the supposedcombination or common design andthat, to the extent such a combinationor common design had been formed,this would have taken place in London.Constantin, on the other hand, arguedthat the objection of the alleged corruptagreement was to influence DrGribkowsky’s behaviour as anemployee of a German company (BLB)and that the acts which Dr Gribkowskyundertook pursuant to that agreement

would have been undertaken inGermany. Overall, the Judgeconsidered that the significance ofthese latter elements outweighed thesignificance of the fact that the allegedcombination was formed in England.As a result, German law applied.

German law claimsAccordingly, the court was in theposition of applying German law (onthe basis of expert evidence of Germanlaw) to determine the claims made byConstantin. Constantin sought to relyon a provision in section 826 of theGerman Civil Code which simplyprovides that “A person who wilfullycauses damage to another in a manner

THE BACKGROUND TO THE CASE CONCERNED THE OWNERSHIP OF FORMULA ONE, WHICH HAS GROWN TO BE A MULTI-BILLION DOLLAR BUSINESS

Constantin Medien vEcclestoneIn February, Mr Justice Newey dismissed the claims which hadbeen brought against Bernie Ecclestone arising out of briberyallegations relating to the ownership and control of Formula One

On 20 February 2014 Mr Justice Neweyhanded down his judgment in theaction of Constantin Medien vEcclestone [2014] EWHC 387 (Ch). Thecase attracted many headlines. At itsheart was the allegation that thearchitect of Formula One, BernieEcclestone, had paid a bribe of someUS$44 million to a German banker inorder to procure the sale of FormulaOne to the private equity firm, CVC.

The Sale of Formula OneThe background to the case revolvedaround the various corporatetransactions that had taken place inrelation to Formula One since the late1990s. In particular, through a series oftransactions Formula One had by 2001become owned as to 75% by the KirchMedia group, a large German mediaconglomerate and another Germanmedia company EM.TV and as to 25%by the Bambino Trust, a trust of whomthe beneficiaries included members ofMr Ecclestone’s family. In 2002 KirchMedia encountered serious financialdifficulties and collapsed intoinsolvency. Three of its lender bankstook enforcement action over KirchMedia’s and EM.TV’s stake in FormulaOne. The banks, BayerischeLandesbank (“BLB”), JP Morgan Chase

and Lehman, thereby inherited a verysignificant stake in the Formula Onebusiness. The BLB team responsible forthe Formula One stake was led by aGerman banker, Gerhard Gribkowsky.

The three creditor banks were notnatural owners of a large stake in theFormula One business which they hadacquired as a result of enforcementaction. In late 2005 a deal wastherefore agreed whereby the privateequity firm, CVC, would acquire thestakes of BLB and Bambino in FormulaOne for some US$1.5 billion. CVC alsosubsequently acquired the stakes of JPMorgan and Lehman and therebybecame the owner of the business.

The issue in the proceedings arosebecause it was subsequently revealedthat Dr Gribkowsky had receivedpayments of some US$44 million fromcertain companies associated withBambino and Mr Ecclestone. Incriminal proceedings in Germany, DrGribkowsky was convicted ofcorruption, breach of fiduciary dutyand sentenced to 8½ yearsimprisonment. In the course of thoseproceedings, Dr Gribkowsky reportedlyadmitted that the payments which hadbeen made to him were a bribe.

In the English proceedings, theClaimant, Constantin, claimed that it

had an economic interest in the sale byBLB of its interest in Formula Onebecause of the existence of certain“overage” rights which had beengranted in favour of EM.TV incompromise of a dispute between BLBand EM.TV when BLB enforced itsecurity. Under these rights, Constantinwas entitled to a certain percentage ofthe proceeds of sale of BLB’s stakeabove an agreed level. Constantinclaimed that there had been a corruptagreement between Mr Ecclestone andDr Gribkowsky and that, but for thatcorrupt agreement, BLB’s stake inFormula One would have been sold fora much higher price with the resultthat Constantin would have received alarge sum pursuant to its contractualoverage rights.

Applicable law: German or English?Although Constantin commenced theproceedings against the Defendants inEngland, its primary claim in fact wassaid to arise under German law. One ofthe questions for the court todetermine was therefore whetherGerman law or English law applied tothe claims. This is a question which isnow governed by the Rome IIConvention on the law governing non-contractual obligations1. However, ! !

2/. Section 11(1).3/. And where the claim is not for personal injury or damage to property.4/. Section 11(2)(c).

! !

1/. Council Regulation 864/2007/EC.

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debt is a provable debt does not meanthat the salvage principle cannot apply.

The argument of the landlords wasthat whether rent payable in advanceis apportionable at common law orunder the Apportionment Act 1870 isirrelevant. The salvage or “LundyGranite” principle should be appliedand that principle relies on the rules ofequity rather than the common law.The opposing argument of Game RetailLtd was that rent payable in advancecannot be apportioned.

The origins and development of thesalvage or “Lundy Granite” principlewere explained by Lord Hoffmann inRe Toshoku Finance Ltd [2002] UKHL 6.They can be traced back to Re ExhallCoal Mining Co Ltd (1864) 4 De GJ & S377. In Exhall the landlord had put in adistress for rent on the same day as butafter the presentation of the petition.The Court of Appeal allowed the

distress to proceed. Of Exhall, LordHoffmann observed: “thus was createda discretion to allow a creditor to use aprocess of execution to recover in full adebt for which he would otherwise havehad to prove in the liquidation. Insubsequent years a body of precedent onthe exercise of the discretion developed”.It is clear that Lord Hoffmann did notregard the existence of a provable debtas incompatible with the salvageprinciple.

In Re Lundy Granite exp Heavan(1870-71) LR 6 Ch App 462, the landlordwas permitted to distrain for rentwhich had accrued due after the

winding up. The principle underlyingthe decision was formulated by JamesLJ as follows: “But in some casesbetween the landlord and the company,if the company for its own purposes, andwith a view to the realization of theproperty to better advantage, remains inpossession of the estate, which thelessor is therefore not able to obtainpossession of, common sense andordinary justice require the Court to seethat the landlord receives the full valueof the property. He must have the samerights as any other creditor, and if thecompany choose to keep the estates fortheir own purposes, they ought to pay

SOME STORES WERE CLOSED DOWN IMMEDIATELY WHILST OTHERS REMAINED TRADING

Pay As You Go for administratorsHannah Thornley reviews the Games Station judgment, including the overrulingof Goldacre and Luminar by the Court of Appeal and the treatment of rent payableunder a lease held by a corporate tenant that enters administration or liquidation.When is rent no more than a provable debt; and when does it rank as an expense ofthe administration?

IntroductionOn 24 February 2014 the Court ofAppeal handed down judgment inJervis v Pillar Denton; re Games Station.I will look at the facts, the decision andthe key points arising from thedecision.

FactsThe Game group of companies wentinto administration on 26 March 2012,the day after the March quarter day.Various companies in the group ownedleasehold interests in a large numberof stores. Rent was payable in advanceunder all of the relevant leases. Therent falling due in advance on theMarch quarter day was not paid. Somestores were closed down immediatelybut trading continued in other storeswhich were included in a swift sale ofthe business and assets of the group toGame Retail Ltd. The administratorsdid not pay any part of the rent fallingdue, despite the fact that the storeswere used for the benefit of theadministration throughout the

remainder of that quarter, in relianceon the decisions in Goldacre andLuminar. At the heart of the appeal wasthe question of whether part of aninstalment of rent payable in advancecan be treated as an expense in thecontext of insolvency.

Goldacre and LuminarIn Goldacre (Offices) Ltd v UK NortelNetworks Ltd [2011] Ch 455, HH JudgePurle QC decided that if a quarter’srent (payable in advance) fell dueduring a period in whichadministrators were retaining theproperty for the purposes of theadministration, the whole of thequarter’s rent was payable as anadministration expense even if theadministrators were to give upoccupation later in the same quarter.

In Leisure (Norwich) II Ltd v LuminarLava Ignite Ltd [2013] 3 WLR 1132, HHJPelling QC decided that where aquarter’s rent payable in advance felldue before entry into administrationnone of it was payable as an

administration expense even ifadministrators retained possession forthe purposes of the administration forthe rest of that quarter. The rent washeld to simply be a provable debt in theadministration.

DecisionLord Justice Lewison gave the onlyreasoned judgment of the Court ofAppeal in Games Station. He noted thatit was common ground between theparties that: (i) at common law rent isnot apportionable in respect of timeand that rent payable in advance is notapportionable under theApportionment Act 1870; (ii) whetherrent is payable as an administrationexpense is not a question of an exerciseof the court’s discretion. Either itcounts as an expense, or it does not. Ifrent falls within the salvage or “LundyGranite” principle it is anadministration expense. If not, not; (iii)the salvage principle and the right toprove for a debt are not mutuallyexclusive. Thus the mere fact that a

The Lundy Granite principle relies onthe rules of equity rather than thecommon law

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A new spotlight oncompany controllersSimon Mortimore QC reports on Governmentproposals to enhance corporate transparency

Crown Dependencies.In July 2013 BIS published a

Discussion Paper: “Transparency &Trust: Enhancing the Transparency ofUK Company Ownership and IncreasingTrust in UK Business” (the “BISDiscussion Paper”) which outlined theGovernment’s thinking on thosematters, including four key proposalsfor enhancing transparency of UKcompany ownership: (i) a centralregistry of UK company ownership, (ii)abolition of bearer shares, (iii)increased transparency about nomineedirectors, and (iv) prohibition ofcorporate directors. Responses wererequired by 16 September 2013. TheLaw Society, the Bar Council andseveral firms and other bodiessubmitted papers.

On 31 October 2013 BIS announcedthat the register of beneficialownership of UK companies would bepublicly accessible. Thisannouncement received theenthusiastic support of Prime MinisterDavid Cameron and World Bank GroupVice-President Sanjay Pradham. BISalso announced that further details ofthe register would be revealed in aformal response to the BIS DiscussionPaper to be published in early 2014.That paper would explain BIS’s

proposals for abolishing bearer shares,tackling the use of corporate directorsand directors who act as a front for thereal controller.

At the time of writing the BIS formalresponse has not been published.Before looking in more detail at the BISproposals for reform, it is worth askingwhat has brought about this urgentneed for reform of company law sosoon after the Companies Act 2006.

The reforms in the 2006 Act followedthe most extensive review of companylaw by the Law Commission, whichproduced reports on ShareholderRemedies (1997) and CompanyDirectors: Regulating Conflicts ofInterest and Formulating a Statement ofDuties (1999), the Company LawReview Steering Committee, whichproduced four reports under thegeneral heading Modern Company Lawfor a Competitive Economy (1999-2001)and by the Government itself. Thetransparency issues that now concernBIS and indeed other governmentswere considered serious problems atthe end of the Twentieth Century andare either not mentioned or barelydiscussed in the reports that providedthe foundation for the 2006 Act. Sincethen the scale, speed, andinternationalization of businessactivity and investment has expandedto a degree that could not have beencontemplated a dozen or so years ago.Corporate structures have grown evermore complex and there has been farmore use of offshore companies. While

much this is legitimate and beneficial,it must be recognised that opaquestructures involving a maze ofoffshore companies, can be used toconceal ownership of assets, to evadetaxes and to disguise criminal andterrorist activity. It is therefore notsurprising that governments wantgreater transparency. The reasons forthe BIS proposals for reform aretherefore readily understandable.

A central registry for companybeneficial ownership informationFor over 150 years, since theCompanies Act 1862, there have beentwo core features of UK company law,which need to be borne in mind whenconsidering the BIS proposals. The firstis that a company should keep aregister of its members, which is openfor inspection and that informationabout its members should be publiclyavailable at the Companies Registry.2

The company and its directors need tohave a record of members for obviousgovernance reasons, but the reasonwhy the public should have the rightto information about a company’smembers is less obvious and has ahistorical origin. In the NineteenthCentury it was common for shares tobe issued not fully paid up. Thecompanies register would enable ashareholder to know with whom heshared responsibility for thecompany’s liabilities and the publicregister would enable intendingcreditors to “reach a view as to thecredit-worthiness of the concern andthe sufficiency of the contributors”.3

Those reasons for a public register areseldom relevant today. In the interestsof cutting red tape and the costs ofrunning companies, there may be acase for doing away with a publicregister of members.

The other core feature is that a

PRESIDENT PUTIN ADDRESSES THE PRESS AT THE SUMMIT WHICH PROPOSED AN ACTION PLAN TO PREVENT MISUSE OF COMPANIES.

company is not required to take noticeof any trusts affecting shares.4 Thisfacilitates the proper conduct ofcompany meetings and distributingdividends. As the Davey Committee putit in 1895:

“Any provision which would render itincumbent upon the directors andmanagers of joint stock companies, inorder to keep themselves within thelaw, to inquire into and take notice oftrusts affecting shares would impose anintolerable burden upon the officers of acompany, and would be a departurefrom the policy hitherto adopted asshown by statutory enactment andjudicial decision.”5

Since 1980 there have been twosignificant inroads into this principleaffecting public and quotedcompanies. First, in 1981 theprovisions now found in Part 22 of the2006 Act were introduced to enable apublic company to obtain information

For most people the June 2013 G8Summit at Lough Erne was memorablefor the sight of President Putin, sittingstern-faced by a placid Northern Irishlake in an open-neck shirt and resistingall attempts at conviviality. Againstthat unpromising background, it isperhaps surprising that there were anypositive developments. But forcompany lawyers the Summitproduced the intriguing prospect ofreforms to UK company law to improvethe transparency of the ownership andcontrol of companies. On 18 June theDepartment for Business Innovationand Skills (“BIS”) announced “A UKAction Plan to prevent misuse ofcompanies and legal arrangements”which includes:1

! amending the Companies Act 2006so that companies are required tomaintain records of beneficialownership of their shares, to make thatinformation available to the authoritiesthrough a central registry maintainedby Companies House and consulting onwhether that information should bepublicly accessible;! reviewing corporate transparency,

including bearer shares and nomineedirectors; and! supporting transparency action

plans for Overseas Territories and! !

2/. Now 2006 Act, ss 113-121, 856-856B. See also the 1862 Act, ss 25-27.3/. Cohen Report (1945) at [77].4/. 2006 Act, s 126. See 1862 Act, s 30. These provisions are usually supported by the company’s articles; see 1985 Act Table A, reg 5; 2006 Act ModelArticles for private and public companies, articles 23 and 45 respectively.5/. See [18].

! !

1/. This article only focuses on the company law aspects of the DBIS announcements and discussion paper.

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CASE DIGESTSBanking and Financial Services p21Civil Procedure p24Commercial litigation p27Company Law p28Corporate Insolvency p30Personal Insolvency p36Property & Trusts p39Sport p41

FEATURE ARTICLES

Bank insolvency regimes the George Clooney of finance may never use...Hilary Stonefrost examines developments in bank insolvency p6

Constantin Medien v EcclestoneThe recent case against the F1 boss and the alleged bribery of a banker during the sale of F1 to CVC Partners p12

MF Global meets Jimmy SavileWilliam Trower QC examines an unlikelypairing between the MF Global specialadministatrion and that of the estateof Jimmy Savile p16

Southsquare.comSouth Square’s new website p43

Forum conveniens in ‘necessary orproper party’ casesStephen Robins examines caseswhich show the doctrine of forum conveniens can lose its potency p44

Pay As You Go for administratorsHannah Thornley reviews the Games Station judgment p48

INSOL Hong Kong 2014William Willson reports on South Square’sattendance at INSOL’s regional conference in Kowloon, Hong Kong p52

FOCUS - Hong KongRoxanne Ismail SC reports on some of the recent developments in Hong Kong p54

REGULARS

From the Editor p4EU/EAA Update p78News in Brief p80South Square Challenge p84Diary Dates p85

THIS ISSUE REPORTS ON SOUTH EAST ASIA AND RECENTLEGAL DEVELOPMENTS IN THE REGION FOLLOWING

INSOL IN HONG KONGNight View of Victoria Harbour Hong Kong

FOCUS - SingaporeJamie Harrison and Adeline Chunglook at recent developments inthe Singapore legal landscape while David Chan and Tan Su Hui report on recent insolvency/restructuring cases p58

A new spotlight on companycontrollersSimon Mortimore QC reports on Government proposals to enhance corporate transparency p62

A tide of high yield restructuringWilliam Needham and Daniel Bayfieldlook at the trend for Euro corporates to look to English law restructuring p68

South Square annual gatheringSouth Square and friends at the National Portrait Gallery p74

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COVER STORY

New SilksDavid Allison QC and Tom Smith QCare the latest additions to South Square’s silks p76

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FROM THE EDITORDAVID ALEXANDER QC

Uncertainty abounds abroadwhile the UK powers on...

a plane with all the satellites and otherequipment available to the world’s powers. Andthat is just the beginning. Why did the plane gomissing? At some stage we (and the poor familiesinvolved in this tragedy) may get concreteanswers. But who knows whether the true storywill ever be known.

So what has been happening with the economyin the UK over the last three months? Well it allseems to be roaring on. Insolvencies are down.Inflation is apparently down. Average earningshave edged above inflation. Predictions forgrowth keep rising with even the IMF sharplyincreasing its growth forecast for the UKeconomy for 2014 from 1.9 per cent to 2.4 percent meaning that the UK is growing faster thanany other major European economy.Manufacturing is looking up. Property prices

Welcome to the May edition of the Digest.Well the goings-on in the rest of the world havebeen fairly extraordinary over the three monthperiod since the last edition. Three things standout for me, all carrying uncertainty.

First, the Scottish independence movement hasreally got going with the SNP refusing to acceptthat any of the Westminster parties are seriouswhen they say with one united voice that ifScotland leaves it cannot keep the Pound. But,nevertheless, the “yes” vote is still creeping up onthe “no” vote and there are still more than fourmonths to go to polling day. Maybe Alex Salmondand Nicola Sturgeon will get their way after alland Scotland will leave the UK. A result which, tothe horror of the SNP, one senior Labour figureapparently described as being “cataclysmic”. Forthose who wish the Scots to stay, maybe the timehas come to stress the positive reasons whyScotland should remain with the rest of the UKrather than telling everyone how bad it will befor them if they leave.

Secondly, Russia has effectively taken over theCrimea in what one can describe as an almostbloodless coup of breath-taking audacity. The restof the world seems to have been left powerless todo anything about it other than ban a fewRussians from shopping in places like Harrodsand the United States. Not a good example to setto anyone who has ambitions on theirneighbour’s territory. But as I am sure Mr Putinwill have calculated – what else could the rest ofthe world really do? And now there is a crisiswith East Ukraine.

Thirdly, and most peculiarly, for what seemslike an astonishingly long period of timeeveryone was asking what had happened to themissing Malaysian Airlines plane, MH 370, withthere being either no, or inaccurate, information.It seems amazing that it could take so long to find SALMOND: WILL HE GET HIS WAY?

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SOUTH SQUARE DIGEST IS PUBLISHED BY SOUTH SQUARE BARRISTERS, AT 3-4 SOUTH SQUARE GRAY,S INN, LONDON WC1R 5HP. TEL 020 7696 9900. PUBLICATION, PRINT AND PRODUCTION BY WENDOVER PUBLISHING LTD. TEL 01428 658697.

seem to be increasing in most of the country,with prices apparently rising in London over thelast year by something like 20 per cent(interestingly more than 50 per cent of propertiesin London above £1 million were apparentlybought by foreigners). And there seems no sign ofany of this “positive” news ending with interestrates remaining at the low levels that they areand with an election now only a year away.

On to the last three months at South Square.Well, it has been rather a busy time. Leavingaside the numerous cases that members ofChambers appeared in both here and abroad, anumber of us went to INSOL in Hong Kong (seepage 52) which is one of the reasons why we haveHong Kong on the front cover of this edition. Anamazing place by day, but perhaps even moreamazing by night. Next Chambers held its SpringReception at the National Portrait Gallery onWednesday 9 April 2014 (see page 74). Then thevery next week David Allison and Tom Smithtook silk (see page 76). And finally we are aboutto have a new website to trumpet which will belaunched very shortly (see page 43)

So what other materials do we have for you inthis edition of the Digest? Well, as you will see,this edition is a little larger than the last, andcontains a number of interesting articles. HilaryStonefrost writes on bank insolvency regimes,and we have an article on the recent BernieEcclestone trial where Tom Smith appeared forthe second defendant. Hannah Thornley gives usan update on the Court of Appeal decision inGames Station, being the latest in the Goldacreseries of cases. William Needham of Weil Gotshal& Manges joins South Square’s Daniel Bayfield inan article on high yield restructurings. StephenRobins writes on forum conveniens in necessaryand proper party cases and we have an article byour Head of Chambers, William Trower QC, oncommon issues arising out of MF Global and theadministration of the estate of Jimmy Savile(deceased). Simon Mortimore QC enlightens uson the Government’s April 2014 proposals toenhance corporate transparency. And last, but byno means least, the latest in our series of offshorearticles, this time on Hong Kong (by RoxanneIsmail SC) and Singapore (by Jamie Harrison andAdeline Chung of Addleshaw Goddard and DavidChan and Tan Su Hui of Shook Lin & Bok).Inaddition to all of that we of course have the usualcase digest section, edited in this edition by HilaryStonefrost. And we have Gabriel Moss QC’sregular Euroland piece, as well as news-in-brief,

diary dates and the latest South SquareChallenge.

All at South Square hope that you enjoy thislatest edition of the Digest. And as I always say ifyou find yourself reading someone else’s copy ofit and wish to be added to the circulation listplease just send an email [email protected] and we will do ourbest to make sure that you get the next editionand all future additions after that. Best wishes toeveryone and we hope that you have a greatspring and early summer – I have heard that Mayis predicted to be very hot here in England!

David Alexander QC EditorENGLAND, THIS MONTH. IF YOUBELIEVE THE MET OFFICE.

DAVID ALLISON QC (LEFT) ANDTOM SMITH QC IN FULL REGALIAON THE DAY THEY TOOK SILK

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1/. When Mark Carney was appointed as Governor of the Bank of England he was described in the press as the George Clooney of finance and hailed, bysome, in the media as the saviour of the UK economy. His tenure as Governor began on 1 July 2013. 2/. At the end of August 2008, Alistair Darling, in an interview in The Guardian, made headlines when he said that the economic times we were facing were“arguably the worst they’ve been for 60 years.” 3/. In 2013 the Act was amended to reflect the reorganisation of bank regulation. The Financial Services Act 2012, which came into force on 1 April 2013,abolished the Financial Services Authority, which was independent from the Bank of England. The regulatory structure now consists of the Bank ofEngland’s Financial Policy Committee, the Prudential Regulation Authority and the Financial Conduct Authority. The PRA is part of the Bank of Englandand is responsible for, among other things, the prudential regulation of banks. The FCA is a separate institution which is responsible for promotingeffective competition and ensuring that the markets function properly. 4/. There is a separate regime for investment banks which was covered in an article by Adam Goodison in the February 2014 edition of the digest.5/.Paragraphs 3.17 and 3.18 of the discussion paper published in October 2007.6/.The Banking Act 2009 defines a “bank” as a UK institution (i.e. an institution incorporated or formed under the law of any part of the UK) which haspermission under Part 4 of the Financial Services and Markets Act to carry on the regulated activity of “accepting deposits”. In this article the word“bank” is used to describe such an institution. For what constitutes “accepting deposits” see section 2 of the Banking Act 2009. “Bank” does not include abuilding society or a credit union.7/. See, for example the speech given by Andrew Bailey, Executive Director for Banking Services and Chief Cashier, Bank of England, to the ICAEW on 26November 2009.

The bank insolvency regimes thatthe George Clooney1 of finance may never need to use...IntroductionSpecial insolvency regimes for bankswere introduced in early 2009, by theBanking Act 2009 (the “Act”), justmonths after the then Chancellor hadsaid that the UK faced an economiccrisis that was “arguably the worst for60 years”.2

The special insolvency provisions inthe Act do not prevent a bank frombeing put into administration orliquidation under the Insolvency Act1986 (the “IA 1986”). They do, however,enable the Bank of England, theFinancial Conduct Authority (the"FCA") and the Prudential RegulationAuthority ("PRA") an option as towhether to bring administration orwinding-up proceedings under the IA1986 or the Act.3 And, if the insolvencyproceedings are commenced under theAct, these authorities are able to controlwhat is done in the early stages of thoseinsolvency proceedings.

Before 2009 there was no specialinsolvency regime for banks. All bankinsolvencies were governed by the

general insolvency legislation,contained for the most part in the IA1986 and the Insolvency Rules 1986;including the insolvencies of BCCI andBarings.4

The failure of Northern Rock did not,at first, prompt consideration of specialinsolvency procedures for banks.5

Initially the government’s focus was onwhat has become known as the SpecialResolution Regime (SRR). The SRR wasintroduced by the Banking (SpecialProvisions) Act 2008 which had asunset clause after 12 months. Thisstatute was used to deal with thefailures of Northern Rock, Bradford &Bingley, Kaupthing and HeritableBank.

The statute that introduced specialinsolvency procedures for banks,6 the

Banking Act 2009 (the “Act”), receivedRoyal Assent on 12 February 2009, justbefore the sun came down on thetemporary provisions.

By this time the Bank of England haddecided that normal corporateinsolvency procedures were notadequate to deal with bank failures fora number of reasons. First, a loss ofconfidence by depositors oftenprecedes the point where normalcorporate insolvency procedures can beused. Second, these standardprocedures are not well suited toensuring continuity of key bankingfunctions, in particular access bydepositors to their funds. Third afailure of one bank may causeproblems for other financialinstitutions.7

! !

HILARY STONEFROST looks at special insolvencyregimes that were introduced for banks in 2009,shortly after Alistair Darling described the state of theeconomy as arguably the worst for 60 years

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The main provisions of the Act cameinto force on 21 February 2009.8 Part 2of the Act introduced the “BankInsolvency Procedure” for the windingup of a failed or failing bank. Part 3introduced the “Bank AdministrationProcedure” for use where part of afailing bank’s business has beentransferred. These insolvencyprocedures have also been applied tobuilding societies by secondarylegislation.9 Credit Unions are notcovered by the Act; on 6 April 2014 a

special insolvency regime was alsointroduced for these financialinstitutions.10

There are provisions that apply onlyto banks in the Act, in addition theprovisions of the IA 1986 are modifiedin the Act for the purpose of bankadministration and liquidation. Thereare also insolvency rules for deposittaking banks and for building societieswhich are a combination of new rulesand modifications to the InsolvencyRules 1986.11

Special Resolutions RegimeThe departures from and modificationsto the general insolvency proceduresare intended to reflect the overallobjectives of SRR in Part 1 of the Act.

The purpose of the SRR is to enablethe authorities to take steps to dealwith a failing bank or a bank that islikely to fail before it is insolvent.12 Theidea is that the authorities can triggerthe resolution of a bank before thebank reaches the point where theconditions for formal insolvency

! !

8/. The provisions of the Banking Act 2009 that did not come into force on that date came into force during the course of the year.9/. The Building Societies (Insolvency and Special Administration) Order 2009, SI 2009/805.10/. A special regime was introduced by The Industrial and Provident Societies and Credit Unions (Arrangements, Reconstructions and Administration)Order 2014 (SI – 2014/299) which came into force on 6 April 2014. This statutory instrument modifies provisions of the IA 1986.11/. The Bank Insolvency (England and Wales) Rules 2009 (SI 2009/356); The Bank Administration (England and Wales) Rules 2009 (SI 2009/357); TheBuilding Society Special Administration (England and Wales) Rules 2010 (SI 2010/2580); The Building Society Insolvency (England and Wales) Rules 2010(SI – 2010/2581)12/. The relevant authorities are the Treasury, the PRA, the FCA and the Bank of England; section 4(3) of the Act.

CLOONEY, OR CARNEY

8

being effectively supervised, have“appropriate resources”, be fit andproper and have a suitable businessmodel for the activities beingconducted.15

(2) Having regard to timing andother relevant circumstances it is notreasonably likely that (ignoringstabilisation powers) action will betaken by or in respect of the bank thatwill enable it to satisfy the threshold

conditions.16

The remedies available under theSRR regime include: transfer of thebank or some or all of its business to aprivate sector purchaser; transfer ofsome or all of its business to a bridgebank; or, what amounts to, insubstance, nationalisation.17

Bank administration under the ActWhere the SRR has been used tointervene in the bank’s affairs and partof the bank’s business has beentransferred to a private purchaser or toa bridge bank, the part of the bank thathas been left behind is likely to beinsolvent (the “residual bank”).18

An application for a bankadministration order under the Act,made by the Bank of England,19 can bemade where a partial property transferhas occurred or is intended using theSRR powers. The Bank of England mustalso be satisfied that the residual bankis unable to pay its debts or is likely tobecome unable to pay its debts as aconsequence of the transfer.20

The first objective of theadministration is to ensure that theprivate purchaser or the bridge bank,as the case may be, is provided withthe services and facilities that it needsto continue the business that has beentransferred (“Objective 1).21 The maindifference between what the Actdescribes as “normal” administrationprocedure (i.e. the procedure underthe IA 1986) and bank administrationproceedings under the Act is that anadministrator appointed under the Acthas a statutory objective to support the

proceedings could or would be met. The Act gives the PRA considerable

discretion as to when to use its SRRpowers.13 The SRR powers can beinvoked when the following conditionsare satisfied:

(1) The bank is failing or is likely tofail to satisfy the thresholdconditions.14 The principal thresholdconditions are, in very broad terms,that the bank must be capable of

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13/. A stabilisation power can only be exercised in respect of a bank if the PRA is satisfied that the conditions are met. The conditions are drafted in such away as to give the PRA flexibility. Before determining whether the second condition is satisfied the PRA must consult the Bank of England, the FCA and theTreasury. Section 7 of the Act. 14/. In this context “threshold conditions” are as defined in sub-section (1) of section 55B of the Financial Services and Markets Act 2000 for which the PRAis treated as responsible under sub-section 2 of that section; see sub-section 7(4A) of the Act. 15/. The “threshold conditions” are set out in Schedule 6 to the FSMA 2000.16/. The threshold conditions are to be treated by the PRA as met if the PRA is satisfied they are met but for financial assistance provided by the Treasuryor the Bank of England (disregarding ordinary market assistance); section 7(4) of the Act. 17/. The circumstances in which the Bank of England may exercise any of the stabilisation powers under Part 1 of the Act are set out in the Act. The Bank ofEngland has to conclude that it is necessary to do so having regard to the public interest in the stability of the financial systems of the United Kingdom; thepublic confidence in the UK banking system; the protection of depositors or of client assets. The Bank of England must also consult the other authoritiesbefore exercising these powers. (Section 8 of the Act) The Treasury has the power to nationalise the bank in certain circumstances. (Sections 9 and 13 of theAct)18/. Sub-section 136(2)(c) of the Act.19/. Sections 136(2)(b) and 142 of the Act.20/. Section 143 of the Act. The documentation required for such an application is set out in the Bank Administration Rules. 21/. Sub-section 138(1) of the Act.

HILARY STONEFROST

9


transferred business with anyinfrastructure that has been left behindin the insolvent residual bank.

In substance the Bank of Englandcontrols this first stage of theadministration process. WhetherObjective 1 has been achieved isentirely a matter for the Bank ofEngland to decide.22 While there is aprovision that enables theadministrator to apply to the court fora direction concerning theachievement of Objective 1, the mostthe court can do on such an applicationis to direct that the Bank of England“consider whether to give notice” thatObjective 1 has been achieved.23

Once this first objective has beenachieved, the balance of power

changes. The objectives became thoseof a “normal” administration: therescue of the residual bank as a goingconcern or to achieve a better resultfor the residual bank’s creditors thanwould be likely if the bank werewound up without first being in bankadministration.24 At this stage a“normal” creditors’ committee can be

established.25

The Act gives a bank administratorthe power to do anything necessary orexpedient to for the pursuit of theobjectives. The administrationprovisions in Schedule B1 of the IA1986 apply subject to the modificationsset out in Table 1 of the Act.26 Most ofthe modifications of substance restrict

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22/. Sections 137 to 139 of the Act. See also The Bank Administration (Sharing Information) Regulations.23/. Sub-section 139(2) of the Act.24/. Sections 136(2)(d) and 140 of the Act; see also Table 1 and the modifications to Schedule B1 of the IA 1986.25/. Rule 2.5 of the Insolvency Rules 1986, as modified by the Bank Administration Rules.26/. This table appears after section 145 of the Act. Table 2 applies some other provisions of the IA 1986 to administrations under the Act; for example adistribution may only be made prior to objective 1 having been achieved with the consent of the Bank of England and only out of assets that have beendesignated as realisable by agreement between the Bank of England and the bank administrator.

The Banking Act 2009 gives the Bankof England has a high degree of control over the conduct of the firststage of the administration

THE BANK OF ENGLAND: WHETHER OBJECTIVE 1 HAS BEEN ACHIEVED IS ENTIRELY A MATTER FOR IT TO DECIDE

10

business into the Building SocietySpecial Administration Procedureunder the Act. The business thatremained with the residual bank inadministration included commercialloans, acquired residential mortgages,subordinated debts and most treasuryassets.

Bank administrations and theInsolvency Act 1986 The Act does not prevent anapplication for an administration orderor an out-of-court appointment of anadministrator in respect of a bankunder the IA 1986.

The appropriate regulator(s), the FCAand/or the PRA, are entitled to be heardon applications for administration

orders made pursuant to Schedule B1of the IA 1986.28

An administrator cannot beappointed by the company or directorspursuant to paragraph 22 of ScheduleB1 of the IA 1986 without the writtenconsent of the appropriate regulator.29

In addition, the FCA and/or PRA canmake an administration application inrespect of a bank pursuant to ScheduleB1 of the IA 1986 instead of using theprocedures under the Act.30

On an application for anadministration order in respect of abank the court may make a bankinsolvency order on the application ofthe relevant authorities. 31

Bank winding up orders under theActThe Bank of England can make anapplication to wind up a bank underthe Act if the PRA has informed theBank of England that the PRA issatisfied that the bank is failing or hasfailed to satisfy the “thresholdconditions” (described above), and theBank of England is satisfied that thebank has eligible depositors and thateither the bank is unable or is likely tobecome unable to pay its debts(Ground A) or the winding up of thebank would be fair (Ground C).32 (Thisappears to be the same ground as the“just and equitable” provision in thegeneral insolvency law.33)

The PRA may apply for a bankinsolvency order on the same groundsas the Bank of England, but only withthe consent of the Bank of England.34

Only the Secretary of State for theTreasury can make an application towind up a bank in the public interest(Ground B).35

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27/. See the Bank of England website.28/. Section 362 of the FSMA 2000 as amended by Schedule 14 of the FSMA 2012.29/. Section 362A of the FSMA 2000 as amended by Schedule 14 of the FSMA 2012. A failure to obtain the necessary consent prior to the appointment doesnot invalidate the appointment, but the appointment only takes effect from the date on which the consent is filed with the court. See In the matter of CeartRisk Services Limited [2012] EWHC 1178 (Ch) (But see also M.T.B. Motors Limited (in administration) [2010] EWHC 3751 (Ch) where the administratorsaccepted that the consent had to be filed with the notice of intention to appoint; the court made a retrospective appointment.)30/. Section 359 of the FSMA 2000 as amended by Schedule 14 of the FSMA 2012. Paragraph 11 of Schedule B1 of the 1986 IA on inability to pay debts asapplied to banks is amended by this provision.31/. Section 117 of the Act.32/. Sub-section 96(2) of the Act.33/. See Sub-section 96(5) of the Act and sub-section 124A(1) of the IA 1986.34/. Sub-section 96(3) of the Act.35/. Section 96(4). The Secretary of State also has to be satisfied that the bank has eligible depositors.

what a bank administrator may do inthe period before the Bank of Englandhas determined that Objective 1 hasbeen achieved and has served anObjective 1 Achievement Notice.

The use of the bank administrationprocess under the Act So far the SRR in conjunction with thebank administration under the Act hasonly be used once.27 Over the weekendof 28 to 29 March 2009 theDunfermline Building Society’s retailand wholesale deposits, branches, headoffice and originated residentialmortgages were transferred toNationwide. Following the transfer toNationwide, on 30 March 2009, a courtorder was made to put Dunfermline’s

THE FAILURE OF NORTHERN ROCK DID NOT, AT FIRST, PROMPT CONSIDERATION OF SPECIAL INSOLVENCY

PROCEDURES FOR BANKS.

11


directed at the achievement ofObjective 1 and role of the authoritiesin the achievement of that objective.43

Bank winding-up orders under theInsolvency Act 1986A petition to wind up a bank may bepresented under the IA 1986.

Where a person presents a petition towind up a bank the appropriateregulator is entitled to be heard at thehearing of the petition.44

In addition, the FCA or PRA maypresent a petition to wind up a bankunder the IA 1986 and the court maymake a winding up order if that personis unable to pay its debts within themeaning of section 123 IA 1986 or thecourt is of the opinion that it is just andequitable that the bank should bewound up.45 On a petition for a windingup order in respect of a bank, the courtmay make a bank insolvency order onthe application of the relevantauthority. 46

The use of the bank insolvencyprocess under the ActOn 16 June 2011 the court made anorder putting the Southsea Mortgageand Investment Company Limited intothe bank insolvency procedure. Thebank was found not to be meeting theregulatory requirements and wasunable or likely to become unable topay its debts. This was a small bank

The liquidator of the bank appointedunder the Act has two objectives.36 Thefirst is to ensure that the accounts ofeligible depositors are transferred toanother financial institution or that thedepositor receives payment from theFCSC as soon as practicable (Objective1).37 This objective has priority. Thesecond objective, which is pursued atthe same time as the first, is toachieve the best result for the bank’screditors as a whole, in much thesame way as a “normal” winding up(Objective 2).

So far as the duties and powers of aliquidator of a bank wound up underthe Act are concerned, there are onlylimited modifications to those of aliquidator in a “normal” winding up.38

One key difference is that, at thecommencement of the liquidation, themembers of the liquidationcommittee are nominees of the Bankof England, the PRA, the FCA and theFSCS.39 The liquidator is required tokeep the committee, which is onlyquorate if all the members arepresent, informed of progresstowards Objective 1.40 On Objective 1being achieved, a new committee canbe formed of creditors who were noteligible depositors.41 The FSCSbecomes immediately andautomatically subrogated to the rightsof the depositors that have been paidfrom the compensation scheme and sohas an option to stay on the committeeafter the achievement of Objective 1.

A bank liquidator may do anythingnecessary or expedient for the pursuitof the Objectives.42 The liquidator hasthe general powers under the IA 1986subject to modifications. The mainmodifications of substance are

with about 270 customers with depositsof some £7.4 million. The FSCScompensated the eligible depositors.The other creditors were dealt with inthe insolvency under the “normal”insolvency provisions.

ConclusionThe special insolvency procedures forbanks has only, as yet, had to be used todeal with two relatively small bankfailures, neither of which was likely tocause any or any significant contagionto other institutions. One substantialbank, the Co-operative Bank, was hit bya number of scandals in 2013, one ofwhich was the determination by thePRA that the bank had a shortage ofcapital of some £1.5 billion. The Co-opBank’s financial problems were notresolved by the use of the proceduresunder the Act, but by way of a schemeof arrangement pursuant to section 896the Companies Act 2006.

There is a more general point aboutspecial regimes. There are now nofewer than 17 special insolvencyregimes (England and Wales) and theypresent potential difficulties because itis neither clear from the generalinsolvency legislation whether a specialregime exists nor are all the relevantprovisions relating to any particularspecial regime necessarily easilyidentifiable from any single statute orstatutory instrument.

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36/. Section 99 of the Act.37/. Section 101 of the Act.38/. Section 103 of the Act. In exercising powers under Schedule 4 of the Insolvency Act 1986, the liquidator is required to have regard to the first objective.The power to bring or defend proceedings expressly includes a power to go to arbitration. Section 104 of the Act.39/. Section 100(1) and (2) of the Act. 40/. Section 100 and 101(2) of the Act.41/. Section 100(6) of the Act.42/. Section 103 of the Act.43/. The table of applied provisions, with the modifications, is at section 103 of the Act.44/. Section 371 of the FSMA 2000 as amended by Schedule 14 of the FSMA 2012.45/. Section 367 of the FSMA 2000 as amended by Schedule 14 of the FSMA 2012.46/. Section 117 of the Act

In a liquidation under the Banking Act 2009, aliquidation committee must be established toensure the liquidator properly exercises hispowers

12

Constantin Medien vEcclestoneIn February, Mr Justice Newey dismissed the claims which hadbeen brought against Bernie Ecclestone arising out of briberyallegations relating to the ownership and control of Formula One

On 20 February 2014 Mr Justice Neweyhanded down his judgment in theaction of Constantin Medien vEcclestone [2014] EWHC 387 (Ch). Thecase attracted many headlines. At itsheart was the allegation that thearchitect of Formula One, BernieEcclestone, had paid a bribe of someUS$44 million to a German banker inorder to procure the sale of FormulaOne to the private equity firm, CVC.

The Sale of Formula OneThe background to the case revolvedaround the various corporatetransactions that had taken place inrelation to Formula One since the late1990s. In particular, through a series oftransactions Formula One had by 2001become owned as to 75% by the KirchMedia group, a large German mediaconglomerate and another Germanmedia company EM.TV and as to 25%by the Bambino Trust, a trust of whomthe beneficiaries included members ofMr Ecclestone’s family. In 2002 KirchMedia encountered serious financialdifficulties and collapsed intoinsolvency. Three of its lender bankstook enforcement action over KirchMedia’s and EM.TV’s stake in FormulaOne. The banks, BayerischeLandesbank (“BLB”), JP Morgan Chase

and Lehman, thereby inherited a verysignificant stake in the Formula Onebusiness. The BLB team responsible forthe Formula One stake was led by aGerman banker, Gerhard Gribkowsky.

The three creditor banks were notnatural owners of a large stake in theFormula One business which they hadacquired as a result of enforcementaction. In late 2005 a deal wastherefore agreed whereby the privateequity firm, CVC, would acquire thestakes of BLB and Bambino in FormulaOne for some US$1.5 billion. CVC alsosubsequently acquired the stakes of JPMorgan and Lehman and therebybecame the owner of the business.

The issue in the proceedings arosebecause it was subsequently revealedthat Dr Gribkowsky had receivedpayments of some US$44 million fromcertain companies associated withBambino and Mr Ecclestone. Incriminal proceedings in Germany, DrGribkowsky was convicted ofcorruption, breach of fiduciary dutyand sentenced to 8½ yearsimprisonment. In the course of thoseproceedings, Dr Gribkowsky reportedlyadmitted that the payments which hadbeen made to him were a bribe.

In the English proceedings, theClaimant, Constantin, claimed that it

had an economic interest in the sale byBLB of its interest in Formula Onebecause of the existence of certain“overage” rights which had beengranted in favour of EM.TV incompromise of a dispute between BLBand EM.TV when BLB enforced itsecurity. Under these rights, Constantinwas entitled to a certain percentage ofthe proceeds of sale of BLB’s stakeabove an agreed level. Constantinclaimed that there had been a corruptagreement between Mr Ecclestone andDr Gribkowsky and that, but for thatcorrupt agreement, BLB’s stake inFormula One would have been sold fora much higher price with the resultthat Constantin would have received alarge sum pursuant to its contractualoverage rights.

Applicable law: German or English?Although Constantin commenced theproceedings against the Defendants inEngland, its primary claim in fact wassaid to arise under German law. One ofthe questions for the court todetermine was therefore whetherGerman law or English law applied tothe claims. This is a question which isnow governed by the Rome IIConvention on the law governing non-contractual obligations1. However,

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1/. Council Regulation 864/2007/EC.

13


where, as in this case, the allegedwrongful acts took place before 11January 2009 the position is governedby the Private International Law(Miscellaneous Provisions) Act 1995.Under that Act, the general rule is thatthe applicable law is the law of thecountry in which the eventsconstituting the tort in question occur2.But where elements of those eventsoccur in different countries3, theapplicable law under the general ruleis to be taken as being the law of thecountry in which the most significantelement or elements of those eventsoccurred4.

In this case, elements of the relevantevents had taken place in both England

and Germany. The relevant English lawcauses of action were in the torts ofunlawful means conspiracy andcausing loss by unlawful means. Thedefendants argued that the mostsignificant of the elements constitutingthese alleged torts was the supposedcombination or common design andthat, to the extent such a combinationor common design had been formed,this would have taken place in London.Constantin, on the other hand, arguedthat the objection of the alleged corruptagreement was to influence DrGribkowsky’s behaviour as anemployee of a German company (BLB)and that the acts which Dr Gribkowskyundertook pursuant to that agreement

would have been undertaken inGermany. Overall, the Judgeconsidered that the significance ofthese latter elements outweighed thesignificance of the fact that the allegedcombination was formed in England.As a result, German law applied.

German law claimsAccordingly, the court was in theposition of applying German law (onthe basis of expert evidence of Germanlaw) to determine the claims made byConstantin. Constantin sought to relyon a provision in section 826 of theGerman Civil Code which simplyprovides that “A person who wilfullycauses damage to another in a manner

THE BACKGROUND TO THE CASE CONCERNED THE OWNERSHIP OF FORMULA ONE, WHICH HAS GROWN TO BE A MULTI-BILLION DOLLAR BUSINESS

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2/. Section 11(1).3/. And where the claim is not for personal injury or damage to property.4/. Section 11(2)(c).

14

which violates good morals is bound tocompensate the other for thus causeddamage”. On the facts, the difficultieswhich Constantin faced in establishingits claims included that there was noevidence that the defendants wereaware at the time of Constantin, or ofits overage rights, and thus it wasdifficult to say that anything which thedefendants did could have been done

might result from their actions andConstantin was within the scope of thedirection of that damage. The Judge,however, rejected this contention. Heconsidered that under German lawthere could be no claim under section826 unless the defendants had knownof the overage rights. Absent this, aGerman court would have decided thatthe defendants lacked the necessaryintention and/or had not actedcontrary to good morals vis-à-visConstantin.

But, apart from this, the claim alsofailed for a further reason. Constantin’scontractual overage rights were rightsas against BLB. BLB in turn, in theory,would have had its own claim againstthe defendants under German law. Inthese circumstances, any loss sufferedby Constantin was reflective of losswhich had been suffered by BLB and, ifboth BLB and Constantin were to haveclaims, there would be overlap andpotential double recovery. The Germancourt would not in these circumstanceshave permitted Constantin a claim inany event.

English law?Although Constantin pursued Englishlaw claims in the alternative, the Judgefound that it was impossible for thoseclaims to succeed on the facts. As notedabove, the causes of actions relied on byConstantin were the torts of unlawfulmeans conspiracy and causing loss byunlawful means. Following the Houseof Lords decision in OBG Ltd v Allan[2008] 1 AC 1 and the subsequentauthorities5, both torts require proof ofan intention on the part of thedefendant to injure the claimant.

For these purposes, a relevantintention to injure will exist if a persondesires to cause loss to a particularperson or desires a result that he knowswill cause that person loss. So, if adefendant desires to make a profit forhimself but knows that in so doing thiswill inevitably cause loss to theclaimant then this will be sufficient.

TOM SMITH QC

with the intention of harmingConstantin.

In order to address this, Constantinsought to argue that under German lawit was not necessary for the defendantsto have been aware of the existence ofthe overage rights; rather it was said tobe sufficient for the purposes ofliability under section 826 that thedefendants were aware that damage

A relevant intention to injure will existif a person desires to cause loss to aparticular person or desire to make aprofit for himself but knows that in sodoing this will inevitably cause loss

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5/. The most recent of which is the decision of the Court of Appeal in WH Newson Holding Ltd v IMI plc [2013] EWCA Civ 1377.

15


However, it is not enough for aclaimant to show that loss to him wasreasonably foreseeable or even that thedefendant realised that there was achance that such loss would be caused.It is also not enough that the defendantmust have appreciated that someone(whether or not the claimant ormembers of a specific class includingthe claimant) would suffer loss.

Since, on the facts there was noevidence that the defendants knew ofConstantin or its overage rights, it wasimpossible to say that they had anyintention to injure Constantin, andaccordingly the English law claimsfailed for this reason.

The Court therefore did not need toconsider the further point which would

have arisen, namely, whether there canbe any liability in the unlawful meanstort or for unlawful means conspiracywhere the third party is not preventedfrom performing its contractualobligations owed to the claimant, andthe only effect is that such performanceis rendered less valuable to theclaimant.

What would have happened absentthe alleged bribe?Finally, Constantin’s case also failed oncausation. The Judge found on theevidence that it was more likely thannot that BLB would have accepted CVC’soffer even if the alleged corruptarrangement had not been made. Inother words, the payments made to Dr

BERNIE ECCLESTONE GAVE EVIDENCE FOR OVER 3 DAYS, AND THE CLAIM AGAINST HIM WAS DISMISSED, ALTHOUGH HE STILL FACES A BRIBERY TRIAL IN GERMANY WHICHSTARTED ON 24 APRIL 2014

Gribkowsky had no causal effectbecause BLB would have accepted CVC’soffer in any event. On this point, theinternal BLB documents showed thatthe view within BLB, including of themembers of its Administrative andSupervisory Boards, was unanimouslyto the effect that CVC’s offer was a goodone and undoubtedly sought to beaccepted. Moreover, Constantin alsofailed to show that, even if BLB haddecided to look for another offer, therewould have been another buyer whowould have been willing to pay morethan CVC.

Tom Smith QC appeared for thesuccessful Second Defendant in theproceedings

16

MF Global meets Jimmy Savile

The ultimate objective of every procedure forthe terminal administration of a fund is therealisation and distribution of the assetsamongst those entitled. In the case of aninsolvency, those primarily entitled will be thecreditors and the distribution will beundertaken by the insolvency office holder.Where a deceased estate or trust fund isbeing administered, those primarily entitledwill be the beneficiaries and the distributionwill be undertaken by the personalrepresentatives or the trustees. But that is notalways the full picture; insolvency officeholders sometimes have to deal with difficulttrust claims to assets held by or in the nameof the insolvent debtor, while personalrepresentatives and trustees sometimes haveto deal with difficult creditor claims payableout of the trust assets ahead of thebeneficiaries.

An unlikely pairing of an investment bankspecial administration and the administrationof the estate of Jimmy Savile (deceased) hashelped to illuminate the distribution principlesto be applied in such circumstances. Thatillumination is to be found in the judgments ofDavid Richards J in In re MF Global UKLimited [2013] EWHC 1655 (Ch) and Sales Jin National Westminster Bank Plc v. Lucas[2014] EWHC 653 (Ch), which show thatthere are common themes. The judgmentsdemonstrate the flexibility and adaptability ofthe court’s jurisdiction to supervise and,where appropriate, intervene in theadministration of a trust; a jurisdiction whichcan prove particularly useful in juxtaposition

with the administration of an insolvent estate.In Scotland, Lord Hodge reached a similarresult in Joint Liquidators of Direct SharedealLimited, Petitioners [2013] CSOH 45, but by arather different route.

MF GlobalMF Global UK Limited (“MFGUK”) was aninvestment bank and held client money aspart of its business. That client money washeld on the trusts established by the FSA’sCASS rules. On 31 October 2011, specialadministrators of MFGUK were appointedunder the Investment Bank SpecialAdministration Regulations 2011 (“theRegulations”). This caused a primary poolingevent to occur for the purposes of the clientmoney distribution regime contained in CASS7A. The effect of this event was that all clientmoney held by MFGUK was treated aspooled, and MFGUK was required todistribute that pool so that each clientreceived a rateable proportion of its clientmoney entitlement calculated in accordancewith CASS 7A.

Unfortunately, however, the CASS rulesmake no specific provision for theadjudication of disputed claims or theimposition of a bar date after which claimscannot be made (or after which late claimantscannot disturb distributions already made).Furthermore, although the bar date and court-approved scheme provisions introduced byregulation 11 of the Regulations andimplemented by Part 5 of the InvestmentBank Special Administration (England and

Wales) Rules 2011 had been successfullyused to obtain the court’s approval to adistribution plan in respect of client assetsother than client money, that procedure wasnot available for client money.

The evidence before David Richards J wasthat there was a very substantial shortfall inthe client money pool. At the time he gavejudgment in June 2013, the client moneyclaims made in MFGUK’s administrationexceeded US$2.2 billion, while there wasonly c.US$950 million of client moneyavailable for distribution. In thesecircumstances, the omissions from the clientmoney rules described above meant thatthere was a real risk that, without the court’sassistance, the pool could not be properlyadministered. Since the hearing the positionhas changed in the sense that there has beena significant reduction in the shortfall (thelatest report shows that, after a smallreduction in the amount available fordistribution and a much larger reduction in theestimated figure for total client money claims,the claimants will have received in excess of75c in the $). However, a procedure is stillrequired to enable the administrators todistribute without having to make provision forall possible eventualities. If such a procedurewere not to have been developed, theobligations to distribute client monies inaccordance with the provisions of CASS 7Acould not have been achieved, because theadministrators would have been at risk ofdistributing in breach of trust if clients were tomake subsequent claims which were nolonger capable of being satisfied in theamounts to which they were entitled.

Jimmy SavileOn 29 October 2011, two days before the

WIlliam Trower QC examines an unlikely pairing betweenthe MF Global special administration and theadministration of the estate of Jimmy Savile (deceased)

17


appointment of special administrators toMFGUK, Jimmy Savile died. The executor ofhis will is National Westminster Bank Plc(“NatWest”). The will named a number ofindividual beneficiaries, but the residue of hisestate was left to the Jimmy Savile CharitableTrust (“the Charitable Trust”). InitiallyNatWest proceeded to administer his estatein the normal way, placing an advertisementfor claims under section 27 of the Trustee Act1925, which would have enabled it to effect adistribution to beneficiaries on the expiry ofthe relevant notice period (13 March 2012),having regard only to claims of which it thenhad notice.

At the beginning of October 2012, andbefore NatWest had made any distribution,ITV broadcast a documentary calledExposure: the Other Side of Jimmy Savile,accusing him of being a serial child abuserand sex offender. Since then, and as is nownotorious, a large number of people havemade claims that they were subjected toabuse by Savile. As at 11 March 2014, 139people had intimated to NatWest that theyhad personal injury claims against him andhis estate. The nature and evidence relatingto those claims satisfied Sales J that “there isno serious dispute that some, perhaps many,of the claims may be well-founded andmeritorious”. In addition many of theclaimants asserted claims against third partyentities such as the BBC, certain NHS trusts,Barnado’s and Mind all of which were said tobe vicariously liable for personal injury tortscommitted by Savile. In the event that suchclaims are established, it is likely that thosethird parties will have indemnity claimsagainst the Savile estate.

The total value of the Savile estateexceeds £3 million. It is clear, however, thatthe personal injury claims are such that thereis a serious possibility that they will exhaustthe estate, and that there will be a shortfall. Italso seems that the Charitable Trust does notaccept that this will inevitably be the case, orthat many of the claims will be made out. Ithas expressed concern that the personalinjury claims will not be defended by NatWestwith a sufficient degree of robustness.Indeed, this was such an issue for theCharitable Trust that one of the matters dealtwith by Sales J, (indeed the matter with which

the major part of his judgment is concerned),was an application by the Charitable Trust toremove and replace NatWest as Savile’spersonal representative. In the event, theremoval application failed, but the court hadto proceed on the assumption that, while it isquite likely that the estate is insolvent, it is notclear that it is.

The probable insolvency also means thatthere is some prospect that an insolvencyadministration order will be made in duecourse. No such order has yet been made,although Sales J did make a prospectivevalidation order in relation to certaincategories of cost and expense under section284 of the Insolvency Act 1986. It alsofollowed that the circumstance with whichNatWest had to grapple was one in which itwas on notice of a large number of claims(and so could no longer distribute under the

protection of section 27), but those claimswere inherently uncertain as to number andamount. Furthermore, the possibility of adeficiency as regards claimants meant thatnot only the beneficiaries under the will, butalso the other claimants had an interest inensuring that there was a proper system forscrutinising each claim against the estatebefore any distributions were made.

The Problem of UncertaintyThe problems which came before DavidRichards J and Sales J were therefore verydifferent, but they had this important factor incommon. In both instances the ability of theperson in control of the fund to distribute theassets was seriously compromised byuncertainties as to the identity of thoseentitled to share in any distribution, and thesize of their pro rata shares. The effect of

The ability of the person in control of thefund to distribute the assets was seriouslycompromised by uncertainties as to theidentity of those entitled to share in any distribution

SAVILE’S ESTATE WOULD BE QUICKLY EXHAUSTED BY THE VOLUME OF CLAIMS

18

these uncertainties was exacerbated by thelack of any statutory provisions designed tofacilitate distributions on completion of anyform of proving or claims administrationprocess.

In a conventional insolvency process,these kinds of uncertainty are dealt with byrules which include provision for the provingof claims, the admission or rejection of proofsin whole or in part, an estimation of the valueof uncertain or contingent claims, thedeclaration and payment of dividends and theprinciple that late-proving creditors are notentitled to disturb dividends already paid butwill normally be able to catch up if and whenfurther dividends are declared. The policywhich underpins these rules, whetherapplicable in winding up, administration orbankruptcy, is to strike an appropriatebalance between the desirability of ensuringthat claimants to a fund are given anadequate opportunity to assert theirentitlements, but that distributions to othersinterested in that fund are not delayed forlonger than is necessary. These rules are, ofcourse, part of the statutory scheme underwhich the creditors are entitled to participatein a distribution of the assets of an insolventdebtor. Their rights are limited to those givenby the statutory scheme itself, which includethe possibility that a late proof will not besatisfied because all of the assets will havebeen distributed to those proving in time.

Where a claimant’s rights are not limited toits entitlement under the statutory insolvencyscheme, but are proprietary claims to thereturn of specific assets or, as in the case ofMF Global, a proprietary right to share in anidentified pooled fund, the position is different.There is no mechanism for estimatingcontingent or future liabilities and paying adividend on the estimated amount. It followsthat the special administrator cannot ensurehis own release from liability to comply withthe duty to distribute by following a defined

statutory process, but nor can he easily fulfillhis positive duty to distribute to those whoseclaims have been established with theexpedition that the client money rules appearto contemplate. Likewise, where a deceasedestate is subject to uncertain or contingentcreditor claims, such as the personal injuryclaims asserted against the Savile estate orthe insurance claims asserted against theestate of a deceased Lloyds nameconsidered in Re Yorke (deceased); Stone v.Chataway [1997] 4 All ER 907, the personalrepresentatives can be faced with verydifficult decisions. (In the latter instance theuncertainty arose from a concern that thereinsurance provided by Equitas may nothave been adequate to protect the Yorkeestate from late-claiming long tail liabilities.)How are they to ensure that their duty todistribute to beneficiaries as soon aspracticable is complied with, withoutsubjecting themselves to the risk of adevastavit if unpaid creditor claims againstthe estate are subsequently established?Section 27 will only assist where the claimsare not just unascertained, but also unknownat the time the distribution is made.

There was a time when the solution in thecontext of distributing a deceased estate waseither to make a reserve for theunascertained claims of contingent or futurecreditors, or to require the beneficiary toprovide security against the personalrepresentative’s right to an indemnity for theconsequences of what might later prove to bea wrongful distribution. Many of the cases inwhich the principles were established aroseout of the administration of the estates ofdeceased lessees, which, at the date ofdeath, were subject to highly uncertaincontingent liabilities accruing only in the eventof the failure of the tenant for the time being.In either instance an application to court wasrequired, but where such an application wasmade, and the executors retained sufficient

reserves or obtained adequate security, theywould gain complete protection against theemergence of future claims.

This form of solution gives sufficientcomfort to the personal representatives, butone of its unsatisfactory aspects is that finalityis not achieved. The very nature of a reservemeans that undistributed assets remain in thehands of the personal representative, whilethe very nature of security is that the assetswhich would otherwise be within the freedisposition of the beneficiaries remainencumbered by the obligation to indemnify.This problem was particularly acute in thetype of case exemplified by Re Yorke, wherethe claims were highly contingent, and manydecades may well pass before it can be seenwith clarity that no claim will ever emerge.

The position of the client money claimantsin the case of MFGUK was slightly different tothe position of the contingent creditors of adeceased estate. The decision of theSupreme Court in Lehman BrothersInternational (Europe) v. CRC Credit FundLimited [2012] UKSC 6 established that thepooled fund constituted by the CASS rulesdid not just create identifiable trust property, italso gave rise to identifiable beneficialinterests. It follows that, unlike the creditors ofa deceased estate whose principal right is apersonal claim against the executors inrespect of an unpaid liability where assets outof which the liability might have been paidhave passed through the executors’ hands,the client money claimants have proprietaryclaims to their proportionate share of theclient money pool. The end result is, however,very similar. If the assets have beendistributed without taking account of all clientmoney claims, MFGUK and its specialadministrators are exposed to claims forbreach of duty.

The Solution AdoptedThe approach adopted by both the MFGUKspecial administrators and the Savilepersonal representatives was to present aprocedural scheme to the court and to seekthe court’s direction that they proceed toimplement that scheme as part of theadministration of the estate over which theyhad been appointed. By adopting thisapproach, the special administrators and

These cases are two very different modernexamples of the court’s well-establishedjurisdiction to supervise and intervene inthe administration of a trust

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personal representatives respectively aimedto ensure that the funds which they hadbeen appointed to administer weredistributed as expeditiously as practicable,(or in the case of Savile to at least start thatprocess), while ensuring that theythemselves were protected from claims forbreach of duty. In both cases, interestedclaimants (in so far as their identities wereknown) were notified of the applications,but formal representation orders do notseem to have been made.

In the case of MFGUK, the relief soughtcould not vary the beneficial interest of anyclient who subsequently established aclaim to the client money pool. The courtwas, however, able to give directions fordistribution as part of its general jurisdictionto supervise and administer trusts. It is wellestablished by cases such as In ReBenjamin [1902] 1 Ch 723 (unascertainedresiduary beneficiary) and In Re Gess[1942] Ch 37 (untraceable creditors) thatthose directions will protect the trusteesagainst late claims made by clients ofwhich they are not aware at the time ofdistribution. David Richards J alsosanctioned the introduction of furtherrefinements to the principle and agreed togive directions set out in a lengthyprocedural order which amounted to ajudicially-sanctioned mechanism foragreeing and admitting proofs, concludingwith a liberty to distribute once thoseprocedural hoops had been gone through.Not surprisingly, perhaps, many of thestages in the process bore a closeresemblance to the proving and distributionprocedures commonly used in a moreconventional formal insolvency. Inparticular, they included provisionpreventing any late-claiming client fromdisturbing distributions already made,thereby protecting not just MFGUK and itsspecial administrators, but also the clientswho had already received the distributionsout of the client money pool, even though,with the benefit of hindsight, it mighttranspire that they will have received morethan the amount to which they wereentitled.

The analysis adopted by Lord Hodge inthe much smaller Scottish case of Joint

Liquidators of Direct Sharedeal Limited,Petitioners [2013] CSOH 45 was slightlydifferent. Direct Sharedeal Limited (“DSL”)carried on investment business andhappened to hold client money in respect ofits CFD business with MF Global HoldingsLtd. After DSL went into liquidation, itbecame apparent that there was asignificant shortfall in the client money pool.This led to its liquidators making anapplication to the Court of Session forsimilar protective relief to that sought by thespecial administrators of MFGUK.However, rather than relying on the court’sgeneral jurisdiction to supervise andadminister trusts, Lord Hodge simplyimplied into CASS 7 itself what hedescribed as “a judicial power to givedirections to achieve a means of identifyingthe clients of DSL and to give finality to theprocess of their ascertainment”. Hepreferred this approach to the invocation ofthe power of the court to supervise aScottish private trust on the basis that theauthorities which established that powerwere “somewhat removed from thecircumstances of this case”. In the eventthough, the outcome of both cases wasvery similar, although it seems that theorder made in England was rather moreelaborate than that made in Scotland.

The procedural scheme sanctioned bySales J in the Savile case will not enabledistributions to be made without more. Itprovides for a proving and disputeresolution procedure, designed to promotesettlement of personal injury claims againstthe estate and was described by the judgeas similar to those which operate in relationto RTA, employment and public liabilityclaims under their respective CPRprotocols. Its purpose is to introduce aprocedure for the agreement of personalinjury claims against the estate intended toachieve as much clarity as possible asquickly as possible and at the least possiblecost. It was intended that NatWest and thethird parties (such as the BBC) wouldaccede to the scheme by agreement, but itwas accepted that no personal injuryclaimants could be required to participate. Itwas hoped, however, that many would andthat this would have the beneficial effect of

speeding up the process by which thecorrect distribution of the estate could befully worked out. In other words, the reliefgranted by Sales J was interim in form. Itgave NatWest sufficient comfort to go aheadwith the proposal, and to incur costs in doingso, and set the scene for an application tosanction a distribution in due course. Thetime at which NatWest can proceed to thenext stage will presumably depend on theprogress that is made in persuading theclaimants to settle under the auspices of thescheme.

These cases are two very differentmodern examples of the court’s well-established jurisdiction to supervise andintervene in the administration of a trust andto give guidance to personal representativeson the distribution of a deceased estate. Thecourt does not vary proprietary rights but,short of that, can give wide rangingdirections to ensure that funds which mightbe subject to unknown or unascertainedclaims are safely distributed to those entitledas soon as practicable. It seems that, in anappropriate case, directions can be givenwithout introducing the full panoply ofrepresentation orders in relation to eachcategory of affected person, but whetherthat will be possible will be heavilydependent on the facts of each case.

WILLIAM TROWER QC

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Since the beginning of February 2014 there have been anumber of important decisions. In particular, I have inmind the decision in the Lehman Waterfall case where MrJustice David Richards addressed a number of issuesarising from the likelihood of a surplus in the estate ofLehman Brothers International (Europe) after paymentof all proved debts. There is also the decision of theCourt of Appeal in Jervis v Pillar Denton which hassolved the problem caused by the decisions in Goldacre(Offices) Ltd v Nortel Networks UK Ltd and Leisure(Norwich) II Ltd v Luminar Lava Ignite Ltd byoverruling those cases. The Court has now decided that,where an administrator or liquidator makes use ofleasehold property for the purposes of theadministration or the winding up, then the reserved rentis payable as an expense of the administration for theperiod during which the property is used and will betreated as accruing from day to day for that purpose (i.e.the date on which a quarter’s rent becomes payable isirrelevant). In addition, the Cayman Islands Court ofAppeal in Irving Picard v Primeo Fund (in OfficialLiquidation) decided the trustee cannot rely on USinsolvency law to reverse preferences but can rely onCayman insolvency law to do so. See Hannah Thornley'sreview of these decisions at page 48 of this edition of theDigest.

The schemes of arrangement cases include a case,Apcoa Parking, of the Court sanctioning a scheme wherethe governing law and jurisdiction had been changed toEnglish law for the purpose of allowing the companies topropose schemes of arrangement.

The Court’s approach to relief from sanctions forbreaching orders of the Court since the Court of Appeal’sdecision in Mitchell has not, or at least not yet, reachedthe point of “one strike you’re out”: see the CivilProcedure section on p24. And, for those of you who think“sport and physical education” includes contract bridge,see the English Bridge Union Ltd case in the Sport sectionon p41.

Finally, we need to make a correction to one of theDigests which appeared in the last issue. As has been on

our website for a while, it has been drawn to our attentionthat the editorial on page 14 of the February 2014 issue ofthe Digest and the Case Digests on page 19 both refer to acase called BAT Industries v Windward in a way whichsuggests that a Receiver was in fact appointed by theCourt. In fact, as Hamblen J envisaged might be the case inparagraphs 55 and 58 of his Judgment, the matter wasdealt with by way of the giving of undertakings obviatingthe need for the appointment of a Receiver.

Hilary Stonefrost

Case Digests

HILARY STONEFROST

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BANKING AND FINANCIAL SERVICES Digested by WILLIAM WILLSON

WILLIAM WILLSON

Citibank N.A. v Geodesic Ltd [2014] EWHC 306 (Comm) QBD (Com)(Walker J), 7 February 2014

C (a trustee of a bond issue) soughtsummary judgment against G (acompany registered in India) foraround US$157 million following thematurity of bonds issued by G. Gsought to oppose the application forsummary judgment based on anallegation that a valid direction hadnot been given by the bondholders toC to enforce against G as (i) a numberof bondholders did not hold theirbonds at the time of the direction;

and/or (ii) a number of bondholdershad acquired their interest in thebonds after the redemption date. Thejudge found that this defence had noprospect of success as: (i) theevidence filed by C demonstrated thatthe bondholders did hold their bondsat the time of the direction; (ii) abondholder was defined as a person“who is, for the time being, shown inthe records of Euroclear orClearstream, Luxembourg and is the

holder” of a particular principalamount of the bond. There would beno commercial purpose in restrictingthe natural and ordinary meaning ofthe defined term so as to include onlythose bondholders who held bondsprior to the redemption date; (ii) inany event, C had a discretion pursuantto the Trust Deed to act without therehaving been a written direction by thebondholders.[David Allison QC]

Bond – construction – summary judgment

Citicorp International Ltd v Shiv-Vani Oil & Gas Exploration Services Ltd [2014] EWHC 245 (Comm) QB (Andrew Smith J), 11 February 2014

C (a trustee of a bond issue) soughtsummary judgment against S (acompany registered in India) foraround US$85m on the acceleration ofthe sums due under the bondsfollowing the failure by S to make apayment of interest in the sum ofUS$2m. C also issued a winding-uppetition against S in India based uponthe failure to discharge the sums duein respect of the bonds. S challengedC’s entitlement to summary judgmentbased on an alleged express or impliedterm that S would not be required tomake payment of any sums incircumstances where the Reserve Bankof India had not consented to thepayment as this would otherwise beunlawful under the Indian Foreign

Exchange Management Act applicableto S. S also contended that it wasoppressive for C to have commencedtwo sets of proceedings against it andapplied for an order that C should bemade to elect between the two sets ofproceedings and that the Court shoulddismiss or grant a stay of the UKproceedings unless C withdrew thewinding-up petition in India. Thejudge dismissed S’s application onreasons including the following: (i) theUK proceedings raised a narrowquestion on the meaning and effect ofthe Bond Conditions and the TrustDeed; (ii) the Bond Conditions and theTrust Deed were governed by Englishlaw with an exclusive jurisdictionclause in favour of the English court;

(iii) the issue could properly bedecided summarily against S; (iv)efficient case management called forthe issue to be determined by theEnglish court. The judge thenproceeded to grant summaryjudgment to C as: (i) there was no realprospect of S establishing the allegedexpress or implied term so as toexcuse non-payment in the absence ofthe consent of the Reserve Bank ofIndia; and (ii) there could be nodefence based on illegality or publicpolicy as any alleged illegality as amatter of Indian law was irrelevant incircumstances where the paymentobligation was to be performed inEngland or New York. [David Allison QC]

Bond – construction – summary judgment – concurrent proceedingsDAVID ALLISON QC

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CASE DIGESTS

Barclays Bank Plc v Unicredit Bank AG[2014] EWCA Civ 302 CA (CivDiv) (Longmore, Patten, Clarke, LLJ), 20 March 2014

The appellant banks (“A”) appealedagainst a decision that the withholdingof consent by the respondent bank (“R”)to the early termination of guaranteesin respect of loan portfolios had beencommercially reasonable. Under theguarantees, A had transferred the creditrisk in certain of their assets to R, whichmade quarterly payments to A inrespect of relevant portfolio losses andin return A paid quarterly premiums toR. The lifetimes of the guarantees were11 years and 19 years, but theguarantees provided that in certaincircumstances A were entitled to endthem after a period roughly equal to theaverage life of the loans, which wasexpected to be five years. In the event of“regulatory change”, early terminationrequired R’s consent, such consent to bedetermined by R in a commerciallyreasonable manner. A regulatory

change occurred and A sought toterminate after two years. R refusedconsent unless A paid it the balance ofits premiums for a five-year period.Their Lordships held that the criticalfactor was that the person who had toact in a commercially reasonablemanner in determining whetherconsent was to be given was theguarantor, namely R. It was the mannerof determination which had to becommercially reasonable; it did notfollow that the outcome had to becommercially reasonable. R could takeaccount of its own interest in preferenceto that of A. Any commercial manwhose consent to a course of action wasrequired but to whom thedetermination of whether to giveconsent was entrusted would think itcommercially reasonable to haveprimary regard to his own commercial

interests. It was impossible to see how arequirement for R to have regard to A’sinterests could work in practice. Aneutral third party could have beengiven the task of determining whetherconsent should be given, but that wasnot what the clause said. Therequirement that consent bedetermined in a commerciallyreasonable manner was intended as acontrol exercise of some kind. It was noteasy to express a test for commercialreasonableness in the instant contract,but it could be tentatively expressed bysaying that the party which had to makethe relevant determination would notbe acting in a commercially reasonablemanner if it demanded a price whichwas way above what it could reasonablyanticipate would have been areasonable return from the contract.[Robin Knowles QC]

Early termination of guarantee – consent – commercial reasonableness

HSH Nordbank AG v Intesa Sanpaolo SPA (2014) [2014] EWHC 142(Comm) QBD (Burton J), 31 January 2014Swap _ mistake – restitution

The claimant (“H”) sought restitutionfrom the defendant (“S”) in respect ofswap entered into with an Italian localauthority (“B”). S entered a swap withB in 2005, restructured in 2006, and Hreplaced S by novation in 2007. H andB entered into an ISDA masteragreement, under which H paid S anovation payment of €8,972,000. TheItalian Ministry of Economy & Finance(“MEF”) issued decree 389, setting outthe rules under which local authoritiescould use derivatives. The regionalCourt of Auditors found that the 2007swap infringed the decree (though the2005/2006 swaps were valid). Hbrought proceedings against S on the

basis that the 2006 swap, and thereforethe 2006 novated swap, were void fornon-compliance with decree 389.Hsubmitted that it had entered into thenovation agreement under themistaken belief that the 2006 swaptransaction was valid, and that therehad been a total failure ofconsideration. The judge held that Hhad failed to show that the 2006 swapwas void. However, if wrong in thatconclusion, the court would considerH’s case for restitution on theassumption that the 2006 swap wasvoid. H’s case based on mistaken beliefhad to fail. H had taken the risk thatthe 2007 swap would not comply with

decree 389 and there was no mistakenbelief (Pitt v Holt [2013] UKSC 26applied). There was no total failure ofconsideration for the novation in anyevent. The 2006 swap was effectivelynovated to H. Considering the relevantclauses of the novation agreement, Hhad understood and accepted the risksof its invalidity and S had not assumedany responsibility in respect of theswap’s legality, validity orenforceability (Standard CharteredBank v Ceylon Petroleum Corp[2011]EWHC 1785 (Comm)applied). H hadobtained what it bargained for, namelythe elimination of S from the equationand its route to the 2007 swap.

ROBIN KNOWLESCBE QC

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Napier Park v Harbourmaster CLO 2 B.V. & Ors [2014] EWHC 1083 (Ch)ChD (The Chancellor), 9 April 2014Notes – Construction – ordinary and natural meaning

Napier Park (“NP”), a junior noteholder ina CLO structure, contended that asubstantial sum of money representingUnscheduled Principal Proceeds wasavailable for reinvestment under the CLOstructure for the benefit of the juniornoteholders. T, the trustee, and CA, thecollateral administrator, contended thatthe monies were not available forreinvestment, but should be used toredeem the most senior class of notes. Thedispute turned on whether the provisionin the Reinvestment Criteria in Schedule 2to the Collateral Management Agreementthat “the ratings of the Class A1 Notes havenot been downgraded below their InitialRatings” was unsatisfied in circumstances

where the Class A1 Notes had beendowngraded by S&P in 2010 from theirInitial Rating of AAA to a rating of AA,even though they were then upgradedback to an AAA rating by S&P in 2012. TheChancellor considered the principlesapplicable to the construction of the CLOdocumentation, noting that incircumstances where it was contemplatedthat the rights and obligations under thecontract may pass to persons other thanthe original contracting parties (as in thecase of tradable financial instruments),the Court should be particularly cautiousabout departing from the ordinary andnatural meaning of the words. TheChancellor found that the words were

clear and unambiguous and that theReinvestment Criteria were not capable ofbeing satisfied in circumstances wherethe Class A1 Notes had at any time beendowngraded below their Initial Ratings,even if they had subsequently beenupgraded to their Initial Ratings. TheChancellor also noted that a great deal ofthe evidence relied upon by the partieswas inadmissible as it represented themarket’s view on the meaning of theprovision and that it was impossible forthe Court, in the absence of expertevidence and cross-examination, to take aview on a number of the points oncommercial purpose made by NP.[David Allison QC]

U.S Bank Trustees Limited v Titan Europe 2007-1 (NHP) Limited andOrs [2014] EWHC 1189 (Ch) (Richard Snowden QC), 16 April 2014Securitisation – Servicing Agreements – Removal of Special Servicer – Need forRating Agency Confirmation – Identity of the Controlling Party

The Note Trustee of a series of notessought directions from the Courtconcerning the interpretation andeffect of financial documentation ofwhich the notes formed a part. Underthe terms of a Servicing Agreement the“Controlling Party” was granted theright to remove the Servicer or SpecialServicer appointed in respect of a£1.1bn loan facility, subject to thesatisfaction of certain conditionprecedents. Those conditionprecedents included confirmation fromthe rating agencies rating the notesthat the removal and replacement ofthe Servicer or Special Servicer wouldnot lead to a downgrade in the then-current rating of the notes (a “RatingAgency Confirmation”).The Offering Circular issued in respectof the notes unequivocally stated thatin the circumstances which pertained

before the court, the “ControllingParty” would be the representative ofthe E Noteholders who, at that stage,were entirely out of the money. Bycontrast, the Servicing Agreementprovided that, in those circumstances,the “Controlling Party“ would be therepresentative of the “A-Loan”, beingtranche of the loan facility in respect ofwhich the notes had been issued. Therepresentative of the E Noteholderssought to exercise its rights asControlling Party to remove the SpecialServicer. By that time Fitch, one of therating agencies rating the notes, hadstated that as a matter of policy itwould not issue a Rating AgencyConfirmation in respect of Europeancommercial backed securities,including the notes. The issues beforethe Court included (i) whether therepresentative of the E Noteholders

was, in fact, “Controlling Party” underthe terms of the contractualdocumentation and (ii) whether RatingAgency Confirmation was in factrequired from Fitch in circumstanceswhere Fitch had notified the marketthat, as a matter of policy, it would notissue such a confirmation.The Court held that while the OfferingCircular clearly indicated that theIssuer thought the Controlling Partywould be the E Noteholders and whileit formed an important part of therelevant matrix against which theServicing Agreement ought to beconstrued, a proper construction of theServicing Agreement meant that theIssuer was the Controlling Party.As to the need to obtain a RatingAgency Confirmation from Fitch, theCourt held that it would not have madeany commercial sense for the parties to

HENRY PHILLIPS

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CASE DIGESTS

Williams v Central Bank of Nigeria [2014] UKSC 10, Supreme Court (LordsNeuberger, Mance, Clarke, Sumption and Hughes). 19 February 2014Dishonest assistance – limitation periods – constructive trusts – fraud

The Supreme Court upheld the Bank’sappeal against the Court of Appeal’sdecision ([2012] EWCA Civ 415) than anaction brought against it by Williams asa beneficiary under a trust was nottime-barred under s.21(3) of theLimitation Act 1980 (the “1980 Act”).Williams had brought an action againstthe Bank requiring it to account forand to trace monies that he had beenfraudulently induced to pay to anindividual (the latter havingundertaken to hold these monies ontrust for Williams, whereas in theevent he paid the money in fraudulentbreach of trust into an account heldwith the Bank). The basis for Williams’claim against the Bank was that it hadbeen a party to the principalfraudster’s fraud or had knowinglyreceived the trust funds.It was agreed that, to the extent thatWilliams’ claims were subject tostatutory limitation, then the limitation

period had expired. The issue indispute was therefore whethers.21(1)(a) of the 1980 Act disapplied thelimitation period that would otherwisebe applicable under s.21(3). Thisquestion turned firstly on whether astranger to a trust who was liable indishonest assistance or knowingreceipt was a trustee for the purposesof s.21(1)(a). If he was not a trustee forthese purposes, then the secondquestion was whether the words “anyaction in respect of any fraud orfraudulent breach of trust to which thetrustee was a party of privy” ins.21(1)(a) included an action against aparty who was not a trustee.The Supreme Court allowed the Bank’sappeal (Lord Mance JSC dissenting),holding that Williams’ claims weretime-barred. In particular, the majorityof the Supreme Court considered thats.21(1)(a) of the 1980 Act wasconcerned only with actions against

Lakatamia Shipping Co Ltd v Nobu Su & Ors [2014] EWHC 275(Comm), Hamblen J, 13 February 2014Disclosure – non-compliance – relief – time limits

A company which failed to comply withan unless order, by serving its disclosurelist 46 minutes late, was granted relieffrom sanction under CPR r.3.9, on thebasis that the non-compliance wastrivial and there were good reasons whythe default had occurred. In particular, itcould be said that the company

“narrowly missed the deadline”, acircumstance which the Court of Appealin Mitchell v News Group NewspapersLtd [2013] EWCA Civ 1537 expresslycontemplated as being de minimis andusually deserving of relief fromsanctions. Further and in particular, thetriviality of the non-compliance was

demonstrated by its effect, that is by thefact that it had caused no prejudice tothe other side and no such prejudice hadbeen suggested. The fact that thecompany had a history of default inrelation to such matters had no bearingon this analysis or “metamorphose” atrivial default into a serious one.

CIVIL PROCEDURE Digested by ALEXANDER RIDDIFORD

ALEXANDERRIDDIFORD

Accordingly, as a matter ofconstruction it was wrong to attributeto the parties the intention that if oneof the Rating Agencies simply stoppedissuing rating confirmations as a

matter of policy there could never be atermination of the Servicer or SpecialServicer. [William Trower QC, BarryIsaacs QC, Tom Smith QC, Henry Phillipsand Charlotte Cooke]

have agreed that just because Fitch nolonger gave rating confirmations as amatter of policy, the Servicer or SpecialServicer’s appointment could never beterminated (not even voluntarily).

trustees, and that the Bank was not atrustee in the relevant sense, since aconstructive trust of the type allegedagainst the Bank was not a true trust.The phrase “constructive trustee” hastwo distinct meanings: (1) de factotrustees, who have lawfully assumedfiduciary obligations in relation to trustproperty but without a formalappointment, and who are truetrustees; and (2) those who haveaccrued liabilities relating to a trust,having exposed themselves toequitable remedies by virtue of theirparticipation in the unlawfulmisapplication of trust assets, but whohave not assumed and never intendedto assume the status of a true trustee.In its second meaning a constructivetrustee was not a trust trustee for thepurposes of s.21(1)(a), and this is sowhether the cause of action in questionwas either dishonest assistance orknowing receipt

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Rawlinson and Hunter Trustees and ors v (1) Stephen John Akers (2)Mark MacDonald [2014] EWCA Civ 136 (Court of Appeal) (Moore-BickLJ, Tomlinson LJ, Ryder LJ), 20 February 2014Third Party Disclosure – Liquidators’ Reports – Litigation Privilege – Dominant

The Appellants are the joint liquidatorsof the Oscatello Group of companies,which operated under the umbrella ofa trust in favour of Robert Tchenguizand his children and remoter issue.The Oscatello Group of companies heldpositions in valuable assets by way ofdirect equity/debt investments andparticipated in large-scale derivativesand futures trading. Their investmentactivities were largely funded byKaupthing hf. The Serious Fraud Office(“SFO”) launched an investigation intothe involvement of Robert and VictorTchenguiz in Kaupthing’s collapse.During the course of the SFO’sinvestigations, the Appellants gave theSFO permission to read (but not takecopies of) a number of reports whichhad been produced at the Appellants’request (the “Reports”). The Tchenguizbrothers subsequently commencedproceedings against the Director of theSerious Fraud Office, alleging that theSFO’s investigation had causedextensive financial losses andreputational harm. The basis of thoseclaims is that the SFO did not have

reasonable grounds to suspect theTchenguiz brothers of havingcommitted a crime. During the courseof the proceedings brought against theSFO, the Tchenguiz brothers made anapplication seeking third partydisclosure of the Reports from theAppellants under CPR rule 31.17(3).At first instance, the Appellantsopposed the application on three maingrounds i.e. (i) necessity/relevance (ii)the Reports had been commissioned bythe Respondents for the dominantpurpose of aiding actual orcontemplated litigation and weretherefore protected by litigationprivilege; and (iii) discretion. Mr JusticeEder held that the evidence failed toestablish that the Reports had beencreated for the dominant purpose ofaiding actual or contemplatedlitigation. In particular, he held amongother things that the dominant purposefor the production of the Reports wasto enable the Appellants to understandthe financial position of the OscatelloGroup of companies in accordancewith their duties as liquidators.

The Appellants appealed on the basisthat, among other things, the Judge hadmischaracterised the proper approachin that an exercise to establish thefinancial position of a company neednot necessarily be independent of thepossible need to take recoveryproceedings and that the approach ofthe Judge wrongly suggested where areport commissioned for or on behalfof an officeholder containsinformation which the officeholdermay otherwise be bound to obtainthen the “dominant purpose” testcannot not be satisfied in respect ofsuch report.The appeal was dismissed.The Court of Appeal held that, whilecertain aspects of the evidence hadbeen overlooked by the Judge, theJudge had not lost sight of the need toidentify the dominant purpose forwhich the Reports had, in fact, beenproduced. The Court held that theevidence before the Court was notsufficient to make out a claim forlitigation privilege [William Trower QC, David Allison QC,Henry Phillips]

OJSC VTB Bank v Parline Ltd & Ors, [2014] EWHC 1045 (Comm),(Walker J) 21 February 2014Preliminary issues – expert evidence – foreign law

The defendants (Ds) applied for anorder directing a preliminary issue asto Russian law. Ds submitted that, iftheir expert evidence of Russian lawwere right, then, taken at their highest,the claimants’ allegations would notfound a cause of action under Russianlaw. The Judge held that the relevantquestion was as follows: what is themost efficient, orderly and just way ofdetermining the procedure which the

court should adopt for deciding theissues which arise? Applying thefactors in Steele v Steele [2001] CP Rep106, the Judge stated that he wouldbear in mind the ‘stern warnings’ thathave been given by appellate courtsabout the danger of identifying whatmay seem to be an easy shortcut.Further, it would not be appropriate toaccept Ds’ invitation to approach thematter as if it were an English law

strike-out application. In the Englishcourts, Russian law is a question offact, which cannot be divorced fromother factual issues arising in the fact.The issues of Russian law raised by Dswere fact-sensitive. The orderly andefficient way of proceeding wouldtherefore be to proceed to a trial of theaction as a whole, at which all facts,including issues of Russian law, couldbe examined together by the trial

WILLIAM TROWER QC

DAVIDALEXANDER QC

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CASE DIGESTS

judge. The proposed issues of Russianlaw did not disclose a sufficientlysuccinct ‘knock out point’ of the typeenvisaged by Lord Hope in Boyle v SCA

Packaging Limited [2009] UKHL 37.Further, the preliminary issue wouldnot necessarily achieve a substantialsaving in costs. Accordingly, Ds’

application was dismissed and theJudge gave directions for the trial ofthe whole action. [David Alexander QC;Stephen Robins]

McTear v Englehard [2014] EWHC 722 (Ch), (Richard Spearman QC), 14 March 2014Extensions of time – judgments and orders – non-compliance

The Defendants were in breach of aMaster’s orders relating to the serviceof witness statements and furtherdisclosure. They had also sought toadduce expert evidence without theleave of the Court. Notwithstanding theabove it was held, on the Defendants’application (inter alia) for relief fromsanctions under CPR r.3.9 (and on theClaimants’ application for the amendedDefence to be struck out pursuant to

CPR r.3.4(2)(c) for non-compliance withthe Master’s orders), that it would be adisproportionate response for the Courtto strike out the Defendants’ pleadedcase which had been placed on therecord before that non-compliance withCourt orders and the CPR had takenplace. The Court decided that (i) wherenon-compliance with an order wastrivial, it would be appropriate to granta prompt application for relief from

sanction, but otherwise the applicantwould need to show a good reason fornon-compliance (Mitchell v News GroupNewspapers Ltd [2013] EWCA Civ 1537applied); but (ii) where non-compliance,taken by itself, might be said to betrivial, it might become moresignificant when seen against thebackground of other matters (Durrant vChief Constable of Avon and Somerset[2013] EWCA Civ 1624 applied).

Porter Capital Corporation v Masters, unreported, (Nicholas Strauss QC),20 March 2014

Case management – order for interim payment – CPR rule 3.9

The Claimant issued an application foran interim payment, pending thetaking of an account, after a contestedhearing. It also sought an order that, inthe event of a default in payment, itshould be permitted to enter judgmentfor the whole amount claimed or,alternatively, the Defendant should bebarred from defending the proceedingsThe Court granted the Claimant aninterim payment but refused to make aperemptory order. The Learned Judgeobserved that, following the Court ofAppeal’s decision in Mitchell v NewsGroup Newspapers Ltd and the morestringent regime for obtaining relief

from sanctions imposed by theamended provisions of CPR r.3.9, it wasappropriate that the Court should adopta cautious approach to the making oforders with sanctions attached, unlessthe sanction is built into the rule, as inthe case of the requirement for a costsbudget which was in issue in theMitchell case.Further, the Judge observed that, sincethe sanctioned party may find it difficultto obtain relief from anything otherthan a trivial breach, the Court shouldconsider in advance whether thesanction will be a proportionateresponse to a breach of the order in all

foreseeable circumstances. Inparticular, where the order requires thepayment of money, as opposed tocompliance with a procedural direction,a breach may not be deliberate or inany sense blameworthy, but due just toa lack of funds[HS2] . Whilst the Courtnow adopts a more rigorous approachto compliance with orders thanformerly, this is still some distancefrom the “one strike and you’re out”regime implied by the order sought inthis case, which even in its milder formwould be inconsistent with access tojustice principles and probably withArticle 6 of the ECHR.

Baho& Ors v Meerza, CA (Treacy LJ, Underhill LJ), 10 April 2014

Delay – non-compliance – extensions of time for appealing

In this case a notice of appeal was filed7 days out of time. This was consideredto be a significant delay. There wasalso a failure promptly to give reasons

for the delay. Although there wasarguably no prejudice and no waste ofcourt resources, the decision inMitchell v News Group Newspapers Ltd

required parties to act promptly,efficiently and give a good explanation.Extension of time for appealing wasrefused.

27


In the matter of Guidezone Ltd [2014] EWHC 1165 (Nugee J), 15 April 2014

Application for extension of time“in-time”

The respondents to an unfair prejudicepetition applied for an application for anextension of time to serve their defencesbefore the date on which the defences

were required to be served. Thepetitioner’s argument that the decisionin Mitchell v News Group NewspapersLtd applied to “in-time” applications was

rejected. Such applications should not betreated as an application for relief fromsanctions; they should be decided byreference to the overriding objective.

COMMERCIAL LITIGATION & ARBITRATION Digested by CHARLOTTE COOKE

CHARLOTTE COOKE

Otkritie International Investment Management Ltd v Urumov [2014] EWHC 191(Comm) (Eder J), 10 February 2014Fraud – Deceit – Conspiracy – Fiduciary duties – Knowing receipt – Dishonest assistance

The Claimants were members of aRussian banking group. They soughtdamages from the Defendants inrelation to two frauds. The FirstDefendant (U) was a trader recruited bythe Claimant from another company,together with his team of four othertraders. A signing on fee of $25 millionwas paid to U. The Claimant claimedthat sum was paid on the basis of

representations that each of the fivetraders had a guaranteed income of $5million per year at their previousemployer and that the fee would beshared equally between U and the fourother traders. It was claimed thoserepresentations were false and madefraudulently. It was further claimedthat the Claimant had been induced tobuy some Argentinean warrants for

$150 million more than they wereworth by false representations as totheir value and as to their having beenacquired from a reputablecounterparty. The Claimants succeededin their claims in deceit, conspiracy,breach of fiduciary duty knowingreceipt, dishonest assistance. TheClaimants were entitled to damages andcertain proprietary remedies.

Leni Gas & Oil v Malta Oil Group [2014] EWHC 893 (Comm)(Males J), 27 March 2014 (Alleged fraudulent implied representations; “but for” test.)

Leni Gas & Oil (“LGO”, the Claimant)alleged Malta Oil Group (“MOG”, theDefendant) had made an impliedfraudulent misrepresentation during atelephone call, which purportedlyinduced LGO to sell LGO’s 10% interestin a Malta oil concession to MOG for $1when allegedly the 10% interest wasworth in excess of $10m. MOG deniedthat any implied representation wasmade as alleged, denied any fraud ordishonesty, and denied that LGO would

have behaved any differently even ifno such alleged representation hadbeen made. LGO’s claim failed on eachpoint and was dismissed in its entirety.The judge decided that MOG werehonest, and had no intention to makeany implied statement as alleged. Thejudge held moreover that no suchimplied representation was made, as areasonable man would not haveunderstood any such purportedimplied representation to have been

made and LGO did not in factunderstand at the time that any suchpurported implied representation hadbeen made. The judge also held, on thefacts, that LGO would not havebehaved any differently and would stillhave sold their interest on the sameterms, applying the “but for” test.Raiffeisen Zentralbank Osterreich AG vRoyal Bank of Scotland plc [2010]EWHC 1392 applied. [Antony ZacaroliQC and Adam Goodison]

San Evans Maritime Inc v Aligaion Insurance Co SA [2014] EWHC 163(Comm) (Teare J), 4 February 2014 Insurance – Contract – Shipping

The Court was required to determineissues relating to the properconstruction of a follow clause in an

insurance agreement. First, whether,on a proper construction, the followclause in the policy: (i) required the

Defendant to follow any settlementmade by C and B under the policy; or(ii) merely authorised C and B to act on

ADAM GOODISON

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Constantin Medien AG v Ecclestone [2014] EWHC 387 (Ch) (Newey J),29 February 2014Fraud – conspiracy to use unlawful means – causing loss by unlawful means

The Court dismissed claims which hadbeen brought against BernieEcclestone and two other defendantsarising out of the sale of Formula Oneto CVC in 2007. The interest in theFormula One was held by, inter alia, aGerman bank, Bayerische Landesbank(BLB) and the Claimant claimed that ithad the benefit of overage rightswhich entitled it to a portion of thesales proceeds received by BLB abovea certain level. The Claimant furtheralleged that a bribe had been paid toan official of BLB in order to procurethe sale and that as a result the

Claimant had suffered loss as BLB’sstake had been sold at a lower pricethan the price it would otherwise havebeen sold at. The Claimant assertedclaims in German law, alternatively inEnglish law in conspiracy to useunlawful means and causing loss byunlawful means. The Court dismissedthe claim. Although a bribe had beenpaid to the BLB official, it was not partof the Defendants’ purpose to procurea sale of BLB’s stake an undervalue.The Defendants also had no knowledgeof the Claimant’s overage rights anddid not intend to cause loss to the

Claimant. Apart from this, theClaimant had not proved that it hadsuffered any loss. The evidencesuggested that, even if the bribe hadnot been paid, BLB would in any casehave accepted CVC’s offer. Further,there was nothing to suggest that evenif BLB had not accepted CVC’s offer itwould have obtained a better offerfrom either CVC or any other party. Onbalance, the applicable law governingthe claims was German law, but theclaims failed under both German andEnglish law.[Tom Smith QC]

Waleed Abouraya v (1) Anja Sigmund (2) Triangle Metals & Minerals TradingLtd (A company incorporated in Hong Kong) (3) Triangle Metals & MineralsTrading Ltd [2014] EWHC 277 (Ch) (Richards J), 13 February 2014Company Law – Derivative Claims – Companies Act 2006, s. 260

The Claimant’s application forpermission to continue an actionagainst the First Defendant (D1) as aderivative claim on behalf of the Secondand Third Defendant companies (D2and D3) was refused, in circumstanceswhere C was held to be using thederivative action procedure to enablehim to use his status as a shareholder in

a parent company in order to advancehis interests as a creditor of a wholly-owned subsidiary. C and D1 wereshareholders in the company D2, beinga holding company with two wholly-owned subsidiaries: D3 and TriangleSwitzerland (TS). D1 was the soledirector of both subsidiaries. C hadprovided the working capital for, and

claimed to be a creditor of, D3, inrelation to which proceedings werepending for recovery of sums allegedlydue to C. In the proposed derivativeaction, C claimed that D1 had procured(i) the misappropriation of fundsbelonging to D3 for the benefit of TS,and (ii) the diversion of a businessopportunity from D3 to TS. C accepted

COMPANY LAW Digested by GEORGINA PETERS

GEORGINA PETERS

the Defendant’s behalf in negotiatingand/or agreeing the settlement ofdisputed claims with the claimants.Secondly, if on a proper construction ofthe follow clause it required theDefendant to follow any settlementmade by C and B under the policy,whether the follow clause wastriggered by the settlement agreement.Thirdly, whether the Claimants hadagreed by Clause 7 of the settlementagreement that the settlement

agreement would not be binding on theDefendant and, if so, whether theDefendant was entitled to rely on s 1(b)of the Contract (Rights of Third Parties)Act 1999 to enforce that term. It washeld that on a true construction of thepolicy, the follow clause wasreasonably to be understood asmeaning that the Defendant hadagreed with the Claimants to followany settlement made by C and B inrespect of an insurance claim arising

from a casualty affecting the vessel.The follow clause was triggered by thesettlement agreement. As to Clause 7 ofthe settlement agreement, that clausewould be understood by a reasonableperson as meaning that the partieswere not intending to bind any otherinsurer, though it was equally not apromise not to rely on the followclause. The Defendant could not relyon s 1(b) because Clause 7 did notconfer a benefit of the Defendant.

TOM SMITH QC

29


Graham v Every & Ors [2014] EWCA Civ 191 (Arden LJ, McCombe LJ, Vos LJ),27 February 2014

Company Law – Directors’ Duties – Unfair Prejudice – Pre-Emption Agreement – Companies Act 2006, s. 994

The Court of Appeal allowed an appealagainst the partial strike-out of theappellant’s (G) petition for relief fromunfair prejudice under the CompaniesAct 2006, s. 994. G’s petition, presentedafter his removal as a director of thecompany, contained allegations that: (i)the company had been formed on thebasis of a common understandingbetween the parties, being itsshareholders, recorded in part inwritten heads of agreement; and (ii)one of the respondent shareholdershad bought the shareholdings of two ofthe others in breach of a pre-emptionterm in the heads of agreement.The Court held, first, that the judge waswrong to strike out parts of theallegation that there had been acommon understanding between theshareholders recorded in the heads ofagreement. The court could not, on astrike-out application, determine that

the only way that G could haveaccepted the heads of agreement wasby notifying the respondents that thedocument had been executed, and thequestion whether G had communicatedhis acceptance of the agreement wasan arguable issue. Second, the judgehad erred in striking out the allegationconcerning the non-compliant sharepurchase on the basis that it did notconstitute unfair prejudice. If theallegation was properly particularized,it could involve the unfairlyprejudicial conduct of the company’saffairs within the meaning of s. 994(1).If, contrary to the heads of agreement,G had been denied an opportunity tobuy shares, then he had lost anopportunity that might have been ofvalue to him, being that of obtaining apotentially valuable strategic positionas a 27 per cent shareholder. Therewas an arguable case that the share

purchase in breach of the pre-emptionprovision was an act within theconduct of the company’s affairs. Merebreach of a pre-emption agreementwould not in itself constitute theconduct of the affairs of a company, ReCoroin Ltd [2014] BCC 14 considered,but diluting the shareholding of acompany member could amount toconducting a company’s affairs in amanner that was unfairly prejudicial.The parties had agreed that thecompany’s directors were to beremunerated by way of dividendrather than salary, and such a policywas within the conduct of thecompany’s affairs. By denying G’s pre-emption right while he was still adirector, the respondents had arguablyinterfered with the way in which thecompany remunerated its directors,Gross v Rackind [2005] 1 WLR 3505applied.

that there was no loss either to D2 or tohimself in his capacity as a shareholderof D2. His concern was that D3 wouldnot have the funds to satisfy anyjudgment he may ultimately obtainagainst D3, unless D1 was compelled torestore to D3 the sums diverted. TheJudge held, first, that C’s claim was nota derivative claim for the purposes ofthe Companies Act 2006, s. 260, but theCourt had jurisdiction at common law

to entertain it. Second, in order to bepermitted to continue his action as aderivative claim, C first had todemonstrate a prima facie case that D3was entitled to the relief sought, whichC had established on the evidence.Third, C had to establish a prima faciecase that the proposed action fell withinthe exception to the rule in Foss vHarbottle 67 E.R. 189, which he couldnot do given that he had not suffered

any loss as a shareholder in D2 as aresult of the alleged wrongdoing.Fourth, in any event, there were otherreasons for refusing the application,given C’s real purpose of using hisshareholding in D2 to advance hisinterests as a creditor of D3. This wouldprovide him with a means ofenforcement unavailable to othercreditors, which was not a proper use ofthe derivative action procedure.

(1) Pavel Sukhoruchkin (2) Hurley Investment Holdings Ltd (3) Pavel Novoselov (4)Vickgram Holdings Ltd v Marc Giebels van Bekestein & Ors[2014] EWCA Civ 399(Sir Terence Etherton (Chancellor), Macur LJ, Sir Timothy Lloyd), 27 February 2014Company Law – Reflective Loss – Freezing Injunctions

The Court of Appeal allowed an appealagainst a refusal to continue aworldwide freezing injunction and aproprietary injunction in relation to theassets of the respondents, holding thatthe appellants did have a good arguablecase that there had been breaches of

fiduciary duties owed by co-jointventurers in the payment of funds tothird parties under two agreements.The joint venture formed between theparties involved the establishment of afund company and investment advisorycompany, both incorporated in the

Cayman Islands. It was agreed that theco-joint venturers would share equallyin the benefits of the funds business.The appellants alleged that adistribution agreement, under whichtwo-thirds of the sums that would havebeen paid to the investment advisory

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CASE DIGESTS

company in relation to a particularinvestment were instead paid to a thirdparty, was entered into without theirknowledge or consent. Further, that thethird party had received secretpayments pursuant to a writtendistribution agreement, known as theRio agreement, with another companywithin the same structure. The Court, inconsidering whether the appellants hada good arguable case in relation to theirclaims for breach of fiduciary duties,held that the judge had not beenentitled to find that their case was no

more than borderline. The judge’srejection of a good arguable case wasbased on the no reflective lossprinciple, yet the respondents had notidentified the precise causes of actionwhich the investment advisorycompany might have if the appellantswere successful in their claims forbreach of fiduciary duty in connectionwith the distribution and Rioagreements. The judge had consideredtwo claims that the company mightpursue against the respondents,making findings of shadow

directorship of that company which (i)did not take into account anydifferences in the law of the CaymanIslands as compared with English law,and (ii) were impossible to resolve atan interlocutory stage. Given that theapplication of the no reflective lossprinciple was highly fact dependent,and given the current state of thedisputed evidence, the appellants wereheld to have a good arguable case thattheir claims for relief for breach offiduciary duty would not be barred attrial by that principle.

CORPORATE INSOLVENCY Digested by ADAM AL-ATTAR

Re Lehman Brothers International Europe (in administration) [2014]EWHC 704 (Ch), (David Richards J), 21 February 2014Lehman Brothers Waterfall Application

The issues for consideration arose asbetween the shareholders of LBIE onthe one hand and creditors of LBIE’sinsolvent estate on the other. Inparticular, the application consideredwhether the subordinated debt held byLB Holdings Intermediate 2 Limitedwas subordinated to the claims ofcreditors of LBIE to be paid post-administration statutory interest. Italso considered whether creditors ofLBIE with a contractual entitlement tobe paid in a currency other thansterling had a claim against LBIE forany shortfall suffered by them as aresult of being paid dividends on theirproved debt in sterling, and whetherthe subordinated debt of LB HoldingsIntermediate 2 Limited wassubordinated also to such foreigncurrency conversion claims. Theapplication further considered, in lightof the fact that LBIE is an unlimitedliability company, the extent of theobligation of LBIE’s shareholders tocontribute to the assets of LBIE in itsadministration or in liquidation, andaddressed issues of set-off as betweenthe shareholders’ contingent liability tocontribute in LBIE’s liquidation and thesubordinated and unsubordinated debt

claims of the shareholders in LBIE’sinsolvency.The Judge stated his conclusions asfollows:“1. Conclusions on issues which are notconnected with the status of LehmanBrothers International Europe (LBIE)as an unlimited company:(i) The claims of LB HoldingsIntermediate 2 Limited (LBHI2) underits subordinated loan agreements withLBIE are subordinated not only toprovable debts but also to statutoryinterest and un-provable liabilities.(ii) Creditors of LBIE whose contractualor other claims are denominated in aforeign currency are entitled to claimagainst LBIE for any currency lossessuffered by them as a result of adecline in the value of sterling asagainst the currency of the claimbetween the date of thecommencement of the administrationof LBIE and the date or dates ofpayment or payments of distributionsto them in respect of their claims. Suchcurrency conversion claims rank as un-provable liabilities, payable only afterthe payment in full of all proved debtsand statutory interest on those debts.(iii) If the administration of LBIE is

immediately followed by a liquidation,any interest in respect of the period ofthe administration which has not beenpaid before the commencement of theliquidation will not be provable as adebt in the liquidation nor will it bepayable as statutory interest undereither rule 2.88 of the Insolvency Rules1986 or section 189 of the InsolvencyAct 1986.(iv) Those creditors of LBIE with debtswhich carry interest by reason ofcontract, judgment or other reasonsunconnected with the administrationor liquidation of LBIE will be entitled toclaim in a liquidation of LBIE, whichimmediately follows theadministration, for interest whichaccrued due during the period of theadministration, as an un-provableclaim against LBIE, payable after thepayment in full of all proved debts andstatutory interest on such debts.2. Conclusions on those issues whicharise from the status of LBIE as anunlimited company:(i) The obligation of members tocontribute under section 74(1) of theInsolvency Act 1986 extends not only toprovide for proved debts but also forstatutory interest on those debts and

ADAM AL-ATTARMARK ARNOLD QC

31


un-provable liabilities.(ii) The contributory rule (that is, therule that a contributory of a companyin liquidation cannot recover anythingin respect of any claims he may have asa creditor until he has fully dischargedhis obligations as a contributory)applies only in a liquidation. It doesnot apply in an administration,including the administration of LBIE.The equitable rule in Cherry v Boultbeealso does not apply.(iii) LBIE, acting by its administrators,will be entitled to lodge a proof in adistributing administration or a

liquidation of either Lehman BrothersLimited (LBL) or LBHI2 in respect ofthose companies’ contingent liabilitiesunder section 74(1) of the InsolvencyAct 1986 which may arise if LBIE wereto go into liquidation. The valuation ofsuch claims would be a matter ofestimation under the provisions of theInsolvency Rules.(iv) In a distributing administration orliquidation of LBL or LBHI2, theclaims of those companiesrespectively as creditors of LBIEwould be the subject of mandatoryset-off against the claims of LBIE in

respect of those companies’ contingentliabilities as contributories. I havereached the conclusion that thedecision in In re Auriferous PropertiesLimited (No I) 1898 1 Ch 691 waswrong and should not be followed.(v) In the administration of LBIE thecontingent liabilities of LBL andLBHI2 as contributories will be thesubject of mandatory set-off againstthe admitted proofs of debt of thosecompanies as creditors of LBIE.” [William Trower QC, Antony ZacaroliQC, Barry Isaacs QC Mark Arnold QC,David Allison QC and Daniel Bayfield]

Jervis v Pillar Denton re: Games Station [2014] EWCA Civ 180 (PattenLJ, Lewison LJ and Sharpe LJ), 24 February 2014Administration/Liquidation – payment of rent as an expense

The Game group went intoadministration on 26 March 2012, theday after the March quarter day.Various companies in the group ownedleasehold interests in a number ofstores. Rent was payable in advanceunder all of the relevant leases. Therent falling due in advance on theMarch quarter day was not paid. Theadministrators refrained from payingany part of it, notwithstanding that thestores were used for the benefit of theadministration throughout theremainder of the quarter, in reliance

on the decisions in Goldacre (Offices)Ltd v Nortel Networks UK Ltd [2011] Ch455 and Leisure (Norwich) II Ltd vLuminar Lava Ignite Ltd [2013] 3 WLR1132. The Court of Appeal in this caseoverruled both Goldacre and Luminar.It held that where an administrator orliquidator makes use of leaseholdproperty for the purpose of theadministration or the winding up, thenthe reserved rent is payable as anexpense for the period during whichthe property is so used, and will betreated as accruing from day to day for

that purpose. This is true whether therent was payable in advance or inarrears. The date upon which aquarter’s rent becomes payable, andwhether that is before, during or afterthe period during which the property isused for the purposes of theadministration or liquidation, isirrelevant. The Apportionment Act1870 had no part to play indetermining the amount of rentpayable as an expense under thesalvage principle [Antony Zacaroli QC,Daniel Bayfield and Hannah Thornley]

Akers and Others v. Samba Financial Group [2014] EWHC 540 (Ch)(The Chancellor), 28 February 2014Cross Border Insolvency Regulations – Section 127 – stay of proceedings

Saad Investments Company Limited (inOfficial Liquidation) (“SICL”) and itsJOLs brought proceedings (“the Claim”)against a bank, Samba, for relief underthe Cross Border InsolvencyRegulations and section 127 InsolvencyAct 1986. The JOLs contended thatcertain shares (the “Disputed Shares”)were owned by SICL under trusts (“theTrusts”) that were governed by the lawof the Cayman Islands, and that theDisputed Shares had been transferred

to Samba after the presentation of thewinding-up petition against SICL andthat therefore that transfer was void(unless validated by the Court).Samba applied under CPR Part 11 foran order staying the proceedings onthe grounds that the English courtshould not exercise jurisdiction overthe claim made by the JOLs and SICLagainst Samba, because there existsanother forum which is clearly anddistinctly more appropriate, namely

the courts of the Kingdom of SaudiArabia. The JOLs resisted the StayApplication on the basis that (1) Sambacould not demonstrate that anotheravailable forum (having competentjurisdiction) is clearly and distinctlythe more appropriate forum for thetrial of the Claim and (2) even if Sambacould demonstrate that Saudi Arabiawere clearly the more appropriateforum for the Claim, there werecircumstances which dictated that the

FELICITY TOUBE QC

DANIEL BAYFIELD HANNAH THORNLEY

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CASE DIGESTS

Claim should nevertheless be tried inEngland. In particular, on SICL and theJOLs’ case Cayman Islands law appliesto the Trusts, but it was commonground between the parties’ expertsthat Saudi Arabian courts will notapply or even consider the law of theCayman Islands (or any other foreign

law), but only the law of Saudi Arabia.The Chancellor stayed the Claim. Heheld that it could only succeed if, at therelevant date, SICL had a proprietaryinterest in the Disputed Shares and hefurther concluded that (1) The Trustswere governed by the law of SaudiArabia and (2) the Claimants did not

acquire a proprietary interest in theDisputed Shares by virtue of the Trusts.If the Judge had not reached thisconclusion (on the Hague TrustsConvention and as a matter of commonlaw), he made it clear that he wouldnot have stayed the Claim.[Felicity Toube QC]

Hockin v Marsden [2014] EWHC 763 (Ch) (Nicholas Le Poidevin, QC),19 March 2014Assignment of claims in administration

The applicant applied under paragraph74 of Schedule B1 to compel theadministrators to assign claims of thecompany the administrator did not wishto pursue. The Judge directed theadministrators to assign the claims. Hesaid of the claims that the limitation

period will soon begin to operate andthat, since it is proposed that anassignment should be on terms that theadministrators would receive apercentage of any recoveries, anysuccess if the Applicants pursued theclaims would be a benefit to the

creditors. Conversely, if the claimsfailed, the creditors would have sufferedno prejudice. The consideration, interms of the percentage if successfullypursued, was not derisory and, in thecircumstances, was sufficientconsideration. [Lloyd Tamlyn]

Re ARM Asset Backed Securities (No 2) [2014] EWHC 1097 (Ch) (NugeeJ), 28 March 2013Provisional liquidation – s.130(2) stay

The company went into provisionalliquidation in England as ‘mainproceedings’ under Art.3(1) of the ECInsolvency Regulation, pursuant to theOrder of David Richards J, who held thatthe company’s COMI was in the UK: seeRe ARM Asset Backed Securities [2013]EWHC 3351 (Ch). Subsequently, LeProcureur d’Etat de Luxembourg (“thePublic Prosecutor”) applied inLuxembourg for the liquidation of thecompany in Luxembourg under Article39 of the Luxembourg law of 22 March2004 on securitisation (as amended)(“the Securitisation Law”). The Englishprovisional liquidators opposed thePublic Prosecutor’s application,contending that the automatic statutorystay under s.130(2) IA 86 appliedthroughout the European Union,pursuant to Art.17(1) of the ECInsolvency Regulation. The LuxembourgCommission de Surveillance du SecteurFinancier (“the CSSF”), which had askedthe Public Prosecutor to apply to theLuxembourg court for the liquidation ofthe company, contended that a

liquidation in Luxembourg under theSecuritisation Law would not amount to‘insolvency proceedings’ for thepurposes of the EC InsolvencyRegulation and that the requirement foran ‘establishment’ as a pre-condition tothe commencement of secondaryproceedings within Art.3(2) of the ECInsolvency Regulation would not apply.On this basis, the CSSF contended thatthe absence of an ‘establishment’ inLuxembourg would not prevent theLuxembourg court from commencing aliquidation under the SecuritisationLaw in Luxembourg. In thesecircumstances, the English provisionalliquidators applied to the English courtfor a declaration that the PublicProsecutor’s application in Luxembourgwas subject to the stay in s.130(2) IA 86.The Judge held: (1) the Englishprovisional liquidation amounted to‘main proceedings’ for the purposes ofthe EC Insolvency Regulation (ReEurofood IFSC Ltd, C-341/04 [2006] Ch508 applied); (2) as a result of Art.17(1)of the EC Insolvency Regulation, the

effect under English law of theappointment of the provisionalliquidators was applicable with nofurther formalities in all States to whichthe Insolvency Regulation applies,including Luxembourg; (3) pursuant tos.130(2) IA 86, no “actions orproceedings” could be commencedagainst the company without thepermission of the English court; (4) theterm “action or proceeding” has a widemeaning, including criminal and quasi-criminal proceedings, and it was clearthat the Public Prosecutor’s applicationwas an action or a proceeding againstthe company falling within s.130(2) ofthe 1986 Act, which was automaticallystayed; (5) although, outside the contextof the EC Insolvency Regulation, thestay under s.130(2) IA 86 has no effectoutside the UK, the effect of Art.17(1) ofthe EC Insolvency Regulation is to applythat stay to the whole territory of theEuropean Union (excluding Denmark)(Kaupthing HF v Kaupthing Singer &Friedlander [2012] EWHC 2235 applied).For these reasons, the provisional

LLOYD TAMLYN

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liquidators were entitled to adeclaration that the Public Prosecutor’s

application in Luxembourg was stayedby operation of s.130(2), which applied

in Luxembourg by virtue of Art.17(1).[Felicity Toube QC, Stephen Robins]

Carman (liquidator of Casa Estates (UK) Ltd) v Bucci [2014] EWCA Civ383 (Sullivan, McFarlane, Lewison LJJ), 3 April 2014

Inability to pay debts – when can CA substitute its own evaluation of facts

The Court of Appeal considered twoquestions in this case. First, when is acompany deemed to be unable to payits debts, with the result that it isinsolvent? Secondly, whether theintermediate appeal court wasentitled to substitute its ownevaluation of the facts upon which theanswer to the legal question depends?The context was a transaction atundervalue claim. The questions arosebecause Warren J had gone behindHH Judge Purle QC’s conclusion thatcompany was cash-flow solvent up toDecember 2008 and found that thecompany was using new deposits topay old debts. The case did not involvea Ponzi scheme but the case wasexamined through the lens of thefollowing example:“In the early stages of a Ponzi schememoney flows in from investorspromised high returns. Money fromnew investors is used to pay thepromised returns to existing investors.On the face of it therefore the companyis managing to pay its debts as they falldue. But the underlying reality is that,sooner or later, the whole house ofcards will collapse. The accumulatingliabilities to new investors cannot hopeto be matched by any real investments:they are dependent on the continuedinflow of new money. When that driesup, the game is up. In any commercialsense the company is insolvent fromthe beginning. What a commercialapproach requires the court to do isnot to stop automatically at the answerto the question: is the company for thetime being paying its debts as they falldue? In an appropriate case it must goon to inquire: how is it managing to doso?”

Lewison LJ derived the followingproposition from Eurosail:

(1) The tests of insolvency in s123(1)(e) and 123 (2) were notintended to make a significantchange in the law as it existedbefore the Insolvency Act 1986.(2) The cash-flow test looks to thefuture as well as to the present. Thefuture in question is the reasonablynear future; and what is thereasonably near future will dependon all the circumstances, especiallythe nature of the company’sbusiness. The test is flexible andfact-sensitive.(3) The cash-flow test and thebalance sheet test stand side by side.The balance sheet test, especiallywhen applied to contingent andprospective liabilities is not amechanical test. The expressreference to assets and liabilities is apractical recognition that once thecourt has to move beyond thereasonably near future any attemptto apply a cash-flow test will becomecompletely speculative and acomparison of present assets withpresent and future liabilities(discounted for contingencies anddeferment) becomes the onlysensible test.(4) But it is very far from an exacttest. Whether the balance sheet testis satisfied depends on the availableevidence as to the circumstances ofthe particular case: para 38. Itrequires the court to make ajudgment whether it has beenestablished that, looking at thecompany’s assets and making properallowance for its prospective andcontingent liabilities, it cannot

reasonably be expected to meet thoseliabilities. If so, it will be deemedinsolvent even though it is currentlyable to pay its debts as they fall due.(5) Cash-flow solvency or insolvencyis not to be ascertained by ablinkered focus on debts due at therelevant date. Such an approach willin some cases fail to see that amomentary inability to pay is onlythe result of temporary illiquidity. Inother cases it will fail to see that anendemic shortage of working capitalmeans that a company is on anycommercial view insolvent, eventhough it may continue to pay itsdebts for the next few days, weeks,or even months.(6) Even if a company is not cash-flow insolvent, the alternativebalance-sheet test will afford apetitioner for winding up aconvenient alternative means ofproof of a deemed insolvency.

On the basis of these propositions, theCourt of Appeal refused to interferewith the decision of Warren J. LewisonLJ remarked that:“It certainly seems counter-intuitive (tome at least) that a company thatmanages to stave off cash-flowinsolvency by going deeper and deeperinto long-term debt is not insolvent. Itmay be able to trade its way out ofinsolvency, and thus avoid going intoinsolvent liquidation, but that is adifferent matter. Equally if (as Warren Jheld) Casa UK was only able to continueto pay its debts as they fell due bytaking new deposits, and using them topay off old debts, in any commercialsense the company was insolvent,whether on a cash flow basis or abalance sheet basis.”

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CASE DIGESTS

Re Stemcor [2014] EWHC 1096 (Ch) (Birss J), 10 April 2014

Scheme of Arrangement

The Court sanctioned the scheme ofarrangement to restructure the debt ofStemcor. The key holdings as regard theobjections to sanction were two-fold.First, the fact that the schemeconferred an additional benefit on twolenders with more limited guaranteeswas not unreasonable or unfair in the

circumstances where all schemecreditors benefited from the companyhaving in place a single restructuredloan facility with an extended maturitydate since it will thereby give it time torepay its indebtedness owed to all.Additionally, the remaining schemecreditors voted firmly in favour of the

scheme. Secondly, it was reasonable togive priority in the future to thoseprepared to fund trade finance andborrowing base facility, which wouldbe made available to the groupcreditors. [Antony Zacaroli QC, David Allison QC,Tom Smith QC]

Christophorus 3 Limited [2014] EWHC 1162(Ch) (Henderson J), 15 April 2014Administrations - pre-packs - release of liabilities under inter-creditor agreement

The Court was concerned with anapplication for (1) an administrationorder in respect of the companypursuant to paragraph 12(1)(b) ofSchedule B1 to the Insolvency Act 1986;and (2) an order granting the proposedadministrators liberty to enter into animmediate “pre-pack” agreement for thesale and purchase of all the company’sassets (“the SPA”).The relief sought formed part of ascheme for the restructuring andrefinancing of the predominantlyGerman-based Auto-Teile-Unger (“ATU”)group. The scheme had been devised asthe only practicable means of saving theATU group from compulsory insolvency,and a number of steps had already beentaken towards its implementation. Themaking of an administration order inthis jurisdiction, and the entry by theproposed administrators into the SPA,were essential to the success of thescheme. A crucial requirement of thescheme was that the assets to be soldunder the SPA (which included, throughan intermediate holding structure, theshares in the operating companies of theATU group) should be sold “clean”,released from all the existingindebtedness of the group secured onthem. Achievement of this objectivedepended, among other things, on thegranting of effective releases from therelevant existing liabilities by the

Security Agent under and in accordancewith the terms of an IntercreditorAgreement dated 15 October 2010 (“theICA”) which was governed by Englishlaw. The exercise of the releases under clause14.2 were dependent on two matters: (1)there being a disposal of “all of theshares (which are held by an Obligor) inthe capital of an Obligor owingLiabilities or Liabilities of the Issuerunder the Notes and Notes Indenture orany holding company of that Obligor…”;and (2) the sale being “implementedunder any court approved process”. Asto the first issue, the definition of“Obligor” in the ICA required any newObligor to be a subsidiary of the mainoperating entity in the group ("Handels")at the time when it becomes a party tothe ICA by execution and delivery to theSecurity Agent of an Obligor AccessionDeed. It was clear that this conditionwas satisfied when the companyexecuted the necessary deed on 15January 2014, but the question waswhether it ceased to be satisfied when,later the same day, the company wasmoved up the group structure to becomean intermediate holding company. TheCourt was satisfied that the companyremained an "Obligor" within themeaning of clause 14.2 of ICA at allmaterial times and notwithstanding itsmove up the corporate chain on 15

January 2014. The ICA contained noexpress requirement that an “Obligor”should serve any particular commercialpurpose, or that it should have beentrading for any particular length of time.What mattered was the contractualobligations undertaken by an Obligor. Ittherefore made no difference if, as in thepresent case, the company wasincorporated with the main (or even thesole) object of becoming an Obligor, ofbeing moved up the corporate structureonce it had achieved that status, and ofthen being used as the vehicle for a saleof the group’s assets. Although pre-planned and in some senses artificial,these steps served the very realcommercial purpose of maximisingrecovery for the group and facilitating arefinancing. The court was satisfied thata purpose of this nature fell fairly andsquarely within the purview of clause14.2.As to the second issue, the Court wasalso satisfied that the proposed salewould be “implemented under any courtapproved process”. This was because (a)the proposed sale was to be effected byadministrators appointed by the court,the administration itself being theprocess approved by the court for thepurposes of clause 14.2; (b) theadministrators were officers of thecourt; and (c) the court was, in anyevent, being asked to authorise them to

ANTONY ZACAROLI QC

35


Re Apcoa Parking Holdings GmbH and others [2014] EWHC 997 (Ch)(Hildyard J), 26 March 2014Scheme of Arrangement – convening hearing – foreign law opinions

Several related companies, includingcompanies incorporated in Germany,Austria, Denmark, Norway andBelgium, proposed schemes ofarrangement with their creditorspursuant to Part 26 of the CompaniesAct 2006. The relationship between thecompanies and their creditors wasgoverned by a Facilities Agreement,pursuant to which, at the date ofexecution, the governing law was

German law, and the courts ofFrankfurt/Main had exclusivejurisdiction. The governing law andjurisdiction were subsequently changedto English law and jurisdiction by amajority vote of creditors, pursuant tothe terms of the Facilities Agreement.The companies adduced opinions offoreign law that the changes were validunder German law, and that the courtsin the countries in which the companies

were incorporated would, if otherwisesatisfied as to the process, give effect toany scheme sanctioned by the EnglishCourt. The Court accepted that, for thepurpose of convening meetings ofcreditors to consider and, if thought fit,approve the schemes, there was asufficient connection with thejurisdiction, and convened thosemeetings accordingly.[Simon Mortimore QC, Barry Isaacs QC]

enter into the sale. In these circumstances, the Court wassatisfied that it would be appropriate to

grant the relief sought, and that theSecurity Agent had power under clause14.2 of the ICA to grant the necessary

releases. [William Trower QC; David Allison QC;Marcus Haywood]

Nine companies in the Apcoa Parkinggroup applied for the sanction ofschemes of arrangement. Most of thecompanies’ indebtedness was governedby a Facilities Agreement, which wasoriginally subject to German law andthe exclusive jurisdiction of the Courtsof Frankfurt/Main. The governing lawand jurisdiction were recently changedto English law and jurisdiction by amajority vote, in accordance with theamendment provisions in the FacilitiesAgreement. The purpose of the change

was to allow the companies to proposeschemes of arrangement. Theprincipal term of the schemes extendedthe repayment date of the Companies’indebtedness under theFacilities Agreement. A number of thecompanies were incorporated incountries outside the UK (namelyGermany, Austria, Belgium, Norwayand Denmark); and they had no assetsor operations in the UK. The Courtreceived expert evidence of foreignlaw, to the effect that the change of

governing law and jurisdiction, and theSchemes themselves, would be likely tobe recognised in the countries in whichthose Companies were incorporated.The Court determined that a sufficientconnection with this jurisdictionexisted for the invocation of thescheme jurisdiction. The Court alsoexercised its discretion, having regardto the facts, in favour of sanctioningthe Schemes. [Simon Mortimore QC, Barry Isaacs QC,Adam Goodison]

Irving Picard v Primeo Fund (In Official Liquidation), Cayman IslandsCourt of Appeal (Chadwick P, Mottley JA, Campbell JA), 16 April 2014Cayman Islands law cross-border insolvency – governing law of claims

The U.S. trustee of the liquidation ofBernard L Madoff InvestmentSecurities LLC (“BLMIS”) commencedproceedings against Primeo Fund inthe Cayman Islands. Jones J directedthe trial of a number of preliminary

issues of law, including: (i) whetherthe trustee could rely on U.S.insolvency law to reversepreferences, pursuant to ss 241-2 ofthe Cayman Companies Law; (ii)whether the trustee could rely on

Cayman insolvency law to reversepreferences, pursuant to ss 241-2 ofthe Cayman Companies Law; and (iii)whether the trustee could rely onCayman insolvency law to reversepreferences, pursuant to the Court’s

Re Apcoa Parking Holdings GmbH and others (Hildyard J), 14 April 2014

Scheme of Arrangement – sanction hearing – recent change of governing law andjurisdiction SIMON

MORTIMORE QC

MICHAEL CRYSTAL QC

GABRIEL MOSS QC

BARRY ISAACS QC

36

CASE DIGESTS

power at common law to grantjudicial assistance in cross-borderinsolvency cases. The provisions of ss241-2 of the Cayman Companies Lawderive ultimately from s.304 of theU.S. Bankruptcy Code.In a series of decisions, U.S. courtsheld that s.304 enabled them to applythe foreign insolvency law of theforeign insolvency proceedings toreverse preferences. The trustee contended that ss 241-2 ofthe Cayman Companies Law shouldbe interpreted in the same way, so asto enable the Cayman courts to applyforeign insolvency laws. Since BLMISis in liquidation in the United States,the trustee’s argument, if upheld,would have permitted the Caymancourts to apply U.S. insolvency law toreverse preferences. Jones J held thatss 241-2 of the Cayman CompaniesLaw drew on s.304, but did not copyit. Accordingly, he declined to

interpret ss 241-2 on the basis of U.S.case law. Jones J further held that ss241-2 did not confer any power on theCourt in respect of the reversal ofpreferences. The trustee appealed.The Court of Appeal, deliveringjudgment on issues (i) and (ii) above(issue (iii) above having beenadjourned for further oral argumentin due course), disagreed with JonesJ’s conclusion. First, Chadwick P heldthat the reference in s.242(1)(c) to“the prevention of preferential orfraudulent dispositions of propertycomprised in the debtor’s estate” was aclear indication that s.241 wasintended to enable the Court to assistforeign liquidators by avoidingpreferences. Secondly, Chadwick Pheld that the reference to “turnover …of any property belonging to a debtor”in s.241(1)(e) was sufficient to coverthe reversal of preferences, as thereversal of a preference would

restore property belonging to thedebtor, so that it could be turned overto the foreign liquidator. Thirdly,Chadwick P held that the applicationof foreign insolvency law wouldrepresent so radical a departure fromthe common law that it could not beachieved without clear words. In theabsence of such clear words in ss 241-2, the law applicable to the reversal ofpreferences must be Caymaninsolvency law. Mottley and Campbell JJA agreed. Onthis basis, the Court of Appeal ruledthat: (i) the trustee cannot rely on U.S.insolvency law to reversepreferences, pursuant to ss 241-2 ofthe Cayman Companies Law; and (ii)the trustee can rely on Caymaninsolvency law to reversepreferences, pursuant to ss 241-2.[Michael Crystal QC, Gabriel Moss QC,Tom Smith QC, Stephen Robins, AdamAl-Attar]

Price v Davis [2014] EWCA Civ 26, Court of Appeal (Arden, Sullivanand Davis LJ), 21 January 2014 Binding of creditors following a suspension of an IVA

D had obtained interim orders unders.252 of the Insolvency Act 1986 (the“Act”) and individual voluntaryarrangements (the “Original IVAs”)had been approved. P however,successfully challenged the valuationof their claims under s.262 of the Actand the District Judge hearing thematter discharged the interim orders,suspended the creditors’ approval ofthe Original IVA and, under s.262(4)(b) of the Act, directed the nominee tosummon further creditors’ meetings.The suspension came to an end afterfurther creditor meetings approvedvaried forms of the Original IVAs (the“Varied IVAs”). Pursuant to s.260 ofthe Act the Varied IVAs were bindingon those creditors who were entitledto vote. As a consequence of their

challenge to the valuation of theirclaims in the Original IVAs, P hadbecome creditors of D in respect oftheir costs incurred as a result of thechallenge. P opposed the Varied IVAsand served statutory demands on Dfor the unpaid costs on the basis thatthey were not bound by the approvalsunder the Varied IVAs in respect ofthose costs. D successfully applied toset aside the statutory demands andP’s initial appeal was dismissed. TheJudge held that r.5.21(2) ofthe Insolvency Rules 1986 (The“Rules”) applied, and that P werebound by the creditors’ approvalsgiven at the further meetings. Onappeal to the Court of Appeal, Pcontended that the Judge had wronglyconflated suspension and revocation

and the Original IVAs would come intoeffect on the lifting of the suspension,meaning that P would not be bound bythe Original IVAs. D argued that, oncesuspended, the original approvals hadno legal existence and could notrestrict the class of creditors bound bya subsequent approval. The Court ofAppeal dismissed P’s appeal. The Courtheld that if the IVAs were varied andapproved by the creditors, those werethe IVAs to come into force, not theOriginal IVAs which, in reality, wouldcease to have any legal existence. Itfollowed that the fact that the courthad suspended the original creditors’approvals rather than revoke themdid not mean that only the creditorsbound by the Original IVAs could bebound by the Varied IVAs. The Court

PERSONAL INSOLVENCY Digested by MATTHEW ABRAHAM

MATTHEW ABRAHAM

37


accepted that in the instant case, theliteral meaning of s.260 was that itapplied only to the original meetingand that a further meeting summonedby a nominee under s.262 had none ofthe consequences which the Actattached to the original meetingsummoned. However, the Court held

that the effect of a literalinterpretation was to createsignificant anomalies whichParliament could not have intendedand as a result the Court sought aninterpretation which avoided thoseanomalies. Based on this the Courtheld that the reference to a “further

meeting” in s.262(4)(b) of the Act, inrelation to a nominee, was to beinterpreted as a reference to a“further meeting under s.257”. Onthat basis, the statutory bindingapplied in the instant case and P werebound by D’s varied IVAs in respectof their costs.

Helman v John Lyon Free Grammar School [2014] EWCA Civ 17 (ArdenLJ, Rimer LJ, Sir David Keene), 22 January 2014Bankruptcy and the Leasehold Reform Act 1967

This case dealt with the question ofwhether a notice claiming to exercisethe right of enfranchisement, set outin s.1 of the Leasehold Reform Act1967 (“the 1967 Act”), in respect of ahouse falling within the 1967 Act wasvalid in circumstances where thetenant was adjudicated bankrupt anda trustee in bankruptcy wasappointed. S.1 of the 1967 Actprovides that the right to acquire, onfair terms, the freehold or anextended lease in relation to aproperty is only available to a tenantthat has: (a) a long tenancy at lowrent and (b) has been a tenant for twoyears prior to the issue of the relevantnotice to the landlords. The landlordsof a house (the “House”) granted a 99-year lease of the House which wasassigned to (“J”). J charged the Houseto Excel Securities PLC (“Excel”)which in turn granted a registeredsub-charge to Bank Leumi (UK) Plc(the “Bank”). As a result of the termsof the charge document as well as theapplication of s.53 of the LandRegistration Act 2002, both Excel andthe Bank were entitled to appoint oneor more receivers in relation to theHouse. The receivers had variouspowers including the power of sale. Jbecame bankrupt and a trustee inbankruptcy (“T”) was appointed. As aresult of this the Bank appointed

receivers over the House. Afterappointment the trustee inbankruptcy filed a notice under s.315of the Insolvency Act 1986 (“the 1986Act”) disclaiming his interest in theHouse. Following the disclaimer thereceivers entered into an agreementwith Mr Helman (“H”) for the sale ofthe House. At the request of H thereceivers served the landlords with anotice claiming the freehold inrelation to the House pursuant to the1967 Act. The notice was stated to begiven on behalf of J and asserted thathe was the tenant of the House. Afterservice of the notice, the receiverstransferred the lease and sought toassign the benefit of the notice toacquire the freehold to H. Thelandlords accepted that, in duecourse, H would fall within theprovisions of s.1 of the 1967 Act butthey argued that until then he was noteligible to the right to acquire thefreehold. The landlords also acceptedthat, prior to J’s bankruptcy, J hadbeen a tenant for seven years and atthat stage would have qualified underthe 1967 Act to give a notice claimingthe freehold. They argued that J’sbankruptcy had the effect of vestingthe tenancy in T with the result that Jno longer had the right under s.1 ofthe 1967 Act and so no right could beassigned. It was argued by H that the

property rights of J that vested in Twere subject to the prior rightsgranted to Excel and the Bank andthat those rights included the right onthe part of the appointed receivers togive notice under s.1 of the 1967 Act.The Judge at first instance concludedthat the property vesting in T did notinclude the right to give a notice,under the 1967 Act, on his behalf andthat T was not entitled to disclaim thetenancy insofar as it affected thegiving of notice by the receivers toacquire the freehold. The Court ofAppeal held that if the registeredproprietor of a property becomesbankrupt his entire interest in aproperty will be vested in his trusteein bankruptcy. The effect of this wasthat T was the new tenant and anynotice pursuant to s.1 of the 1967 Acthad to be in relation to T. As T had notbeen a tenant for two years no noticecould be given. As a result the Courtof Appeal found that whilst the chargeand sub-charge conferred the widestpowers upon the Bank and thereceivers to take steps in relation tothe lease of the House, including tosell it, nothing in such powers couldor did enable the receivers to exerciserights in relation to the House thatwere not available in law to beexercised when they purported toexercise them.

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CASE DIGESTS

JSC Bank of Moscow and ZAO Sberbank Leasing v Vladimir AbramovichKekhman ChD (Bankruptcy), (Chief Registrar Baister), 9 April 2014Debtor’s petition – Personal Presence – Application to annul bankruptcy order

Two Russian banks (“As”) applied toannul and/or rescind a bankruptcyorder made on a debtor’s petitionpresented by the respondent Russianbusinessman (“R”). R had invoked thejurisdiction of the bankruptcy court onthe basis that he was personally presentin England on the date of presentation,

relying on Section 265 (1)(b) of theInsolvency Act 1986 (“IA86”). In hispetition R, who had over £300 million ofdebts, said that he would bring£200,000 cash into the jurisdiction, thathe had substantial property assets inRussia and that any bankruptcy orderwould be recognised in Russia. The As

issued applications to annul thebankruptcy on the basis that, havingregard to the facts as they existed at thedate of the order, the order ought not tohave been made, and that it ought to beannulled on the basis of material non-disclosure. R contended that the Courthad exercised its discretion properly

Re Salliss [2014] EWHC 229 (Ch), (Etherton C), 10 February 2014Bankruptcy annulment and Trustee’s remuneration

Barclays Bank plc (“Barclays”)petitioned for the bankruptcy of MrSalliss (“S”) based on a debt of morethan £2m. S was made bankrupt on 20December 1993. Following thebankruptcy order Barclays did notsubmit a proof of debt. Aside fromBarclays, there were claims from fourother unsecured creditors that eachsubmitted a proof of debt. At themeeting of creditors it was agreed thatthe trustee’s fee was fixed on the basisof a percentage of the assets realisedand distributed.S was automatically discharged frombankruptcy in December 1996. The onlyassets available to meet the claims ofthe creditors were S’s pension plans.When S reached the requisite age todrawdown on the pension plans hepaid the four creditors that hadsubmitted proof of debts. He did notpay Barclays. In 2011, S’s trustee inbankruptcy (“T”) contacted Barclaysstating that they had not submitted aproof of debt. Barclays wrote backstating that due to time that had passedsince the debt was due they would nolonger be making a claim in thebankruptcy estate.On 3 December 2011, S issued anapplication for the annulment of hisbankruptcy under s.282(1)(b) of theInsolvency Act 1986 on the basis that allthe bankruptcy debts and the expenses

of the bankruptcy had either been paidor secured. T filed a report with thecourt, as required by r.6.207 where anannulment is made under s.282(1)(b),which stated that he considered itappropriate that his fees ought to bebased on time costs for the purposes ofannulment. The reason given by T forthe change in the basis for determininghis remuneration was that that sincethere had been no realisations to date itwas not appropriate to determine hisfees on the percentage basis as agreedto before. The Deputy Registrar hearingthe application for annulment held thatthe fact that Barclays appeared to beowed more than £2m weighed againstthe exercise of any discretion to annul.The Deputy Registrar relied on the caseof Gill v Quinn [2004] EWHC 883 (Ch) asauthority for the proposition that, whendetermining whether to make anannulment, the Court ought to take intoaccount debts which are provable buthave not been proved. As for the T’schange of basis for determining hisremuneration the Deputy Registrarheld that a time costs basis was the onlyappropriate basis as there would be norealisations. The Chancellor of the HighCourt, Etherton J, held that the DeputyRegistrar had erred in principle whendetermining the annulmentapplication. In relation to the treatmentof Barclays’ debt, the Chancellor held

that the decision in Gill v Quinn wasclearly distinguishable. The reason forthis was that the evidence showed thatBarclays, unlike the creditors in Gill vQuinn, had made it clear that theywould not be pursuing their debtagainst S. As a result the Chancellorheld that there was no reason inprinciple why the court should take anyaccount of any debt due to Barclayswhen considering whether or not togrant an annulment. In relation to thechange in the basis for determining T’sfees, Etherton J held that the DeputyRegistrar failed to take into account thePractice Statement: The Fixing andApproval of the Remuneration ofAppointees (2004) as referred to byDavid Richards J in Brook v Reed,Practice Note [2011] EWCA Civ 331. TheChancellor said that there is no doubtthat the Practice Statement applied toan application to change the basis ofthe remuneration of a bankrupt trusteeand that it will be important for theCourt to bear in mind the principles setout in paragraph 20.2.3. He held thatthe Deputy Registrar failed to apply theprinciples in the Practice Statement andas a result remitted the issue. As theissue of remuneration was remitted theChancellor also remitted the annulmentapplication on the basis that it couldonly be determined after the issuerelating to remuneration.

39


when making the bankruptcy orderand that there was utility in thebankruptcy. After hearing oralevidence from both R, expert witnessesof Russian law and R’s trustee, the ChiefRegistrar dismissed the applications. Heaccepted the As’s contentions that thebankruptcy order would not in fact berecognised in Russia and that the£200,000 and the assets in Russia had

been subject to an ‘arrest’ at the time ofbankruptcy (and therefore would nothave been available for the estate).However, he concluded that there wasutility in the bankruptcy on the basisthat the trustees would be able toconduct investigations of R’s affairs andthere had been limited realisations ofassets (and could be furtherrealisations). The authorities

demonstrated that the English courtsare prepared to countenance what is inreality forum-shopping, and thebankruptcy order filled in a lacunaunder Russian law (where anindividual cannot be made bankrupt).Any non-disclosure by R was notsufficiently serious or material towarrant annulment or rescission.[Felicity Toube QC; William Willson]

PROPERTY & TRUSTS Digested by STEPHEN ROBINS

Day v Tiuta International Ltd & Ors [2014] EWHC 4583 (Ch)Chancery Division (Sales J), 6 September 2013Real Property – Mortgage – Equitable Set-off – Subrogation

The claimant (D) had borrowedsubstantial sums from the firstdefendant (T), which were secured by amortgage in favour of T over D’sproperty. The loan became due forrepayment and D failed to repay. Dcontended that T had acted in breach ofcontract, giving rise to a substantialclaim for damages. D contended that hecould set this damages claim off againstthe mortgage debt by way of equitableset-off, so as to release the property fromthe mortgage, and that T’s appointmentof LPA receivers had therefore beeninvalid. T counterclaimed for (inter alia)a declaration that the appointment ofthe LPA receivers had been valid. Tapplied to strike out D’s attempt to relyon equitable set-off and soughtsummary judgment on its owncounterclaim. In response, D contendedthat the mortgage in favour of T hadbeen induced by fraudulentmisrepresentation and that he had

rescinded it. D contended that theappointment of the LPA receivers couldbe challenged on this basis. In addition,D sought to rely on Article 1 of the FirstProtocol to the European Convention onHuman Rights (A1P1). Sales J grantedrelief in the terms sought by T, holdingthat: (1) In the absence of clear and expressterms to the contrary, a mortgagor hasno right to rely on cross-claims orequitable set-off in answer to amortgagee’s reliance on a legal charge(Samuel Keller (Holdings) Ltd v MartinsBank Ltd [1971] 1 WLR 43 and NationalWestminster Bank plc v Skelton [1993] 1All ER 242 applied); (2) If the mortgage in favour of T hadbeen rescinded prior to the appointmentof the LPA receivers, T would have beensubrogated in equity to the rights of theprior mortgagee, Standard Chartered(SC), whose mortgage had beendischarged using money from T.

Accordingly, there were only twopossibilities: either D’s claim torescission would fail, in which case itwould follow that the LPA receivers hadbeen appointed validly under themortgage in favour of T; or it wouldsucceed, in which case T would besubrogated to the mortgage in favour ofSC and the appointment of the receiverscould be justified by reference to themortgage in favour of SC (BurstonFinance Limited v Speirway Limited[1974] 1 WLR 1648 applied); (3) There was no interference with D’spossessions within A1P1, as thosepossessions were subject to securityrights in favour of T and/or SC, to whichD had freely agreed. D’s appeal to the Court of Appeal onpoint (2) above (with the permission ofWarren LJ) was heard recently by Vos,Gloster and Moses LJJ and the decisionof the Court of Appeal is awaited.[Stephen Robins]

Pullan v Wilson [2014] EWHC 126 (Ch) Chancery Division (HHJ Hodge QC), 28 January 2014Trusts – reasonableness of remuneration – acquiescence by beneficiaries

The beneficiary of a discretionarysettlement challenged thereasonableness of the remunerationcharged by a former trustee to thetrusts. The claimant was one of thebeneficiaries of ten family trusts, eight

of which had interests in a number offamily companies. In circumstanceswhere there had no agreement as tohourly rates charged by the trustee, itwas appropriate to assess thereasonableness of the hourly rate

which had been charged including byreference to the work which hadactually been done by the trustee.Accordingly, a professional trustee isnot necessarily entitled to charge byreference to his normal or standard

STEPHEN ROBINS

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CASE DIGESTS

Boyd v Rozel Channel Islands Limited & Ors [2014] JRC056Royal Court of Jersey (Samedi Division) (W. J. Bailhache, Q.C., DeputyBailiff, and Jurats Fisher and Nicolle), 4 March 2014Trusts – mistake – invalidity

B was resident and domiciled inEngland until March 1997 andthereafter became resident anddomiciled in the Isle of Man. Shortlyafterwards, he sold his commercialbusiness and sought appropriate adviceas to how to deal with the shares in aJersey company that held the proceedsof sale so as to satisfy his wishes and toensure the arrangement was taxefficient. In October 1997, and relyingupon professional advice, B, as settlor,settled the shares of the Jerseycompany into a discretionary trust. Ithad Jersey trustees and was subject toJersey law. B and his wife werebeneficiaries with long stop trusts infavour of charities generally. The trustcontinued for more than 10 years untilit became apparent to the UKaccountants that the effect of the‘deemed domicile’ rule had beenoverlooked. The result was that under

UK tax law: (1) the initial or subsequenttransfer to the trust gave rise to a taxcharge of 20% of the capital value; (2)10 year charges, amounting to about 6%of the capital value, were levied on each10th anniversary; (3) There would bean exit charge when the trust waswound up; (4) The settled propertywould be treated as part of B’s estate onhis death and subject to inheritance tax;and (5) There would be interest andpenalties to pay. The ultimate financialresult would be that approximately onequarter of the £4 million value of thetrust would be subject to tax whichotherwise would not have arisen hadthe trust never been created. B appliedunder Article 11 of the Trusts (Jersey)Law 1984 dealing with invalidity of atrust for equitable mistake,alternatively under the Trusts(Amendment No. 6) (Jersey) Law 2013,which sets out a statutory test for

Hastings Bass and equitable mistakeapplications. The Court held that Article11 of the Trusts (Jersey) Law 1984,together with the earlier common lawposition on mistake, could be applied tothe facts of the case. This resulted in afinding that the three requirements hadbeen met, namely: (1) There had been amistake on the part of B, in his capacityas the settlor; (2) B would not haveentered into the transaction ‘but for’the mistake; and (3) The mistake was ofso serious a character as to render itunjust to allow the trust to stand.Accordingly the Court declared that thetrust should be set aside on the groundsof mistake and to have been invalidunder Article 11. The trustees, who hadsupported the application, werepermitted to retain their remunerationand expenses and to charge theirreasonable and proper costs incurredin dealing with B’s application.

charging rates (or those of hisassistants), at least unless these havebeen specifically identified andapproved before the relevant work isundertaken. However, in relation to

those hourly rates had beencommunicated to the beneficiary whowas challenging the remuneration andagreed by him then he would beprecluded from challenging the

reasonableness of remuneration to thatextent, notwithstanding that otherbeneficiaries might be able to maintainsuch a challenge. [Tom Smith QC]

In the Matter of an Application for Information About a Trust [2013] CA (BDA) Civ 8Court of Appeal for Bermuda (Zacca P, Evans JA and Ward JA), 5 February 2014Trusts – Disclosure of Information by Trustee

This case concerned the impact of adisclosure information mechanism ina Bermuda trust on the question ofwhether the Court should orderdisclosure of trust information. Thedisclosure mechanism provided thatinformation should not be disclosedwithout the consent of the protector.The protector was the principalbeneficiary of the trust. The protectorwas also the mother of the other adultbeneficiary. The protector wasconcerned about the use to which theother adult beneficiary might put the

information disclosed and thereforedecided not to provide consent todisclosure. The other adultbeneficiary brought the matter beforethe Bermuda Court to seek an orderthat the trustee provide suchinformation. Subject to certainsafeguards, the Chief Justice grantedsuch order in relation to a number oftrust documents, so the protectorappealed to the Court of Appeal forBermuda. The Court of Appealdismissed the appeal for threereasons. First, the disclosure

mechanism should be read asintended to permit the Court to beable to order disclosure even where adecision not to disclosure had beentaken in accordance with themechanism. Secondly, in any case theCourt retained a broad supervisoryjurisdiction over trusts which allowedit to order disclosure. Thirdly, theCourt stated that if necessary it wouldhold that the protector had notcomplied with the limits of themechanism.[David Alexander QC]

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Crociani v Crociani [2014] JCA 089 Jersey Court of Appeal (Beloff,Nutting and Martin JJA), 7 April 2014Trusts – exclusive jurisdiction – exceptional circumstances

The Jersey proceedings involved breachof trust claims to recover funds andassets believed to be worth in excess ofUS$100 million removed from a trustcreated in 1987 called the Grand Trust.The impugned transactions principallytook place between 2007 and 2011while the Grand Trust was governed byJersey law and administered by the firstto third appellants. By a deed dated 10February 2012, the first to thirdappellants purported to retire astrustees of the Grand Trust in favour ofthe fourth appellant and to change the

proper law of the trust to that ofMauritius (the 2012 Retirement). Thevalidity of the 2012 Retirement waschallenged in these proceedings. Theappellants commenced proceedings inMauritius and applied to stay the Jerseyproceedings on forum conveniensgrounds. Their application wasdismissed. The appellants’ appeal wasdismissed by the Jersey Court of Appeal,which held: (1) A clause by whichMauritius had become the “forum forthe administration” of the trust did notamount to an exclusive jurisdiction

clause in favour of Mauritius. It did notmake the courts of Mauritius the onlyforum for the resolution of disputes inrespect of the trust; it simply providedfor the trust to be administered inMauritius. The forum of administrationof a trust and the forum for resolutionof disputes in respect of it need not bethe same. Koonmen v Bender [2002]JCA 218 overruled. (2) Alternatively,there were exceptional circumstancesjustifying a refusal to stay the Jerseyproceedings on forum conveniensgrounds.

SPORT Digested by MARCUS HAYWOOD

MARCUS HAYWOOD

English Bridge Union Ltd v Revenue and Customs Commissioners[2014] UKFTT 181 (TC) First Tier Tribunal Tax Chamber (Judge CharlesHellier, Sheila Cheesman), 12 February 2014 12/02/2014Sport - VAT

"Sport or physical education" inDirective 2006/112 art.132(1)(m) did notinclude contract bridge. The normalEnglish meaning of sport required an

athletic element and whilst bridgeinvolved some physical activity, physicalskill, as opposed to mental skill, was notparticularly important to the outcome of

participation. The supply of servicesmade by the English Bridge Union inrelation to bridge competition fees weretherefore not exempt for VAT purposes.

British Telecommunications Plc v Office of Communications & Ors[2014] EWCA Civ 133 Court of Appeal (Civ Div) (Arden LJ, Aikens LJ,Vos LJ), 17 February 2014 17/02/2014Sport – competition law

OFCOM had jurisdiction under theCommunications Act 2003 s.316 toimpose conditions in broadcastinglicences of BSkyB if, as it had found, itspractices relating to Pay TV made itappropriate to impose them to ensurefair and effective competition. At therelevant time, BSkyB held the right tobroadcast the content of major sportingevents, such as Premier League football,and it did so on core premium sportschannels (CPSCs). In its "Pay TVstatement" of 2010, OFCOM concludedthat BSkyB had a practice of refusing tonegotiate wholesale deals for the supply

of CPSCs to retailers in order to maintainits two strategic objectives, identified asbeing the protection of its retail businesson its own satellite platform andreducing the risk of stronger competitionfrom rival retailers to be able to bid forcontent rights. OFCOM found that thatpractice was prejudicial to "fair andeffective" competition in the Pay TVmarket. As a result, OFCOM declared thatpursuant to the Communications Act2003 s.316, it would exercise its statutoryright to impose a term in the licences ofBSkyB that it must offer to wholesale itsCPSCs to retailers at a price fixed by

OFCOM. BSkyB challenged that decision.The Court of Appeal held that OFCOMhad jurisdiction to make the conditionsthat it did. Given that it was OFCOM'sstatutory duty to promote the interests ofconsumers in relevant markets and thatone of those relevant markets must bePay TV, then it had to follow that s316was to be widely construed. However,the Competition Appeal Tribunal haderred in law in the way it disposed ofsome of the issues that were before it onthe appeal. Those issues would beremitted to the tribunal for furtherconsideration.

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CASE DIGESTS

Dato Worawi Makudi v Baron Triesman [2014] EWCA Civ 179 Court of Appeal (Civ Div) (Laws LJ, Tomlinson LJ, Rafferty LJ), 26February 2014Football - parliamentary privilege

The protection afforded by the Bill ofRights 1689 art.9 to statements made inthe Houses of Parliament could extendto speech outside Parliament where (a)there was a public interest in therepetition of the statement, which thespeaker ought reasonably to serve; and(b) it was reasonably foreseeable at thetime of the first speech that the speakerwould be obliged to repeat hisstatement, and his purpose in speakingon both occasions was the same or veryclosely related. The appellant appealedagainst a decision striking out his claimagainst the respondent for defamationand malicious falsehood. Therespondent was the chairman of theEnglish Football Association ("the FA")and the English 2018 Football WorldCup bid. After the failure of the Englishbid, an inquiry into domestic footballgovernance was set up by the Culture,Media and Sports Committee ("theCMSC") of the House of Commons. Therespondent gave evidence before theCMSC concerning allegations thatmembers of the FIFA Executive hadtaken bribes in exchange for votes onthe World Cup bids. He referred to aconversation between him and theappellant concerning a proposedmatch between the Thai and Englishfootball teams, and allocation ofcertain lucrative TV rights, which hebelieved was linked to a promise tovote for the English bid. He also gavean undertaking to take his concerns tothe FA. The FA subsequently set up itsown inquiry. The respondent'sevidence before the CMSC wasprotected by absolute privilege but wasrepeated: (i) in oral evidence before theFA inquiry; (ii) in a witness statement

for the FA inquiry; (iii) by the Chair ofthe FA inquiry to FIFA and the FA; (iv)on the FIFA website. The issue waswhether those subsequent referencesattracted immunity under the Bill ofRights 1689 art.9.The Court of Appeal, dismissing theappeal, held that: (1) Absolute privilege was a commonlaw rule affording a defence in somedefamation cases. Its scope was strictlydefined by reference to the setting inwhich the words complained of wereuttered: Parliament and the Queen'scourts. Once publication in theprescribed setting was established, theprivilege attached. However, the reachof art.9 was not as clear-cut. It statedthat "the freedom of speech, anddebates or proceedings in Parliament,ought not to be impeached orquestioned in any court or placeoutside Parliament". But the meaningof "impeached or questioned" was notclear. (2) Members and witnesses speaking inthe House or before the Committeewere not to be vexed by the fear oflitigation, for if they were, thefunctions of Parliament itself would beinhibited. It was clear in this regardthat the protection afforded by art.9was not given for the sake of theindividual members, but for theintegrity of the legislature's democraticprocess. (3) Accordingly, a member who, for hisown purposes, chose to repeat outsideParliament what he had said within itswalls had no claim to the protection ofart.9. However, not all such repetitionswere the gratuitous choice of thespeaker. There would be occasions

when it would be in the public interestthat he should repeat or refer to hisearlier utterance in Parliament, and itmight be a public interest which heought reasonably to serve, because ofhis knowledge or expertise as aParliamentarian, or an expectation orpromise arising from what he said inParliament. Generally, cases where theprotection of art.9 extended to extra-Parliamentary speech would possesstwo characteristics: (a) a public interestin repetition of the Parliamentaryutterance which the speaker oughtreasonably to serve, and (b) so close anexus between the occasions of hisspeaking, in and out of Parliament, thatthe prospect of his obligation to speakon the second occasion (or theexpectation or promise that he woulddo so) was reasonably foreseeable atthe time of the first, and his purpose inspeaking on both occasions was thesame or very closely related. Courtswould look for a very strong case ifart.9 was to apply. They would beconcerned to see that the protection ofart.9 was not extended to speechoutside Parliament more than wasstrictly necessary. (4) On the facts, the protection of art. 9applied. The respondent's participationin the FA inquiry flowed directly fromthe undertaking he gave to the CMSCand the invitation he received from theFA very shortly after he had given hisevidence. There was plainly a publicinterest in the FA inquiry, which wouldbe served by the respondent'scontribution. Art 9 thereforeprohibited an examination of therespondent's evidence in the FAinquiry.

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http://www.southsquare.com....South Square will shortly be launching anew website. The new site will not look likethe typical site for a barristers’ chambers. Itis all rather different. Here’s why.

Barry Isaacs QC and William Willson,working with a design agency(Grainger&Wolff), started from the premisethat the exercise was not initially one aboutdesign; rather, it was about understandingthe most important things we could tellanyone thinking of using our services.What clients want is the right barrister withthe right expertise to achieve the rightresult; and so we have sought to put themembers of South Square at the heart ofthe website.

Having decided to make this departurefrom the norm, we set about capturing thisdifference in the site’s design. A sitestructured around what we hope you, theuser, wants, and which brings with it clarity,better navigability and an enhanced userexperience. The result, we believe, is asimple site where anything you might wantto know about South Square is no morethan two clicks away.

We would be delighted to receive anycomments or suggestions you may have –please [email protected]

What clients want is the right barrister with the rightexpertise to achieve the right result and so we havesought to put the members of South Square at theheart of the website

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1/. See also De Molestina v Ponton [2002] 1 Lloyd’s Rep 271 per Colman J at p.281; MRG v Engelhard Metals Japan [2004] 1 Lloyd’s Rep 731 per Toulson J atp.732; and Carvill America Incorporated v Camberdown UK Ltd [2005] 2 Lloyd’s Rep 457 per Clarke LJ at para 24.2/. See also Seaconsar Far East Ltd v Bank Markazi Jomhouri Islam Iran [1994] 1 AC 438 per Lord Goff at p.453D-G; MRG v Engelhard Metals Japan [2004]1 Lloyd’s Rep 731 per Toulson J at p.732; Carvill America Incorporated v Camberdown UK Ltd [2005] 2 Lloyd’s Rep 457 per Clarke LJ at para 45.3/. See also United Film Distribution Ltd v Chhabria [2001] 2 All ER (Comm) 865 (CA).

Forum conveniens in‘necessary or properparty’ casesStephen Robins examines a trilogy of recent cases inthe Commercial Court which show that the doctrine offorum conveniens can lose its potency.

IntroductionThree recent decisions in the CommercialCourt – Erste Group Bank AG v JSC ‘VMZRed October’ [2013] EWHC 2926 (Comm)(Flaux J), OJSC VTB Bank v Parline Ltd &Ors [2013] EWHC 3538 (Comm) (Leggatt J)and BAT Industries plc v Windward ProspectsLtd [2013] EWHC 4087 (Comm) (Field J) –make clear that the ordinarily potent doctrineof forum conveniens will be weakened to thepoint of irrelevance where the foreigndefendant is a necessary or proper party to aclaim against defendants sued in England asof right.

The Three-Part TestThe three-part test applicable in non-EUcases when seeking to bring a foreigndefendant into proceedings in England wasrecently restated authoritatively by the PrivyCouncil in Altimo Holdings & Investment Ltd vKyrgyz Mobil Tel Ltd [2012] 1 WLR 1804 atpara 71.

First, the claimant must satisfy the courtthat in relation to the foreign defendant thereis a serious issue to be tried on the merits, i.e.a substantial question of fact or law or both(“the first requirement”). This is the same testas for summary judgment, namely whetherthere is a real prospect of success1.

Secondly, the claimant must satisfy thecourt that there is a good arguable case thatthe claim falls within one of the jurisdictionalgateways set out in paragraph 3.1 of PracticeDirection 6B (“the second requirement”)2.

Thirdly, the claimant must satisfy the courtthat England is the appropriate forum for thetrial of the dispute and that the court ought toexercise its discretion to permit service of theproceedings out of the jurisdiction (“the thirdrequirement”).

The third requirement is ordinarily regardedas an important free-standing point: partiesoften seek to provide the Judge with long listsof factors that are said to connect the claim toone particular forum or another. However, incases where the jurisdictional gateway tosatisfy the second requirement is the‘necessary or proper party’ test in paragraph3.1(3) of Practice Direction 6B, it isincreasingly clear that the secondrequirement and the third requirement areinseparably related. If a claimant in such acase satisfies the Court that the foreigndefendant is a necessary or proper party to aclaim against defendants who can be sued asof right in England, it will ordinarily followinexorably that England is the appropriateforum for the claim against the foreigndefendant as well.

The Second RequirementParagraph 3.1(3) of Practice Direction 6Bstates that the Court will have jurisdiction if:“(3) A claim is made against a person (‘thedefendant’) on whom the claim form hasbeen or will be served (otherwise than inreliance on this paragraph) and – (a) there isbetween the claimant and the defendant areal issue which it is reasonable for the courtto try; and (b) the claimant wishes to servethe claim form on another person who is anecessary or proper party to that claim”. Thistest was first introduced in 1883. It hassubsequently been the subject of numerousdecisions of the Courts. Although there aretextual differences between paragraph 3.1(3)of Practice Direction 6B and the formerprovisions of RSC Ord.11, “the differencesare not intended to reflect any change in theunderlying principles”: see MRG v EngelhardMetals Japan [2004] 1 Lloyd’s Rep 731 perToulson J at p.7323.

The ‘necessary or property party’ test hastwo limbs. First, the Court must be satisfiedthat there is a “real issue” between theclaimant and the ‘anchor’ defendant. Insubstance this is the same as the test forsummary judgment under Part 24: see Altimoat para 82 (“There is no practical differencebetween the two tests”). In Ellinger v

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4/. This test has been applied repeatedly. See, for example, Qatar Petroleum Producing Authority v Shell Internationale [1983] 1 Lloyd’s Rep 35 per AcknerLJ at p. 41 and Barings plc v Coopers & Lybrand [1997] I L PR 12 per Chadwick J at paras 14 and 15.5/. See also Barings plc v Coopers & Lybrand [1997] I L PR 12 per Chadwick J at para 18 and 889457 Alberta Inc v Katanga Mining Ltd [2008] EWHC 2679(Comm) per Tomlinson J at para 26.

Guinness, Mahon & Co [1939] 4 All ER 16,Morton J said at p.22 (in a passage cited withapproval by the Privy Council in Altimo atpara 65): “I do not think it is part of thefunction of the court, in considering whetheran action is ‘properly brought’ against a partywithin the jurisdiction, to arrive at a conclusionas to whether the plaintiff will or will notsucceed against that party. It is enough if thecourt is satisfied that there is a real issuebetween the plaintiff and that party which theplaintiff may reasonably ask the court to try”.

Secondly, the Court must be satisfied (tothe ‘good arguable case’ standard) that the

foreign defendant is a “necessary or properparty” to the claimant’s claim against theanchor defendant. The meaning of“necessary or proper party” wasauthoritatively explained by Lord Esher MR inMassey v Heynes & Co (1888) 21 QDB 330at p. 338: “The question, whether a personout of the jurisdiction is a ‘proper party’ to anaction against a person who has been servedwithin the jurisdiction, must depend on this –supposing both parties had been within thejurisdiction, would they have been properparties to the action? If they would, and onlyone of them is in this country, then the rule

says that the other may be served, just as ifhe had been within the jurisdiction”4.

It is accordingly necessary to consider therules for joinder in CPR 19.2(2): “(2) Thecourt may order a person to be added as anew party if – (a) it is desirable to add thenew party so that the court can resolve all thematters in dispute in the proceedings; or (b)there is an issue involving the new party andan existing party which is connected to thematters in dispute in the proceedings, and it isdesirable to add the new party so that thecourt can resolve that issue”. A person whocould be joined as a new party within CPR19.2(2) will be a proper party for the purposesof paragraph 3.1(3) of Practice Direction 6B:see United Film Distribution Ltd v Chhabria[2001] EWCA Civ 416 at paras 36 to 385.

For this reason, it has been said that aforeign defendant will be a ‘necessary orproper party’ to a claim against a defendantwithin the jurisdiction “when the liability ofseveral persons depends on oneinvestigation” (Massey v Heynes & Co (1888)21 QDB 330 per Lindley LJ at p.338; PetroleoBrasiliero SA v Mellitus Shipping Inc (TheBaltic Flame) [2001] 2 Lloyd’s Rep 203 perPotter LJ at para 33); or when the claims“give rise to common questions of fact”(United Film Distribution Ltd v Chhabria[2001] 2 All ER (Comm) 865 (CA) perBlackburne J at para 40); or when the claimagainst the foreign defendant is “closelybound up” with the claim against thedefendant within the jurisdiction (CarvillAmerica Incorporated v Camberdown UK Ltd[2005] 2 Lloyd’s Rep 457 per Clarke LJ atpara 46).

The Third RequirementThe third requirement raises the issue offorum conveniens. The Court is required toconsider where the claim may be tried“suitably for the interests of all the parties andfor the ends of justice”: see Spiliada MaritimeCorporation v Cansulex [1987] AC 460 perLord Goff at p.482, citing Sim v Robinow[1892] 19 R 665 per Lord Kinnear at p.668.However, in cases where the jurisdictional

STEPHEN ROBINS

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[6] See also Aiglon Ltd v Gau Shan Co Ltd [1993] 2 Lloyd’s Rep 164 per Hirst J at p.172 (“the Court would inevitably have regard to the fact that the � claimsagainst Ltd and SA respectively were inextricably interlinked and that � in the interests of justice they would be heard together, so as to save costs and avoidinconsistent results”); Citi-March Ltd v Neptune Orient Lines Ltd [1996] 1 WLR 1367 per Colman J at p.1375F-G (“there is a risk, if actions in respect of thesame loss must be brought in different jurisdictions, that there will be inconsistent decisions on the facts”); Barings plc v Coopers & Lybrand [1997] I L PR12 per Chadwick J at para 55 (“The potential for different decisions by different courts on the same underlying facts ought to be avoided if possible”);889457 Alberta Inc v Katanga Mining Ltd [2008] EWHC 2679 (Comm) per Tomlinson J at para 25 (referring to “the desirability of concentratingproceedings in one jurisdiction so as to avoid the possibility of inconsistent decisions”); and JSC BTA Bank v Granton Trade Ltd [2011] 2 All ER (Comm) 542per Christopher Clarke J at para 17 (“If the proceedings ... against the applicants are heard in Kazakhstan � there is an obvious risk of inconsistentjudgments and of waste and duplication of costs. That is a powerful factor in favour of having the applicants as parties to this litigation”).

gateway for the second requirement is the‘necessary or proper party’ test in paragraph3.1(3) of Practice Direction 6B, it is clear fromthe authorities that the second requirementand the third requirement will be inseparablyrelated. If a claimant satisfies the Court thatthe foreign defendant is a necessary orproper party to a claim in England, it willordinarily follow that England is theappropriate forum for that claim.

Earlier AuthoritiesA number of older decisions make this point.First, in Golden Ocean Assurance Ltd vMartin (The Goldean Mariner) [1989] 2Lloyd’s Rep 390, [1990] 2 Lloyd’s Rep 215,Phillips J held that there was “oneconsideration which … outweighed all othersin making London the obvious forum for thetrial of the plaintiffs’ claims against all thedefendants”: “Where … the validity of a claimhas to be determined by litigation, this shouldoccur in a single hearing binding on allconcerned … To suggest in suchcircumstances that the ends of justicerequired the plaintiffs to proceed againstsome of the defendants in England and somein New York would have been patentlyabsurd”. The foreign defendants sought tochallenge this decision. However, the Court ofAppeal dismissed the appeal.

Secondly, in Societe Commerciale deReassurance v Eras International Ltd (TheERAS EIL Actions) [1992] 1 Lloyd’s Rep 570,Waller J held that “necessary or proper partycases will often be just those type of cases… when leave will normally be given once ajudge is satisfied … that a person is a properparty. Since the forum is already chosen, itwill normally be a case when the discretion isexercised in favour of service”. Theappellants sought to persuade the Court ofAppeal that Waller J had approach the matteron an inappropriate basis. They contendedthat he had imposed “an unjustified fetter onthe free exercise of the Court’s discretion”(p.591, col.2). The Court of Appeal rejected

the appellants’ contentions and upheld WallerJ’s decision. Mustill LJ (delivering thedecision of the Court of Appeal) explained atp.591 that “the factors which make the partyserved a necessary or proper party … willalso weigh heavily in favour of granting leaveto make the foreigner a party”.

Thirdly, in Barings plc v Coopers &Lybrand [1997] I L PR 12, Chadwick J wasrequired to consider the issue of forumconveniens. He set out the relevantprinciples in paras 53 and 54 by reference toSpiliada before concluding in para 55: “Thefactors which lead the court to conclude thatthe foreign defendant is a proper party to theproceedings commenced in England arebound to point, although not to the exclusionof other factors, to the conclusion thatEngland is the appropriate forum”.Christopher Clarke J adopted a similarapproach in JSC BTA Bank v Granton TradeLtd [2011] 2 All ER (Comm) 542.

Risk of Inconsistent JudgmentsOne of the main factors in the reasoning insuch cases relates to the importance ofavoiding a risk of inconsistent judgments,which courts have always regarded as a“potential disaster from a legal point of view”(see Aratra Potato Co Ltd v EgyptianNavigation Co [1981] 2 Lloyd’s Rep 119 perBrandon LJ at p.128)6.

Such a risk would be created if the courtwere to require a claimant to pursue thesame underlying claim simultaneously in twodifferent jurisdictions but eliminated if thecourt were to permit the foreign defendant tobe sued in the same forum as the domesticdefendants.

Consequently, in circumstances where (i) aclaimant is already suing an Englishdefendant as of right in England and (ii) aforeign defendant is a necessary or properparty to that litigation, it is clear that theappropriate forum for the claimant’s claimagainst the foreign defendant will ordinarily beEngland. In such a case the relevant question

is not “What is the appropriate forum for thelitigation as a whole?” Rather, the relevantquestion is “In circumstances where thisclaim is to be pursued in England against theEnglish defendant, what is the appropriateforum for the pursuit of the same claimagainst the foreign defendant?”

Three Recent Commercial CourtCasesAs stated above, three recent decisions in theCommercial Court underscore this reasoning.

First, in Erste Group Bank AG v JSC ‘VMZRed October’ [2013] EWHC 2926 (Comm),the claimant was entitled to sue certaindefendants in England, pursuant to anexclusive jurisdiction clause. The defendantsought to join other foreign defendants to theclaim. Those foreign defendants sought tochallenge the jurisdiction of the English courton forum conveniens grounds by contendingthat Russia was the most appropriate forumfor any claims against them. Flaux J rejectedthe jurisdiction challenge. He held in para 156that the claimant had a fully arguable caseagainst the borrower and the guarantor inconspiracy, which it was entitled to pursue inEngland, and that the other foreigndefendants were necessary or proper partiesto that claim, on the basis that they were atthe relevant time in the same group (andparties to the same conspiracy) as theborrower and the guarantor. Flaux J held: “Inmy judgement, it would be verging on theperverse for [the claimant] to have to litigatethe conspiracy and other tort claims againstcompanies arguably in the same group asthe borrower and the guarantor in Russia …involving as that would litigating the samecomplex issues of fact twice with all theattendant waste of cost and risk ofinconsistent findings in the two jurisdictions”.

In OJSC VTB Bank v Parline Ltd & Ors[2013] EWHC 3538 (Comm), the claimantwas entitled to sue the first defendant (anEnglish company) and the third defendant(an English domiciled individual) in England

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as of right, pursuant to the BrusselsRegulations. The claimant also sued thesecond defendant (a Russian domiciledindividual) in England, contending that shehad been party to a conspiracy with the firstand third defendants. The second defendantchallenged jurisdiction on forum conveniensgrounds, contending that Russia was themost appropriate forum for any claim againsther. Leggatt J rejected the jurisdictionchallenge. He held in para 4 that “the factthat the second defendant is a necessary orproper party is a relevant and indeedweighty factor to take into account, albeitthat it is not conclusive and does not in anyway exclude consideration of other factors”.He explained: “The reason why it is aweighty factor is, in essence, that it isgenerally desirable that claims arising out ofthe same facts and requiring a single factualinvestigation should be decided in oneproceeding in the same place. The reasonswhich make that so are, first, the desirabilityof avoiding duplication and waste of timeand costs and, second, the undesirability ofinconsistent judgments. Those are the policyconsiderations which underlie the jurisdictionof the court over a defendant who is anecessary or proper party to thoseproceedings, and those same policy factorsare clearly important factors to take intoaccount in deciding which is the mostappropriate and convenient forum for thetrial”.

In response to the contention (whichLeggatt J accepted) that the case againstthe second defendant was overwhelminglyconnected with Russia, Leggatt J held thatthose connecting factors lost all theirpotency in circumstances where the claimagainst the second defendant was not afreestanding claim: “I accept that, if the claimagainst the second defendant were afreestanding claim, all those factors wouldpoint overwhelmingly to Russia being theappropriate forum for the claim. However,the context is that the claim against thesecond defendant is not a freestandingclaim, and it has to be considered incircumstances where the claimant haschosen to bring, and is entitled to bring,claims against the first and third defendantsin England, which it wishes to pursue,

very heavy and very expensive litigation andthe risk of inconsistent decisions is pregnantwith disaster”.

ConclusionThese decisions potentially make it easier fora claimant to sue a foreign defendant inEngland, by finding some other defendantagainst whom proceedings may credibly bebrought in England as of right, so that theforeign defendant can be joined as anecessary or proper party, robbing theordinary forum conveniens arguments of theirnormal potency in the process. However it willalways be important in such a case for theEnglish anchor defendant to be a real partyand not simply a token defendant sued for thepurpose of founding jurisdiction against the‘real’ defendant, who could not otherwise besued in England. As Leggatt J put it in para 7of the VTB decision: “It seems to me that ifthe situation were one in which claims againstthe defendants domiciled in England wouldnot be brought except for the fact that it wassought to use those claims as a hook onwhich to bring another defendant into thejurisdiction, then that would be a strongreason for discounting the arguments infavour of England being the most appropriatejurisdiction”. In other words, if the claimagainst the ‘English’ defendants is an artificedesigned to bring foreign defendants withinthe jurisdictional reach of the English courts,the doctrine of forum conveniens will retain itsusual potency. If however the Englishdefendants are real parties to the claim, whocan be sued as of right in England, theforeign defendant who protests that the claimhas far stronger connections with a foreignjurisdiction will find those complaints falling ondeaf ears.

Stephen Robins was junior counsel for theclaimant in OJSC VTB Bank v Parline Ltd &Ors [2013] EWHC 3538 (Comm), led byDavid Alexander QC.

These decisions potentially make iteasier for a claimant to sue a foreigndefendant in Englandregardless of whether the second defendantis brought into these proceedings or not”.Leggatt J explained: “What therefore has tobe considered … is not whether England orRussia is the more suitable forum for theclaim against the second defendant, otherthings being equal, but whether it isappropriate to have proceedings against thesecond defendant in Russia incircumstances where proceedings involvingidentical or virtually identical facts, all thesame transactions, witnesses anddocuments, will anyway be taking place inEngland”. As Leggatt J put it in para 5: “Thereal question, in other words, is whether thefactors which connect the claim against thesecond defendant with Russia carry weightin circumstances where to require the claimto be pursued in Russia would result induplication of costs and the risk ofinconsistent judgments – the same factorswhich make the second defendant anecessary or proper party”.

Field J adopted the same approach in BATIndustries plc v Windward Prospects Ltd[2013] EWHC 4087 (Comm). The claimantwas suing an English company as of right inEngland. The second defendant was acompany incorporated in the United Stateswhich sought to challenge jurisdiction onforum conveniens grounds. Field J concludedin para 81: “I conclude that looking only at theconnecting factors and ignoring for themoment the issue of bifurcation ofproceedings, there is a clear preponderancein favour of New York over London”. Field Jproceeded to ask in para 82: “Does theprospect of [the claimant] having to bringsubstantially identical actions in twojurisdictions, in London against [the firstdefendant] and in New York against [thesecond defendant] with the risk ofinconsistent decisions, decisively tip thescales in favour of London being theappropriate forum? In my judgment it does”.Field J explained: “The claims … involve

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Pay As You Go for administratorsHannah Thornley reviews the Games Station judgment, including the overrulingof Goldacre and Luminar by the Court of Appeal and the treatment of rent payableunder a lease held by a corporate tenant that enters administration or liquidation.When is rent no more than a provable debt; and when does it rank as an expense ofthe administration?

IntroductionOn 24 February 2014 the Court ofAppeal handed down judgment inJervis v Pillar Denton; re Games Station.I will look at the facts, the decision andthe key points arising from thedecision.

FactsThe Game group of companies wentinto administration on 26 March 2012,the day after the March quarter day.Various companies in the group ownedleasehold interests in a large numberof stores. Rent was payable in advanceunder all of the relevant leases. Therent falling due in advance on theMarch quarter day was not paid. Somestores were closed down immediatelybut trading continued in other storeswhich were included in a swift sale ofthe business and assets of the group toGame Retail Ltd. The administratorsdid not pay any part of the rent fallingdue, despite the fact that the storeswere used for the benefit of theadministration throughout the

remainder of that quarter, in relianceon the decisions in Goldacre andLuminar. At the heart of the appeal wasthe question of whether part of aninstalment of rent payable in advancecan be treated as an expense in thecontext of insolvency.

Goldacre and LuminarIn Goldacre (Offices) Ltd v UK NortelNetworks Ltd [2011] Ch 455, HH JudgePurle QC decided that if a quarter’srent (payable in advance) fell dueduring a period in whichadministrators were retaining theproperty for the purposes of theadministration, the whole of thequarter’s rent was payable as anadministration expense even if theadministrators were to give upoccupation later in the same quarter.

In Leisure (Norwich) II Ltd v LuminarLava Ignite Ltd [2013] 3 WLR 1132, HHJPelling QC decided that where aquarter’s rent payable in advance felldue before entry into administrationnone of it was payable as an

administration expense even ifadministrators retained possession forthe purposes of the administration forthe rest of that quarter. The rent washeld to simply be a provable debt in theadministration.

DecisionLord Justice Lewison gave the onlyreasoned judgment of the Court ofAppeal in Games Station. He noted thatit was common ground between theparties that: (i) at common law rent isnot apportionable in respect of timeand that rent payable in advance is notapportionable under theApportionment Act 1870; (ii) whetherrent is payable as an administrationexpense is not a question of an exerciseof the court’s discretion. Either itcounts as an expense, or it does not. Ifrent falls within the salvage or “LundyGranite” principle it is anadministration expense. If not, not; (iii)the salvage principle and the right toprove for a debt are not mutuallyexclusive. Thus the mere fact that a

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debt is a provable debt does not meanthat the salvage principle cannot apply.

The argument of the landlords wasthat whether rent payable in advanceis apportionable at common law orunder the Apportionment Act 1870 isirrelevant. The salvage or “LundyGranite” principle should be appliedand that principle relies on the rules ofequity rather than the common law.The opposing argument of Game RetailLtd was that rent payable in advancecannot be apportioned.

The origins and development of thesalvage or “Lundy Granite” principlewere explained by Lord Hoffmann inRe Toshoku Finance Ltd [2002] UKHL 6.They can be traced back to Re ExhallCoal Mining Co Ltd (1864) 4 De GJ & S377. In Exhall the landlord had put in adistress for rent on the same day as butafter the presentation of the petition.The Court of Appeal allowed the

distress to proceed. Of Exhall, LordHoffmann observed: “thus was createda discretion to allow a creditor to use aprocess of execution to recover in full adebt for which he would otherwise havehad to prove in the liquidation. Insubsequent years a body of precedent onthe exercise of the discretion developed”.It is clear that Lord Hoffmann did notregard the existence of a provable debtas incompatible with the salvageprinciple.

In Re Lundy Granite exp Heavan(1870-71) LR 6 Ch App 462, the landlordwas permitted to distrain for rentwhich had accrued due after the

winding up. The principle underlyingthe decision was formulated by JamesLJ as follows: “But in some casesbetween the landlord and the company,if the company for its own purposes, andwith a view to the realization of theproperty to better advantage, remains inpossession of the estate, which thelessor is therefore not able to obtainpossession of, common sense andordinary justice require the Court to seethat the landlord receives the full valueof the property. He must have the samerights as any other creditor, and if thecompany choose to keep the estates fortheir own purposes, they ought to pay

SOME STORES WERE CLOSED DOWN IMMEDIATELY WHILST OTHERS REMAINED TRADING

The Lundy Granite principle relies onthe rules of equity rather than thecommon law

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the full value to the landlord, as theyought to pay any other person foranything else, and the Court ought totake care that he receives it”.

The Lundy Granite principle wasapproved as founded on equitablegrounds in Toshoku: “The principle…isthus one which permits, on equitablegrounds, the concept of a liabilityincurred as an expense of the liquidationto be expanded to include liabilitiesincurred before the liquidation inrespect of property afterwards retainedby the liquidator for the benefit of the

GOLDACRE V NORTEL HAS BEEN OVERRULED. BELOW: LORD HOFFMAN

insolvent estate. Although it wasoriginally based upon a statutorydiscretion to allow a distress orexecution against the company’s assets,the courts quickly recognised that itseffect could be to promote a creditorfrom merely having a claim in theliquidation to having a prior right topayment in full. As in the case of otherequitable doctrines, the discretionhardened into principle. By the end of thenineteenth century, the scope of theLundy Granite Co principle was wellsettled.” per Lord Hoffmann at para. 29.

Lord Hoffman did not regard the existence of a provable debt as incompatible with the salvage principle in Toshoku

51


Lewison LJ then went through theearlier distress and salvage cases toshow that the state of the law at theend of the nineteenth century was thatthe salvage principle was applied bothto rent payable in arrear and inadvance. The modern cases referred toby Lord Hoffmann in Toshoku thenshow that the law continued to beapplied in this way for the nextcentury.

Game Retail Ltd relied upon certainrating cases in order to demonstratethat the rent could not be apportioned.Lewison LJ analysed the rating cases,but did not find them helpful asliability for rates accrues from day today in modern law.

Lewison LJ concluded that the extentof the salvage principle is that theoffice holder must make payments atthe rate of the reserved rent for theduration of any period during whichhe retains possession of the propertyfor the benefit of the winding up oradministration. Rent will be treated asaccruing from day to day. Suchpayments will be payable as expensesof the winding up or administration.The duration of the period is aquestion of fact and is not determinedmerely be reference to which rentdays occur before, during or after thatperiod.

ConclusionThe key points arising from thedecision in Games Station are asfollows:! Goldacre and Luminar are bothoverruled;! Where an administrator orliquidator makes use of leaseholdproperty for the purposes of theadministration or winding up, then thereserved rent is payable as an expensefor the period during which theproperty is so used, and will be treatedas accruing from day to day for thatpurpose;! The rent will be treated as anexpense and accrue daily whether ornot it is payable in arrears or in

advance;! The date upon which a quarter’s rentbecomes payable, and whether that isbefore, during or after the periodduring which the property is used forthe purposes of the administration orliquidation, is irrelevant;! The Apportionment Act 1870 is notrelevant to the calculation of rentpayable as an expense under thesalvage or “Lundy Granite” principle;! The Court should apply the salvageprinciple in the same way in anadministration as it was applied inliquidation, in the light of the similarity

in the respective rules relating toexpenses (this was common groundbetween the parties);! It will no longer be necessary foradministrations to commence on theday after a quarter day in order tominimise the expenses claims oflandlords, as administrators now needto pay as they go.

Hannah Thornley was junior counsel forthe Landlords in Games Station. Shewas led by Antony Zacaroli QC. GameRetail Ltd has applied for Permission toAppeal to the Supreme Court.

HANNAH THORNLEY

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FOCUS: SOUTH EAST ASIA - HONG KONG

After a very successful visit lastNovember to the INSOL Caribbeanconference, South Square againdeployed in number to March’sregional conference in Hong Kong. 9members – Michael Crystal QC, FidelisOtitah QC, David Alexander QC, AntonyZacaroli QC, Glen Davis QC, Tom Smith,Marcus Haywood, William Willson andMatthew Abraham attended (as well as2 academic/ associate members,Professor Ian Fletcher QC and RoxanneIsmail SC) – took the total Chambersturnout to nearly 25%. This underlinesthe substantial amount of instructionsreceived by South Square in recentyears with an Asia Pacific dimension,and our continued forging ofprofessional relationships in this ever-growing marketplace.

This year’s conference saw a capacitycrowd, with all tickets sold out monthsin advance. There were 650 delegatesin total, with significant attendancefrom the hedge fund and financialservices industry, emphasising HongKong’s position as a global businesshub. It was a pleasure to see so manyof our friends and colleagues fromjurisdictions all over the world (theCaribbean, the Channel Islands, the US,Australasia, the Middle East and HongKong/Singapore). Particular praisemust go, however, to the contingentfrom the British Virgin Islands who, inmost cases, had travelled nearly 40hours to be there. As a bonus, the end

INSOL Hong Kong 2014

of the conference neatly coincided withthe biggest event in Hong Kong’s socialand sporting calendar – the rugby 7s.Hong Kong was at its best and busiest.

The conference kicked off on theSaturday evening with some socialevents, including a Walkers dinner atthe stylish China Club and a privatedinner hosted by Borrelli Walsh.

On the Sunday 200 or so of usgathered for an “Offshore AncillaryMeeting” sponsored by South Square –an opportunity to consider hot topics inoffshore jurisdictions that affect

William Willson reports on South Square’s attendance atINSOL’s regional conference in Kowloon, Hong Kong

(TOP) THE SOUTH SQUARE BREAKFAST (ABOVE) GLEN DAVIS QC CHAIRS THE JUDGES PANEL

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practitioners all over the world. Themeeting was sponsored by SouthSquare, and chaired by Walkers’ FraserHern.

The speaking programme startedwith “Driving the Exit: A comparativeanalysis of “offshore” legal issuesfacing private equity investors”, withinformative (as well as amusing)contributions from Bermuda, theCayman Islands and the BVI whichunderlined the finely-balancedcompetitiveness and camaraderie ofpractitioners in those jurisdictions.

In the afternoon Glen Davis QCchaired a “Judicial Question Time”involving five judges from theCaribbean and Asia: Chief JudgeKawaley (Bermuda), Justice Bannister(BVI), Justice Foster (Cayman Islands),Justice Coomarasmawy (Singapore),Justice Harris (Hong Kong) and JudgeFu Wang (China) (the first ever judgefrom the people’s Republic of China tospeak at such an event).

This panel followed the familiarmodel of UK’s “Question Time”, withquestions from the floor posed to eachof the panellists. Though held underChatham House rule, the questionsdealt with the panellists’ views on thedecision in Rubin, the preferentialtreatment of local creditors, as well asmore lighted hearted topics such as thestrangest submission their Lordships’had ever had put to them.

The conference proper began onMonday morning with a keynoteaddress from Michael Smith, the ChiefExecutive Officer of Australia and NewZealand Banking Group Limited (ANZ)and Ali Moore, the international TVbroadcast journalist. This was entitled“The global financial crisis, the AsianCentury and the transformation offinance”, and provided a fascinatinginsight into lessons learnt in the lastdecade – and the shape of the 21st

century in the financial industry.This was followed by various “break-

out” sessions. Notable examplesincluded “Hedge Funds and DistressedDebt Investing: the past, the present

and future”, a fascinating, hands-onpanel looking into the changinginvestment profile of hedge funds andthe distressed debt market, ablychaired by Jesse Hibbard, of FulcrumCapital, as well as “It’s not all about theUSA: issues in emerging anddeveloping countries”, chaired bySouth Square’s Fidelis Oditah QC.

Later in the day we were treated to“A bridge over troubled waters: thecurrent climates in maritime andshipping insolvencies”, chaired byCurtis Mallet’s Lynn Harrison, with avaluable insight into the respectiveviews from the US, the UK andGermany from Alix Partners’ LisaDonehue, Stephenson Harwood’sStuart Frith and Taylor Wessing’s DrOliver Rossbach. If the writer had onecomment on this particular panel, itwould echo the words of at least twoHong Kong shipping lawyers I spoke toimmediately after it: why nothing onthe Pacific Asia angle given that it isKorea, China, Japan and Singapore thathave generated such a large percentageof these cases in the last 5 years?

On Monday evening we were againtreated to a social whirl at a range ofglamorous locations: thanks to KPMG,Deloitte and Ernst & Young for theirrespective drinks parties, as well as tothe team at Hogan Lovells for theirwaterfront reception on the Hong Kongharbour. The final place on the dancecard was saved for Clifford Chance,Walkers and FTI, who invited delegatesto a bracing evening in the Centralnightclub aptly known as “Insomnia”.

The Tuesday again featured a range ofbreak-out sessions. The highlight ofthese was “Fifty shades of greed: cross-border asset recovery in the wake of theglobal financial crisis”, entertaininglychaired by Walkers’ Collette Wilkinsand Martin Kenney. Introducing itself asa panel that was not going to tell uswhat we already knew about Marevainjunctions, we were instead treated toa psychodynamic analysis of the mindof a fraudster by Dr Alexander Stein,through the medium of clips from

popular films of the last decade such asAmerican Hustle, The Wolf of Wall Streetand Catch me if you Can.

The conference ended, as it hadbegun, with a Gala Dinner in The GrandBallroom hosted by our friends at AlixPartners LLP. For those who had stayedin Hong Kong for either business orpleasure, thanks must also go toHarneys, for their post-conferencedrinks on the Wednesday evening onthe impressive rooftop balcony on oneof Hong Kong’s coolest nightspots,Sevva.

As ever, thanks must go to INSOL’sPenny Robertson for her sterlingorganisational work in bringingtogether a programme that operatedseamlessly.

And thanks also to the conference’smain sponsors: bmcgroup, BorelliWalsh, FTI consulting and PPB advisory.

To our ever-growing globalreadership, it was brilliant to catch upwith so many of you in Hong Kong, torenew old acquaintances and make newfriendships.

We look forward to seeing you allagain soon - and we will be attendingthe INSOL Channel Islands conferencein June.

WILLIAM WILLSON

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Notable recent developments in HongKong include:1. The coming into force of the newCompanies Ordinance (Cap. 622) on 3March 2014.2. The reform proposals for corporateinsolvency law.3. The clarification of when a HongKong court will take jurisdiction towind up a foreign-incorporatedcompany.

The new Companies Ordinance(“CO”)The new CO is divided into 21 parts. Itattempts to modernize and clarifycompany law, including clarificationin respect of the use of electronicforms and communications. However,this article will focus on substantivechanges.

1. Part 1 streamlines the type ofcompanies which may be formed:

unlimited companies without a sharecapital are abolished; guaranteecompanies without a share capitalwill be treated similarly to publiccompanies; public companies aredefined as companies other thanprivate and guarantee companies.The consequence is 5 type ofcompanies rather than 8: private andpublic companies limited by shares,private and public unlimitedcompanies with a share capital, andcompanies limited by guaranteewithout a share capital.

2. Part 3 addresses the abolition ofthe memorandum of association andnew requirements for the articles ofassociation. It adds statutory

ROXANNE ISMAIL SC reports on some of the recentdevelopments in Hong Kong

Hong Kongroundup

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protection for persons dealing withthe company (to complement thecommon law indoor managementrule protection).

3. Part 4 includes the adoption of amandatory system of no-par for allcompanies with a share capital.

4. Part 5 addresses reduction ofshare capital and financial assistance.A uniform solvency test is adopted toapply as a basis for the followingdifferent types of transaction: analternative court-free procedure forreduction of capital; allowingcompanies to purchase their ownshares out of capital; allowingcompanies to provide financialassistance for acquisitions of shares.

5. Part 8 revises the system forregistration of charges.

6. Part 9 introduces simplifiedaccounting and reportingrequirements for SMEs.

7. Part 10 codifies directors’ dutiesto incorporate a mixed objective andsubjective test. It requires ratificationof directors’ conduct to be by way ofapproval of disinterested members. Italso clarifies the permissibleindemnification which may be givenby a company to its directors.

8. Part 11 expands the prohibitionson loans and similar transactions tocover a wider category of personconnected with a director, andexpands prohibitions on payments forloss of office. It requires disinterestedmembers’ approval for certainprohibited transactions, and requiresmembers’ approval for directors’employment to exceed 3 years. It alsorequires increased disclosure in linewith UK law. Sanctions become civilinstead of criminal.

9. Part 12 addresses companyadministration and procedure andintroduces changes to enhanceshareholder engagement (e.g.reducing the threshold requirementfor members to demand a poll from10% to 5% of voting rights) andmaking comprehensive provision forpassing written resolutions.

10. Part 13 addresses schemes andamalgamations. The provisions arelargely unchanged save that the“headcount test” for approving ascheme is changed for a schemeinvolving a takeover offer or generaloffer to buy back shares, so thatdissenting votes do not exceed 10% ofdisinterested shares.

11. The shareholder remedyprovisions are consolidated andrefined but not substantially altered(there having been substantialrevision in 2004 and 2010 e.g. theintroduction of statutory derivativeactions and multiple derivativeactions).

12. Part 15 streamlines proceduresfor striking off and restoringcompanies.

Effectively, save for provisions on

prospectuses, all of the pure companyparts of the old CO (Cap. 32) havebeen repealed, subject to transitionalprovisions. The remaining prospectusprovisions and corporate insolvencyprovisions in Cap. 32 are retitled as“Companies (Winding up andMiscellaneous) ProvisionsOrdinance”.

Company insolvency law reformIn 2013, the Government conducted aconsultation on limited proposals forreform. These proposals concern thecommencement of winding-up, theappointment and powers ofprovisional liquidators andliquidators, the conduct of winding-up, voidable transactions, andinvestigations during winding-up,offences before or during winding-up

Part 10 of the new Companies Ordinance codifies directors’ duties toincorporate a mixed objective andsubjective test...

HONG KONG: THERE ARE COMPANY INSOLVENCY LAW REFORMS BUT CONSPICUOUSLY ABSENT FROM THE REFORMAGENDA IS THE ADOPTION OF THE UNCITRAL MODEL LAW

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and powers of the court. It is intendedthat a draft bill will be proposed inthe 2014/2015 term.

Largely, the proposed changes aresimply “tightening up” rather thanany major change. However, there isa proposal to introduce transaction atan undervalue provisions (alreadypresent in the BankruptcyOrdinance), provisions forinvalidating pre-commencementfloating charges, and provisions forclawback of redemptions and buy-backs of shares out of capital, allmodeled on UK law. Further, there isa proposal to codify the inter-

relationship between privateexaminations and the privilegeagainst self-incrimination; and aproposal to widen the scope of publicexamination.

Also on the reform agenda is thelong overdue introduction of acorporate rescue procedure and theintroduction of insolvent tradingprovisions. Whilst the administrationoriginally intended that suchprovisions also be proposed in the2014/2015 term, the reform proposalshave not yet been put before theAdvisory Group which would precedepublic consultation.

Conspicuously absent from thereform agenda is the adoption of theUNCITRAL Model Law.

Jurisdiction over foreign-incorporated companiesAs a result of a number of recentcases, it has been confirmed that forthe Hong Kong court to exercise itsjurisdiction to wind up a foreign-incorporated company, it will applythe orthodox test of the three corerequirements (using the language ofthe English case Re Real EstateDevelopment Ltd [1991] BCLC 210),namely: (1) sufficient connection withHong Kong (which does not need toconsist of assets in Hong Kong); (2) areasonable possibility that the orderwould benefit those applying for it;and (3) the court must be able toexercise jurisdiction over one or morepersons in the distribution of the

On the reform agenda is the long overdue introduction of a corporaterescue procedure...

THE FORMER LEGISLATIVE COUNCIL BUILDING, SOON TO BE OCCUPIED BY THE COURT OF FINAL APPEAL

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some detail the significance of thethird core requirement and how itmay be satisfied. Simple presentationof the petition within the jurisdictionis not enough. Something more isrequired such as the petitioner beingemployed or resident in thejurisdiction, or having obtainedjudgment within the jurisdiction, orbeing registered under the localCompanies Ordinance and having aplace of business within thejurisdiction. There may be cases, itwas held, although they will be rare,in which the third core requirementis satisfied by the presence of aperson within the jurisdiction whohas an indirect but substantial

economic interest in the liquidatione.g. the owner of a foreign company,which is a major creditor of therelevant company. However, it wasnot sufficient that the fund managerof overseas funds (which werecreditors) was located in Hong Kong.Roxanne Ismail S.C. practised from 3-4South Square from 1994 to 2001, whenshe relocated to Hong Kong. She haspractised from Temple Chambers,Hong Kong to date, and specializes inthe areas of commercial, company andinsolvency law. She took silk in 2013.She is a member of Hong Kong’sStanding Committee for Company LawReform, and a member of the AdvisoryGroup on corporate insolvency law

company’s assets. See Re Yung KeeHoldings Ltd [2012] 6 HKC 246, upheldon appeal on 6 March 2014 (as yetunreported). The courts in Yung Keeemphasized that it would be harderfor shareholders to establish that thecourt should wind up a company in aplace other than the place of itsincorporation as they must havevoluntarily approved the law of theplace of incorporations as governingthe company’s legal status.

The Yung Kee case is of particularinterest in the context of offshorecompanies which indirectly hold(through other subsidiaries) assets ofvalue in Hong Kong. Without a placeof business in Hong Kong, or theconduct of management in HongKong, or any directly-owned assets inHong Kong, there was held to beinsufficient connection for the HongKong court to wind up the offshoreholding company.

The core requirements have beenheld to go to discretion rather thanjurisdiction: Re China MedicalTechnologies Inc (unrep.) 9 April 2014,Harris J. It may be in certaincircumstances that the connectionwith Hong Kong is so strong that oneof the other core requirements neednot be established: Re Pioneer Ironand Steel Group Company Ltd, (unrep.)HCCW 322/2010, 6 March 2013, HarrisJ.

Re China Medical concerned aCayman Islands company, listed onNASDAQ, with BVI operatingsubsidiaries which held operatingcompanies in the PRC mainland.There were business activities inHong Kong such as a small office andsome employees although these werenot regarded as significant in thecontext of business activities in the USor the mainland. However, theCayman-appointed liquidator soughtan ancillary liquidation in Hong Kongpredominantly because of suspicioustransactions involving Hong Kongcompanies and/or Hong Kong bankaccounts. China Medical examines in

ROXANNE ISMAIL SC

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FOCUS: SOUTH EAST ASIA - SINGAPORE

Recent developments in theSingapore legal landscapeJamie Harrison and Adeline Chung of Addleshaw Goddard on recentdevelopments in the Singapore Legal Landscape

Arbitration In SingaporeAlong with Hong Kong, Singapore isnow widely recognized as a leadingarbitration centre in Asia, and is alsothe preferred base for internationallaw firms and corporate counsel ofMNCs within Southeast Asia and in the10 ASEAN (Association of South EastAsia Nations) jurisdictions. Singaporeis the third most preferred seat of

arbitration in the world, behindLondon and Geneva and on par withTokyo and Paris, with the SingaporeInternational Arbitration Centre(“SIAC”) as the fourth most preferredarbitral institution (after the ICC, LCIAand the International Centre forDispute Resolution).1 The activecaseload of SIAC as of 31 December2013 was 619 cases.2

The Singapore courts adopt a pro-arbitration stance, and have generallybeen slow to set aside or refuseenforcement of internationalarbitration awards. Having said that,in 2013, there were two notable Courtof Appeal decisions involving recourseagainst international arbitrationawards.

(i) PT First Media TBK v Astro

! !

1/. See Report of the Singapore International Commercial Court Committee (November 2013) athttp://www.mlaw.gov.sg/content/dam/minlaw/corp/News/Annex%20A%20-%20SICC%20Committee%20Report.pdf2/. See http://www.siac.org.sg/why-siac/facts-figures/statistics

59


held that Rule 24(b) of the 2007 SIACRules does not confer on the Tribunalthe power to join third parties who arenot party to the arbitration agreement.It merely permits other parties to thearbitration agreement who are not yetparty to the arbitration proceedings tobe joined in as parties. Accordingly,the parts of the award relating to thejoined parties were unenforceable.

The effect of the Court of Appeal’sdecision is that parties do not need tochallenge a tribunal’s jurisdiction inthe Singapore Courts while arbitrationproceedings are ongoing. Parties mayconserve their resources and challengean unfavourable award at the point ofenforcement. The decision alsohighlights that care needs to be takenwhen considering extending thejurisdiction of an arbitration to non-parties to the arbitration agreement.The latest version of the SIAC rules(released in April 2013) makes it clearthat third parties may be joined to thearbitration, provided that they are aparty to the arbitration agreement andthey provide written consent (see SIACRule 24.1(b)).

(ii) International Research CorpPLC v Lufthansa Systems Asia PacificPte Ltd [2013] SGCA 55

This was an appeal by InternationalResearch Corp PLC (“IRCP”)challenging the ruling of the arbitraltribunal that it had jurisdiction overarbitration proceedings commencedby Lufthansa Systems Asia Pacific PteLtd (“Lufthansa”).

In summary, the facts are as follows– Lufthansa entered into a cooperationagreement with Datamat PublicCompany Ltd (“Datamat”).Subsequently, Lufthansa, Datamat andIRCP entered into 2 supplementalagreements. The cooperationagreement has a multi-tiered disputeresolution clause. The 2 supplementalagreements were specificallyexpressed as being “annexed to and

made a part of” the cooperationagreement. Lufthansa commencedarbitration against IRCP pursuant tothe arbitration clause in thecooperation agreement.

The Court of Appeal held that asSingapore’s legislative frameworkgives effect to the 1985 UNCITRALModel Law on InternationalCommercial Arbitration,3 it is time to“put the English authorities aside”.4 Asthe supplemental agreements didcontain a clear reference to thecooperation agreement, the court hadto determine whether as a matter ofconstruction, the parties intended toincorporate the arbitration agreementinto the supplemental agreements. TheCourt then went on to apply thecontextual approach to contractualinterpretation and found that thesupplemental agreements gave rise toobligations distinct from those underthe cooperation agreement – IRCP’sonly substantive obligation under thesupplemental agreements was to act asa payment agent and it assumed noobligations under the cooperationagreement. Therefore, the Court heldthat the arbitration agreement in thecooperation agreement had not beenintended to also be incorporated intothe supplemental agreements.

The Court of Appeal also confirmedthe enforceability of multi-tiered

Nusantara International BV and others[2013] SGCA 57

The Court of Appeal considered thekey issue of whether an arbitratingparty may oppose enforcement of anarbitral award on the ground that thearbitral tribunal lacked jurisdiction,notwithstanding that such a challengehad not been raised previously. Todetermine this question, the court hadto interpret the relevant provisions ofSingapore’s International ArbitrationAct (“IAA”) and the UNCITRAL ModelLaw on International CommercialArbitration (“Model Law”) whichtogether govern the enforcement ofinternational arbitral awards made inSingapore.

The Court of Appeal held thatSection 19 of the IAA, when construedalongside with the underlyingphilosophy of the Model Law, permitsan award debtor to have a “choice ofremedies”. The award debtor mayapply to resist enforcement of adomestic international award (i.e. aninternational commercial arbitralaward made in the same territory asthe forum in which recognition andenforcement is sought) under Section19 of the IAA even if he has notactively challenged the award at anearlier opportunity under Article 16(3)or Article 34 of the Model Law. Thesame grounds for resistingenforcement under Article 36 of theModel Law would be available to aparty resisting enforcement underSection 19 of the IAA.

Having established that the courthas the power under Section 19 of theIAA to refuse enforcement of domesticinternational awards if one of thegrounds under Article 36 of the ModelLaw is established, the Court of Appealwent on to consider the specificobjection on jurisdiction, being thetribunal’s decision to join theadditional parties to the arbitration.

In this regard, the Court of Appeal

! !

3/. Article 7(2) of the Model Law does not require express reference to the arbitration agreement, it only requires a reference to the document containing it4/. The strict rule from English law that clear and express reference to an arbitration clause was required for it to be incorporated into another contractwas followed by Singapore in Star-Trans Far East Pte Ltd v Norske-Tech and others [1996] 2 SLR(R) 196

JAMIE HARRISON

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FOCUS: SOUTH EAST ASIA - SINGAPORE

international jurists;(iii) The SICC will hear cases

governed by Singapore law and byforeign law, with the court takingjudicial notice of the foreign law;

(iv) The SICC will hear cases whereparties have consented to use the SICCor where cases are transferred to theSICC from the Singapore High Court bythe Chief Justice;

(v) Decisions of the SICC will beappealable to the Court of Appeal;

(vi) Foreign counsel may appear inproceedings in certain circumstances(where the case has no

substantial connection to Singapore– for example, where Singapore law isnot the governing

law or the choice of Singapore lawis the sole connection to Singapore);and

(vii) The creation of a set of rulesand practice directions to governproceedings in the SICC, which shouldbe sensitive to the commercial needsof SICC’s users and followinternational best practices forcommercial dispute resolution.5

The Law Minister, Mr KShanmugam, announced in March2014 that the Ministry of Law ispreparing legislative changes toSingapore’s Constitution, the SupremeCourt of Judicature Act, the EvidenceAct and the Legal Profession Act topave the way for the setting up of theSICC. The SICC aims to handle disputeswith little or no connection toSingapore and public consultationswill soon be held on the proposedlegislative changes. Mr Shanmugamalso said that the SICC will beconstituted as a division of the HighCourt of Singapore and its judgmentswill be treated and enforced as HighCourt judgments. SICC judgments maytherefore be enforced by registrationin countries listed in the ReciprocalEnforcement of Commonwealth

Judgments Act and the ReciprocalEnforcement of Foreign JudgmentsAct. The Ministry of Law is exploringways to strengthen the enforceabilityof SICC judgments, including studyingthe feasibility of Singapore signing theHague Convention on Choice of CourtAgreements.6

The SIMCThe SIMC is expected to be launchedlater this year.7 It is aimed at assistingfeuding business partners work outtheir differences through a process ofdiscussion using qualified mediatorsso as to avoid the more costlyarbitration or court process. Theworking group tasked with assessingand making recommendations on howto develop Singapore into a centre forinternational commercial mediationhas recommended, among others,establishing a professional body to setstandards and provide accreditationfor mediators and enacting of aMediation Act to help strengthen theframework for mediation in Singapore.8

dispute resolution clauses. In thisregard, the court held that whereparties had clearly contracted for aspecific set of dispute resolutionprocedures as preconditions forarbitration, these preconditions mustbe complied with.

This case is significant for the Courtof Appeal’s clarification of when anarbitration agreement may beincorporated by reference and theCourt’s approach with respect tocompliance with multi-tiered disputeresolution clauses.

Singapore’s plans to set up anInternational Commercial Court &Mediation CentreIn view of the growth of trade andinvestment in Asia and the significantrise in commercial transactions in theregion, the number and complexity ofcross-border disputes is expected toincrease. To enhance Singapore’sposition as the destination of choicefor resolving commercial disputes inAsia, the Ministry of Law announcedin December 2013 its plans to set upthe Singapore InternationalCommercial Court (“SICC”) andSingapore International MediationCentre (“SIMC”).

The SICCA committee has been set up to studythe viability of developing aframework for the establishment ofthe SICC (“SICC Committee”). The keyrecommendations of the SICCCommittee in its November 2013report are as follows:

(i) Establishment of SICC as adivision of the High Court, to hearinternational commercial disputes. Itwill offer litigants the option to havetheir disputes heard by specialistcommercial judges in Singapore;

(ii) The constitution of an SICC panelof judges which could include eminent

5/. See “Government Welcomes Recommendations to Establish Singapore International Commercial Court” at http://www.mlaw.gov.sg/news/press-releases/government-welcomes-recommendation-to-establish-SICC.html6/. See “S’pore paving way to be dispute resolution centre” by Selina Lum, Straits Times, 6 March 20147/. See “S’pore paving way to be dispute resolution centre” by Selina Lum, Straits Times, 6 March 20148/. See Recommendations of the Working Group to develop Singapore into a centre for international commercial mediation athttp://www.mlaw.gov.sg/content/dam/minlaw/corp/News/FINAL%20ICMWG%20Press%20Release%20-%20Annex%20A.pdf

! !

ADELINE CHUNG

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liquidator, the Court of Appeal wassatisfied that the ancillary liquidationdoctrine was entrenched in Singaporelaw. Given that the Singapore creditorsof the company were unsecuredcreditors and did not enjoy any otherpriority under Singapore law, the Courtof Appeal stated that the application ofthe ancillary liquidation doctrinerequired that the company’s Singaporeassets be transferred to the Germanliquidators. Although the issue of thetreatment of the Singapore creditorsunder the German liquidation was notraised, the Court of Appeal opined thatthe mere fact that the foreign insolvencyscheme differs from the local insolvencyscheme would not suffice to constitutesuch injustice that would warrant a ring-fencing of the Singapore assets for theSingapore creditors.

Larsen Oil and Gas Pte Ltd vPetroprod Ltd (in official liquidationin the Cayman Islands and incompulsory liquidation in Singapore)The liquidators of Petroprodcommenced proceedings against Larsen,with whom it had entered amanagement agreement. Theproceedings, which were to avoid anumber of payments made by Petroprodand its subsidiaries to Larsen under themanagement agreement on the basisthat the payments were undervalue ormade with the intent to defraud it as acreditor of the subsidiaries. Larsen’sapplication for a stay of proceedings infavour of arbitration failed in the HighCourt and the Court of Appeal on thebasis that the claims brought byPetroprod were non-arbitrable.

The Court of Appeal considered thatallowing the pre-insolvencymanagement of a company to limit theavenues by which the company’screditors could enforce the verystatutory remedies which were meant toprotect them against the company’s

management would be wrong. As such,the pronouncement by the Court ofAppeal drew a distinction for the firsttime between disputes involving aninsolvent company that stem from itspre-insolvency rights and those thatstem from its status as a company inliquidation.

DBS Bank Ltd v Tam Chee Chong andanother (judicial managers of JurongHi-Tech Industries Pte Ltd (underjudicial management)) [2011] 4 SLR948Judicial Managers of a company appliedsuccessfully to the High Court to setaside a charge given by the company onthe basis that it constituted an unfairpreference under s 227T of theCompanies Act (Cap.50). The Court ofAppeal, in dismissing the appeal, citedwith approval the test in Re MC BaconLtd [1990] BCLC 324.

The Court of Appeal noted obiter thatif the charge was found not to be unfair,the existence of negative pledges andpari passu clauses which the companyand its parent company had entered intowith other creditors had the effect ofcreating among the contracting parties a“cessation of payments”. The SingaporeCourt of Appeal opined that there wasno reason why a court would notenforce such an arrangement in anappropriate case, and in the presentcase, the chargee, if it had beensuccessful in the appeal, may have beenfound liable in tort for interfering withthe aforesaid contractual rights of theother creditors.

Insolvency practice in Singapore hasbeen greatly shaped by Singapore’sposition as an international and regionalbusiness hub. Singapore’s Court ofAppeal continues to extensively shapethe insolvency landscape in Singaporeand the role of the Singapore Courts incross-border insolvencies, striking adelicate balance between the statutoryprotections afforded by the variousinsolvency regimes and widerconsiderations of international trade.Three examples are highlighted below.

Beluga Chartering GmbH (inliquidation) and others v BelugaProjects (Singapore) Pte Ltd (inliquidation) and another [2014] SGCA14Singapore liquidators of a charteringcompany which was principally underliquidation in Germany were directed toremit the company’s assets to theGerman Liquidator. The Court of Appealheld that the company’s creditors inSingapore were not entitled tosatisfaction of the debts incurred by thecompany in priority to the company’sglobal creditors. The Court of Appealreversed a High Court decision to applya “ring-fencing provision” under s377(3)(c) of the Companies Act (Cap. 50)which preserves assets in Singapore forthe purpose of meeting claims inSingapore on the basis that the companydid not have a place of business inSingapore nor did it carry on business inSingapore. The Court of Appeal referredwith approval to RBG Resources plc (inliquidation) v. Credit Lyonnais [2006] 1SLR(R) 240 in which the High Courtfound if a foreign company was notregistered under the Companies Act atthe time it went into liquidation, thenthe ring-fencing provisions would notapply to it.

Turning to the nature of therelationship between a Singaporeliquidator of a company and its foreign

David Chan and Tan Su Hui at Shook Lin & Bok report onrecent insolvency/restructuring cases in Singapore

DAVID CHAN

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A new spotlight oncompany controllersSimon Mortimore QC reports on the Government’sApril 2014 proposals to enhance corporate transparency

plans for Overseas Territories andCrown Dependencies.

In July 2013 BIS published aDiscussion Paper: “Transparency &Trust: Enhancing the Transparency ofUK Company Ownership and IncreasingTrust in UK Business” (the “BISDiscussion Paper”) which outlined theGovernment’s thinking on thosematters, including four key proposalsfor enhancing transparency of UKcompany ownership: (i) a centralregistry of UK company ownership, (ii)abolition of bearer shares, (iii)increased transparency about nomineedirectors, and (iv) prohibition ofcorporate directors. Responses wererequired by 16 September 2013. TheLaw Society, the Bar Council andseveral firms and other bodiessubmitted papers.

On 31 October 2013 BIS announcedthat the register of beneficialownership of UK companies would bepublicly accessible. Thisannouncement received theenthusiastic support of Prime MinisterDavid Cameron and World Bank GroupVice-President Sanjay Pradham. BISalso announced that further details ofthe register would be revealed in aformal response to the BIS DiscussionPaper to be published in early 2014.

On 16 April 2014 BIS published itsresponse (the “BIS Response”), whichincludes mandatory disclosure ofbeneficial ownership of most UKcompanies, a public register of thoseinterests, no more bearer shares,restrictions on corporate directors andsteps to inform directors of the risks ofacting as a “front” for another person.

Before looking in more detail at theBIS proposals for reform, it is worthasking what has brought about thisurgent need for reform of companylaw so soon after the Companies Act2006.

The reforms in the 2006 Act followedthe most extensive review of companylaw by the Law Commission, whichproduced reports on ShareholderRemedies (1997) and CompanyDirectors: Regulating Conflicts ofInterest and Formulating a Statement ofDuties (1999), the Company LawReview Steering Committee, whichproduced four reports under thegeneral heading Modern Company Lawfor a Competitive Economy (1999-2001)and by the Government itself. Thetransparency issues that now concernBIS were not regarded as seriousproblems at the end of the TwentiethCentury and are either not mentionedor barely discussed in the reports thatprovided the foundation for the 2006Act. Since then the scale, speed, andinternationalization of businessactivity and investment has expandedto a degree that could not have beencontemplated a dozen or so years ago.

For most people the June 2013 G8Summit at Lough Erne was memorablefor the sight of President Putin, sittingstern-faced by a placid Northern Irishlake in an open-neck shirt and resistingall attempts at conviviality. Againstthat unpromising background, it isperhaps surprising that there were anypositive developments from theSummit. But there was at least one: the“G8 Action Plan Principles to preventthe misuse of companies and legalarrangements”. On 18 June theDepartment for Business Innovationand Skills (“BIS”) announced its ActionPlan to give effect to the G8 Principlesto improve the transparency of theownership and control of UKcompanies, which includes:1

! amending the Companies Act 2006so that companies are required tomaintain records of beneficialownership of their shares, to make thatinformation available to the authoritiesthrough a central registry maintainedby Companies House and consulting onwhether that information should bepublicly accessible;! reviewing corporate transparency,

including bearer shares and nomineedirectors; and! supporting transparency action

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1/. This article only focuses on the company law aspects of the BIS announcements, discussion paper and response. There are also proposals to improve thedisqualification regime and for compensating creditors for directors’ misconduct.

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Corporate structures have grown evermore complex and there has been farmore use of offshore companies. Whilemuch this is legitimate and beneficial,it must be recognised that opaquestructures involving a maze of offshorecompanies are too often abused. AsBusiness Secretary Vince Cable said inhis Foreword to the BIS Response, “alack of transparency with respect tothose who really own and controlcompanies can allow tax evasion,money laundering and terroristfinancing to flourish”. It is therefore notsurprising that the G8 governmentswanted greater transparency. Thereasons for the BIS proposals forreform are therefore readilyunderstandable.

A central registry for companybeneficial ownership informationFor over 150 years, since theCompanies Act 1862, there have been

two core features of UK company law,which need to be borne in mind whenconsidering the BIS proposals. The firstis that a company should keep aregister of its members, which is openfor inspection and that informationabout its members should be publiclyavailable at the Companies Registry.2

The company and its directors need tohave a record of members for obviousgovernance reasons, but the reasonwhy the public should have the right toinformation about a company’smembers is less obvious and has ahistorical origin. In the NineteenthCentury it was common for shares tobe issued not fully paid up. Thecompanies register would enable ashareholder to know with whom heshared responsibility for the company’sliabilities and the public register wouldenable intending creditors to “reach aview as to the credit-worthiness of theconcern and the sufficiency of the

PRESIDENT PUTIN ADDRESSES THE PRESS AT THE SUMMIT WHICH PROPOSED AN ACTION PLAN TO PREVENT MISUSE OF COMPANIES.

contributors”.3 Those reasons for apublic register are seldom relevanttoday. Instead they have been replacedby a need to prevent the abuse ofcompanies to conceal illegitimateactivities.

The other core feature is that acompany is not required to take noticeof any trusts affecting shares.4 Thisfacilitates the proper conduct ofcompany meetings and distributingdividends. As the Davey Committee putit in 1895:

“Any provision which would render itincumbent upon the directors andmanagers of joint stock companies, inorder to keep themselves within the law,to inquire into and take notice of trustsaffecting shares would impose anintolerable burden upon the officers of acompany, and would be a departurefrom the policy hitherto adopted asshown by statutory enactment andjudicial decision.”5

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2/. Now 2006 Act, ss 113-121, 856-856B. See also the 1862 Act, ss 25-27.3/. Cohen Report (1945) at [77].4/. 2006 Act, s 126. See 1862 Act, s 30. These provisions are usually supported by the company’s articles; see 1985 Act Table A, reg 5; 2006 Act ModelArticles for private and public companies, articles 23 and 45 respectively.5/. See [18].

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Since 1980 there have been twosignificant inroads into this principleaffecting public and quoted companies.First, in 1981 the provisions now foundin Part 22 of the 2006 Act wereintroduced to enable a public companyto obtain information about who isinterested in its shares. If theappropriate disclosure was not given,the court could make an order imposingrestrictions on the shares. Theseprovisions gave public companiesvaluable protection from attempts attakeover by stealth and were widelyused in the 1980s.6 Second, Part 9 of the2006 Act reflects the fact that investorsin shares invariably make theirinvestments through nomineecompanies and gives (i) a memberpower to nominate another person toexercise members’ rights, if the articlesso provide, and (ii) persons interested inshares in a quoted company which areheld by a nominee the right to enjoyinformation and other rights against thecompany.

The BIS announcement of 31 October2013 included Business Secretary VinceCable’s explanation of the need for apublic registry giving information aboutbeneficial ownership of companies:

“We believe a public register, listingthose who really own companies makesBritain a better place to invest and dobusiness. People have a right to knowwho controls UK companies and greateropenness will help tackle tax evasion,money laundering and other crimes.”

This statement makes it clear thatBIS’s purpose in proposing a publicregister of beneficial ownership ofcompanies is to deter and obstruct taxevasion, money laundering and othercrimes and to facilitate investigation bythe authorities. Improving corporategovernance would be a bi-product. Inother respects, Mr Cable’s statement isopen to debate. Will a public register ofbeneficial owners of companies (public

and private) boost investment andbusiness in the UK? Does the publicreally have right to know who owns UKcompanies, private as well as quoted?

The proposals about beneficialownership raise several significantissues. The first point to note is that BISproposes public disclosure of beneficialownership of the company not ofindividual shares in the company.7

Hence BIS suggested adopting thedefinition of “beneficial owner” in theMoney Laundering Regulations 2007:8

“In the case of a body corporate,“beneficial owner” means any individualwho –

(a) as respects any body other than acompany whose shares are listed on aregulated market, ultimately owns orcontrols (whether through directownership or control, including throughbearer share holdings) more than 25% ofthe shares or voting rights in the body; or

(b) as respects any body corporate,otherwise exercises control over themanagement of the body.”

By this definition a person is abeneficial owner of a company if he isable to block a special resolution or if heexercises control over management.The Money Laundering Regulationsprovide that banks, lawyers,accountants and other professionalbodies are required, as part of their“know your customer” due diligence, toidentify the beneficial owners of acorporate client.9 As such, informationabout beneficial ownership shouldemerge from an investigation. The BISproposal would make the informationgenerally available without the relevantcriminal or regulatory authority havingto go to trouble and expense of an

investigation to obtain it. As such theproposed reform would support thenew standard of the Financial ActionTask Force (“FATF”) to combat moneylaundering and the financing ofterrorism under which:

“Competent authorities should be ableto obtain, or have access in a timelyfashion to adequate, accurate andcurrent information on the beneficialownership and control of companies andother legal persons.”

This standard has also been adoptedin the European Commission’s proposalfor a Fourth Money LaunderingDirective, so a strong international caseis building up for privacy of corporateownership to yield to public disclosureas a matter of both principle andexpediency. After considering responsesto the BIS Discussion Paper, BIS hasdecided to adopt the anti-moneylaundering definition, but to give clarityas to the meaning of “otherwiseexercises control”.

The second point to note concerns thecompanies to which the requirement ofdisclosure of beneficial ownershipshould apply. BIS proposed that thereshould be an exemption for companieswhose shares are quoted on the MainMarket of the London Stock Exchange,since an individual who holds 3% ormore of the voting rights in such acompany must disclose that fact to themarket and the regulator. Followingrepresentations from the Law Societyand others, BIS will exempt companieswho comply with the FCA’s Disclosureand Transparency Rules or who havesecurities listed on a regulated subject toequivalent disclosure requirements. Themain application of the proposals is

Vince Cable: “People have a right toknow who controls UK companies...”

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6/. Since 1989 the only reported case on these provisions is Eclairs Group Ltd v JKX Oil and Gas plc [2014] 1 BCLC 202.7/. BIS Discussion Paper at [2.1]-[2.3]. Therefore the definition of an interest in shares in the 2006 Act, s 820 would not be helpful.8/. No 2157/2007, reg 6(1). The FATF International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation define abeneficial owner as “�the natural person(s) who ultimately owns or controls a customer and/or natural person on whose behalf a transaction is beingconducted. It also includes those persons who exercise ultimate effective control over a legal person or arrangement”.9/. No 2157/2007, regs 3 and 4.

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therefore in the field of privatecompanies. BIS has also decided toextend disclosure of beneficialownership to LLPs.

The third point concerns how theinformation should be obtained for thepublic register. BIS proposed that thecompany should have a statutoryobligation to obtain the information andthat Part 22 of the 2006 Act could beadapted to give it the necessary powers.Alternatively or additionally thebeneficial owners could be obliged tomake disclosure to the company. Whilethere was general agreement amongrespondents to the BIS Discussion Paperthat Part 22 could be adapted to providethe company with necessary powers,there was real disagreement as towhether the company should be underan obligation to obtain the informationor whether the beneficial owner shouldbe obliged to provide it.10 The problemwith leaving it to the beneficial owner todisclose is that the disclosure rules wouldbecome toothless. Directors andbeneficial owners could ignore them. Inany case BIS supported FATFRecommendation 24 and would beobliged by Article 29 of the draft FourthMoney Laundering Directive to ensurethat “corporate or legal entitiesestablished within their territory obtainand hold adequate, accurate and currentinformation on their beneficialownership”. BIS has therefore decidedthat in principle the company should beobliged to obtain the information,through provisions adapted from Part 22and that beneficial owners should beliable to self-declare as well. It recognisedthat drafting the new legislation will notbe straightforward. The disclosure andfiling obligations would be enforced bycriminal sanctions.

For Insolvency practitioners andothers interested in good governance ofUK companies, the imposition of anobligation on the company and its

directors to obtain information aboutbeneficial ownership would be a positivedevelopment since it would help toidentify actual or potential shadowdirectors. This is because a beneficialowner who exercises control overmanagement is at risk of being a shadowdirector unless his control is onlyexercised through the powers conferredon members under the company’sconstitution. Potential liability for breachof duty as a shadow director is asignificant consideration, albeit that theextent to which fiduciary and otherduties may in particular circumstancesapply to a shadow director is not

settled.11

Fourthly, BIS proposed that theinformation would be kept at theCompanies Registry and would begenerally available, but that there couldbe exceptions where public disclosuremight be harmful. Again this wascontroversial with respondents to the BISDiscussion Paper, but on 31 October 2013BIS announced that the informationwould be publicly available. The BISResponse describes the detailed natureof the disclosure that will be required inorder to make the register as effective aspossible for law enforcement and taxauthorities.12 The Registrar would be

SIMON MORTIMORE QC

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10/. Objectors to the company being obliged to obtain the information included Capita Asset Services and the Law Society, which pointed out that listed andAIM companies were not subject to such an obligation and that placing a company under an obligation to identify its beneficial owners might conflict withs 126 of the 2006 Act under which the company is not concerned with trusts of its shares.11/. Vivendi SA v Richards [2013] EWHC 3006 (Ch), [2013] BCC 771; R v R [2013] EWHC 4244 (Fam); Sukhoruchkin v van Bekestein [2014] EWCA Civ 399.12/. The public register will not be as extensive as the company’s register since it will reveal the month and year of birth, but not the day, and will notreveal residential addresses.

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issued bearer shares, but of those thathad issued them, a high proportionwere entirely owned by bearershareholders, whose identities weretherefore concealed.15

It is possible for the Secretary of Stateto use powers under Section 442Companies Act 1985 to investigateownership of bearer shares and obtainan order freezing the shares if disclosureis not provided. This is a costlyprocedure which also has thedisadvantage of revealing the fact of theinvestigation. Furthermore a freeze onthe bearer shares may not be effectiveand the identity of the owner may neverbe discovered.

BIS favoured abolition of bearershares in preference to a system ofcontrols, but would give holders a periodto convert to registered shares.Responses to the BIS Discussion Paperrevealed little or no support for bearershares.16 The BIS Response proposes toprohibit the further issue of bearershares and to provide for a nine monthsurrender period. Company law will besimpler without bearer shares andnothing worthwhile would be lost. Theyhave become archaic survivors fromNineteenth Century, which have noplace in a world of electroniccommunications and paperless records.

Transparency about nomineedirectorsUK companies have always beenrequired to maintain records ofdirectors and a public record is kept atthe Companies Registry.17 Through theserecords, a person dealing with thecompany may know who has authorityto transact business on its behalf. Ingeneral it does not matter to third

parties if directors take theirinstructions from the members.18

The BIS Discussion Paper shows thatgreater transparency about nomineedirectors is required to deal with twotypes of arrangement. One is where aperson is appointed a director of thecompany in accordance with itsconstitution but in fact acts on theinstructions or according to the wishes ofanother person (“X”). The director is ofcourse subject to all the duties of adirector.19 X is could well be a shadowdirector and may well expose himself toliability to the company for the directionsthat he gives to the de jure director.

The other situation is where thedirector abdicates management of thecompany to X, for whom he is merely anominee or front. The director might giveX a power of attorney or he may simplyleave management of the company in thehands of X. Again the director is subject toall the duties of a director and, throughhis abdication, he is at serious risk ofbreaching them. X is likely to owe thesame duties either as a de facto directoror as an agent under a power of attorney.

A good example of the abuse ofnominee directors of the second kind isStones & Rolls Ltd,20 an English company,which was ostensibly trading incommodities but was in fact used as avehicle for defrauding European banks.The only director was a resident of Sarkand all the shares were held by an Isle ofMan company as trustee for a familytrust set up by Mr Stojevic, the controllerof the company. Quite clearly the Sarkdirector could not and did not dischargehis duties. Mr Stojevic was liable in tortfor the victims’ losses, but there was noeffective remedy against him.21

The BIS Discussion Paper included

given power to exempt from disclosurein exceptional circumstances; e.g.serious risk of violence or intimidation.

There are several problems with theBIS proposed reforms. First, as the LawSociety pointed out, people who wantto conceal their ownership of assetsthrough companies will simply useoffshore rather than Englishcompanies. Much will depend onwhether the UK Government pressesfor improvements in transparency inOverseas Territories and CrownDependencies. Second, it is easy forbeneficial ownership to change withoutthe management of a companybecoming aware. Third, there is littlethat can be done about a stonewallinganswer. This can be illustrated by thefacts of a case under what is now Part 22of the 2006 Act. In 1989 the RicardoGroup, which was the subject of atakeover bid, served a notice on anominee company to disclose who wasinterested in the shares registered in itsname. The response was that the solebeneficial owner was a Lichtensteinanstalt. However unlikely it might havebeen that such an entity should haveacquired the interest in the shares for itsown benefit, the court had to accept theevidence and release the nominee’sshares from restrictions.13

Bearer sharesBIS also put forward a proposal for theabolition of bearer shares. They are anideal tool for concealing economicownership of a company and sofacilitating tax evasion and moneylaundering, but they have never beenpopular with English companies.14 TheBIS Discussion Paper records that onlyabout 0.05% of UK companies have

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13/. Re Ricardo Group plc (No 2) [1989] BCLC 766.14/. Cohen Report at [77], [83] noted that bearer shares were more popular on the Continent. The Company Law Review Steering Group favoured theirretention: Developing the Framework at [4.145, 4.146]. Provision for bearer shares is made in the 2006 Act, ss 122, 779.15/. About 900 non-dormant UK had issued bearer shares. Of a sample of 81 of these, 80% were entirely owned by bearer shareholders.16/. Law Society and Bar Council Responses to Question 27 noted that bearer shares were sometimes used in schemes of arrangement.17/. 2006 Act, s 162, 167, 855, 855A. See 1862 Act, ss 45, 46.18/. Articles invariably give members power by special resolution to give directions to directors; see 1985 Act Table A, reg 70; article 4 of the Model Articlesfor private and public companies.19/. Re Neath Rugby Ltd (No 2) [2009] 2 BCLC 427, CA, at [32], [33].20/. Stones & Rolls Ltd v Moore Stephens [2009] AC 1391.21/. Bankruptcy proceedings in England were rescinded on the basis that his COMI was in Austria: Stojevic v Komercni Bank AS [2006] EWHC 3447 (Ch).He was disqualified for 11 years: Official Receiver v Stojevic [2007] EWHC 1417 (Ch).

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tracing the individuals who run thecorporate director. To BIS the mainadvantages of prohibiting corporatedirectors are limiting the scope formoney laundering and other criminalactivity and saving costs ofinvestigations.

The BIS concern about the misuse ofcorporate directors surely misses thecentral point, which is that they mayenable the individual behind acorporate director to avoidresponsibility for his direction of themanagement of the company itself.This can be illustrated by the Paycheckcase,27 where the events occurredbefore the coming into force of theprovision in the 2006 Act, whichrequires a company to have at least onedirector who is a natural person. MrHolland successfully used corporatedirectors to protect himself from the riskof personal liability if dividends declaredin furtherance of an aggressive taxsaving scheme were unlawful, as turnedout to be the case. Even after the 2006Act the same risk of misuse exists,because the real power could beexercised through the corporatedirector, while the natural person mightbe a man of straw or might disappear.

Several respondents pointed out thatcorporate directors performed usefulfunctions in the pension scheme,structured finance and mutual fundcontexts.28 The BIS Response tookaccount of those views and concluded

that corporate directors would beprohibited, subject to exemptions insectors where they are of value, subjectto regulatory oversight and there is alow risk of financial crime. Companieswill have one year to become compliant.Prohibition should promoteaccountability by removing an artificialcorporate wall between the individualwho takes the decisions or givesdirections to management of a companyand that individual’s responsibility andpotential personal liability for thosedecisions and directions.

ConclusionsThe Government intends to introducelegislation to implement its reforms togive effect to the G8 Principles as soonas Parliamentary time allows. Bearershares and corporate directors (exceptin exempt areas) will be consigned tohistorical footnotes. The position ofpeople who run companies as frontsfor owners and controllers who hide inthe background will become distinctlyuncomfortable. These steps to improvetransparency of UK companies canonly go so far. The interesting questionis whether equivalent transparencyrules will apply to offshore companies.Thus the test for the Government iswhether it will give effective and activesupport for transparency action plansfor Overseas Territories and CrownDependencies, as BIS promised in its18 June 2013 announcement.

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22/. In paragraph 33 of the Executive Summary to the BIS Discussion Paper it was suggested that there should be an “offence for directors to divestthemselves of their duties as director”. It is of course impossible for a director to divest himself of his duties and paragraph 4.16 is more accurate whentalks of divestment of powers.23/. Re Bulawayo Market and Offices Co Ltd [1907] 2 Ch 58.24/. See [3.32]-[3.35]. At that time few countries apart from the Netherlands and some offshore jurisdictions permitted corporate directors. Significantlythey are prohibited in Australia, New Zealand, Canada, Singapore and most US States, including Delaware.25/. 2006 Act, s 155.26/. BIS research reveals that there are about 13,000 corporate directors out of 2.9 million company directors (about 0.4%) and that they are used by about11,600 companies (about 0.5% of active companies).27/. Revenue and Customs Comrs v Holland [2010] 1 WLR 2793, SC.28/. Law Society response to question 35. The Bar Council was agnostic on this question.

The test for the Government is whether itwill give effective and active support for transparency action plans for Overseas Territories and Crown Dependencies

proposals seek to deter thesearrangements through transparency.More would be done to bring home todirectors the duties to which they aresubject and there would be anobligation to make public the name ofthe nominator. The proposals alsosuggest that there should be a specificoffence for a director to divest himselfof the power to direct the company.22

All the responses sympathised withthe BIS proposals, but severaldifficulties were identified. In itsResponse BIS took heed of thesecomments. Now it proposes that theRegistrar will remind all newlyappointed directors of theirresponsibilities. It will explore ways ofextending “shadow directorship” topersons who control an individualdirector and will amend thedisqualification regime to deal explicitlywith directors who act as a “front”.

Corporate directorsIt has long been recognised that acompany could be appointed acorporate director.23 In its White Paper:Modernising Company Law (2002) theGovernment proposed that corporatedirectors should be prohibited,24 butwas persuaded to permit them in the2006 Act, provided that the companyhas at least one director who is anatural person.25

The BIS Discussion Paper reportedthat only a tiny fraction of companieshad corporate directors.26 Althoughthere may be legitimate reasons forusing a corporate director, BIS wasconcerned that corporate directors areused to conceal beneficial ownershipor control of the company and tofrustrate investigation, because ofdifficulties in obtaining documents and

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A tide of high yieldrestructuringsWilliam Needham of Weil, Gotshal & Manges and Daniel Bayfield ofSouth Square consider the growing trend amongst European corporates tolook to English law restructuring processes to compromise their foreign lawhigh yield debt obligations

IntroductionIn 2008, the year in which LehmanBrothers collapsed, the European highyield bond market was at a 10 yearlow. There were fewer than 40issuances that year, with a total valueof only €32 billion. Fast-forward fiveyears, and 2013 saw over 255issuances, with an aggregate value ofover €117 billion.1

During that period, the Europeanhigh yield bond market has beenbuoyant. This, coupled with globalcreditors’ growing familiarity withEnglish restructuring procedures,means that there has been and, wethink, will continue to be, a surge inEuropean corporates with New Yorklaw financing documents runningbalance sheet restructurings throughLondon.

Historically, high yield constituted asmaller component of the overallfinancing package and was typicallyunsecured and subordinated to theother debt. In recent years, most highyield issuances have been seniorsecured. In addition, high yield hasbecome a much larger part of the

financing, and is often used to fundentire transactions.

In deals where high yield is the onlyterm debt in the structure (an “allbond” structure), a super seniorrevolving credit facility (“ssRCF”) istypically put in place for liquiditypurposes. In these deals, the ssRCFranks equally with the bonds in allrespects, except that the ssRCF is paidin priority to the bonds from theproceeds of collateral enforcement.Other structures include term andrevolving credit facilities that sitalongside senior secured bonds (a“pari” structure). In pari structures, theloan facility and the bonds rankequally in all respects.

In all of these structures, high yieldbonds are typically governed by NewYork law, while the loan facilities andthe intercreditor agreement aretypically governed by English law. Thereason we see a difference ingoverning law is because the high yieldbond was developed in the US in the1980s and, as a result, there isextensive New York case lawinterpreting covenants and other

contractual provisions, providinggreater certainty to issuers andinvestors

Intercreditor arrangementsThe intercreditor arrangementsbetween the loan and the bond play akey role in successful restructurings, asthey govern which creditors areentitled to give instructions to acommon security agent to enforcecollateral.

In the all bond structure, the securityagent will initially act on theinstructions of the bondholders. If aftera period of time, no action has beentaken or the ssRCF has not been repaidin full, the security agent willthereafter follow the instructions of thessRCF lenders.

Intercreditor arrangements used inpari structures are more varied.Financings from 2009 to 2011 providethat the lenders under the loanfacilities will have full control overenforcement until the loans representa smaller part of the capital structure(e.g. 25-30%). Today, most “pari” dealsprovide that the lenders and the

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1/. Source of this and bar chart data: Thomson One. Other sources put 2008 to 2009 figures even lower.

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bondholders have an equal vote(“pound-for-pound”) when instructingthe security agent to take anenforcement action.

In addition, structures that includesubordinated bonds have paymentblockage provisions and enforcementstandstills, which are usuallypermanent in the case of a paymentdefault on the senior secured debt and179-days for any other default.

CovenantsWhilst the loan facilities typically havefinancial maintenance covenants(DSCR/EBITDA) ratios etc.), the bondswill have “incurrence-based”covenants: the difference being that adecline in financial performance willnot lead to a breach of covenantsunder the bonds, but will do so underthe loans. This gives lenders an initialadvantage over the bondholders asthey will be able to accelerate thefacility when the bondholders cannotaccelerate the bonds (although doing sowill usually amount to a cross-defaultgiving rise to a right to accelerate thebonds).

Bond restructuring techniquesBond restructurings can take variousguises. For example, there may be anexchange offer, such as that recentlymade by Ideal Standard InternationalS.A.: on 20 March 2014, the companygave holders of its €275m 11.75%senior secured bonds due 2018 theoption to exchange their bonds for newones or convert them into equity. Theoffer was launched with the support of60% of the bondholders in connectionwith a restructuring aimed atimproving the company’s liquidity.Alternatively, there may be cash tenderoffers, redemptions or consentsolicitations to waive or amendcovenants under the indenture. Thesetechniques are used to incentiviseparticipation in exchange/tender offersby stripping the covenants of the bondsthat are not tendered. However, where

the financial difficulties of thecompany are such that, to easepressure on cash flow and shore upliquidity, all bondholders need toconsent, a formal restructuring tool orinsolvency process may be required.

The latter path was recently taken in

the case of Re Magyar Telecom B.V.2

Magyar was a company incorporatedand registered in the Netherlands, anda member of a group operatingtelecommunication services inHungary. In 2009, Magyar issued €345million 9.5% Senior Secured Notes, due

TYPICAL FINANCING STRUCTURE WHERE BOTH BANK FACILITIES AND HIGH YIELD BONDS ARE PRESENT

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2/. [2013] EWHC 3800 (Ch)

THOMSON ONE: EUROPEAN HIGH YIELD BOND ISSUANCES BETWEEN 2008 AND 2013

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in 2016, which were governed by thelaws, and subject to the non-exclusivejurisdiction, of the state of New York.The group was over-leveraged, andrestructuring negotiations took place inorder that commercial termsacceptable to the various stakeholderscould be agreed.

A restructuring agreement wassigned by approximately 70% (byvalue) of bondholders. Magyar hadfirst considered local restructuringprocedures, but neither Dutch norHungarian processes were flexibleenough to accommodate the deal. It isnot uncommon for local procedures tobe unworkable. In ZlomrexInternational Finance S.A. (a broadlysimilar restructuring to that proposedby Magyar) for example, localproceedings would have triggeredevents of default and cross-defaultswhich would have hampered creditorrecoveries.3

The solution? An English law schemeof arrangement. Whilst it might seemodd to use the scheme jurisdiction to

vary New York law governed rightsowed by a European corporate, as isexplained below, it can be the mostcost-effective and certain way ofimplementing a restructuring whichcannot be done wholly consensually orthrough an exchange offer.

Using the scheme jurisdictionWhilst effective, using a scheme ofarrangement to effect a restructuringof this type is not altogetherstraightforward. It requires meticulousplanning.

Before a scheme can be sanctioned,the Court must be satisfied of a numberof matters including (but not limited to)the following:

1. the company proposing thescheme is a “company” for thepurposes of Part 26 of the CompaniesAct 2006 (the “CA06”);

2. the company has a sufficientconnection with this jurisdiction; and

3. the scheme will be effective, in thesense that it will be recognised and giveneffect to in the courts of otherjurisdictions where it is essential to thecommercial success of the scheme thatthe scheme “works”, most notablyjurisdictions in which the company hasassets.

The “liable to be wound up” testIn order to be sanctioned by the

English court under Part 26 of the CA06,a scheme must be proposed by acompany liable to be wound up underthe Insolvency Act 1986.4 It is now wellestablished law, as Mr Justice Richards

reiterated in Magyar, that “a foreignincorporated company is so liable, even ifits circumstances at the time of theapplication to the court are such that theEnglish court would not at that timeexercise its jurisdiction to wind up thecompany”.5

The test could not be set much lowerand, in Magyar, the company satisfiedthe requirement.

The court recognised, however, thatwhere a company is not registered inthis jurisdiction and, more importantly,where the finance documents are notgoverned by English law, there will beserious questions as to whether it will beappropriate for the court to exercise itsdiscretion to sanction the scheme.6

Sufficient connectionIn Re Drax Holdings Ltd Mr Justice Collinsstated that the fact that a foreigncompany would not be wound up by theEnglish court is not itself a bar to thecourt sanctioning the scheme, providedthat there is sufficient connection withthis jurisdiction: “that the companies fallwithin the definition of companies for thepurpose of section 425 of the CompaniesAct 1985, now section 899 of theCompanies Act 2006 does not, of course,mean that there are no limitations to theexercise of jurisdiction under section 425.The court should not, and will not, exerciseits jurisdiction unless a sufficientconnection with England is shown”.7

Mr Justice Richards explains thatdemonstrating a “sufficient connection”with England is, as it is in the context of a

Whilst it may seem odd to use the scheme jurisdiction to vary New York law governed rightsowed by a European corporate, it can be the mostcost-effective and certain way to implement a restructuring

WILLIAM NEEDHAM OF WEIL, GOTSHAL & MANGES

! !

3/. [2013] EWHC 3866 (Ch)4/. S 895(2), CA065/. [11], [2013] EWHC 3800 (Ch). Applying Re Drax Holdings Ltd [2003] EWHC 2743 (Ch), [2004] 1 WLR 1049; Re DAP Holding NV [2005] EWHC 2092 (Ch),[2006] BCC 48; and Re Rodenstock [2011] EWHC 1104 (Ch), [2011] Bus LR 12456/. [13], [2013] EWHC 3800 (Ch)7/. [29], [2003] EWHC 2743 (Ch), [2004] 1 WLR 1049

71


winding up petition, imposed as adiscretionary requirement because it isnecessary for the scheme, or the windingup, to have a practical effect.8 As MrJustice Richards then explains, “thepresence of assets within the jurisdiction isbut the most obvious example of aconnection which will give practical effectto a winding up order”.9

In a number of cases, the sufficientconnection has been satisfied by virtue ofthe governing law of the financedocuments being English law and theEnglish courts having exclusive or non-exclusive jurisdiction in respect ofdisputes (see, for example, Re RodenstockGmbH, Re Primacom Holdings GmbH andRe Vietnam Shipbuilding Industry Group).As the Judge made clear at paragraph 16,the sufficient connection test and the issueof international effectiveness (discussedbelow) are closely related to one another:“the court will not generally make anyorder which has no substantial effect and,before the court will sanction a scheme, itwill need to be satisfied that the schemewill achieve its purpose”.10

The generally adopted conflicts of lawapproach is that the variation ordischarge of contractual rights inaccordance with the governing law of thecontract will be given effect to in otherjurisdictions.11 That is why Mr JusticeBriggs was correct, in Re RodenstockGmbH, to hold that where the rightsbeing varied by a scheme are governedby English law, the sufficient connectionrequirement is satisfied.

In Magyar, as is often the case wherehigh yield bonds are issued by mainlandEuropean registered companies, thebonds were not governed by Englishlaw. In such circumstances, thesufficient connection test will need to besatisfied with reference to other factors.Magyar sought to satisfy the sufficientconnection requirement by migratingits centre of main interests (“COMI”) tothe UK. Whilst a dramatic step to take,

and one which is usually impractical inthe case of an operating company (asopposed to a finance (or holding)company), the COMI migration has theadditional consequence of makingrecognition of the scheme as a foreignmain proceeding possible in the USunder Chapter 15 of the US BankruptcyCode. Given that the bonds weregoverned by New York law, this wasconsidered important in ensuring thatthe scheme would be effective.

The migration of Magyar’s COMI tothe UK satisfied the sufficient

connection requirement because it ledto a situation in which, if Magyar wereto go into formal insolvencyproceedings, they would take place inthis jurisdiction.

Mr Justice Richards was at pains tomake clear that “the significance ofmoving the COMI… lies not so much inthe establishment in the abstract of aconnection between the company andEngland but on the basis that anyinsolvency process for the companywould be undertaken under English lawin England”.12

DANIEL BAYFIELD

! !

8/. Re Compania Merabello San Nicholas SA [1973] (Ch) 759/. [21], [2013] EWHC 3800 (Ch)10/. [16], [2013] EWHC 3800 (Ch). Applied Sompo Japan Insurance Inc v Transfercom Ltd [2007] EWHC 146 (Ch); [73 – 77] Re Rodenstock [2011] EWHC1104 (Ch), [2011] Bus LR 124511/. Rome Convention; Council Regulation (EC) 593/2008 (the Rome 1 Regulation)12/. [23], [2013] EWHC 3800 (Ch)

72

The EC Regulation sets out thepresumption that the COMI of acompany lies where such company isincorporated, and that is where it mustfile for the opening of main insolvencyproceedings.13 The presumption can berebutted, but “in order to rebut thepresumption there must be clear,objective and ascertainable facts whichrebut it”.14 Mr Justice Lewison in HellasTelecommunications reiterated that “it ispossible for an entity… to change itsCOMI from its original or presumedlocation”.

COMI migrationWhere it is done in the interests of thecreditors generally, using insolvencyprocedures in other countries is notgenerally considered to be abusive but“merely the optimisation of proceduralpossibilities”.15 As a result, many foreigncompanies have moved their COMI tothis jurisdiction to take advantage of ouradministration procedure or to promoteschemes of arrangement.

In terms of identifying a company’sCOMI, the decisions of the EuropeanCourt of Justice in Re Eurofood IFSC Ltd16

and Interedil Srl (In Liquidation) vFallimento Interedil Srl17 establish that:1. where the bodies responsible for acompany’s management andsupervision are in the same place as itsregistered office and the managementdecisions of the company are taken, in amanner that is ascertainable by thirdparties, in that place, the COMIpresumption is wholly applicable; 2. that presumption may be rebuttedwhere, from the viewpoint of thirdparties, the place in which a company’s

central administration is located is notthe same as that of its registered office; 3. in that event, the simple presumptionlaid down by the European legislature infavour of the registered office of thatcompany can be rebutted if factorswhich are both objective andascertainable by third parties enable itto be established that an actual situationexists which is different from that whichlocating it at that registered office isdeemed to reflect; and 4. those factors must be assessed in acomprehensive manner, account beingtaken of the individual circumstances ofeach particular case.Precisely what is required successfullyto shift the COMI of a company willdepend on the facts of any given casebut, as a general guide, the followingsteps are involved:1. moving the head office functions andthe principal operating address toEngland;2. notifying all creditors, relevantparties and bodies (including anyrelevant stock exchange) of the move tothe UK;3. issuing a press release whichannounces that the company’s activitiesare shifting to the UK;4. opening a bank account in the UK andmaking all payments through thataccount;5. registering with Companies House;and6. holding all negotiations with creditorsin the UK.18

In Zlomrex, as well as taking the stepssuggested above, the company:7. took on English phone lines;8. received all correspondence in

England;9. appointed directors to the board ofdirectors who were resident in the UK;10. took steps to acquire a Certificate ofTax Residency in England from HMRC;11. entered into a contract with anEnglish company for corporatemanagement functions; and12. held all key meetings and boardmeetings in England.19

Although there is no minimum timeperiod in which a company must havehad its COMI in the new member state,COMI shifts have been achieved overrelatively short periods of time. InMagyar, the convening hearing for thescheme took place some eight to tenweeks after steps were first initiated toshift the company’s COMI, with thesanction hearing taking place fourweeks later. The fact that the COMImigration is recent does not alter theanalysis. The identification of acompany’s COMI is an exercise to beundertaken at the time of the request toopen proceedings and, so long as theCOMI migration has the hallmark ofpermanence, the test is satisfied.20

Where a COMI shift to the UK hasbeen completed and the only practicalalternative to the restructuringproposed under a scheme is a formalinsolvency process, it follows that anysuch insolvency process would beopened by the English court.

International effectivenessIt is well established that the Englishcourt will not act in vain. Accordingly,the court will need to be satisfied thatthe scheme will have substantial effect,i.e. that it will “work” as a matter ofcommercial reality, and thatdisgruntled creditors will not be able togo behind the scheme and rely upontheir pre-scheme rights in a way whichwill undermine the effectiveness of thescheme.

! !

13/. Article 3, Council Regulation (EC) 1346/2000 of 29 May 2000 on insolvency proceedings14/. [3], Hellas Telecommunications (Luxembourg) II SCA [2009] EWHC 3199 (Ch); Re Eurofood IFSC Ltd (C-341/04) [2006] All ER (EC) 107815/. [71 - 73] Re Staubitz-Schreiber (Area of Freedom, Security and Justice) (Case C-1/04) [2006] ECR I-70116/. [2006] (Ch) 50817/. [47 - 53] [2012] BCC 85118/. [2009] EWHC 3199 (Ch)19/. [5], [2013] EWHC 3866 (Ch)20/. Shierson v Vlieland-Boddy [2006] 2 BCLC 9

Where it is done in the interests of creditors, usinginsolvency procedures in other countries is not generally considered to be abusive

73


The governing law of European highyield bonds is typically New York law,and so the English court will need to besatisfied that the US courts, underChapter 15 of the US Bankruptcy Code,which gives effect to the UNCITRALModel Law on Cross-Border Insolvency,would recognise and give effect to thescheme. This is not necessarilystraightforward: our US counterpartsare not known for permitting thealteration or replacement of rightsgoverned by New York law. However,unless recognition can be obtained, thescheme will not achieve its purposebecause, looked at through the eyes ofNew York law, the contractual rightswill not have been varied and thebondholders will be entitled to enforcethem as if the scheme had not becomeeffective.

In order to be recognised by the UScourts under Chapter 15, there mustfirst be a “foreign proceeding”. Tosatisfy this test: (a) the proceedingsmust be brought under a law relatingto insolvency or the adjustment of debt;(b) the assets and affairs of the debtormust be under the control orsupervision of a foreign court; and (c)the proceedings must be for thepurpose of reorganisation orliquidation.21 The US courts haveaccepted that schemes of arrangementqualify as foreign proceedings on manyoccasions (and the Magyar scheme,following its sanction by the Englishcourt, was recognised by the USBankruptcy Court on 11 December2013 under Chapter 15).22

Provided that the existence of aforeign proceeding has beenestablished, the US courts will grant itrecognition if it is a main or non-mainproceeding. A proceeding will be amain proceeding if pending in thecountry where the debtor has its COMI,and non-main if pending in a country

where the debtor has an establishment.In Magyar, Mr Justice Richards

expressed the view that: “where thepractical alternative to the scheme is aninsolvency process in… England, thereis an obvious logic in treating a schemeapproved under English law as effectiveto alter the rights of creditors, eventhough those rights are governed by thelaw of a different country”.23 The courtwas satisfied that it was reasonablylikely (on the basis of expert evidence)that the US courts would recognise thescheme and give effect to it. Thesubsequent decision of the USBankruptcy Court vindicated that view.

The Judge also gave guidance to theeffect that: (i) expert evidence offoreign law should be given be expertsunconnected with the law firmsprofessionally engaged in the scheme24;and (ii) expert evidence should begiven (as it was in Magyar) in relationto the jurisdictions in which there areguarantors and/or assets.

It is, of course, critical that creditorswill not be able to ignore the schemeand enforce against assets in otherjurisdictions. In the case of Magyar, itwas critical to satisfy the court that theHungarian courts were likely torecognise and give effect to thescheme, Magyar’s operating subsidiary(and main asset) operating inHungary.

There appears to be a growing viewin Europe that, subject to public policyexceptions, orders sanctioning Englishschemes of arrangement should berecognised as “judgments” within themeaning of articles 32 and 33 of

Council Regulation (EC) No 44/2001 (theJudgments Regulation).

It will not be necessary, in every casewhere the contractual obligations aregoverned by a foreign law, to satisfythe sufficient connection test bymoving the company’s COMI to the UK.For example, the presence in Englandof assets belonging to a companyproposing a scheme might provide therequisite connection. The question willbe whether that connection issufficient in terms of leading to theconclusion that the scheme, ifsanctioned, would achieve the practicaleffect of preventing the creditors fromrelying upon their pre-scheme rights.

ConclusionIt is likely that Mr Justice Richards’judgment in Magyar will encourageother foreign companies to look toEnglish restructuring processes tocompromise their foreign law debtobligations.

A scheme of arrangement is not theonly way of restructuring high yieldbonds, but it appears to be en vogue asa result of recent successes and theEnglish court’s ability andpreparedness to be inventive andpractical in the interests of creditors.

William Needham advises onrestructurings and distressed investing.He advised creditor-side on Hellas andis advising on current high yieldrestructurings. Daniel Bayfield has formany years advised on a wide range ofrestructurings and acted for the schemecompanies in Magyar and Zlomrex.

! !

21/. § 101(23), US Bankruptcy Code22/. As matters stand, following a decision of United States Court of Appeals for the Second Circuit in Drawbridge Special Opportunities Fund LP v Barnet(In re Barnet), 737 F.3d 238 (2d Cir. 2013) where it held that the debtor eligibility requirements contained in section 109 of the Bankruptcy Code apply toChapter 15 debtors, before petitioning for Chapter 15 relief the foreign debtor will need to ensure that it has a place of business or property in the UnitedStates. 23/. [19], [2013] EWHC 3800 (Ch)24/. [27], [2013] EWHC 3800 (Ch)

The governing law of European high yield bonds istypically New York law, and so the English court willneed to be satisfied that the US courts will recognise and give effect to the scheme

74

South Square and friends...and David BaileyThe South Square annual reception this year took place on Wednesday 9 April when Members and staff welcomedsome 300 clients and friends of Chambers to the National Portrait Gallery. The reception, held in the impressiveVictorian Galleries, included a private viewing of the high profile Bailey’s Stardust Exhibition - the largestretrospective of Bailey’s work spanning his 50+ year career with over 250 images. Guests have fed back how muchthey enjoyed the evening of socialising with contacts old and new, and viewing exhibits at their leisure.

75


MATTHEW ABRAHAM

76

NEW SILKS

DAVID ALLISON QC

David Allison read law at DowningCollege, Cambridge University. Hegraduated with First Class Honours andwas called to the Bar in 1998.

David has developed a broadcommercial practice. He specialises inbusiness, commercial and financial law,with a particular emphasis on corporaterestructuring (both domestic and cross-border), sovereign debt restructuring,banking and financial services, structuredfinance, commercial litigation andcompany matters. He has an extensiveoverseas practice which includes Dubai,Cayman, BVI, Jersey and Guernsey.

David’s recent cases include Lehman(including Lehman Client Money, LehmanPensions, Lehman Waterfall Application),Eurosail, ATU, Airwave, Stemcor, MFGlobal, Nortel, Bank of Ireland, EuropeanDirectories, Stanford International Bank,Madoff, Landsbanki, Glitnir, Kaupthing,Woolworths, Almatis, Arcapita, Metronet,Northern Rock, Dewey & LeBoeuf,Deutsche Annington, PrimaCom, NefTelecom, Biffa, Fitness First, NCP, Monier,Tele Columbus and Cattles.

David is ranked as a leading barrister insix practice areas by the legal directories:Banking & Finance; Insolvency &Restructuring; Company; CommercialDispute Resolution; Chancery:Commercial; and Financial Services.

David is ranked in the Chambers UK100. He has been recognised in theannual awards of Chambers and Partnersas the winner of theInsolvency/Restructuring Award and as anominee for the Banking & FinanceAward.

77


TOM SMITH QC

Tom Smith is a graduate of Clare College,Cambridge University where he obtained firstclass degrees in law (MA and LLM). He wascalled to the Bar in 1999 and has been atSouth Square since then. Tom specialises in commercial litigation and

arbitration, banking and finance andcorporate insolvency and restructuring. Healso practices extensively in the fields ofcompany law, civil fraud and asset recovery,professional negligence and trusts. He actedfor the Bank of England in the Three Riverslitigation and since then has developed asignificant commercial litigation practiceranging from major commercial trials such asthe recent Formula One/Bernie Ecclestonedispute to various arbitrations. These haveincluded a number of banking litigationmatters such as Saltri v MD Mezzanine,Grupo Urvasco, Assénagon v Anglo Irish,and Morgan Stanley v Tael (due to be heardin the Supreme Court in 2014).Tom has also been involved most of the

major domestic and internationalinsolvencies of recent years. His othernotable work includes many of the recentrestructurings and schemes of arrangement.He also has a particular interest in cross-border insolvency, having acted in HIH in theHouse of Lords, Rubin v Eurofinance in theSupreme Court and in the ongoing Primeo vPicard proceedings in the Cayman Islands. Tom is recognised as leading barrister in

five areas in the legal directories: Bankingand Finance, Restructuring/Insolvency (starindividual), Chancery: Commercial,Commercial Dispute Resolution andCompany and has previously been a winnerof Restructuring/Insolvency Junior of theYear at the Chambers Bar Awards.

78

EU/EEA LAW UPDATE

EU Insolvency courts haveuniversal jurisdiction

Gabriel Moss QC (with assistance from one of Chambers’ pupils, Robert Amey)looks at EU/EEA developments outside the UK

The three-cornered discussionsand decision-making between theCommission, Parliament and theCouncil continue, interruptedhowever by the forthcomingEuropean elections. Thesuggestions of an arbitrary periodrequired for COMI changes tobecome effective and the threat offorcing schemes of arrangementinto the Regulation (bothsuggestions from the Parliament)are the major areas of concern forthe UK.

Changes to FrenchRestructuring LawIn January 2014, the Frenchlegislature passed Law No. 2014-1“authorising the Government tosimply and secure corporate life”(“habilitant le Gouvernement àsimplifier et sécuriser la vie desentreprises”), Art.2 of whichauthorises the government to adoptsecondary legislation to promote arescue culture for insolventcompanies. Press reports suggestthat the package of reforms underconsideration include making iteasier for creditors to proposereorganisation plans and tocircumvent dissentingshareholders.

Schmid v Hertel (ECJ, 16th January 2014

The issue here was whether the EURegulation on insolvency proceedingsgave the German courts domestic lawjurisdiction to hear an avoidanceaction against a defendant resident inSwitzerland, in relation to a claimbrought by the liquidator in a Germaninsolvency proceeding.

Prior to this case, it had generallybeen assumed that the Regulation’srules as to jurisdiction, and inparticular Article 3(1) (jurisdiction toopen main proceedings), dealt with theallocation of jurisdiction within the EUbetween Member States and not withjurisdiction under domestic law.However, the ECJ in this case, on thebasis of the objectives of improving theefficiency and effectiveness of EUinsolvency proceedings, where theyhave cross-border effects, interpretedArticle 3(1) as creating domestic lawjurisdiction in EU Member States tohear and determine “actions whichderive directly” from the insolvencyproceedings opened in Member States“and which are closely connected withthem”.

This interpretation was said topromote foreseeability and legalcertainty. The fact that the third

country, in this case, Switzerland,might not be under any obligation torecognise or enforce a judgmentdelivered by a court exercising thistype of jurisdiction within the EU couldnot prevail against this interpretation.The ECJ held that even if such ajudgment is not recognised andenforced on the basis of a bilateralconvention, it may be recognised andenforced by other Member Stateswithin the EU pursuant to Article 25 ofthe Regulation, “in particular if part ofthe defendant’s assets are in theterritory of one of those States”.(Paragraph 38).

The practical effect is that wheneverthere is an insolvency proceeding in anEU Member State, there is jurisdictionto launch an insolvency law avoidanceaction in the courts of the MemberState, not only against EU defendants,but also against Defendants worldwide,regardless of any more restrictivejurisdiction rules in that particularmember State. Of course, as the ECJpoints out, recognition andenforcement in the Defendant’scountry, if outside the EU, may beproblematic, but at least any assetswithin the EU will be available forenforcement purposes.

Reform of InsolvencyRegulation

79


On 7 March 2014, Spain enacted Royal DecreeLaw 4/2014 (“the Decree” ) adopting urgentmeasures on corporate debt refinancing andrestructuring (Real Decreto-ley 4/2014, de 7 demarzo, por el que se adoptan medidas urgentes enmaterial de refinanciaci n y reestructuraci n dedeuda empresarial). The Decree amends certainprovisions of the Spanish Insolvency Act (Ley22/2003, de 9 de julio, Concursal). The mostimportant reforms are as follows.

1/. Art.5bis of the Spanish Insolvency Act isamended so that once a debtor has notified a courtthat it is in negotiations for restructuring under theAct, enforcement proceedings (ejecucionesjudiciales) over assets that are necessary for thedebtor’s business (bienes que resulten necesariospara la continuidad de la actividad profesional oempresarial del deudor) are suspended. Theopening of negotiations must be supported by atleast 51% by value of financial creditors, and

Spanish insolvency reformscannot last more than three months.

2/. Art.71bis of the Spanish Insolvency Act isamended to encourage refinancing agreements (losacuerdos de refinanciacion). The requirement for areport in support of the refinancing issued by anindependent expert has been replaced by arequirement for creditors representing 60% of thevalue of the liability to vote in support. Otherrequirements of Art.71bis are that the assets of thedebtor be increased to a greater level than theliabilities, that the value of security created in favourof creditors not exceed 90% of the outstanding debtdue to those creditors and that the interest rateapplicable to the debt arising from the refinancingnot exceed the interest on the previous debt bymore than one third. Refinancing agreements thatcomply with Art.71bis will not be impeached by acourt. In addition, for the first two years followingthe entry into force of the Decree, cash injectedunder a refinancing agreement will be protected in

the event of future insolvency (the default position isthat only 50% of such cash is protected).

3/. The fourth additional provision (Disposicionadicional cuarta) of the Decree introduces newrules for approval of compositions, in particularwhere it is sought to cram down dissentingcreditors. Refinancing agreements may beapproved by 51% by value of creditors, excludingtrade creditors and public authorities (losacreedores por operaciones comerciales y losacreedores de pasivos de derecho p blico). (Forsyndicated loans (préstamos sindicados) to betaken into account, lenders representing at least75% of the liability must vote in favour, unless thesyndication agreement provides for a smallermajority.)

Where creditors representing 60% of anunsecured liability or 65% of a secured liability havevoted in favour, a composition may postponepayment obligations for up to five years, or convertdebt into equity loans (préstamos participativos).

Where creditors representing at least 75% of anunsecured liability or 80% of a secured liability havevoted in favour, the composition may provide for:! payment obligations to be postponed for 5-10

years;! the reduction of debts (las quitas);! the transfer of assets to creditors in payment

of debt (La cesi n de bienes o derechos a los acreedores en pago de la totalidad o partede la deuda);

! a debt-for-equity swap (La conversi n de deuda en acciones o participaciones de la sociedad deudora); and

! the conversion of debt into:- equity loans (préstamos participativos) for a term of 5-10 years,- convertible bonds (obligaciones convertibles),- subordinated loans (préstamos subordinados),- capitalised interest loans (préstamos con intereses capitalizables), and- any other instrument with ranking, maturity or characteristics that differ from the original debt (cualquier otro instrumento financiero de rango, vencimiento o características distintas de la deuda original).PROPERTY FIRM, REYAL URBIS, FILED FOR INSOLVENCY LAST YEAR, THE SECOND LARGEST IN SPANISH HISTORY

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80

NEWS in brief

Oversight Committeeof IBAJoanna Perkins has been appointed tothe Board of the IntercontinentalExchange Group (ICE) BenchmarkAdministration (IBA) Oversight

Committee. Following therecommendations of the WheatleyReview and a rigorous selectionprocess conducted by the HoggTendering Committee, IBA took chargeas the new independent administratorof the London Interbank Offered Rate(LIBOR) in February. Operating as anautonomous entity within ICE, IBA’soversight committee will administerLIBOR’s code of conduct. Joannaspecialises in structured finance,derivatives and financial regulationand is also Chief Executive of theFinancial Markets Law Committee. In2012, she was voted one of the 100most influential women in Europeanfinance by Financial News.

Conservative Candidatefor South EastCambridgeshire

JOANNA PERKINS

Lucy Frazer QC has been confirmed as theprospective parliamentary candidate for theConservative Party in South EastCambridgeshire. Lucy will be standing forthe Conservatives at the next generalelection in place of MP Sir James Paice,who is retiring. Meanwhile, Lucy maintainsher busy practice at South Square.

LUCY FRAZER QC

SecondmentsToby Brown is currently on a threemonth secondment in the CaymanIslands with Campbells. MatthewAbraham has recently returned toSouth Square after a secondment at theLondon office of Stephenson Harwood.

MATTHEW ABRAHAMTOBY BROWN

Barristers and solicitors across England and Wales staged a second walk-out of courts on 7 March in protest over the government’s legal aid cuts.The decision to take action followed a meeting between Bar CouncilChairman Nicholas Lavender QC and the Ministry of Justice, from whichChairman of the Criminal Bar Association (CBA), Nigel Lithman QC, said“nothing fresh” had emerged.

Following subsequent concessions agreed by Justice Secretary ChrisGrayling, including the deferment of cuts in the Advocate Graduated FeeScheme (AGFS) for at least one year, criminal barristers halted plans forfurther strike action at the end of March.

Reacting to the postponement of the fee scheme, Nigel Lithman said: “Weare glad that we have persuaded the government to recognise that furthercuts to the junior bar are unnecessary and would jeopardise the existenceof the profession”. Nicholas Lavender QC said the move “points to a betterfuture from the one which many have feared”.

Second walk-out over legal aid cuts

81


Barrister permanentlydisbarred for falsified CVMany will recall the temporarysuspension of Dennis O’Riordan frompractising as a barrister last year after itemerged he had falsified academicqualifications listed on his CV.

Mr. O’Riordan, who had worked as anin-house counsel for City institutionsand law firms, made a number of bogusclaims, including two first classdegrees and a DPhil from OxfordUniversity, and a Master’s in Law from

Harvard. He was exposed in November2012 when applying to join a set ofchambers.

At the original disciplinary tribunal inSeptember 2013, the disgraced barristerreceived a three-year suspension frompractice. Following a successful appealby the Bar Standards Board (BSB) tothe Visitors to the Inns of Court, Mr.O’Riordan was permanently disbarredin January.

On Friday 11 April the CaymanIslands Government approved asignificant modernisation of theExempted Limited Partnership Law(“the ELP”) and also introducedThe Contracts (Rights of ThirdParties) Law, allowing contractingparties to give contractuallyenforceable rights to third parties.

The principal changes to the ELPinclude enhanced liabilityprotection for limited partners,greater structural flexibilityincreased certainty ofinterpretation and a simplifieddissolution regime. The new law inrelation to third parties will beparticularly useful in relation toindemnity and exculpation clauses.

Together the changes areregarded as a response to theevolving requirements of theinternational financial service

New Caymanlaws

The Chancellor has announced a

pilot scheme in the Chancery

Division for fixed-end trials. The

Chancery Modernisation Review

report drew attention to the fact

that trials in the Chancery Division

regularly overran. As Lord Justice

Briggs noted, statistics for trials in

2013 showed that nearly 50% had

exceeded their time estimates, on

average by almost 50%. Lord Justice

Briggs recommended that, in the

first instance, there should be a

pilot of fixed-end trials.

The Chancellor has decided that

this pilot runs from 1 May 2014. The

announcement of the scheme

requires all parties to cases listed

for trial in the Chancery Division on

or after that date to check their

time estimates as a matter of

urgency and, should they now be

thought to be too short, inform the

Court at once. And from 1 May 2014

any trial may be selected to be part

of the pilot. If it is selected, it will

have to be completed within its time

estimate. Cases may be chosen to be

part of the pilot from as late as the

day before the trial begins. The

parties to all cases must therefore

prepare for trial in the knowledge

that their cases may not be allowed

to overrun.

Time estimates must make a

realistic allowance for pre-reading.

If the period for pre-reading is

inadequate, the time available in

court will be shortened accordingly.

Furthermore, where it is thought

to be appropriate to have an

interval between the close of

evidence and final submissions, the

time estimate should factor this in

as well. It is, therefore, clearly going

to be necessary for parties to

consider carefully how long each

element of the case is likely to take.

Likewise, parties should agree a

timetable at as early a stage as

possible and review it if

circumstances change.

Fixed Trials: Pilot Scheme

The Chancery Division is to experimentwith holding pre-trial reviews in all casesestimated to last five days or more. From the beginning of next term,

whenever a case with an estimate of atleast five days is fixed to come on for finalhearing on or after 1 March 2015, a pre-trialreview before a judge will be arranged atthe same time, to take place about fourweeks before the trial. Among other things, the judge hearing the

pre-trial review will be concerned to checkthat the time estimate is realistic and thatthe parties have taken appropriate steps toagree a timetable for the trial.

Pre-trial reviews

82

NEWS in brief

Conference round up

This has been a busy quarter forSouth Square members on theconference circuit. Gabriel Moss QCjoined the panel at the

BrooklynJournal of Corporate,Financial & Commercial Law AnnualSymposium on 7 March in New York.He also chaired the Sweet & Maxwell

FELICITY TOUBE QC PROF IAN FLETCHER QC MARK PHILLIPS QC

Insolvency Law Conference 2014 heldon 25 March in London and will bespeaking at the R3 and INSOL EuropeInternational RestructuringConference on 1 May also in London.Barry Isaacs QC was invited to jointhe panel debating ‘Risk issuesarising from the insolvency process’at the Credit Summit: Insolvency &Restructuring Conference whichtook place on 2 April at the QE11Centre in London.

Felicity Toube QC spoke at the ILAAcademic Forum in Oxford the daybefore the ILA Annual Conference on22 March, where she was also aspeaker together with WilliamTrower QC, Mark Phillips QC andBarry Isaacs QC.

The same weekend, another SouthSquare contingent were out in forcein another part of the globe with 10Members attending the INSOLAnnual Regional Conference 23-25March in Hong Kong.

South Square were sponsors andGlen Davis QC and Professor Ian FFletcher QC (Academic Member ofSouth Square) facilitated sessionsand spoke at the well-attendedconference.

These external events are inaddition to the in-house events andnumerous bespoke talks SouthSquare Members gave for clients attheir premises.

BARRY ISAACS QC DEBATES RISK ISSUES ARISING FROM THE INSOLVENCY PROCESS WITH EY’S ALAN BLOOM

Company liquidationsStatistics released by the InsolvencyService revealed there were 3,552company liquidations in England andWales in the fourth quarter of 2013, adecrease of 7.4 per cent on the previous

in 2012, in addition to 2,860 creditors’voluntary liquidations, which fell by 1per cent on both the previous quarterand the corresponding quarter of theprevious year.

quarter and 7.1 per cent less than thesame quarter in 2012. This comprised692 compulsory liquidations, down 26.7per cent on the previous quarter anddown 25.8 per cent on the same period

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Judges in Delaware have urged theSupreme Court to reinstate a lawallowing sitting judges to arbitratecorporate litigation disputes in private.A contentious state law passed in 2009offered litigants with at least $1 millionat stake the opportunity to resolvebusiness disputes in secret hearingsbefore Delaware’s Chancery Courtjudges in courtrooms for so-called“arbitrations” that produced enforceablelegal judgments.

For these proceedings, the courtroom

would be closed to the public and theoutcome would be secret.

The Delaware Supreme Court couldhowever review judgments but it is notclear whether appeals would also beconfidential.

The system gained little notice until2011, when a merger dispute involvingSkyworks Solutions and AdvancedAnalogic Technologies prompted agroup called the Coalition for OpenGovernment to accuse the court of“secret justice for wealthy companies”.

A federal judge conceded the legislationviolated the public’s right of access tocivil proceedings under the FirstAmendment. A divided appellate courtconcurred the law was unconstitutional.New calls to reinstate the practice,outlawed in 2012, have promptedobjections from campaigners and majorUS news organisations. The New YorkTimes observed the situation inDelaware points to a broader problem:the increasing privatisation of judgingand closing of access to courts.

Delaware secret court hearings

Chambers is sad to report the death ofSir Richard Ground QC OBE, Bermuda’sformer Chief Justice, who passed awayin February at the age of 64. SirRichard had a long and distinguishedcareer in the judiciary of the OverseasTerritories.

He sat on Bermuda’s Supreme Court

Queen’s Birthday honours inrecognition of his achievements duringan eight-year tenure as Bermuda’sChief Justice. His successor, Hon MrJustice Ian Kawaley, described SirRichard as a model modern judge who“set exceptionally high standards offairness and clarity of reasoning”.

bench as a Puisne Judge for six years.Then he was Chief Justice in the Turksand Caicos Islands for a further sixyears between 1998 and 2004. Nextfrom 2004 to 2012 he was Chief Justiceof Bermuda.

Following retirement in March 2012,he received a knighthood in the

Sir Richard Ground QC OBE

‘So much damage’ afterstenographer misconductA Manhattan court stenographer wentrogue during a high-profile criminaltrial repeatedly typing, “I hate my job, Ihate my job, I hate my job” instead ofthe trial dialogue, the New York Postreported in April. Daniel Kochanski,who has since been fired formisconduct, wreaked havoc on some30 cases. A high-profile source told thenewspaper his “gibberish” typing mayhave jeopardised multiple convictions,prompting judges to hold‘reconstruction hearings’. “I never hada situation where a single court

reporter was responsible for so muchdamage,” Claudia Trupp from theCentre for Appellate Litigation said.

RECONSTRUCTION HEARINGS NOW NEEDED IN NYC

The Insolvency Service conducted anInsolvency Practitioner regulationand fee structure consultation whichclosed on 28 March and feedback iscurrently being analysed. The consultation set out ways to

strengthen the regulation of IPs, byintroducing regulatory objectivesand giving the oversight regulatoradditional powers to deal with failureto comply with the objectives. It also included proposals to

change the ways an IP can chargefees to ensure that money isavailable to pay creditors.

Insolvencyconsultation

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SOUTH SQUARE CHALLENGEWelcome to the May 2014 South Square Challenge. This is similar but not quite the same as previous challenges. In thisinternational age, Members of Chambers have obviously appeared in the courts of or advised in or about matters in numerouscountries and territories outside England and Wales. Obvious ones include Cayman, Bermuda, the Bahamas, BVI, Hong Kong,Singapore, Jersey, Guernsey, Scotland, Ireland and the like. So this challenge is called Maps and Flags. Each pair of imagesrepresents the map and flag of a country or territory (not any of the ones mentioned above!) where one or more members has hadan involvement. Of course they are some of the more obscure ones. All you have to do is work out which country each of the eightpairs of images represents. As always for the winner (if necessary drawn from the wig tin), a magnum of champagne. And themuch coveted South Square umbrella. Please send your answers to [email protected] or by post to Kirsten at theaddress on the back page. Entries by Friday 20 June 2014 please. Good luck. David Alexander QC

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FEBRUARY CHALLENGEThe correct answers to the February 2014 South Square Challenge were (1) The White Book (2) Gore-Browne on Companies (3) Chitty onContracts (4) Bowstead & Reynolds on Agency (5) Clark & Lindsell on Torts (6) Sealy and Milman: Annotated Guide to the InsolvencyLegislation (7) Dicey and Morris on Conflict of Laws and (8) Mortimore on Company Directors. The connection was that they are, of course, alllegal books. As for the winner, it is a joint entry from Jane Cary and Danny Schaffer at Isadore Goldman to whom go our congratulations, amagnum of champagne and an ever-useful South Square umbrella.

Diary Dates

South Square members will be attending, speaking at and/or chairing the following events.

We look forward to seeing you at one or more of them.

R3 and INSOL Europe International Restructuring Conference1 May - Hilton Tower Bridge, London

R3 Annual Conference14-16 May - Vilamoura, Portugal

III 14th Annual International Insolvency Conference 9-10 June - Mexico City

INSOL International Channel Islands One Day Seminar 12 June - Jersey

INSOL Europe Annual Congress9-12 October - Istanbul, Turkey

South Square also runs a programme of in-house seminars and talks -both in Chambers and onsite at our client premises - covering important

recent decisions in our specialist areas of practice as well as topicsspecifically requested by clients. For more information, contact

[email protected], or visit our website www.southsquare.com.

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Michael Crystal QC

Christopher Brougham QC

Gabriel Moss QC

Simon Mortimore QC

Richard Adkins QC

Richard Sheldon QC

Richard Hacker QC

Robin Knowles CBE QC

Mark Phillips QC

Robin Dicker QC

William Trower QC

Martin Pascoe QC

Fidelis Oditah QC

David Alexander QC

Antony Zacaroli QC

Glen Davis QC

Barry Isaacs QC

Felicity Toube QC

Mark Arnold QC

Jeremy Goldring QC

Lucy Frazer QC

David Allison QC

Tom Smith QC

John Briggs

Adam Goodison

Hilary Stonefrost

Lloyd Tamlyn

Daniel Bayfield

Richard Fisher

Stephen Robins

Joanna Perkins

Marcus Haywood

Hannah Thornley

William Willson

Georgina Peters

Adam Al-Attar

Henry Phillips

Charlotte Cooke

Alexander Riddiford

Matthew Abraham

Toby Brown

Legal 500

SOUTH SQUARE PROVIDES ‘A WORLD CLASS SERVICE’

3-4 South Square Gray’s Inn London WC1R 5HP UKTel. +44 (0)20 7696 9900. Fax +44 (0)20 7696 9911. LDE 338 Chancery Lane. Email [email protected]

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