D IG E S T - South Square | Barristers Chambers Square Digest June 2015.pdf · S O U T H D IG E S T...

DIGESTSOUTH SQUARE

www.southsquare.comJUNE 2015

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

The Apcoaschemes of

arrangement

City LinkLessons to be

learned

focus onAustralia &New Zealand

Piercing theCorporate Veil

The Court ofAppeal hands

down WaterfallJudgment

DIGESTSOUTH SQUAREDIGESTSOUTH SQUARE

Butterworths Insolvency Law HandbookSeventeenth Edition Edited by Glen Davis QC and Marcus Haywood

Reed Elsevier (UK) Limited trading as LexisNexis. Registered offi ce 1-3 Strand London WC2N 5JR Registered in England number 2746621 VAT Registered No. GB 730 8595 20. LexisNexis and the Knowledge Burst logo are trademarks of Reed Elsevier Properties Inc. © LexisNexis 2015 0415-071. The information in this document is current as of 04-15 and is subject to change without notice.

Butterworths Insolvency Law Handbook is the most comprehensive single collection of statutory source material and practice directions relating to insolvency law in England, Wales and Scotland. It is the essential reference source for lawyers, accountants, insolvency practitioners, regulators and students.

Why Butterworths Insolvency Law Handbook?

statutory instruments and European legislation

printed as currently in force with all amendments, repeals and revocations

commencement as well as cross-references to other legislation, commencement tables and forms tables

and industry recognised layout

What’s New?The 17th Edition will refl ect recent legislative updates, including:

relevant legislation made by the Small Business, Enterprise

Lexis®Note. Take it personally.

other titles from the Butterworths Handbook Series

next edition

Publication details:

Formats available:

For more information: www.lexisnexis.co.uk/lnssd

[email protected]

+44 (0)845 370 1234 When placing your order, please quote your unique code 20415.

3

JUNE 2015 SOUTH SQUARE DIGEST

JUNE 2015

7

MAY 2015 SOUTH SQUARE DIGEST

6

APCOA

The Apcoa schemes ofarrangement Class composition and new obligationsby Daniel Bayfield and South Square pupil barrister, Ryan Perkins.

AbstractThis article discusses the recent caseof Re Apcoa Parking Holdings GmbH& Ors [2014] EWHC 3849 (Ch), inwhich Hildyard J sanctioned schemesof arrangement (the schemes)between nine companies in the Apcoagroup (the scheme companies) andtheir main creditors. The schemeswere contested at both the conveninghearing and the sanction hearing by aminority creditor (FMS). Apcoa is thelatest case to consider the court’sjurisdiction to sanction schemes ofarrangement in relation to foreigncompanies, and has attractedsignificant attention in this regard:see e.g. Pacey, “APCOA schemes ofarrangement: take II”, Insolv Int(2015) 28(2) at 29-31. The judgment inApcoa also discusses the nature ofclass composition and the difficultiesassociated with seeking to useschemes of arrangement to imposenew obligations on creditors. Thepresent article focuses on the lattertwo issues.

I. IntroductionThe financing structureThe debt targeted by the schemes fellinto three basic categories: seniordebt (of which EUR 660m wasoutstanding), second lien debt (ofwhich EUR 68m was outstanding),and so-called super senior debt (ofwhich EUR 34m was outstanding).The senior debt and the second liendebt were secured on the Apcoagroup’s assets pursuant to the termsof an intercreditor agreementgoverned by German law (the ICA).As its name suggests, the second liendebt was subordinated behind thesenior debt. All nine schemecompanies were obligors in respect ofthe senior debt and second lien debt,but only two scheme companies wereobligors in respect of the super seniordebt. FMS, which opposed theschemes, held approximately 8% ofthe senior debt. A distressed debtfund (Centerbridge) held 56% of thesenior debt and 89% of the supersenior debt.

Notwithstanding the name given toit, the super senior debt was in factunsecured and not super senior asregards all of the senior debt. The ICAdid not provide for a contractualsubordination of the senior debtbehind the super senior debt, or anyform of structural subordination.Rather, the senior lenders – with theimportant exceptions of FMS andanother minority creditor (Litespeed)– had entered into a turnoveragreement with the super seniorlenders and with the two schemecompanies which were obligors inrespect of the super senior debt.Pursuant to the turnover agreement,each consenting senior lender wasobliged to remit (or “turn over”) anyrecoveries it received in respect ofthe senior debt to the super seniorlenders (primarily Centerbridge),until the super senior debt wasdischarged in full. Because FMS wasnot a party to the turnoveragreement, its share of the seniordebt would, in insolvency

proceedings, be paid in priority to thesuper senior debt. (Adding a furtherlayer of complication, the turnoveragreement was terminated before theconvening hearing took place andreplaced with a materially identicalturnover agreement to which none ofthe Apcoa companies was a party.The significance of this fact isdiscussed below.)

For the purposes of this article, theprecise details of the schemes areirrelevant. The essential point is thatthe schemes provided for the supersenior debt to be fully repaid in cash,whereas the senior debt (includingthe senior debt owned by FMS) was toreceive less favourable treatment.One part of the senior debt was to be(contractually) subordinated behindnew super senior debt and thebalance of the senior debt was to be

“hived up” to a new holdingcompany, so as to facilitate thedeleveraging of balance sheets at theoperating company level. This hadthe effect of structurallysubordinating the hived-up seniordebt behind the liabilities of theoperating companies in the Apcoagroup. The schemes formed part of awider restructuring involving a debtfor equity swap in favour of thesenior lenders. (An earlier “amendand extend” scheme in relation to theApcoa group was sanctioned inprevious proceedings: see [2014] BCC

538.)

II. Class compositionThe testAt the convening hearing, the schemecompanies argued that the seniorlenders should be treated asconstituting a single class. FMSargued that it should not be placedinto a class containing the consentingsenior lenders, because theconsenting senior lenders, unlikeFMS, had already consented to thesubordination of their senior debtsuch that they were not, in

APCOA IS PRESENTLY THE MARKET LEADING PROVIDER OF CAR PARKING (BY NUMBER OF SPACES MANAGED) IN GERMANY (225,000 SPACES), NORWAY (96,900), DENMARK (61,900), AUSTRIA (48,100), ITALY (42,400), AND POLAND (12,600)

Notwithstanding its name, the super senior debt did not rank in priority to allof the senior debt.

Key Points:• It would seem, following Hildyard J’s reasoning in Apcoa, that if intercreditor subordination isachieved through turnover arrangements, certain class issues might be avoided.

• New obligations cannot be imposed through a scheme – and schemes which purport to extendthe duration of lending commitments in respect of revolving credit facilities, for example, willneed to be scrutinised with real care.

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12

WATERFALL APPLICATION

Court of Appeal handsdown judgment in theWaterfall appealIn re Lehman Brothers International (Europe) (inadministration)[2015] EWCA Civ 485. Alexander Riddiford

On 14 May 2015 the Court of Appeal handeddown its judgment in the appeals against thedecision of David Richards J in In re LehmanBros International (Europe) (in administration)(No 4) [2014] EWHC 7004 (Ch), [2015] Ch 1.

This was an application, which has come tobe known as the “Waterfall Application”,brought by the joint administrators of threecompanies in the Lehman group inadministration for the determination of anumber of issues that have arisen in veryunusual circumstances, in particular: (a) oneof the companies (LBIE) being an unlimitedcompany with a surplus arising in itsadministration; and (b) that company’smembers (LBHI2 and LBL) having unlimitedliability as contributories.

The Waterfall Application takes its namefrom the order (or “waterfall”) for paymentout of the assets of a company in liquidationor distributing administration. This order ofpriority was summarized by Lord Neubergerof Abbotsbury PSC in Re Nortel GmbH [2013]UKSC 52, [2014] AC 209, at [39], as follows:

(1) Fixed charge creditors;(2) Expenses of the insolvency

proceedings;(3) Preferential creditors;(4) Floating charge creditors;(5) Unsecured provable debts;(6) Statutory interest;

(7) Non-provable liabilities; and(8) Shareholders.The ten appeals before the Court of Appeal

(each of David Richards J’s directions wasappealed) concerned what exactly is tohappen, in the circumstances of LBIE’sadministration, with the surplus left after theestate has discharged all proved debts in full,i.e. category (5) in Lord Neuberger’s waterfall.The issues fall broadly into four categories, asset out in Sections A to D below.

Subordinated debtThe first issue before the Court of Appealconcerned the ranking in the waterfall of thesubordinated debt owed by LBIE to LBHI2, i.e.whether it ranked immediately after thepayment in full of proved debts (as category5A) or immediately after non-provableliabilities (as category 7A).

The subordinated debt formed part ofLBIE’s regulatory capital for the purposes ofcapital adequacy rules (whose principal aim isto ensure that firms provide financialresources to protect their customers againstfailure). The loan was made on a formapproved by the FSA which was printed aspart of the Interim Prudential Sourcebook(INPRU), the document that set out thefinancial resources requirements applicable toLBIE at the relevant time.

The extent of the subordinated debt’ssubordination was established by clause 5 ofthe subordinated debt agreement (the “SDA”),which set out (inter alia) the conditionsqualifying LBHI2’s right to repayment. Thecritical question of construction was whethernon-provable claims are capable of being“established or determined in the Insolvency”for the purposes of the condition provided byclause 5(2)(a) of the SDA.

The Court of Appeal, construing the SDA inthe context of its specific regulatory purpose,decided unanimously that the LBHI2’s claimsunder the SDA were provable but rankedimmediately after the payment of non-provable liabilities (as category 7A). This wasbecause, on the proper construction of theterms of the SDA, the subordinated debt isrepayable on conditions that include (a)payment of statutory interest and (b) paymentof any non-provable liabilities. Such claimsmay be proved as contingent claims along

with other provable debts but the proofs mustbe valued so as to take account of bothcontingencies (a) and (b). As a result,according to Lewison LJ at [62], the “lodging ofa proof will not adversely affect thesubordination”.

Currency conversion claimsThe next issues for the Court of Appealconcerned the existence and nature of whathas become known as “currency conversionclaims” (or “CCCs”). The issues were:

(1) Whether, if a creditor receives less insterling on its proved debt than it would havereceived in the foreign currency in which itsclaim was originally denominated (as a resultof an adverse FX movement between the dateof conversion to sterling and the date ofpayment in sterling of the proved debt), thecompany is liable to pay the shortfall; and

(2) If so, where this liability ranks in thewaterfall.

THE WATERFALL APPLICATIONTAKES ITS NAME FROM THEORDER (OR “WATERFALL”) FORPAYMENT OUT OF THE ASSETSOF A COMPANY IN LIQUIDATION OR DISTRIBUTINGADMINISTRATION.

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CORPORATE VEIL

PPiieerrcciinngg tthheeCCoorrppoorraattee VVeeiillMarcus Haywood and his pupil, Oberon Kwok, explore the ways in which thecorporate veil can be bypassed in the aftermath of two Supreme Court decisions.

IntroductionIn what circumstances can thecorporate veil be pierced or lifted?This article reflects on the decisionsof the Supreme Court in VTB Capitalplc v Nutritek International Corp[2013] 2 A.C. 337 and Prest v PetrodelResources Ltd [2013] 2 A.C. 415. Prestin particular laid down arationalisation of past cases in whichcourts have disregarded the doctrineof separate corporate personality - adoctrine laid down more than acentury ago by the House of Lords inSalomon v A Salomon & Co Ltd [1897]AC 22.

The Decisions in VTB and PrestIn VTB, VTB advanced loan monies toRAP to purchase certain propertiesfrom Nutritek. The contract wasgoverned by English law andcontained an English non-exclusivejurisdiction clause. The loan wasalleged to have been induced byfraudulent misrepresentations fromNutritek. Given that RAP andNutritek were both non-EU

companies, VTB sought and obtainedpermission to serve claims inconspiracy and deceit against,amongst others, Mr Malofeev, whowas the ultimate controller of bothRAP and Nutritek. The defendantsapplied to set aside service.

Putting the issue of forum nonconveniens aside, VTB argued in theSupreme Court that Mr Malofeevcould be held liable for breach of theagreements on the basis that thecorporate veil could be pierced, thusestablishing the jurisdiction to serveout on Mr Malofeev. In effect, VTBargued that Mr Malofeev should betreated as if he were, or had been, aco-contracting party with RAP underthe relevant agreements. TheSupreme Court rejected thatambitious argument.

Lord Neuberger (with whom theother members of the Supreme Courtagreed) held that for Mr Malofeev tobe treated as a joint contractingparty alongside his company wouldbe contrary to Salomon v A Salomon,for a company must be “treated as

being a person by the law in the sameway as a human being” ([138]).Moreover, none of the partiesobjectively intended Mr Malofeev tobe a contracting party ([140]). Norcould it be said, on the facts, that RAPwas a mere façade for Mr Malofeev([142]-[143]). In Lord Neuberger’sview, if the corporate veil is to bepierced, “the true facts” must meanthat, in reality, it is the personbehind the company, rather than thecompany, which is the relevant actoror recipient (as the case may be). Bycontrast, here, on VTB’s case, “thetrue facts” related to the control,trading performance or to thegenuineness of the nature of theunderlying arrangement. None ofthese features could be said toinvolve RAP being used as a “façadeto conceal the true facts”. Anextension of the court’s jurisdictionto pierce the corporate veil in thesecircumstances was contrary toauthority and principle ([145]).

In VTB the Supreme Courtexpressly left open the question of

whether, unless a statute expresslyor impliedly provides otherwise, thecourt could pierce the corporate veilat all ([130]).

A few months afterwards, theSupreme Court handed downjudgment in Prest. That was a claimfor ancillary relief by a wife for theassets owned by her husband’scompany. The question for theSupreme Court was whether thecompany’s assets could be treated asher husband’s. The Court ultimatelyallowed the claim on the basis thatthe husband was the beneficialowner of the property under aresulting trust. However, it rejectedthe wife’s argument that thecorporate veil could be pierced.

In Prest the Supreme Courtanswered the question it had leftopen in VTB and accepted that therewas a limited power to pierce thecorporate veil and to disregard theseparate personality of a company.

In Lord Sumption’s view that powerwas necessary if the law were not tobe disarmed in the face of abuse,provided that the limits wererecognised and respected.

Lord Sumption drew a distinctionbetween lifting and piercing the veil([16]). Lifting the veil concernedsituations in which the controller ofthe company can be held to bepersonally liable withoutdisregarding the company’s separatepersonality. The court could look tosee who the real actors in atransaction were, pursuant to whathe termed the “concealmentprinciple” ([28]). The concealmentprinciple could be invoked a

company or perhaps severalcompanies had been interposed so asto conceal the identity of the realactors. This would not deter thecourts from identifying those realactors, assuming that their identitywas legally relevant. In these casesthe court is not disregarding the veil,but only looking behind it to discoverthe facts which the corporatestructure is concealing.

Piercing the veil concerned “trueexceptions” to Salomon; that is, thelimited situations where the owneror controller of a company isidentified with the company byvirtue of his ownership and control([16]). The court could pierce the veil

THE REAL ACTORS BEHIND A COMPANY CANNOT BE HIDDEN FROM THE COURT

It is veil-lifting, not the court’s insistence onthe corporate veil, that accords with common sense and justice (Conway v Ratiu)

12

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CASE DIGESTS

Banking and Finance p23Civil Procedure p24Commercial Litigation p26Company Law p28Corporate Insolvency p31Personal Insolvency p34Property and Trusts p36Sport p38

FEATURE ARTICLES

The Apcoa schemes of arrangementDaniel Bayfield an pupil Ryan Perkins lookat class composition and new obligationsfollowing Apcoa p6

Court of Appeal hands downWaterfall judgmentAlexander Riddiford reports on the recentcourt of appeal in In re Lehman BrothersInternational (Europe) (in administration) [2015]EWCA Civ 485 p12

City Link-Lessons to be learnedA Report suggests that the example of City Linkmakes an overwhelming case for improvementsto legislation and practice to protect workers,writes Charlotte Cooke p18

Piercing the Corporate VeilMarcus Haywood and his pupil, Oberon Kwok,explore the ways in which the corporate veil canbe bypassed in the aftermath of two SupremeCourt decisions p40

FOCUS - AUSTRALIA & NEW ZEALAND

Allens insolvency Update. Recentdevelopments in AustraliaAllen’s Chris Prestwich and PrzemekKucharski report on the vexing issue of“vesting”: the Personal Property Securities Act

p46

Directors defence costs deniedNew Zealand Supreme Court rulings clarify thirdparty rights to insurance monies. Murray Tingeyand Tim Fitzgerald of Bell Gully report p53

REGULARS

From the Editor p4EEC/EEA Update p76News in Brief p78South Square Challenge p84Diary Dates p86

DIGESTSOUTH SQUARE

www.southsquare.comJUNE 2015

A REGULAR REVIEW OF NEWS, CASES AND ARTICLES FROM SSOOUUTTHH SSQQUUAARREE BBAARRRRIISSTTEERRSS

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DIGESTSOUTH SQUAREDIGESTSOUTH SQUARE

SYDNEY HARBOUR AT SUNSETINSOL’S TENTH WORLD INTERNATIONAL

CONGRESS TAKES PLACE IN SYDNEY

Samba and its implications forinsolvency practitionersDavid Alexander QC and Stephen Robinsconsiders the decision of the Court of Appeal inAkers v Samba Financial Group p58

The Banana BankruptWilliam Willson considers the decision in JSCBank of Moscow v Kekhman & Ors [2015] EWHC396 (Ch) p62

Plus c !a change.... ? Recent insolvencyrelated legislative reformsButterworths’ Insolvency Law Handbook editors,Glen Davis QC & Marcus Haywood, describesome of the recent insolvency related legislativechanges p66

South Square at The WallaceCollectionSouth Square’s Spring party p70

40

COVER STORY

2015 COMBARSingapore Round Table EventMatthew Abraham reports p72

INSOL San FranciscoWe report on South Square’s attendance at Insolin San Franciso p74

In this issueButterworths Insolvency Law HandbookSeventeenth Edition Edited by Glen Davis QC and Marcus Haywood

Reed Elsevier (UK) Limited trading as LexisNexis. Registered offi ce 1-3 Strand London WC2N 5JR Registered in England number 2746621 VAT Registered No. GB 730 8595 20. LexisNexis and the Knowledge Burst logo are trademarks of Reed Elsevier Properties Inc. © LexisNexis 2015 0415-071. The information in this document is current as of 04-15 and is subject to change without notice.

Butterworths Insolvency Law Handbook is the most comprehensive single collection of statutory source material and practice directions relating to insolvency law in England, Wales and Scotland. It is the essential reference source for lawyers, accountants, insolvencypractitioners, regulators and students.

Why Butterworths Insolvency Law Handbook?

statutory instruments and European legislation

printed as currently in force with all amendments, repeals and revocations

commencement as well as cross-references to other legislation, commencement tables and forms tables

and industry recognised layout

What’s New?The 17th Edition will refl ect recent legislative updates, including:

relevant legislation made by the Small Business, Enterprise

Lexis®Note. Take it personally.

other titles from the Butterworths Handbook Series

next edition

Publication details:

Formats available:

For more information: www.lexisnexis.co.uk/lnssd

[email protected]

+44 (0)845 370 1234When placing your order, please quote your unique code 20415.

4

FROM THE EDITORDAVID ALEXANDER QC

In the last Digest editorial I said that by the time wegot to the election on May 7 2015, we were probablyall going to be pretty fed up with it. How true thatwas, the general verdict being that it was a dullcampaign.

The same cannot, however, be said for the result.The polls had led us to believe right up until the lastminute that we were on for a heavily hungParliament. How wrong they were from the momentthe exit poll was released at 10pm on that Thursdaynight. What’s more the events that unfolded over thenext 24 hours were even more extraordinary.

The Tories crept towards an overall majority andeventually got a small one to what must have beengreat jubilation among all Conservatives, in particular

our own Lucy Frazer QC who was elected as MP forSouth East Cambridgeshire with a majority of morethan 16,000. Labour had a poor night - doing worsethan Gordon Brown had done, indeed worse than inany election since Neil Kinnock lost to John Major in1992. They also lost some big names - Ed Balls,Douglas Alexander and Jim Murphy to name butthree. For the Lib Dems, being in coalition with theTories seems to have been nothing short of a disasterelectorally. They lost 49 MPs and were left with justeight of a previous 57. They also lost big names -Vince Cable, Danny Alexander and Charles Kennedyfor example. Nigel Farage’s party polled somethinglike 3.8 million votes (about 12.6% of the whole) butgot just one seat, with Farage himself not winning inThanet South. The Greens polled 1.1 million (3.8% ofthe whole) and also only got one seat. But up inScotland Nicola Sturgeon’s party turned that countrySNP yellow with only 4.8% of the whole UK vote butwinning all but three (56 out of 59) of the Scottishseats. I am not sure that everything adds up here. Itseems to me that there may be some people who arelegitimately disenchanted with our first past the postsystem.

So next the country was presented with a slew ofresignations. Farage said that he was a man of hisword and having not won his seat he resigned(though he held the door open to a return after asummer break and then UKIP refused his resignationso he stayed on). Ed Miliband took full responsibilityfor Labour’s defeat after his slip at the interview andhis “Ed Stone” moment and fell on his sword

Tory turn up forthe books..

THE EDSTONE WAS INTENDEDTO BE DESTINED FOR THEGARDEN OF NO. 10

http://www.southsquare.com/david-alexander-qc

So what of this edition of the Digest? As alwaysthere is lots to read. We have Dan Bayfield and RyanPerkins, the latter a pupil in Chambers, on the ApcoaSchemes of Arrangement, class composition and newobligations. We also have Alexander Riddiford on theCourt of Appeal’s recent decision on the WaterfallAppeal and Charlotte Cooke on lessons to be learnedfrom City Link. In addition there is Marcus Haywood,together with another pupil in Chambers, OberonKwok, on piercing the Corporate Veil. Then there is anarticle by Stephen Robins and myself on the Court ofAppeal decision in Samba and its implications for IPs,as well as an article by William Willson entitled “TheBanana Bankrupt”. Finally there is an article by GlenDavis QC and Marcus Haywood on recent insolvencylegislative changes that feature in the newButterworths Insolvency Law Handbook.

As regards our normal offshore sections, this timewe have contributions from Allens in Sydney (whereINSOL’s Tenth World International Congress will takeplace on 19-22 March 2017) and Bell Gully in NewZealand, a report from Mathew Abraham on aCOMBAR Singapore Roundtable and something onINSOL in San Francisco. In addition we have GabrielMoss QC’s latest update from Euroland, the usualCase Digests section, this time edited by HilaryStonefrost, a report on South Square’s recentreception at the Wallace Collection, news in brief(including on the upcoming INSOL event in Bermudain June 2015), the South Square Challenge and diarydates.

As ever I hope that you find something of interest toyou in this edition of the Digest. If you wish to beadded to the circulation for future editions of theDigest (and it is free) please just [email protected] and we will do ourbest to ensure that you get the next edition of theDigest promptly. We at South Square wish you all agood summer until then.

5


SOUTH SQUARE DIGEST IS PUBLISHED BY SOUTH SQUARE, 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.

(although he is apparently going to stay on in politicsfollowing the leads of William Hague and Iain DuncanSmith). Nick Clegg also quit as leader of the LibDems. These were scenes that no one had seen foryears (all three resignations on Friday 8th May camewithin about an hour of each other). And the wholeday brought about a surge in the £ and the markets.

So what now? Well I guess all the Englishopposition parties will have to pick themselves upand start preparing for the 2020 election. In themeantime, the next two years I suspect will bedominated by whether Cameron can re-negotiate theUK’s position inside Europe and, once that has beendone (assuming our partners there will agree tochange), whether the UK should stay in or out ofEurope. So, perhaps to the dismay of some, politicswill go on for us all even outside of a generalelection.

So what has happened of note in the last fewmonths beyond the election sphere? Three positiveevents stand out. First, the US and Cuba seem tohave reached some form of rapprochement, with thetwo countries having the first high-level meetings inhalf a century. Second, we got a new royal baby,Princess Charlotte who, probably conveniently for theConservatives, arrived just in time to make peoplefeel a little bit better. Finally we had VE Daycelebrations almost immediately after the election tohonour those who enabled us now to live in a freecountry.

LUCY FRAZER QC MP WITHHOME SECRETARY THERESAMAY

FARAGE’S UKIP POLLED 3.8MILLION VOTES FOR ONE SEAT

6

APCOA

The Apcoa schemes ofarrangement Class composition and new obligationsby Daniel Bayfield and South Square pupil barrister, Ryan Perkins.

AbstractThis article discusses the recent caseof Re Apcoa Parking Holdings GmbH& Ors [2014] EWHC 3849 (Ch), inwhich Hildyard J sanctioned schemesof arrangement (the schemes)between nine companies in the Apcoagroup (the scheme companies) andtheir main creditors. The schemeswere contested at both the conveninghearing and the sanction hearing by aminority creditor (FMS). Apcoa is thelatest case to consider the court’sjurisdiction to sanction schemes ofarrangement in relation to foreigncompanies, and has attractedsignificant attention in this regard:see e.g. Pacey, “APCOA schemes ofarrangement: take II”, Insolv Int(2015) 28(2) at 29-31. The judgment inApcoa also discusses the nature ofclass composition and the difficultiesassociated with seeking to useschemes of arrangement to imposenew obligations on creditors. Thepresent article focuses on the lattertwo issues.

I. IntroductionThe financing structureThe debt targeted by the schemes fellinto three basic categories: seniordebt (of which EUR 660m wasoutstanding), second lien debt (ofwhich EUR 68m was outstanding),and so-called super senior debt (ofwhich EUR 34m was outstanding).The senior debt and the second liendebt were secured on the Apcoagroup’s assets pursuant to the termsof an intercreditor agreementgoverned by German law (the ICA).As its name suggests, the second liendebt was subordinated behind thesenior debt. All nine schemecompanies were obligors in respect ofthe senior debt and second lien debt,but only two scheme companies wereobligors in respect of the super seniordebt. FMS, which opposed theschemes, held approximately 8% ofthe senior debt. A distressed debtfund (Centerbridge) held 56% of thesenior debt and 89% of the supersenior debt.

Notwithstanding the name given toit, the super senior debt was in factunsecured and not super senior asregards all of the senior debt. The ICAdid not provide for a contractualsubordination of the senior debtbehind the super senior debt, or anyform of structural subordination.Rather, the senior lenders – with theimportant exceptions of FMS andanother minority creditor (Litespeed)– had entered into a turnoveragreement with the super seniorlenders and with the two schemecompanies which were obligors inrespect of the super senior debt.Pursuant to the turnover agreement,each consenting senior lender wasobliged to remit (or “turn over”) anyrecoveries it received in respect ofthe senior debt to the super seniorlenders (primarily Centerbridge),until the super senior debt wasdischarged in full. Because FMS wasnot a party to the turnoveragreement, its share of the seniordebt would, in insolvency

Key Points• It would seem, following Hildyard J’s reasoning in Apcoa, that if intercreditor subordination isachieved through turnover arrangements, certain class issues might be avoided.

• New obligations cannot be imposed through a scheme – and schemes which purport to extendthe duration of lending commitments in respect of revolving credit facilities, for example, willneed to be scrutinised with real care.

http://www.southsquare.com/daniel-bayfield

http://www.bailii.org/ew/cases/EWHC/Ch/2014/3849.html

7


proceedings, be paid in priority to thesuper senior debt. (Adding a furtherlayer of complication, the turnoveragreement was terminated before theconvening hearing took place andreplaced with a materially identicalturnover agreement to which none ofthe Apcoa companies was a party.The significance of this fact isdiscussed below.)

For the purposes of this article, theprecise details of the schemes areirrelevant. The essential point is thatthe schemes provided for the supersenior debt to be fully repaid in cash,whereas the senior debt (includingthe senior debt owned by FMS) was toreceive less favourable treatment.One part of the senior debt was to be(contractually) subordinated behindnew super senior debt and thebalance of the senior debt was to be

“hived up” to a new holdingcompany, so as to facilitate thedeleveraging of balance sheets at theoperating company level. This had theeffect of structurally subordinatingthe hived-up senior debt behind theliabilities of the operating companiesin the Apcoa group. The schemesformed part of a wider restructuringinvolving a debt for equity swap infavour of the senior lenders. (Anearlier “amend and extend” schemein relation to the Apcoa group wassanctioned in previous proceedings:see [2014] BCC 538.)

II. Class compositionThe TestAt the convening hearing, the schemecompanies argued that the seniorlenders should be treated asconstituting a single class. FMSargued that it should not be placedinto a class containing the consentingsenior lenders, because theconsenting senior lenders, unlikeFMS, had already consented to thesubordination of their senior debtsuch that they were not, infundamental respects, interested inthe proposed schemes. If accepted,

APCOA IS PRESENTLY THE MARKET LEADING PROVIDER OF CAR PARKING (BY NUMBER OF SPACES MANAGED) IN GERMANY (225,000 SPACES), NORWAY (96,900), DENMARK (61,900), AUSTRIA (48,100), ITALY (42,400), AND POLAND (12,600)

Notwithstanding its name, the super senior debt did not rank in priority to allof the senior debt

8

APCOA

It is arguably artificial to treat turnoversubordination differently from othertypes of subordination

failed, there would be more to dividethan to unite FMS and the othersenior creditors. The secondcomponent of this test appears to be anovel reformulation of the traditionalrule that “persons whose rights are sodissimilar that they cannot sensiblyconsult together with a view to theircommon interest must be givenseparate meetings”: see UDL HoldingsLtd [2002] 1 HKC 172 at [27] (per LordMillett).

The Effect of the Turnover Agreement FMS argued that its legal rights werematerially dissimilar from the legalrights of the consenting seniorlenders who had acceded to theturnover agreement, on the basis thatsuch consenting senior lendersranked lower in the priority waterfallthan FMS (as a matter of substance).The court rejected this argument.Hildyard J held that although theturnover agreement modified therights of the consenting seniorlenders and the super senior lendersinter se, it had no material effect onthe rights of anyone against thescheme companies. The turnoveragreement metaphorically operated“behind the curtain” [92]. Classcomposition is traditionallydetermined by reference to creditors’rights against the company itself,rather than their rights inter se.

In response to this argument, FMSobserved that two scheme companies(which acted as obligors in relation tothe super senior debt) were, in fact,parties to the turnover agreement.These two companies assumed newobligations towards the super seniorlenders in the turnover agreement,including covenants governing thedistribution of repayments and

prepayments of the senior debt andsuper senior debt. Further, in an ill-drafted clause, the two schemecompanies prospectively consented toa novation of the super senior debt tothe consenting senior lenders undercertain circumstances. However,Hildyard J held that the joinder of thetwo scheme companies to theturnover agreement was merely“nominal”, and did not confer rightsof any significance against thescheme companies in question.

Hildyard J’s reasoning may proveto have significant practicalimplications. It is not uncommon forlegal advisors to draft intercreditoragreements between the creditors ofa distressed company. If intercreditorsubordination is achieved throughturnover arrangements rather than(e.g.) structural subordination, ascheme of arrangement will be mucheasier to implement: there will befewer classes and less opportunity forminority veto. (As to structuralsubordination, see Wood, ProjectFinance, Securitisations andSubordinated Debt (2nd Edition,2007), Part III).

On the other hand, until the Courtof Appeal considers the issue, it isimpossible to be certain. Arguably, itis artificial to treat turnoversubordination in a fundamentallydifferent manner from other types ofsubordination, given that all forms ofsubordination are aimed at the samebasic objective (viz. the consensualmodification of priorities ininsolvency). For example, consider atraditional contractual subordination,where the junior creditor covenantswith the debtor that his debt will notbe payable until the senior creditorhas been paid in full (as in ReMaxwell Communications Corp plc(No 2) [1993] 1 WLR 1402 at 1411-12).If ten tranches of debt arecontractually subordinated in thismanner, a scheme of arrangementmay necessitate the division ofcreditors into ten classes: but if

FMS’s argument would have enabledit to have blocked the schemes.

After reviewing the authorities,Hildyard J held that class compositionshould be determined as follows:

“The modern approach … is tobreak the question into two parts, andask first whether there is anydifference between the creditors inpoint of strict legal right … and ifthere is, to postulate, by reference tothe alternative if the scheme were tofail, whether objectively there wouldbe more to unite than divide thecreditors in the proposed class,ignoring for that purpose any personalor extraneous motivation operating inthe case of any particular creditor(s).”[52]

Thus, FMS was required to proveboth (i) that there was a differencebetween FMS and the consentingsenior lenders “in point of strict legalright” and (ii) that, if the schemes

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substantially the same effect isinstead achieved through turnoverarrangements to which the debtorcompany is not a party, there may beonly one class of creditors. It isdifficult to conceive of a plausiblepolicy rationale for this outcome.

Furthermore, if creditors’ rightsagainst third parties are irrelevant toclass composition, then creditors witha claim against a solvent guarantor(in addition to a claim against thescheme company as principal debtor)can fall within the same class ascreditors without the benefit of sucha guarantee. Given that a scheme canbe used to release claims againstthird party guarantors (Re LehmanBrothers (International) Europe [2010]] BCC 272 at [63]-[65]), this might beconsidered to be an undesirableoutcome.

Termination of the TurnoverAgreementSeveral months after the turnoveragreement was executed, theconsenting senior lenders and thesuper senior lenders entered into alock-up agreement, by which theparties made a binding covenant tovote in favour of the schemes, andnot to procure the enforcement ofany security. Thereafter, and prior tothe convening hearing, the turnoveragreement was terminated. In itsplace, the consenting senior lendersexecuted a new turnover agreement,which had been intentionallymodified to ensure that none of thescheme companies was a party to it.It was common ground that thesearrangements were designed toprevent any argument that FMS andLitespeed fell into a different classfrom Centerbridge and the otherconsenting senior lenders.

Hildyard J held that thetermination of the turnoveragreement was fatal to FMS’s case onclass constitution. Even if, contrary tothe judge’s primary view, theturnover agreement had the effect of

modifying the consenting seniorlenders’ rights in a material manner,the termination of the turnoveragreement was said to render anysuch modification otiose [93]. Inresponse, FMS contended that thelock-up agreement substantiallypreserved the effect of the turnoveragreement, by compelling theconsenting senior lenders to vote infavour of a restructuring whichreflected the order of prioritiescontained in the turnover agreementitself (at a time when the latteragreement had yet to be terminated).

The judge rejected this argument fora number of reasons. First, applyingRe Telewest Communications (No 1)[2005] 1 BCLC 752 at 769 (per DavidRichards J), the judge held that lock-up or voting agreements are usuallyirrelevant to class constitution:“though the lock-up agreementundoubtedly affected each party’senjoyment of the relevant rightsaffected (voting and enforcement), Iam not persuaded that it affected therights themselves” [100]. Second,Hildyard J found that the lock-upagreement was unlikely to have

DANIEL BAYFIELD

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APCOA

impose a new obligation on certainlenders which was outwith the scopeof a “compromise or arrangement” forthe purposes of Part 26 of theCompanies Act 2006.

FMS argued that creditor schemesof arrangement under Part 26 of theAct must amount to an arrangementbetween the company and itscreditors which varies the creditors’existing creditor rights and concernstheir position as creditors: Re T&NLtd [2006] 1 WLR 1728 at [45]; ReLehman Brothers International(Europe) [2010] BCC 272 at [63] - [66].It is not enough that what is proposedmight be characterised as anarrangement in a general sense. Itmust constitute a compromise orarrangement of the existing (actual orcontingent, present or future) rightsof the creditors: it is not a means bywhich creditors can be forced toundertake new and furtherobligations.

FMS made the point that at theheart of the reasoning of the Court ofAppeal in Re Lehman BrothersInternational (Europe) was that partof the proposed scheme did notinvolve the re-arrangement of therights of the creditors in theircapacity as such. Neither the fact thatthe creditors were creditors (whichwas assumed) nor the fact that thescheme would also affect their rightsas creditors in other ways was ananswer to the fact that the schemepurported to release the creditors’property rights which was somethingwhich was beyond the scope of Part26 because the release of propertyrights was not a variation of thecreditors’ rights as creditors.

After the hearing, Hildyard Jannounced that he had “… sufficient

concerns on both jurisdictional anddiscretional grounds that [he]wouldnot feel able to approve the schemesinsofar as they indirectly impose thenew obligations” [162]. In response,the scheme companies agreed toremove the offending provisionsfrom the schemes, which were thensanctioned in their modified form.

As a result of this concession by thescheme companies, Hildyard J did notconsider it “necessary or wise toexpress a final view” on the newobligations issue [163]. However,after reviewing a number of domesticand commonwealth authorities, thejudge commented:

“All I will say for the present is thatin my view, the imposition of a newobligation to third parties is verydifferent from the release in whole orin part of an obligation to such thirdparties. More generally, I am notpersuaded that obligations may beimposed under a scheme ofarrangement under Part 26: increditors’ schemes, it appears to melikely that the jurisdiction exists forthe purpose of varying the rights ofcreditors in their capacity as such, andnot imposing on such creditors newobligations.” [164]

It is suggested that the Judge wascorrect to take that view thecorrectness of which can bedemonstrated with reference to thetests which are applied at theconvening hearing and sanctionhearing stages of a creditor scheme ofarrangement:

At the convening hearing stage, thelaw requires that the rights of thoseincluded in a single class must be “notso dissimilar as to make it impossiblefor them to consult together with aview to their common interest”:Sovereign Life Assurance Co vDodd[1892] 2 QB 573 at 583 perBowen LJ. The application of this testrequires a consideration of: (a) therights of creditors in the absence ofthe scheme; and (b) any new rights towhich the creditors become entitled

altered the parties’ existing votingintentions. Finally, the judge rejectedthe suggestion that the termination ofthe existing turnover agreementinvolved any form of objectionableclass manipulation [173]. An attemptto prevent the proliferation of classesis not, in itself, objectionable (ibid).

It remains to be seen whether thedistinction between rights and theenjoyment of rights gains generalacceptance in the field. If A is asecured creditor whose rights ofsecurity are valid but unenforceable(e.g. due to illegality: see Paros Plc vWordlink Group Plc [2012] EWHC 394(Comm) at [80]), and B has anenforceable security interest in thesame asset, then it might beconsidered artificial to treat A and Bas members of the same class.

III. New obligationsOn one point, however, FMS wassuccessful. One of the senior facilitieswas known as the bank guaranteefacility. It operated in the followingmanner: (i) certain banks (known asissuing banks) would agree to act asguarantors in relation to theobligations of Apcoa groupcompanies; (ii) the issuing bankswere entitled to an indemnity fromthe bank guarantee lenders in respectof such guarantees; and (iii) the bankguarantee lenders were, in turn,entitled to an indemnity from thescheme companies.

In their original form, the schemesimposed an obligation upon the bankguarantee lenders to indemnify newand different issuing banks in respectof new guarantees issued by them fora period of up to six further years.FMS objected to this provision on thebasis, inter alia, that it purported to

Schemes exist for the purpose of varyingcreditors’ rights, not varying or imposingobligations

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under the scheme: Re T&N Limited(No. 4) [2007] Business LR 1411 at[86]. The focus is on rights, not onobligations because the jurisdiction toenter into an arrangement withcreditors exists for the purposes ofvarying rights, not varying orimposing obligations. It is, after all, ajurisdiction to sanction a compromiseor arrangement between a companyand its creditors, or any class of them.What makes a creditor a creditor isits rights against the schemecompany, not any obligations it mayowe.

At the sanction stage, the Courtmust consider, among other things,the fairness of the scheme. If ascheme could impose obligations onscheme creditors, it would makeconsideration of the fairness of thescheme all the more difficult for theCourt. For example, as DavidRichards J stated in Re T & N Ltd

[2005] 2 BCLC 488 at [82]: “While I am wary of laying down in

advance of a hearing on the merits ofany scheme or CVA any particularrule, there is one element which can bementioned at this stage. I find it verydifficult to envisage a case where thecourt would sanction a scheme ofarrangement, or not interfere with aCVA, which was an alternative to awinding up but which was likely toresult in creditors, or some of them,receiving less than they would in awinding up of a the company,assuming that the return in a windingup would in reality be achieved andwithin an acceptable time-scale: see ReEnglish, Scottish and AustralianChartered Bank [1893] 3 Ch 385.”

New obligations are not imposedon creditors in a winding-up suchthat the Court, when comparing theoutcome for a creditor on a windingup and under the scheme, is

comparing apples with apples. Ifnew obligations could be imposedthrough a scheme, the Court might becompelled to compare apples withpears.

A further feature of thejurisdiction which bears on thisquestion is the statutoryrequirement to secure the support of75% in value of the creditors (or ofeach of the relevant classes) before ascheme can be sanctioned: section899(1) of the Act. The valuerequirement focuses on the rights ofthe creditors as a proxy for theirfinancial stake in the company ascompared with the other membersof their class. The focus is on rightsbecause the jurisdiction facilitatesthe variation of rights. If itfacilitated the imposition of newobligations, the voting requirementwould be different.

The Judge’s dictum is likely to beof real practical significance infuture restructurings. Schemeswhich purport to extend theduration of lending commitments inrespect of revolving credit facilities,for example, will now need to bescrutinised with real care. Thedistinction between objectionableand unobjectionable arrangementsmay ultimately depend on the subtledifference between the imposition ofa new obligation and the barerollover of an existing obligation[163].

For the time being, a degree ofuncertainty prevails. The leadingcases on schemes of arrangementrarely proceed beyond first instance(including the instant case, whichwas compromised before the appealwas heard), which has resulted in adearth of Court of Appeal authority.It is hoped that the Court of Appealwill have an opportunity to considerthe issues raised in Apcoa in thenear future.This article first appeared in the April2015 edition of Corporate Rescue andInsolvency

FOR THE TIME BEING, A DEGREE OF UNCERTAINTY PREVAILS



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Court of Appeal handsdown judgment in theWaterfall appealAlexander Riddiford reports on the recent Court ofAppeal decision in In re Lehman Brothers International(Europe) (in administration) [2015] EWCA Civ 485. On 14 May 2015 the Court of Appeal handeddown its judgment in the appeals against thedecision of David Richards J in In re LehmanBros International (Europe) (in administration)(No 4) [2014] EWHC 7004 (Ch), [2015] Ch 1.

This was an application, which has come tobe known as the “Waterfall Application”,brought by the joint administrators of threecompanies in the Lehman group inadministration for the determination of anumber of issues that have arisen in veryunusual circumstances, in particular: (a) oneof the companies (LBIE) being an unlimitedcompany with a surplus arising in itsadministration; and (b) that company’smembers (LBHI2 and LBL) having unlimitedliability as contributories.

The Waterfall Application takes its namefrom the order (or “waterfall”) for paymentout of the assets of a company in liquidationor distributing administration. This order ofpriority was summarized by Lord Neubergerof Abbotsbury PSC in Re Nortel GmbH [2013]UKSC 52, [2014] AC 209, at [39], as follows:

(1) Fixed charge creditors;(2) Expenses of the insolvency

proceedings;(3) Preferential creditors;(4) Floating charge creditors;(5) Unsecured provable debts;(6) Statutory interest;(7) Non-provable liabilities; and(8) Shareholders.

The ten appeals before the Court of Appeal(each of David Richards J’s directions wasappealed) concerned matters arising from theunusual circumstances of LBIE’sadministration such as what exactly is tohappen with the surplus left after the estatehas discharged all proved debts in full, i.e.category (5) in Lord Neuberger’s waterfall.The issues fall broadly into four categories, asset out in Sections A to D below.

Subordinated debtThe first issue before the Court of Appealconcerned the ranking in the waterfall of thesubordinated debt owed by LBIE to LBHI2, i.e.whether it ranked immediately after thepayment in full of proved debts (as category5A) or immediately after non-provableliabilities (as category 7A).

The subordinated debt formed part ofLBIE’s regulatory capital for the purposes ofcapital adequacy rules (whose principal aim isto ensure that firms provide financialresources to protect their customers againstfailure). The loan was made on a formapproved by the FSA which was printed aspart of the Interim Prudential Sourcebook(INPRU), the document that set out thefinancial resources requirements applicable toLBIE at the relevant time.

The extent of the subordinated debt’ssubordination was established by clause 5 ofthe subordinated debt agreement (the “SDA”),

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which set out (inter alia) the conditionsqualifying LBHI2’s right to repayment. Thecritical question of construction was whethernon-provable claims are capable of being“established or determined in the Insolvency”for the purposes of the condition provided byclause 5(2)(a) of the SDA.

The Court of Appeal, construing the SDA inthe context of its specific regulatory purpose,decided unanimously that LBHI2’s claimsunder the SDA were provable but rankedimmediately after the payment of non-provable liabilities (as category 7A). This wasbecause, on the proper construction of theterms of the SDA, the subordinated debt isrepayable on conditions that include (a)payment of statutory interest and (b) paymentof any non-provable liabilities. Such claimsmay be proved as contingent claims along withother provable debts but the proofs must bevalued so as to take account of bothcontingencies (a) and (b). As a result, accordingto Lewison LJ at [62], the “lodging of a proof

will not adversely affect the subordination”.

Currency conversion claimsThe next issues for the Court of Appealconcerned the existence and nature of whathas become known as “currency conversionclaims” (or “CCCs”). The issues were:

(1) Whether, if a creditor receives less in�sterling on its proved debt than it would have�received in the foreign currency in which its�claim was originally denominated (as a result�of an adverse FX movement between the date�of conversion to sterling and the date of�payment in sterling of the proved debt), the�company is liable to pay the shortfall (i.e. a�CCC), and�

(2) If so, where this CCC liability ranks in thewaterfall.

Briggs and Moore-Bick LJJ considered thatsuch a claim does exist and that it ranks as anon-provable claim. Lewison LJ, dissenting onthe CCC issues, considered that CCCs did notexist.

THE WATERFALL APPLICATIONTAKES ITS NAME FROM THEORDER (OR “WATERFALL”) FORPAYMENT OUT OF THE ASSETSOF A COMPANY IN LIQUIDATION OR DISTRIBUTINGADMINISTRATION.

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a right to interest would be lost altogether in asubsequent liquidation or whether it would bepayable in the subsequent liquidation; and (b)if such a liability for interest would be payablein the subsequent liquidation, on what basis itwould be payable, e.g. under rule 2.88 of the1986 Rules (which governs statutory interestin administration), under section 189 of the1986 Act (which governs statutory interest inliquidation), or as a non-provable claim.

The difficulty in this context arises from thetension between rule 2.88 of the 1986 Rulesand section 189 of the 1986 Act which (as theyapply to the facts of the case) are in thefollowing terms:

“Any surplus remaining after payment of thedebts proved shall, before being applied for anypurpose, be applied in paying interest on thosedebts in respect of the periods during whichthey have been outstanding since the companyentered administration” (rule 2.88(7) of the1986 Rules);

Any surplus remaining after the payment ofthe debts proved in a winding up shall, beforebeing applied for any other purpose, be appliedin paying interest on those debts in respect ofthe periods during which they have beenoutstanding since the company went intoliquidation” (s.189(2) of the 1986 Act).”

In short, the Court of Appeal decidedunanimously that, where a surplus has arisen(or can retrospectively be shown to havearisen) in the hands of the administrator, thecreditor who has proved in the administrationhas an accrued statutory right to be paidinterest out of that surplus under rule 2.88(7)of the 1986 Rules and this right will not“disappear into a black hole” simply becauseLBIE moves from administration intoliquidation (per Lewison LJ at [108]).

The Court of Appeal’s analysis proceeded onthe basis that the surplus in the hands of theadministrator is impressed with an obligationto pay interest under rule 2.88(7) and that thisobligation does not evaporate simply becausethat surplus passes into the hands of asubsequent liquidator. Whereas Lewison LJpreferred not to “become bogged down inselecting a suitable private law label by whichto describe this statutory instruction” (at [107]),Briggs LJ considered a Quistclose-type trustanalysis to be the best way to explain theeffect of rule 2.88(7) on the surplus in the

At the heart of the debate was whether or notrule 2.86(1) of the 1986 Rules, which providesthat “for the purpose of proving a debt incurredor payable in a currency other than sterling” theamount in question is to be converted intosterling at the rate prevailing on the date ofadministration of the company, has asubstantive effect and operates so as tosubstitute an obligation in sterling for what hadpreviously been an obligation in a foreigncurrency.

Lewison LJ considered that this provision didhave a substantive effect. However, Briggs andMoore-Bick LJJ considered that such aconclusion was inconsistent with the highestauthority, for example Lord Hoffmann’scomments in Wight v Eckhardt Marine G.m.b.H.[2003] UKPC 37, [2004] 1 A.C. 147 (“Nortel”), at[27]: “The winding up leaves the debts of thecreditors untouched. It only affects the way inwhich they can be enforced… The winding updoes not either create new substantive rights inthe creditors or destroy the old ones. Theirdebts, if they are owing, remain debtsthroughout. They are discharged by the windingup only to the extent that they are paid out ofdividends. But when the process of distributionis complete, there are no further assets againstwhich they can be enforced.”

Accordingly the Court of Appeal decided(Lewison LJ dissenting) that CCCs do exist andthat they rank as non-provable claims (i.e.category (7) in Lord Neuberger’s waterfall).

Statutory interestThe next issues concerned what is to happen,if the administration of LBIE wereimmediately followed by a liquidation, to anyentitlement to interest in respect of the periodof the administration which has not been paidbefore the commencement of the subsequentliquidation.

In essence the issues were: (a) whether such

The Court of Appeal’s analysis proceeded on the basis that the surplus in the hands of the adminstra is impressed with anobligation to pay interest...

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hands of the administrator.As both Lewison and Briggs LJJ noted, the

solution provided by their judgments is only apartial solution to the infelicities of thedrafting of rule 2.88 of the 1986 Rules ands.189 of the 1986 Act. For example, there willbe many combinations of administration andliquidation where no surplus is thrown upduring the administration to which rule2.88(7) can attach, but where the statutoryscheme gives rise to an inexplicable gapbetween the ending of the period for whichcontractual interest can be proved and thebeginning of the period for which statutoryinterest is payable. Their Lordships bothagreed that the sooner this inexplicable gapbetween contractual and statutory interest isremedied by amendment to the Act or to theRules, the better.

Contributory issuesThe issues that arose in respect of the liabilityof LBIE’s members as contributories tocontribute to LBIE’s assets fell into three partsas follows.

(a) The extent of the contributory’sliabilityFirst, it fell to the Court of Appeal to determinewhether the liability of LBIE’s members tocontribute to LBIE’s assets under section 74(1)of the 1986 Act extended to provide forstatutory interest and non-provable liabilities(categories (6) and (7) of the statutorywaterfall). Section 74(1) of the 1986 provides:“When a company is wound up, every presentand past member is liable to contribute to itsassets to any amount sufficient for payment ofits debts and liabilities, and the expenses ofwinding up, and for the adjustment of the rightsof the contributories among themselves.” Thequestion was in essence whether the phrase“its debts and liabilities” means only theprovable debts of the company being woundup, or includes (under “liabilities”) statutoryinterest and non-provable liabilities.

The Court of Appeal decided that theliability of LBIE’s members to contribute toLBIE’s assets under section 74(1) of the 1986Act does extend to provide for statutoryinterest and non-provable liabilities.

The reasons given by the Court of Appealwere broadly in accord with those given by

David Richards J below. In particular, theCourt was persuaded that it would beanomalous for section 74(1) to contemplateexpressly that a call could be made onmembers to contribute “for the adjustment ofthe rights of the contributories amongthemselves” (i.e. category (7) in the waterfall)but not for statutory interest and non-provable claims (i.e. categories (5) and (6) inthe waterfall).

Further, whereas the Appellants argued thata call on members to create a surplus out ofwhich statutory interest might then be paidwould amount to a “boot straps” positionwhere a surplus might only arise where a callhad in fact been made (and would not ariseotherwise), Briggs LJ agreed with the LBIEAdministrators that this argument was wrongfor various reasons, in particular because (asthe Court below had held): (a) the right to

ALEXANDER RIDDFORD

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make calls was itself an asset of the company;and (b) where the aggregation of that rightwith the other assets of the companydisclosed a surplus, the making of the calland the payment by contributories inresponse to it simply enabled the payment ofstatutory interest (rather than “creating” thesurplus in the first place).

(b) Proving in the contributory’sinsolvency proceedingsThe next issue was whether LBIE can, by itsadministrators, prove in the administrationof LBL, and in the administration of LBHI2 ifand when it becomes a distributingadministration, in respect of thosecompanies’ contingent liabilities undersection 74(1) as contributories of LBIE.

It was common ground that an accruedobligation to contribute under a call alreadymade prior to the commencement of thecontributory’s insolvency proceedings was aprovable debt.The issue in dispute waswhether a company in administration couldprove for a call which had not yet beenmade at that date (and which, indeed, only asubsequent liquidator would be able tomake).

In short the Court applied the threefold

test, as set out by Lord Neuberger in Nortel,for the provability of a statutory liability(which has not crystallised at the date of thecommencement of insolvency proceedings)under rule 13.12(1)(b) of the 1986 Rules. Thatrule provides that a “debt” includes “any debtor liability to which the company may becomesubject after that date by reason of anyobligation incurred before that date”. LordNeuberger’s threefold test is as follows (at[77]):

“…at least normally, in order for acompany to have incurred a relevant“obligation” under rule 13.12(1)(b), it musthave taken, or been subjected to, some step orcombination of steps which (a) had some legaleffect (such as putting it under some legalduty or into some legal relationship), andwhich (b) resulted in it being vulnerable to thespecific liability in question, such that therewould be a real prospect of that liability beingincurred. If these two requirements aresatisfied, it is also, I think, relevant toconsider (c) whether it would be consistentwith the regime under which the liability isimposed to conclude that the step orcombination of steps gave rise to anobligation under rule 13.12(1)(b).”

Briggs LJ considered that stages (a) and (b)

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of the test were plainly satisfied. As for (c),this was the focus of the dispute between theparties. However, Briggs LJ attachedimportance to “the policy that all debts andliabilities should, as far as possible, be dealtwith in any process for the winding-up ordistributing administration of the debtor” (at[226]) and “the policy that the members of anunlimited company are required to make theirresources available to the fullest possibleextent to ensure that their companydischarges all its liabilities” (at [232]), asoutweighing the concerns raised by LBHI onthis point.

Accordingly, it was decided that limb (c) ofthe test was satisfied and that therefore LBIEcould prove in its contributories’administrations for contingent liabilitiesunder section 74(1).

(c) The contributory ruleThe final issue was whether the contributoryrule, which prevents a contributory fromrecovering anything in a liquidation until hehas fully discharged his liability, applies inadministration.

In practical terms the Court’s decision onthe previous issue (the provability ofcontingent claims in respect of calls in the

RICHARD FISHER

BARRY ISAACS QC

contributory’s insolvency proceedings) took“much of the steam out of this issue” (perBriggs LJ at [236]).

In the event, however, the Court decidedthat it would be a serious injustice to asolvent contributory to be disabled from everproving in a distributing administrationbecause, in the absence of a call, there wasnothing which he could pay to free himselffrom the shackles of the rule. Indeed, thecompany might (and usually would)distribute all its assets to its creditors withoutever going into liquidation, leaving thecontributory high and dry, even though itsliability as a contributory might be verysmall, and its claim as a creditor very large(per Briggs LJ at [239]).

Further, the Court rejected the submissionthat the absence of the contributory rule inadministration would make an adverseinroad into the pari passu principle (theprotection of which was, the parties agreed,the basis for the contributory rule), since acompany in administration might fend offthis adverse consequence by moving intoliquidation.

In all the circumstances, therefore, theCourt declined to extend the contributory ruleto the context of administration.

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CITY LINK

City Link: Lessons tobe learned...

At 7pm on 24 December 2014,Christmas Eve, courier company CityLink went into administrationfollowing several years of losses.Many of the company’s 2727members of staff, and around 1000contractors, only found out about thecompany’s demise from reports inthe media on Christmas Day. Thisextremely unfortunate turn ofevents, and the fallout from thecompany’s insolvency moregenerally, prompted the Joint Reportof the Business, Innovation and Skillsand Scottish Affairs Committees onthe Impact of the Closure of City Linkon Employment. The report, whichwas published on 23 March 2015,addresses a number of issues andsuggests there are several of lessonsto be learned from the City Link case,in particular as regards the chaoticway in which staff and suppliersdiscovered that City Link had goneinto administration. The example ofCity Link, the report suggests, makesan overwhelming case for making of

improvements to current practicesand the overarching legislativeframework, in order to better protectthe rights of workers.

Much of the report focuses whenand how City Link’s employees andcontractors found out that thecompany had gone intoadministration, it being noted that“employees and contractors feel thatthey were deliberately deceived by thecompany in the weeks and monthsleading up to the closure of City Link.”In this regard, the report urges thegovernment to support dialoguebetween unions, employers andinsolvency professionals in order todevelop best practice for sharinginformation with employees andunions when it is likely that a

A report suggests that the example of City Link makes anoverwhelming case for improvements to legislation and practice toprotect workers, writes Charlotte Cooke.

company will go into administration.Whilst that is, of course, to beencouraged, quite what steps couldand should be taken insofar as anyparticular company potentiallyfacing administration is concernedwill depend on all the specificcircumstances of that case,particularly where attempts to savethe company and avoid going intoadministration are still ongoing.

The report’s recommendations inthis regard tie in with anotherimportant issue addressed,requirements in relation toconsultation on redundancies. In theordinary course, where a companyintends to make more than 20members of staff redundant astatutory consultation period applies

Much of the report focuses on when and howCity Link's employees and contractors found outthat the company had gone into administration

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(30 days for redundancies affectingbetween 20 and 99 members of staffand 45 days for redundanciesaffecting over 100 members of staff).Such consultation did not happen inCity Link’s case and, moreover, it willoften be in the financial interests of acompany to dispense with thestatutory redundancy consultationperiod if the fine for doing so is lessthan the cost of continuing to tradefor the consultation period. It mightalso be pointed out that sometimesthe company’s financial situation willbe such that consultation, at least inany meaningful sense, is impossible.

The report, however, expressesconcern that where decisions arebased solely on the aforementionedpurely financial calculation, the highhuman cost of ignoring the

consultation period is side-lined. It istherefore suggested that thegovernment review and clarify therequirements for consultation onredundancies during anadministration, in order thatemployees can understand what theycan expect and company directorsand insolvency professionals have aclear understanding of theresponsibilities they owe to thecompany’s employees. Since thereport’s publication, the InsolvencyService has launched a call forevidence on consultations onredundancies in insolvency.

The report also notes that in theimmediate aftermath of City Link’sentry into administration a lack ofinformation as to the situation as awhole left scope for

misunderstandings and rumours. Inorder to address this, the reportsuggests that the government andinsolvency professionals shouldwork together to agree a format for ashort initial statement, to be madepublically available within a week ofa company going into administration.Such a statement would set out ahigh-level summary of thecircumstances which led to thecompany going into administration,as well as details as to who to contactwith concerns as to directors’conduct, when the last payment tostaff and suppliers was made and theperiod it covered, as well as an earlyassessment of whether there wouldbe any funds available to make apayment to unsecured creditors(aside from the prescribed part).

THE CHRISTMAS EVE ADMINISTRATION CAUSED MISERY FOR CITY LINK’S EMPLOYEES AND CREDITORS, AND FOR THOSE AWAITING CHRISTMAS DELIVERIES.

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CITY LINK

Moving on from lessons that mightbe learned in relation to theprovision of information tostakeholders, the report alsoaddresses the order of priority inwhich creditors are paid, questioningin particular whether the presentlegislation provides sufficientprotection for workers. As readerswill be aware, under theEmployment Rights Act 1996 theNational Insurance Fund pays (a)arrears of pay in respect of a periodor periods not exceeding eight weeks;(b) any amount which the employer

is liable to pay the employee for therelevant statutory period of notice;(c) any holiday pay in respect of aperiod or periods of holiday (notexceeding six weeks in total) towhich the employee became entitledduring the 12 months immediatelypreceding the employer’s insolvency;

(d) any basic award of compensationfor unfair dismissal; and (e) anyreasonable sum by way ofreimbursement of the whole or partof any fee or premium paid by anyapprentice or articled clerk. Onmaking such payments the NationalInsurance Fund is then subrogated tothe employee’s claim against thecompany (see section 189 of theEmployment Rights Act 1996). Thatclaim will rank as preferential (i.e.will be paid before claims secured bya floating charge) under section175(2)(b) of the Insolvency Act 1986,save that wage arrears will, however,only be treated as preferential up toa limit of £800.

The preferential treatment ofemployees in this regard has itsorigins in the Preferential Paymentsin Bankruptcy Amendment Act 1897.One policy justification for thepreferential treatment of employeesbeing introduced by that piece oflegislation was explained by GeorgeKemp in the House of Commons asfollows:

“First of all, the mortgagee got hismoney, because it was on the landsand buildings, which were not in anyway affected by, nor did they affect,the work of the workpeople. Secondly,why should the workpeople come inpriority to the debenture holdersunder a floating charge? For thereason that the raw material and thearticles partly or whollymanufactured were part of the assetsof the debenture holders. This rawmaterial had benefited by the work ofthe workpeople to the extent of thetime for which their wages were inarrear. Therefore it was only rightand just that the workpeople shouldhave the benefit of the enhanced value

Any change to the order in which a company's creditors are paid will needto be considered very carefully

CHARLOTTE COOKE

21


of these articles, which, as the lawstood at the present time, would befirst claimed by the holders ofdebentures or debenture stock”. HCDeb., cols 72-73 (February 20, 1897)(see Goode, Principles of CorporateInsolvency Law, para 8-51).

Further justification for suchpreferential treatment stems fromthe fact employees typically rely on asingle company for their income and,indeed, their livelihood.

It should, however, be borne inmind that often the NationalInsurance Fund will receive only asmall part of what it has paid and thereport notes in this regard that “it isa matter of great concern that, undercurrent legislation, taxpayers are leftto pick up the bill, allowing privateinvestors to recover more of theirinvestment”. On the other handthough, secured creditors willnaturally be at pains to point out thatthey have (as is often the case)suffered a shortfall and, were it notfor their provision of funding, jobsmay not be been created in the firstplace. Whether the right balance isstruck by the present legislation is,however, certainly food for thought.

City Link’s Administrators’proposals explain that itsadministrators believe alloutstanding overtime andcommission owed to employees hasbeen, or will be, paid in full, with theexception of an estimated 29employees whose claims exceed thelimit for preferential treatment.However, according to the proposals,City Link’s unsecured creditors willreceive no payment, save for theprescribed part (likely to be£600,000) to be shared between allunsecured creditors.

This is, perhaps, particularlyimportant in circumstances wherechanges to working practices haveseen increasing self-employmentsuch that the current legislationregarding preferential creditors nolonger covers all those who work for,

and rely on a single company fortheir income; changing workingpractices mean that works seem tono longer be sufficiently protected.Indeed, City Link’s contractors (andsub-contractors) were hitparticularly hard by its demise,particularly in circumstances wheremany felt they had been encouragedto take on additional staff andvehicles and work longer hours inthe lead up to Christmas. They areunsecured creditors and, as such,unlikely to receive the majority ofthe money owed to them. Some ofCity Link’s contractors weretherefore left in serious financialdifficulties themselves.

There are a number of aspects tothe report’s recommendations in thisregard. The review initiated by theSecretary of State for Business,Innovation and Skills into theproblem of bogus self-employment iswelcomed.

Further, the report notes that thecurrent order of priority of paymentsin insolvency just does not reflectmodern employment practice andquestions whether the currentregime “where those who have givensecure credit to a company arecushioned from the full impact of aninsolvency because of the losses borneby those who work for a company ona self-employed basis, or ascontractors or suppliers representsthe appropriate balance.” It isrecommended that the governmentrevises the order of priority in orderto give preference to all workers,whether or not they are directlyemployed. There seems to be muchto commend in this approach, thoughquestions as to where to draw theline will need to be investigated.

One other point worth noting onthe issue of whether the currentlegislation provides adequateprotection for workers is that theaforementioned limit of £800 onclaims for wage arrears beingtreated preferentially (which is setby the Insolvency Proceedings(Monetary Limits) Order 1986) wasoriginally set out schedule 1 to theInsolvency Act 1976 and not beenadjusted since, notwithstanding thatother monetary limits applicable toinsolvency proceedings wereamended in 1986 and some havebeen further adjusted since (forexample, the minimum bankruptcypetition debt was £50 in 1869, £200 in1976 and now £750). This issuemight also be revisited.

Perhaps then the real lesson to belearned from the City Link case isthat as times change it is imperativeto monitor whether legislationcontinues to be fit for purpose,achieving what it is supposed toachieve. Consideration of the CityLink case provides plenty of food forthought and does suggest thatimprovements could be made tocurrent practices and theoverarching legislative framework inorder to ensure that workers areafforded the appropriate level ofprotection. That said, there will, ofcourse, always be those who lose outwhen a company is insolvent andgoes into administration and, thatbeing the case, any change to theorder in which a company’s creditorsare paid will need to be consideredvery carefully, bearing in mind theneed to balance the interests of allstakeholders (including taxpayers),as well as the need to ensure creditand investors for the future.

As times change it is imperative to monitor whether legislation continues to be fit for purpose

22

Case Digests

The “Waterfall Application”, an epithet chosen for the caseconcerning the order of priority of payments out of theassets of Lehman Brothers International (Europe), has nowbeen decided by the Court of Appeal. The problem in thiscase is not one that is commonly encountered in insolvencyproceedings: what to do with the surplus that remains afterall the provable debts have been paid? The order of prioritywas summarised by Lord Neuberger in Re Nortel GmbHand, by reference to this ranking, there were four issuesdecided by the Court of Appeal: first, the ranking of thesubordinated debt; the existence and nature of currencyconversion claims, which arise as a consequence ofexchange rate movements between the date of conversion(the date of the administration) and the date of payment insterling; the right to statutory interest of a creditor who hasproved in the administration where the interest has not beenpaid before the commencement of a subsequent liquidation;and, a number of issues relating to proving in thecontributory’s insolvency proceedings. This case issummarised at page 33 and a detailed analysis appearsfrom page 12.

Unsurprisingly, the Supreme Court dismissed the appealin the Jetivia case (p32) that the claim against two formerdirectors should be struck out on the grounds of the illegalitydefence because their unlawful conduct should be attributedto the company in liquidation in accordance with Stone &Rolls. The Supreme Court held that whether a director’sconduct or state of mind is attributed to the companydepends on the context. Where a company is seekingdamages against directors for perpetrating a fraud against athird party that also caused loss to the company it wasinappropriate to attribute the fraud to the company. Stone &Rolls was different; the claim in that case was against a thirdparty, the auditor. The Supreme Court also held that section213 of the Insolvency Act, fraudulent trading, has extra-territorial effect.

The Court of Appeal has also considered the positionwhere a company in insolvency proceedings applies for afreezing injunction and the circumstances in which the courtwill accept a limited cross-undertaking in damages. In thePugachev case (page 31) the court considered whether theJudge was wrong to require a cross-undertaking in anunlimited amount as the price of a liquidator (a Russian stateentity acting as a liquidator) obtaining a freezing injunction.The CA upheld the decision of Rose J who refused to accepta limited cross-undertaking. The main reason for Rose J’sdecision was the fact that there was evidence that therewere major creditors and the only evidence as to why they

HILARY STONEFROST would not support the cross-undertaking was a “rathervague statement” that “The DIA understands that majorcreditors are not willing to expose themselves to furtherpotential losses.” There was no evidence that the liquidatorhad tried to obtain insurance to support a cross-undertaking,or had sought an indemnity from the creditors for anunlimited undertaking or that they were in danger of puttingtheir personal assets at risk (as in DPR Futures). LordJustice Lewison (with whom the other Lord Justices agreed)did say that he did not wish to cast doubt on the many casesin which judges have been prepared to accept limited cross-undertakings from liquidators and other office holders andthat he was not saying he would necessarily have exercisedan original discretion in the same way as the Judge. For further case law on schemes of arrangement see ReWelcome Financial Services Ltd (page 30) and Re DTEKFinance BV (page 30)

Hilary Stonefrost

http://www.southsquare.com/hilary-stonefrost

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Digested by TOBY BROWNBANKING AND FINANCE

Tael One Partners Ltd v Morgan Stanley & Co International plc [2015]UKSC 12 (Supreme Court, 11 March 2015)Interpretation - Loan Market Association standard terms

Unusually this appeal before theSupreme Court involved no dispute asto the legal principles. It concernedsolely a question of contractualinterpretation of Loan MarketAssociation standard terms andconditions for par trade transactions(“LMA terms”), which are commonlyused in the secondary loan market. The claimant T participated inadvancing $32m of a $100m loan to theborrower under a facility agreementwhich provided for both payment ofinterest and for a premium payment tobe paid upon prepayment orrepayment of the loan. T transferred$11m of its participation to thedefendant MS, documented by atransfer certificate, an LMA tradeconfirmation which incorporated theLMA terms, and a purchase priceletter. The latter provided that thepurchase price was $11m plus accruedinterest to date, but made no provisionfor any payment to be made by MS inrespect of the payment premium. MSlater sold its participation to S. In duecourse the borrower prepaid the loanin full and paid the payment premiumto all lenders, including T (which wasstill a participant) and to S, but not MS.Condition 11.9(a) of the LMA termsprescribed how interest and feeswould be allocated between the seller

and buyer of a loan. It provided that“any interest or fees (other than[payment in kind] interest)…whichare expressed to accrue by referenceto lapse of time…shall, to the extentthey accrue in respect of the periodbefore (and not including) thesettlement date, be for the account ofthe seller”. T claimed that MS wasrequired by the LMA terms to pay itthe payment premium in respect ofthe $11m participation, so far as itaccrued at the date of transfer.Popplewell J granted T summaryjudgment but was overturned by theCourt of Appeal. Lord Reed gave theSupreme Court’s judgment. Thestarting point for interpretingcondition 11.9(a) was the words usedby the parties. Although there wasroom for argument whether thepayment premium would naturally bedescribed as “interest or fees” orwould fall within the definition of“payment in kind”, it was clear that itis not “expressed to accrue byreference to lapse of time”. The word“accrue” is generally used to describethe coming into being of a right or anobligation. An entitlement to apayment premium under the facilityagreement accrues on a defined event.The purpose of the payment premiumwas to reward a lender for use of their

money over a period of time. Interestand time entered into the calculation,and it might be said that part of thepayment premium relates to theperiod before the settlement date. Thisdid not mean, however, that thepayment premium can be regardedretrospectively as having notionallyaccrued over the period. Thisconclusion was reinforced by thecommercial context, namely that theLMA terms are intended for use in amarket where the loan is traded.Indeed, a loan may be traded manytimes to different parties. One wouldnot readily infer that a contract of saleof a loan in such a market wasintended to create continuing rightsand obligations in respect of paymentwhich might exist over a substantialperiod of time. The LMA terms containno mechanism enabling the seller toknow that their putative right to thepayment premium has vested or inwhat amount. Accordingly, if a lendersold his participation, unless as here heretained some partial participation, hewould not know when he had becomeentitled to payment of the paymentpremium from the buyer, nor theamount. The Court of Appeal’s decisionwas therefore upheld and T was notentitled to payment from MS of anypayment premium. [Tom Smith QC]

TOBY BROWN TOM SMITH QC

Financial Conduct Authority v Capital Alternatives Ltd [2015] EWCACiv 284 (Court of Appeal, 25 March 2015)Financial regulation – collective investment schemes

The appellants appealed against theJudge’s decision that four schemesconstituted collective investmentschemes (“CIS”) under s. 235

Financial Services Markets Act 2000(“FSMA”). The establishment,operation and winding-up of CISs areregulated activities under FSMA and

cannot lawfully be carried out byunauthorised persons. To constitute aCIS under s. 235 the arrangementmust not involve the participants



24

CASE DIGESTS

having day-to-day control over themanagement of the property.Secondly their contributions andprofits/income must be pooled and/orthe property must be managed as awhole by the operator.The first scheme involvedexploitation of a rice farm in SierraLeone and had attracted £8.1m fromover 1,160 investors. The Court ofAppeal upheld the Judge’s decisionthat the “property is managed as awhole” under s. 235. Those words areordinary language and so no glosswas needed - it was not appropriateto attach a test based on whether theelements of individual managementwere “substantial”. The criticalquestion was whether acharacteristic feature of thearrangements was that property wasmanaged a whole, and this requiredan overall assessment and evaluationof the relevant facts. The

“arrangements” were thereforecentral to the understanding of a CIS.For this purpose it was necessary toidentify (i) what is “the property”and (ii) what is the managementthereof which is directed towardsachieving the contemplatedincome/profit. It is not necessary thatthere should be no individualmanagement activity, only that thenature of the scheme is “in essence”that the property is managed as awhole. Applying that test, it was plainthat the property, i.e. the farm, wasmanaged as a whole. In truth, themanagement activity here involvedin separating the individual farmplots was not designed to generateprofits but to try to ensure thescheme was not a CIS. The case lawillustrated that in construing“managed as a whole” the court mustfocus on the investment objectives ofthe arrangements.

The three other schemes concernedcarbon credits related to forest areasin Australia, Sierra Leone and theAmazon and had attracted £8.8mfrom nearly 919 investors. As to theAustralian scheme, the Court ofAppeal upheld the Judge’s ruling thatthere had been no pooling of incomebut that collective management waspresent. As to the first issue, in orderto determine the nature of thescheme it was necessary tounderstand the way in which thescheme was intended to (or in timedid) operate in practice, since herethe contractual documentation andbrochure did not specify the methodof attribution of income or profit. TheJudge’s decision that the properties ofthe Sierra Leone and Brazil schemeshad been managed as whole was alsoaffirmed. Accordingly each of the 4schemes was properly to be regardedas a CIS.

Avonwick Holdings Ltd v Webinvest Ltd [2014] EWCA Civ 1436(Court of Appeal, 17 October 2014)Without prejudice communications – subject to contract - disclosure

The underlying dispute was a claimfor money alleged to be due under aloan agreement and a guarantee. Thesubject matter of the appeals was anorder holding that certaincorrespondence marked “Withoutprejudice” was admissible inevidence and another order relatingto disclosure of documents leading upto the settlement of arbitrationproceedings. Lewison LJ, giving theCourt of Appeal’s judgment, set outthe principles derived from theauthorities on the without prejudicerule, and concluded that there aretwo bases for the operation of the

without prejudice rule; public policyand contract. The policy is toencourage people to settle disputes.In order for public policy to beengaged there must be a dispute. Theconcept of dispute is given a widescope so that an opening shot ofnegotiations may fall within thepolicy even though the other partyhas not rejected the offer. In order todecide whether this head of publicpolicy is engaged, the Court mustdetermine on an objective basiswhether there was in fact a disputeor issue to be resolved. If there wasnot then this head of public policy is

not engaged. In addition, if partiesagree, for valuable consideration,that their communications will not beused in civil proceedings in court, asa matter of principle, the court willuphold that agreement. In this casethe Court of Appeal upheld thedecision of the Court below that therewas no dispute at the time of therelevant communications and thatthey were admissible in evidence.There was no contract in this case tothe effect that communications wouldnot be used in civil proceedings incourt.[Tom Smith QC; Henry Phillips]

CIVIL PROCEDURE Digested by ALEXANDER RIDDIFORD

ALEXANDERRIDDIFORD

HENRY PHILLIPS


25


Kazakhstan Kagazy PLC v Baglan Abdullayevich Zhunus [2015]EWHC 404 (Comm) (Leggatt J, 20 February 2015)Costs – payments on account – interim applications

Leggatt J had to consider anapplication for payment on accountof costs in the context of a large fraudclaim. There had been anunsuccessful application to amendthe particulars of claim and theclaimants had been ordered to paythe defendants’ costs of theapplication. A worldwide freezingorder had been granted over thedefendants’ assets and the claimantshad been ordered to pay the costs ofthe fifth defendant’s application tovary the freezing injunction.The Judge ordered payment on

account of the costs and the partiesconsented to the Court dealing withthat interim payment issue on paper,in the event that agreement could notbe reached. The defendants providedstatements of their costs amountingto around £945,000. The claimantsdid not attempt to agree interimpayments but instead applied for anorder referring the costs for detailedassessment. The Judge decided thatthe request for a hearing wascontrary to the terms of the agreedorder (which provided for the matterto be dealt with on paper) and that it

was also a disproportionate andwasteful request. The Judgeconsidered that, notwithstanding thata party to fraud proceedings mightconsider it reasonable to spare noexpense that might help him win, thetest for the Court for determiningcosts recoverable from the other sidewas what, on an objective basis, wasthe lowest amount which a partycould reasonably have been expectedto spend in order to have its caseconducted and presentedproficiently, having regard to all therelevant circumstances.

Avanesov v Shymkentpivo [2015] EWHC 394 (Comm) (Popplewell J,25 February 2015)Default judgments – delay – non-compliance

The defendant applied to set aside adefault judgment (July 2013) and asubsequent judgment (April 2014) onassessment of damages that had beenobtained against it. On thisapplication the defendant nowadvanced a defence that it had beenentitled to rescind the share purchaseagreements which were the subject ofthe dispute. The issues for the Courtwere: (1) whether the defendant hadmade out a realistic defence; and (2)

whether, in all the circumstances, the�Court’s discretion should be�exercised to set aside the judgments.�Popplewell J held that the defendant’s�defence was realistic. However, for�the purpose of CPR r.13.3(2),�promptness was not to be measured�solely by reference to the length of�delay but also by considering the�reasons for any delay (applying�Denton v TH White Ltd�[2014] 1 WLR�3926). The Judge concluded that the

delay in this case was the result of aconscious decision by the defendantto ignore the proceedings and defaultjudgment until faced with the threatof enforcement, despite being awareof the 21-day period within which adefault judgment is to be challenged.The delay of eight months and sixweeks in respect of the twojudgments respectively was lengthy,serious and highly culpable. Theapplication was refused.

Quah Su-Ling v Goldman Sachs International [2015] EWHC 759(Comm), (Carr J, 26 March 2015)Amendments – delay

The claimant applied two weeksbefore the trial date for permission toamend her claim, amounting to asubstantial re-pleading of her case.The defendant applied for the claimto be struck out and for summaryjudgment on the counterclaim.The claimant stated that the latenessof her application was caused by the

strain she was under from otherproceedings, such that she was not ina fit state of mind to monitor theprogress of the claim and hadsuffered from a lack of funding.Carr J struck the claim out andgranted summary judgment on thecounterclaim. In relation to very lateapplications to amend, a heavy

burden lay upon the party seekingthe amendment to show the strengthof the new case and why it was in theinterests of justice that he should bepermitted to pursue it. It was nolonger sufficient for the amendingparty to argue that no prejudice hadbeen suffered by the delay, save as tocosts.





26

CASE DIGESTS

COMMERCIAL LITIGATION & ARBITRATION Digested by CHARLOTTE COOKE

Edgeworth Capital (Luxembourg) Sarl v Rambals Investments BV[2015] EWHC 150 (Comm) (Hamblen J, 30 January 2015)

Contract – Fees – Penalties

To purchase a property, theDefendant borrower had entered intoa senior loan agreement for !1.5billion, a junior loan agreement for!200 million and a personal loanagreement for !75 million. Further,the Defendant entered an “upside feeagreement” (“UFA”), the amount ofthe fee depending on the paymentevent. A subsequent failure by thepersonal borrowers to makepayments under the personal loantriggered cross-default provisions inthe junior loan. The Claimants arguedthat on the outstanding principalamount of the junior loan becomingdue and payable as a result of theevent of default under the personalloan, a payment event had occurred,within the meaning of the UFA and

the fee provisions did not amount toa penalty. The judge held that theClaimants’ construction of the UFAwas not uncommercial. Though thefees payable under the agreementwere sizeable, the agreement hadbeen entered into when the borrowerneeded finance to complete theproperty purchase. A clause would bea penalty where it was extravagantand unconscionable with apredominant function of deterrence;it would not be a penalty if it was agenuine pre-estimate of loss, but evenif it were not a genuine pre-estimateof loss it would not be a penaltywhere it was commercially justifiableand it could be shown that itspredominant function was notdeterrence (Makdessi v Cavendish

[2013] EWCA Civ 1539 applied) EWCACiv 1539 applied). The rule againstpenalties was inapplicable. Under theagreement, the fee was payable atsome point and the effect of thetriggering event was only to advancethe time for payment; it did notincrease the borrower’s overallobligation. Further, if the borrowerhad performed the junior loanaccording to its terms and repaid theloan after five years, the fee wouldhave then become due and therecould have been no suggestion that itwas a penalty. It would be perverse ifthe borrower was somehow placed ina more advantageous position bybreaching rather than performing thejunior loan. [Mark Phillips QC; William Willson]

MARK PHILLIPS QC

Decura IM Investments LLP and others v UBS AG, London Branch[2015] EWHC 171 (Burton J, 30 January 2015)Contract – Interpretation – Material

The Claimants and the Defendantentered into an agreement in May2012 whereby the Defendant agreedto purchase “Exclusive BusinessServices” needed for its investmentbank business (UBS IB) from theClaimants. The agreement providedthat an “additional terminationevent” would occur if the Defendantceased to carry on a material part ofits investment banking business andsuch cessation had a material effect

on its ability to market the“Exclusive Business Services”. TheClaimant sought a declaration that,following changes made to theDefendant’s investment bankingbusiness, that it was entitled toterminate the agreement. The Courtconsidered the meaning of the word“material” in the relevant clause,concluding that, on a properinterpretation, “material” meant“significant” or “substantial”.

However, on the evidence, theDefendant had not ceased to carry ona material part of its investmentbanking business. Although theDefendant’s strategy involvedsignificant changes to and theshrinking of its investment bankingbusiness, that did not amount to acessation of a part of the business.The court therefore did not need toconsider the question of materiality.

Spar Shipping AS v Grand China Logistics Holding (Group) Ltd[2015] EWHC 718 (Popplewell J, 18 March 2015)Shipping – Charterparty – Condition

The claimant was the registeredowner of three vessels. By threecharterparties the vessels were let on

a long term charter to GCS, withguarantees given by GCL (GCS’ parentcompany). From April 2011 GCS was

in arrears. The claimant withdrew thevessels and terminated thecharterparties.





27


The claimant brought proceedingsagainst GCL seeking the balance ofhire and damages. GCL contendedthat the employee who had signed theguarantees did not have authority todo so and that it was therefore notliable. The Court held that the

employee had been authorised to signthe guarantees (which was a matter ofChinese law) and GCL was thereforebound by the guarantees. It wasfurther held that payment of hire byGCS in accordance with the charterswas not a condition, but GCS had

renounced the charterparties at thedate of the termination notices, whichwere to be treated as an election toterminate the charters preserving theclaimant’s common law right todamages for loss of bargain, suchdamages to be quantified.

PCL and others v The Y Regional Government of X [2015] EWHC 68(Comm) (Hamblen J, 18 March 2015)State immunity – Arbitration

The defendant, a regionalgovernment, applied to set aside twowithout notice orders, one permittingthe claimant to serve an arbitrationclaim form on the defendant’s UKsolicitors and the other abridgingtime for the filing anacknowledgment of service. Thedefendant filed an acknowledgmentof service, indicating that it intendedto dispute jurisdiction. The issues forthe Court were: (i) whether section12(1) of the State Immunity Act 1978(which provides that documentsinstituting proceedings against a Stateshall be served by being transmitted

through the Foreign andCommonwealth Office to the Ministryof Foreign Affairs of the State) did notapply as the claimants were not“instituting proceedings”; (ii) whetherthe defendant had agreed to serviceon its solicitors; (iii) whether thedefendant had waived its right to relyon section 12(1) by acknowledgingservice; and (iv) whether the withoutnotice orders should be set aside onthe ground that the claimant hadfailed to give full and frankdisclosure. Setting aside the orders,the Court held: (i) that the claimant’sapplication had involved “instituting

proceedings” under section 12(1); (ii)that there had been no operativeagreement as to the manner ofservice and, even if there had beensuch an agreement, it no longerapplied; (iii) the defendant had notwaived its right to object that section12(1) had not been complied with as astate only “appeared” in proceedingswhen it filed an acknowledgement ofservice and did not issue anapplication to dispute jurisdiction inthe specified period; and (iv) theclaimants had been in breach of dutywhen they failed to refer to thepotential applicability of the 1978 Act.

Reveille Independent LLC v Anotech International UK Ltd [2015]EWHC 726 (Comm) (Judge Mackie QC, 20 March 2015)

Contract – Acceptance – Conduct

In March 2011, the claimant, a UStelevision company, sought to enterinto an agreement with thedefendant, a British cookwaredistributor, whereby the claimantwould licence US intellectual propertyrights to the defendant for a five yearperiod and permit the promotion ofthe defendant’s products on anumber of episodes of a televisionshow. An issue had arisen in thecourse of negotiations as to a possibleconflict in view of the words “the

Master Chef” being used on a websiterelating to Gordon Ramsey (who wasassociated with the show). A note ona deal memorandum (“the Memo”)stated that this conflict was yet to beresolved. The claimant broughtproceedings, alleging that thedefendant was in breach of contract.The defendant submitted that therewas no binding contract as the Memohad not (as the claimant alleged)been signed by its representative andthere had been no acceptance by

conduct. The defendant furtheraverred that, even if there was acontract, it was subject to a conditionprecedent that had not been fulfilled. The claim succeeded. Although theclaimant had not shown that thedefendant’s representative signed thememo, the work envisaged by thememo had been carried out and theclaimant had communicated itsacceptance by conduct. The Court didnot consider that the conflict issuewas a condition precedent.



28

CASE DIGESTS

COMPANY LAW Digested by ANDREW SHAW

Sebry v Companies House [2015] EWHC 115 (QB) (Edis J, 26January 2015)Negligence – Duty of care

The Registrar of Companies registereda winding up order made in respect of“Taylor and Son Ltd” against adifferent company called “Taylor andSons Ltd” (“the Company”). Thismistake arose in part from the factthat the winding up order did notcontain the registered companynumber of Taylor and Son Ltd. Thisshould have caused it to be rejected bythe Registrar. On discovering thiserror, the Company’s solicitorinformed Companies House and theonline register was correctedimmediately. The information hadalready been disseminated though,and the consequences were disastrousfor the Company, which rapidly lostbusiness and subsequently enteredadministration. The administratorsassigned a claim for negligence andbreach of statutory duty againstCompanies House and the Registrar ofCompanies to the former managingdirector of the Company. Followingthe commencement of proceedings,the court directed that three mattersbe tried as preliminary issues: (i)

whether the defendants owed a dutyof care to the Company; (ii) whetherthe defendants had breached anysuch duty; and (iii) whether any suchbreach of duty had caused theCompany to enter administration. Itwas subsequently conceded that if thedefendants did owe a duty to theCompany, then it had been breached.On the facts, Edis J held that the errorof the Registrar of Companies hadcaused the Company to go intoadministration. Edis J was notsatisfied that there was any cause ofaction for breach of statutory dutyagainst the defendants. TheCompanies Act 2006 regulates thekeeping of the register of companiesand imposes certain duties on theRegistrar of Companies for thatpurpose. As the register can beaccessed over the internet, it isavailable to the whole world. Ifanyone with access to the registerwere able to claim for any economicloss suffered by any act or omission ofthe Registrar of Companies thatamounted to breach of statutory duty,

it would impose a very wide duty onthe Registrar; there was nothing tosuggest that this was Parliament’sintention. In recording the making ofa winding up order against acompany on the register though, theRegistrar of Companies assumes aresponsibility to that company aloneto take reasonable care to ensure thatthe winding up order is correctlyregistered. The necessary specialrelationship between a company andthe Registrar arises from theforeseeable harm that a company willsuffer if it is wrongly recorded asbeing in liquidation. Thus the dutydoes not arise in every case when theRegistrar of Companies alters thestatus of a company in the register butonly when the register is altered in away that will probably cause seriousharm to the company if it is donecarelessly. The common law duty ofcare to a company does not extend tochecking information provided bythird parties, but simply to ensuringthat information supplied is enteredon the register accurately.

ANDREW SHAW

Integral Petroleum SA v SCU-Finanz AG [2015] EWCA Civ 144(Jackson LJ, Kitchin LJ, Floyd LJ, 26 February 2015)

Conflict of laws – Formal validity – Corporate capacity

The claimant and defendant wereboth Swiss companies, the business ofwhich was trading in oil. They hadentered into a contract with eachother by which the defendant agreedto sell, and the claimant agreed tobuy, various fuels. This supplycontract was expressly stated to begoverned by English law.Subsequently, the claimant brought aclaim for breach of the supplycontract against the defendant and

default judgment was entered infavour of the claimant for an amountof USD 1,078,547.At the material time, the two officersof the defendant were an Albert Bassand a Marine Vartanyan. Theirnames were recorded on the Swissregister of companies as “prokurists”.Their power of signature was joint,but only Ms Vartanyan had signedthe supply contract with theclaimant. This was relevant to the

first defence advanced by thedefendant, namely that the contractwas not binding upon it, because ithad only one of the two authorisedsignatures required by Swiss law. Insetting aside the default judgment,Popplewell J held that Swiss law wasthe applicable law to this questionand that on the evidence before himthe defendant was bound to succeedon this issue. Default judgment wastherefore set aside. The claimant

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appealed against this decision. Onappeal, the claimant argued that theissue to be determined should becharacterised as the effect of theabsence of a second signature. Thiswas an issue of the formal validity ofthe supply contract and thereforeengaged Article 11 of the Rome IRegulations. Accordingly, the issue fellto be determined under English law,because this was the substantive lawof the contract.The claimant also argued that unders44 of the Companies Act 2006, asmodified by the Overseas Companies(Execution of Documents andRegistration of Charges) Regulations2009, assisted them because unders44(3) the claimant was a purchaserand the document purported to besigned in accordance with s44(2) by aperson acting under the authority ofthe Company. The defendant’sposition was that the issue to be

decided was whether the acts of asingle prokurist could be attributed toit. It argued that the attribution of theacts of a person to a company aregoverned by its constitution, relyingon the judgment of Lord Hoffmann inMeridian Global Funds ManagementAsia Ltd v Securities Commission[1995] 2 AC 500. The question wastherefore whether Ms Vartanyan’s actin signing the supply contract countedas an act of the defendant. This wasnot a matter of the formal validity ofthe contract. It was therefore to bedecided not by reference to the RomeI Regulation but to the common lawrules set out in Dicey, Morris & Collins:The Conflict of Laws (“Dicey”). Theseprovide that the laws of a company’splace of incorporation govern allmatters concerning its constitution.The Court of Appeal agreed that thecorrect characterisation of thedefendant’s first defence was the

question of the authority of a singleprokurist to bind a company. This wasa matter to be determined by thecompany’s constitution and wastherefore outside the scope of theRome I Regulation. It fell instead to bedetermined by reference to thecommon law rules set out in Dicey.Consequently, the applicable law wasSwiss law. Under Swiss law, a singleprokurist did not have the authorityto bind the Company. Further, s44 ofthe Companies Act, as amended,provided no assistance to the claimantbecause to determine whether adocument purported to be signed inaccordance with the requirements ofSwiss law, it was necessary tounderstand those requirements. AsSwiss law required the signature oftwo prokurists, it could not be saidthat the document purported to meetthis requirement. The appeal wastherefore dismissed.

Allfiled UK Limited v Eltis, Saunders & Ors [2015] EWHC 1300 (Ch) ChD, (Hildyard J, 7 May 2015)

Interlocutory Injunctions – Intellectual Property/Confidential Information – Restrictive Covenants

The applicant software developmentcompany (“A”) applied for wide-ranging injunctive relief against threeof its former directors and thirteenformer employees (“the Rs”)preventing them from using,disclosing or disseminating A’sintellectual property/confidentialinformation (“IP/CI”) and carrying ontrade in breach of various non-compete/non-solicitation clauses untiltrial. A sought damages for breach offiduciary duty and contractualcovenant, damages for tortiousinterference and for unlawful meansconspiracy. The Rs had resigned enmasse from A and started working fora newly incorporated company (“PortTech”) which they contended was

developing/innovating a different�technology to A. Further, A’s largest�client, Magpie, had terminated its�agreement with A and entered a�similar agreement with Port Tech.�The Rs contended that an injunction�in the form sought would put Port�Tech out of business/into liquidation.�The judge applied the American�Cynamid�principles (rejecting the�submission that, per Cayne v Global�Natural Resources [1984] 1 All ER�225, this was a case where a higher�threshold should be applied). There�was a serious issue to be tried in�relation to the claims for violation of�IP/CI, breach of fiduciary duty ()RVWHU�%U\DQW�6XUYH\LQJ�/WG�Y�%U\DQW�[2007]�BCC 804), tortious interference and

breach of restrictive covenant,damages was an inadequate remedy(particularly because of the quasi-proprietary nature of the IP/CIclaims) and the balance ofconvenience favoured thecontinuation of some kind ofinjunctive relief until an expeditedtrial, albeit in a more limited form.Port Tech would be allowed tocontinue using its own IP/CI asdefined but could not enter into anycontract/arrangement for the supplyof Personal Data Storage technologywith anyone without prior notice toA. These and other provisos wouldeffectively attenuate the threat ofPort Tech’s insolvency before trial.[William Willson]

WILLIAM WILLSON




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CASE DIGESTS

Re Welcome Financial Services Ltd [2015] EWHC 815 (Ch) (Rose J, 27 March 2015)

Scheme of arrangement – bar date – definition of “scheme creditor” – definition of “scheme liability”

In March 2011, the company (W)became subject to a scheme ofarrangement under Part 26 of theCompanies Act 2006. W carried onbusiness as a lender to (inter alios)individuals with poor credit ratings.If a scheme creditor failed to submit aclaim form to the scheme supervisorsprior to the specified bar date, thecreditor lost the right to receive adefined share of the schemeconsideration. After the bar date, anumber of W’s former customersasserted claims against W, which thejudge divided into five categories: (i)claims under the Consumer Credit Act1974, including claims founded on thealleged mis-selling of PPI (the CCAclaims), (ii) claims founded on thealleged mis-selling of generalinsurance other than PPI, (iii) claims torecover overpayments to W, (iv)claims by holders of uncashed chequesissued by W, and (v) claims for therefund of default charges andadministration charges, which werealleged to be unlawful. In order to

determine whether the customers’claims were barred, the schemesupervisors applied for directions inrelation to three questions. First, didthe customers constitute “creditors”within section 895 of the CompaniesAct 2006? Second, did the customers’claims arise out of obligationsincurred by W prior to March 2011, soas to constitute “scheme liabilities”which incorporated the contingentcreditor definition found in rule13.12(1) IR 1986? Third, were any ofthe customers’ claims “excludedliabilities” under the terms of thescheme? The detailed answer to eachquestion (in relation to each categoryof claims) can be found in thejudgment, and is not repeated herein.The Judge’s two most significantfindings are as follows. (i) Applyingthe decision of the Court of Appeal inRe LBIE [2009] EWCA Civ 1161, thejudge held that customers assertingthe CCA claims did not act in theircapacity as creditors (and, therefore,were not bound by the scheme) if they

were not asserting a claim for financialrelief against W. The mere fact that acustomer had a claim against W didnot entail that the customer assertedthat claim in his capacity as a creditor.(ii) Many CCA claims accrued byreason of matters occurring after thebar date. In order to determinewhether such claims arose out of an“obligation incurred” prior to March2011, the judge applied LordNeuberger’s three-fold test in Bloom vPensions Regulator [2013] UKSC 52. Thejudge held that entering into a creditagreement created a legal relationshipbetween W and the relevant customer;that the relationship resulted in Wbeing vulnerable to CCA claims; andthat it was consistent with the regimeof the Consumer Credit Act 1974 forthe court to reach this conclusion.Accordingly, the CCA claimsconstituted scheme liabilities evenwhere all the matters relied upon bythe customer in support of the claimoccurred after the Bar Date.[David Allison QC]

DAVID ALLISON QC

Re DTEK Finance BV [2015] EWHC 1164 (Ch) (Rose J, 27 April 2015)Scheme of arrangement – Jurisdiction – Governing law – COMI

DTEK Finance BV (“DTEK”), a companyincorporated in the Netherlands andpart of a group which carries on anenergy business primarily in Ukraine,sought an order sanctioning a schemeof arrangement with holders ofUS$300 million worth of notes due tomature on 28 April 2015 (“the Notes”).Rose J was satisfied the governing lawof the Notes had been changed fromNew York law to English law and thiscreated a sufficient connection toconfer on the court jurisdiction tosanction the scheme. She also accepted

that a sufficient connection wasprovided by: (i) guarantees given bygroup companies being governed byEnglish law; (ii) DTEK having movedits centre of main interests to England;and (iii) DTEK having substantialassets in the jurisdiction. The courtwas also satisfied the scheme wouldhave substantial effect. The factnoteholders were offered a paymentas an incentive for giving an earlyindication they supported the schemedid not create a class issue. A singlemeeting of creditors, as ordered by

Nugee J at the convening hearing, hadtherefore been appropriate. The courtwas satisfied that the statutoryrequirements as to voting had beenfulfilled. Noting that the scheme hadbeen opposed by Alden (a hedgefundwho claimed to hold the beneficialinterest in a number of the Notes), butthat its opposition had beenwithdrawn the day before the hearing,Rose J considered it appropriate toexercise her discretion to sanction thescheme. [Tom Smith QC; Charlotte Cooke]

CHARLOTTE COOKE


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CORPORATE INSOLVENCY Digested by RYAN PERKINS

RYAN PERKINS

JSC Mezhdunarodiy Promyshlenniy Bank & Anor v Pugachev [2015]EWCA Civ 139 (Arden, Lewison and Clarke LJJ, 27 February 2015)Liquidator – Freezing Order – Cross-Undertaking in Damages

The second appellant (the DIA) was aRussian state entity, acting as theliquidator of the first appellant (theBank). The DIA obtained a freezinginjunction against the respondent(P). At first instance, Rose J requiredthe DIA to give an unlimited cross-undertaking in damages. The DIAappealed, contending that aliquidator should not be required togive an unlimited cross-undertaking,having regard to the limitedfinancial resources of the insolventestate. The Court of Appeal dismissed

the DIA’s appeal (on this point),holding that: (i) the default positionis that an applicant for an interiminjunction is required to give anunlimited cross-undertaking indamages; (ii) the mere fact that theapplicant is a liquidator does notcompel the conclusion that the cross-undertaking must be capped: rather,the quantum of the cross-undertaking is within the discretionof the court; (iii) where the applicantis a liquidator, the court is entitledto consider, inter alia, whether the

liquidator has made any efforts topersuade substantial creditors toindemnify the liquidator in respectof the cross-undertaking, whetherthe liquidator has made any effortsto obtain insurance in respect of thecross-undertaking, and whether theliquidator is backed by the state; and(iv) although it would, in manycases, be appropriate to accept alimited cross-undertaking from aliquidator, Rose J was entitled toreject such an undertaking in thepresent case.

Pui-Kwan v Kam-Ho & Ors [2015] EWHC 621 (Ch) (Sir Terence Etherton, 10 March 2015)

Administration – irregular appointment by directors – date of conversion into CVL

The articles of association of the secondrespondent (M) required two directors(C and H) to be present in order for adirectors’ meeting to be quorate. Adirectors’ meeting purportedlyresolved to appoint the applicant (P) asthe administrator of M, pursuant toparagraph 22 of Schedule B1 to theInsolvency Act 1986. However, thecourt found that H was not present atthe directors’ meeting. In consequence,the meeting was inquorate and theappointment of P was prima facie

invalid. P relied on rule 7.55 of theInsolvency Rules 1986, which providesthat “no insolvency proceedings shall beinvalidated by any formal defect or byany irregularity …” The court rejectedP’s argument, holding that: (i) rule 7.55only applies where insolvencyproceedings have actuallycommenced; (ii) in the present case,there were no insolvency proceedingsunless the directors validly resolved toappoint P under paragraph 22 ofSchedule B1; and (iii) there was no

such resolution (having regard to H’sabsence from the meeting), so that rule7.55 had no application. On a differentpoint, the court held that paragraph83(6) of Schedule B1, which providesfor the conversion of anadministration into a creditors’voluntary winding-up, takes effect atthe date when the notice of conversionis sent by the administrator to theregistrar of companies, rather than thedate when the notice is received by theregistrar of companies.

Re Kombinat Aluminjuma Podgorica AD [2015] EWHC 750 (Ch) (Mr Registrar Jones, 16 March 2015)Recognition of foreign proceedings – lifting the stay under the CBIR – declarations

The company (K) entered intoinsolvency proceedings inMontenegro, which were recognisedas foreign main proceedings pursuantto the Cross-Border InsolvencyRegulations 2006 (the CBIR), resultingin the stay of an arbitration betweenK and a bank (VTB). VTB applied forthe stay to be lifted under Article

20(6) of the CBIR, to enable it topursue claims for certaindeclarations in the arbitration. Thecourt declined to lift the stay, holdingthat VTB had failed to demonstratethat the arbitration would be likely tobenefit VTB or other creditors. Themere fact that VTB sought to achievelegal clarity as to its position, by

seeking a declaration of its rights andobligations in relation to K, was notan automatic justification for liftingthe stay. However, if K itself hadcontinued to pursue a counterclaimagainst VTB in the arbitration, thecourt would have lifted the stay inVTB’s favour as a matter of basicfairness.



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CASE DIGESTS

The first respondent (B) was woundup in 2009, pursuant to a petitionpresented by HMRC. B’s liquidatorsbrought proceedings against twoformer directors (who were notparties to the present appeal) andagainst the appellants. Theliquidators alleged that the directorsand the appellants conspired toperpetrate a VAT carousel fraud. B(acting through its liquidators)sought damages from the directorsand the appellants for (inter alia)unlawful means conspiracy. Theliquidators also made a direct claimagainst the directors and theappellants for a contribution undersection 213 of the Insolvency Act1986. The appellants argued that B’sclaim should be struck out under the

principle ex turpi causa non orituractio (also known as the defence ofillegality), because the directors’unlawful conduct should beattributed to B in accordance withStone & Rolls Ltd v Moore Stephens[2009] UKHL 39. The appellants alsoargued that the liquidators’ directclaim under section 213 should bestruck out on the basis that section213 does not have extra-territorialeffect. The Supreme Courtunanimously dismissed the appealon both points and distinguishedStone & Rolls, holding that: (i) section213 does have extra-territorial effect,in accordance with well-knownprinciples in Re Paramount Airways[1993] Ch 223, and any contraryconclusion would seriously handicap

the efficient winding-up of acompany in an increasinglyglobalised economy; (ii) whether thedirectors’ conduct or states of mindshould be attributed to the companydepends on the context in which thequestion arises; and (iii) in thepresent case, where B soughtdamages against the directors andthe appellants for perpetrating afraud against a third party (HMRC)which also caused loss to B itself, itwould be inappropriate to attributeto B the very fraud to which B’s claimrelated, even if the fraud couldproperly be attributed to B in othercontexts (such as a claim against anauditor). By a majority, the SupremeCourt declined to address the generalprinciples of the illegality defence.

Jetivia SA & Anor v Bilta (UK) Ltd & Ors [2015] UKSC 23 (Lords Neuberger,Mance, Clarke, Sumption, Carnwath, Toulson and Hodge, 22 April 2015)Illegality – ex turpi causa – attribution – Section 213

The Trustees of the Olympic Airlines SA Pension and Life Assurance Schemev Olympic Airlines SA [2015] UKSC 27 Supreme Court (Lords Neuberger,Mance, Sumption, Reed and Toulson, 29 April 2015)EC Insolvency Regulation - Establishments

The Supreme Court has ruled on themeaning of the term “establishment”in the EC Regulation on InsolvencyProceedings. In so doing the SupremeCourt has held that the English courtcould only entertain secondaryinsolvency proceedings in respect of acompany which had its centre ofmain interests in another MemberState if the company was conductingbusiness activities in the UK whichextended to dealing with third partiesand did not merely consist of acts ofinternal administration.Olympic Airlines SA (“the Company”)was the Greek national airline. It wasplaced into special liquidation inaccordance with a decision of theAthens Court of Appeal (“the GreekLiquidation Proceedings”). The Greek

Liquidation Proceedings were mainproceedings for the purposes of theEC Insolvency Regulation.Accordingly, the only insolvencyproceedings that could be opened inthis jurisdiction were secondaryproceedings. Under Article 3(2) of theEC Insolvency Regulation suchproceedings could only be opened ifthe Company possessed an“establishment” in the jurisdiction.An “establishment” is defined byart.2(h) of the EC InsolvencyRegulation as a “place of operations”where the debtor carried out “non-transitory economic activity withhuman means and goods.”The Appellants were the trustees ofthe Company’s pension scheme. Theyappealed against a decision of the

Court of Appeal that the English courthad no jurisdiction to entertainsecondary insolvency proceedingsagainst the Company.The Company had ceased flightoperations in September 2009. In July2010, it dismissed all but three of itsUK staff members, whom it retainedin its remaining UK office on short-term contracts, principally to dealwith communications from theliquidator and supervise the disposalof its UK assets. On 20 July 2010, thetrustees petitioned the English courtto wind up the Company so that thepension scheme could enter thePension Protection Fund.At first instance the Chancellor madea winding-up order on the basis thatthe Company’s UK activities were

GABRIEL MOSS QC MARCUS HAYWOOD


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sufficient to qualify as economicactivity. The Court of Appealoverturned that decision, finding thateconomic activity had to consist ofmore than activity relating to thewinding up of a company’s affairs.The Supreme Court dismissed theappeal. It held that the definition of“establishment” in art.2(h) had to beread as a whole. It was not to bebroken down into discrete elements,because each element coloured theothers. The relevant activities had tobe “economic”, “non-transitory” andcarried on from a “place ofoperations” using the debtor’s assetsand human agents. That suggested afixed place of business. Therequirement that the activities should

be carried on with assets and humanagents suggested a business activityconsisting of dealings with thirdparties, not merely acts of internaladministration. The 1996 Virgos-Schmit report, an authoritativecommentary on the EuropeanConvention on InsolvencyProceedings 1995, suggested that theactivities had to be “exercised on themarket” i.e. externally. That couldnot sensibly be read as requiring thatthe debtor should simply be locatableor identifiable by a brass plate on adoor. It referred to the character ofthe economic activities, which had toinvolve business dealings with thirdparties. Some activities carried on bya company in liquidation might be

sufficient, for example where aliquidator carried on the businesswith a view to its disposal, or wherehe disposed of stock in trade on themarket. However, where thecompany had no subsisting business,the mere internal administration ofits winding up would not suffice. Onany reasonable view, the Companywas not carrying on any businessactivities on 20 July 2010. The threeremaining employees were simplyhandling matters of internaladministration associated with thedisposal of the means of carrying onbusiness. Therefore, the Company didnot have an “establishment” in theUK at the relevant time.[Gabriel Moss QC, Marcus Haywood]

In re Lehman Brothers International (Europe) (in administration)[2015] EWCA Civ 485 (Moore-Bick LJ, Lewison LJ, Briggs LJ,CA 14 May 2015)Waterfall Application – Subordinated Debt – Currency Conversion ClaimsStatutory Interest – Contributory Issues

In its judgment in what has becomeknown as the “Waterfall Application”,an application for directions that hasbeen made by the administrators ofthree Lehman entities, the Court ofAppeal has clarified a variety ofissues relating to a very unusual setof circumstances, namely: (a) one ofthe companies (LBIE) being anunlimited company with a surplusarising in its administration; and (b)that company’s members (LBHI2 andLBL) having unlimited liability ascontributories.In brief, the Court of Appeal’sdecision was as follows:(1) LBHI2’s claims under certainsubordinated debt agreements areprovable but rank to be paid, on theproper construction of thoseagreements, immediately after thepayment in full of all non-provableliabilities;

(2) Currency conversion claims, i.e.claims for any shortfall suffered by aforeign currency creditor whoreceives less in sterling on its proveddebt than it would have received inthe foreign currency in which itsclaim was originally denominated (asa result of an adverse FX movementbetween the date of conversion tosterling and the date of payment ofthe proved debt), do exist and rankas non-provable claims (Lewison LJdissenting);(3) Where a company moves fromadministration into liquidation incircumstances where all debtsproved in the administration havealready been paid and there is asurplus in the hands of theadministrator, the liquidator mustapply that surplus (once received)first in satisfaction of any accruedbut unpaid entitlement to statutory

interest under rule 2.88(7) of the1986 Rules in respect of the relevantperiod;(4) The liability of a company’smembers to contribute to thecompany’s assets under section 74(1)of the 1986 Act extends to statutoryinterest and non-provable liabilities;(5) A company in administration canprove in the insolvencies of itscontributories for the amount of thecontingent liability to contributeunder section 74(1) of the 1986 Act;(6) The contributory rule, whichprevents a contributory fromrecovering anything in a liquidationuntil he has fully discharged itsliability, does not apply inadministration. [Robin Dicker QC, William Trower QC, BarryIsaacs QC, Daniel Bayfield, Richard Fisher,Stephen Robins, Charlotte Cooke, AlexanderRiddiford]

ROBIN DICKER QC WILLIAM TROWER QC

STEPHEN ROBINS


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JSC Bank of Moscow v Vladimir Kekhman [2015] EWHC 396 (Ch)(Morgan J, 3 March 2015)Bankruptcy – Annulment – Foreign Resident Debtor

This case involved an appeal againstthe order of Chief Registrar Baistermade on 15 April 2014 in which hedeclined to annul the bankruptcyorder based on the Respondent’s ownpetition. Morgan J upheld the decisionof the Chief Registrar but for differentreasons. In particular, he held thatthe Chief Registrar had erred inprinciple by conflating the issue ofwhether the court ought to havemade the order with the exercise ofthe Court’s discretion.As at the date of his bankruptcypetition, and at all times since, MrKekhman has been a Russian citizen,domiciled and resident in the RussianFederation. Bank of Moscow is aRussian bank which claims to be acreditor of Mr Kekhman in the regionof $150 million based on damages foran alleged conspiracy to defraud.Jurisdiction was claimed by MrKekhman on the basis that he waspresent in the country on the day hispetition was presented. Mr Kekhmanstated that his centre of maininterests was not in a member statewithin the meaning of the ECRegulation on InsolvencyProceedings. In his bankruptcypetition Mr Kekhman attributed hisinsolvency to “overwhelming demands

made on [him] personally underguarantees”. The guarantee referredto in the petition was in favour of asecurity agent. It was governed byEnglish law with an arbitrationclause that had the seat of arbitrationin London. The security agent hadthe ability to elect that a disputeregarding the guarantee should beresolved by litigation before a courtof law. In the circumstances of anelection by the security agent theEnglish Courts had exclusivejurisdiction and it was agreed thatthe English Courts were the mostappropriate and convenient courts.In relation to the legal test thatapplies when dealing with anapplication to annul a bankruptcyorder under s.282(1)(a) of theInsolvency Act 1986, Morgan J heldthat the legal test is whether itappears to the Court that thebankruptcy order “ought not to havebeen made”. If the Court finds thatthe order ought to have been madethe Court has no discretion unders.282 but instead is bound to dismissthe annulment application. Havingfound that the Chief Registrarconflated the test set out above withthe exercise of discretion, Morgan Jheld that it was necessary for him to

form his own view as to whether, onthe grounds existing at the date of thebankruptcy order, that order oughtnot to have been made.When determining whether thebankruptcy order to have been madeMorgan J held that the followingquestions needed to be addressed: (1)What were the grounds existingwhen the bankruptcy order wasmade? (2) Was there a sufficientconnection with this jurisdiction? (3)Was there a reasonable possibility ofa benefit resulting from abankruptcy order? (4) Did themaking of an order breachobligations of international comity?(5) Are there reasons not to make abankruptcy order? (6) By way of anoverall assessment, whether theorder ought not to have been made?Having gone through those questionsMorgan J found that the bankruptcyorder ought to have been made: seepara [135]. It is worth noting thatMorgan J found that there was asufficient connection with thisjurisdiction as a result of theguarantee that was governed byEnglish law. In this respect he reliedon and drew comparisons with theauthorities in relation to the windingup of overseas companies.

PERSONAL INSOLVENCY Digested by MATTHEW ABRAHAM

Shepherd v The Official Receiver [2015] EWHC 561 (Ch)Bankruptcy – Extended Civil Restraint Order

In this case Morgan J made a bespokeextended civil restraint order in thecontext of bankruptcy proceedings.The order was made against a formersolicitor (S) who had actedpersistently in bringing six separateunsuccessful claims against theOfficial Receiver (three of which hadbeen found to be totally without

merit). The power of Court to grant acivil restraint order is set out in CPRr.3.11. The jurisdiction to make suchan order is described in PracticeDirection 3C. Paragraph 3 of thePractice Direction relates to extendedcivil restrain orders which states thatthe Court is able to make such anorder “where a party has persistently

issued claims or made applicationswhich are totally without merit”.Paragraph 3.2 describes the effect ofsuch an order as a restraint beingplaced on applications or claims“concerning any matter involving orrelating to or touching upon or leadingto the proceedings in which the orderis made without first obtaining the

MATTHEW ABRAHAM


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Rose J held that a Deputy Registrarhad not erred in dismissing anapplication to set aside a statutorydemand on the papers under r.6.5(1)of the Insolvency Rules 1986 andthat the case at hand did not havespecial circumstances such that arehearing ought to be ordered.The Deputy Registrar had dismissedthe appellant’s application to setaside a statutory demand presentedagainst him on the basis that thegrounds for setting aside thestatutory demand were whollyunparticularised. The appellantappealed seeking permission to putin proper evidence challenging thestatutory demand. In particular, theappellant submitted that: (1) theDeputy Registrar had been wrong todismiss the application summarily

when there was evidence thatshowed that the debt was disputed;and, (2) there should be a rehearingof the application in the interests ofjustice at which the Court couldconsider all the material putforward. In relation to the firstsubmission of the appellant, Rose Jheld that it was not the DeputyRegistrar’s job to expand or perfectthe set aside application. Further,r.6.5(3) of the Insolvency Rules 1986explicitly referred to the Courtconsidering the evidence thenavailable to it. Rose J considered thecase of Platts v Western Trust &Savings Ltd [1996] B.P.I.R. 339 andfound that the Court could decidethe matter on incomplete evidencewithout adjourning it. Further, RoseJ found that no proper reasons had

been given for not putting forwardinitially the material on which theappellant sought to rely on theappeal.As for the second submission, Rose Jfollowed the decision in Ealing LBC�v Richardson� [2005] EWCA Civ 1798�and stated that an appeal by way ofrehearing pursuant to CPRr.52.11(1)(b) required specialcircumstances. Rose J held that, theargument that the material onwhich the appellant sought to relycould and should be considered at arehearing of the set asideapplication rather than at thehearing of a petition was not a goodreason. It was noted that if arehearing was granted it would givethe appellant three bites of thecherry rather than two.

Mills v Stuart-Smith 30 March 2015 (Unreported)Application to Set Aside Statutory Demand – Appeal

permission of a judge identified in theorder”. The period for which anextended civil restraint order can bemade may not exceed two years (seeparagraph 3.9 of the PracticeDirection). Morgan J held that, if theCourt complies with the test set out inthe Practice Direction, the Court isgiven the power to make an extendedcivil restraint order. Whether or notthe Court exercises the power is amatter of discretion and the Courtmust have regard to all thecircumstances of the case. Whendetermining whether he had thepower to make an order, Morgan Jfirst focused on the question ofwhether the applications that hadbeen made were totally without meritand then whether the respondent hadbeen persistent. Morgan J found thatthe applications made by S were

totally without merit incircumstances where three judgeshad previously described three of theapplications as totally without merit.Morgan J also found that S had been“most persistent” in circumstanceswhere six applications had beenmade challenging the actions of theOfficial Receiver on “more or less thesame point”.Morgan J stated that extended civilrestraint orders are designed toafford a measure of protection torespondents against continuingapplications. He found that theOfficial Receiver fully deserved tohave the protection from furtherapplications which are likely to betotally without merit. He also foundthat, if a civil restrain order wasmade and S were to apply forpermission to bring an application of

the kind he has already brought, it isalmost inevitable that permissionwould be refused. Morgan J thereforeheld that it was appropriate to makean extended civil restrain order.In relation to the terms of the order,Morgan J stated that, although thePractice Direction identifies one wayin which a civil restraint order can beexpressed, in some cases the wordingcan cause real difficulty. In suchcircumstances it is possible to have awider order to give effect to theintention of the Practice Direction.Morgan J stated that he would draftthe appropriate order in the case. Hestated that the order would not justrestrain S from bringing a specifictype of application but also restrain Sfrom calling into question any actionof the Official Receiver in the courseof S’s bankruptcy.



36

PROPERTY & TRUSTS Digested by ANDREW SHAW

AIB Group (UK) Plc v Mark Redler & Co Solicitors [2014] UKSC 58(Supreme Court, 5 November 2014)Breach of trust – Equitable compensation

The claimant had agreed to advance£3.3 million to a Mr and Mrs Sondhi,to be secured by a first legal chargeover their home, which had been val-ued at £4.25 million. At the time ofthis agreement, this property was al-ready subject to a first legal charge infavour of Barclays Bank Plc (“Bar-clays”), which secured borrowings ofaround £1.5 million on two accounts.Accordingly, the claimant instructedits solicitors in accordance with theCouncil of Mortgage Lenders’ Hand-book for England and Wales (2ndedn). This stated, inter alia, thatwhere a mortgage lender required afully enforceable first charge over aproperty by way of legal mortgage, allexisting charges must be redeemedbefore completion and the loan mustbe held on trust for the claimant untilcompletion. The defendant solicitorsestablished the outstanding amountsowed to Barclays. As completion ap-proached, they sought a redemptionfigure from Barclays but in error theamount given related to only one ofthe accounts. The defendants there-fore remitted this amount to Barclaysand paid the balance of the funds toMr and Mrs Sondhi. There remainedoutstanding a sum of £309,000 to Bar-clays, which consequently refused torelease its charge. Mr and Mrs Sondhipromised to pay this sum but did not,and subsequently defaulted. Barclaysrepossessed the property and sold itfor £1.2 million. The claimant waspaid £867,697 of this amount. Theclaimant then brought an actionagainst the defendant solicitors forbreach of trust, breach of fiduciaryduty, breach of contract and negli-gence. It claimed in relief: (i) reconsti-

tution of the trust fund paid away inbreach of trust/breach of fiduciaryduty; (ii) equitable compensation forbreach of trust and breach of fiduci-ary duty; and (iii) damages for breachof contract and negligence. The de-fendants admitted that they hadacted negligently and in breach ofcontract but denied the other allega-tions.At trial, Judge David Cooke found thatthe defendants had acted in goodfaith but were liable for a breach oftrust arising from the failure toretain an additional £300,000 odd todischarge the remaining debt toBarclays. He held that the claimantwas prima facie entitled toreconstitution of the trust fund. Heawarded equitable compensation tothe claimant of £273,777 plus intereston the basis that this was the losscaused to the claimant by thedefendants’ breach of trust. Bothparties appealed. The Court of Appealheld that the trial judge had beenwrong to treat the breach of trust aslimited to that part of the advancedmonies which was paid to theborrowers rather than used todischarge the debt to Barclays butupheld the relief granted. In so doing,the Court of Appeal applied thedecision of the House of Lords inTarget Holdings Ltd v Redferns [1996]AC 421. In that case, it had been heldthat where a breach of trust occurredin the context of a commercialtransaction, the equitable principlesof compensation allowed thecompensation recoverable to bebased upon a proper causalconnection between the breach andthe subsequent loss. On this basis, it

was held that the loss suffered by theclaimant was that arising from thefact that it had less security for themortgage than it would have donebut for the defendants’ breach oftrust. The defendants’ appeal wasdismissed. The claimants appealedagainst this finding, arguing that thetransaction had never beencompleted because of the failure todischarge the outstanding sums owedto Barclays. It was therefore possibleto distinguish Target Holdings, inwhich Lord Browne-Wilkinson hadheld that in a commercial transactionit would be artificial to import anobligation to reconstitute the trustafter the underlying transactiongiving rise to it had been completed.The defendants were therefore underan obligation to reimburse theclaimant to the extent of the full £3.3million advanced, less the sum paidby Barclays following its sale of themortgaged property. The SupremeCourt upheld the decision of theCourt of Appeal. Lord Toulson heldthat in the absence of fraud, it wouldbe wrong to impose a rule that gaveredress to a beneficiary for loss thatwould have been suffered in theevent that the trustee had carried outhis duties properly. The Court ofAppeal had correctly applied TargetHoldings, the basic principle of whichwas that the beneficiary of a trust isentitled to be compensated for anyloss that he would have suffered butfor the breach of trust. In this case,the loss was the reduced securityenjoyed by the claimant due to thefailure to discharge the full amount ofthe debt owed by the Sondhi’s toBarclays.


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Graham-York v York [2015] EWCA Civ 72 (Moore-Bick LJ, TomlinsonLJ, Vos LJ, 10 February 2015)Real property – Beneficial interests – Constructive trusts

Miss Graham-York had lived withNorton York from 1976 until thelatter’s death in 2009. For the last 24years, they had lived together at 17Marlborough Road, London W4 (“theproperty”). The property wasregistered in Norton York’s sole nameand was subject to a mortgage, also inNorton York’s sole name. MissGraham-York continued to live at theproperty after Norton York’s death in2009. Following the development ofarrears on the mortgage, themortgagee sought and obtainedjudgment in respect of the entireamount outstanding under themortgage, together with an order forpossession against Adrian York,Norton York’s son and the personalrepresentative of his estate. MissGraham-York subsequently applied tobe joined to these proceedings.Following a trial, HHJ Diana Faber,sitting at Central London County Court,determined that Miss Graham-Yorkwas entitled to a beneficial interest inthe property amounting to 25% andshould be paid this proportion of thenet sale proceeds of the propertyfollowing discharge of the mortgage.Miss Graham-York appealed againstthis finding, maintaining first that thejudge should have found that herbeneficial interest was 50% of theproperty; and second, that the judgehad erred in directing that the 25% of

the net sale proceeds should be paid toher before, rather than after, thepayment of the sums owed to themortgagee. The Court of Appealaccepted the trial judge’s findings offact, which included findings that MissGraham-York’s financial contributionto the relationship with Norton Yorkdid not “amount to much”; and thatthere had been no express agreementbetween Miss Graham-York andNorton York as to the way in which thebeneficial interest in the property wasto be shared. Miss Graham-York’sbeneficial interest therefore arosefrom a constructive trust arising froma common intention deducedobjectively from her and Norton York’sconduct. Tomlinson LJ, with whomMoore-Bick and King LJJ agreed,applied the approach set out by LordWalker and Lady Hale in Jones vKernott [2011] 1 AC 776. In that case, itwas held that where a family homewas in the name of one party only, thepresumption of joint tenancy in thecase of a home bought in joint namesdid not apply and the starting pointwas whether the unnamed party hadany interest in the property at all. Thisshould be deduced objectively fromthe conduct of the parties. If a commonintention that the unnamed party has abeneficial interest can be deduced, butthe extent of the interest cannot be,then it is to be determined by the

court. In carrying out thisdetermination, the court will haveregard to what is fair, having regard tothe whole course of dealing betweenthe parties in relation to the propertyin question. Tomlinson LJ recognisedthat Miss Graham-York had beenfrequently ill-used by Norton York. Henonetheless held that in determiningwhat share of the property it was fairfor Miss Graham-York to have abeneficial interest in, the court was notconcerned “with some form ofredistributive justice”. However muchsympathy Miss Graham-York’ssituation might attract, this was notrelevant to determining what was fairwith regard to the whole course ofdealing between the parties in relationto the property (emphasis in original).In other words, the quantification ofthe size of Miss Graham-York’sbeneficial interest in the property wasnot akin to awarding hercompensation for the wrongs done toher by Norton York. Given the fact-sensitive nature of this exercise,evaluations made by judges in othercases were not of especial assistance.The trial judge’s finding of abeneficial interest of 25% was upheld.Miss Graham-York’s second ground ofappeal was effectively abandoned,following her concession that she wasin fact bound by the mortgage overthe property.

Re Portman Estate [2015] EWHC 536 (Ch) (Birss J, 4 March 2015)Powers of a trustee – Civil procedure

The Portman Estate comprises a seriesof trust funds held for the benefit ofthe Portman family. The total assets inthe Estate amount to some £1.4 billion.There were discrepancies between thetrusts as to the remuneration of thetrustees and the administrativepowers conferred on the trustees. In

particular, some of the trustsconferred a general power to trade ontheir trustees, while others did not.The trustees of all the funds made anumber of applications: (i) under s57of the Trustee Act 1925 for theadministrative powers of the trustee’sto be harmonised; (ii) a declaration as

to the meaning of provisions in certainof the trust instruments relating toconflicts of interest; and (iii) anapplication under the court’s inherentjurisdiction concerning the trustees’remuneration. A preliminary matterfor consideration by the Judgeconcerned the manner in which the




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SPORT Digested by ROBERT AMEY

Ticket2final OU v Wigan Athletic AFC Ltd (John Baldwin QC sittingas a deputy judge of the Chancery Division, 22 January 2015)

Breach of contract

Ticket2final OU (T2F) had developed abusiness model whereby it soldoptions to sports fans to purchase aticket to a particular sporting eventshould the event take place. Forexample, a football fan might purchasean option to see his club play in the FACup Final. If the fan’s club were toreach the final, then the fan wouldhave the option to purchase a ticket ata reduced price. If the fan’s club did

not reach the final, then T2F wouldkeep its fee. The model has beensuccessful overseas and is widely usedin relation to Euroleague Basketballevents and the Champions League ofthe European Handball Federation.Having entered into a similararrangement with FC Barcelona, T2Fsought to introduce the model toEngland, and entered into anagreement with Wigan Athletic.

In the course of the 2012/2013 FA Cupseason, Wigan performed unusuallywell, and T2F sold a large number ofoptions to eager fans. Wigan reachedthe finals, and ultimately won the FACup in 2013. However, ticket sales atWembley (where the finals and semi-finals are held) are controlled not bythe clubs but by the FA. T2F wastherefore unable to obtain fromWigan the tickets it needed to sell on

ROBERT AMEY

applications had been made. Theaction had been started under CPR Pt8 with all of the trustees named asclaimants but without any defendantsbeing named, in accordance with CPRr.8.2A. Birss J was unaware of anyPractice Direction relating to r.8.2Aand so held there was no requirementfor permission to be sought in order toissue a claim form without any nameddefendants. Considering the mannerin which the applications werecommenced in the light of theoverriding objective at CPR r.1.1, BirssJ took into account the negligible effectof the changes sought on thebeneficiaries of the trusts and the factthat two key beneficiaries hadprovided express written consents tothe applications. While he consideredthat, given the size of the Estate, itwould not necessarily have beendisproportionate to join all thebeneficiaries there was no goodreason to do so, especially given thelarge number of beneficiaries.In considering the application unders57 of the Trustee Act 1925, Birss J tookthe same approach as in Alexander vAlexander [2011] EWHC 2721 (Ch), inwhich Morgan J held that the courtneeded to be satisfied of three matters:(a) the provisions governing the trustcontain no power which allows the

trustees to carry out the transactionthat is the subject of the application;(b) it is expedient that the trusteesshould be able to enter into therelevant transaction; and(c) the court should exercise itsdiscretion to confer the power soughton the trustees. In consideringwhether to confer a general power totrade upon all of the trustees, Birss Jheld that the first two of theseconditions were met. In consideringwhether the court should exercise itsdiscretion to grant the application, heconsidered it relevant that one of thetrust instruments already expresslycontained such a power. Further, sucha power was usually included inmodern trust instruments, and therewas no evidence that such a powerwas contrary to the intentions of thesettlors. Taking these factors togetherwith the nature of the funds and theoverall value of the Estate, Birss Jconferred a general power to tradeupon those trustees who did notalready possess such a power. He alsogranted the trustees’ application forvarious administrative powers to beharmonised across the various funds.The trustees’ application under s57 ofthe Trustee Act 1925 also included anapplication that the trustees should beable to confer further administrative

powers on themselves. Although thisaspect of the application wassubsequently withdrawn, Birss Jindicated that he would not havegranted it. To do so would have beento put the court’s powers under s57into the hands of the trustees, inrelation to further powers which werepresently unforeseen and which it wasdifficult to see the requirement for,given the broad powers the trusteesalready had. The trustees had alsoapplied for an alteration to theremuneration provisions of thevarious funds, such that the trustees ofdifferent funds would be paid thesame amount for doing the samework. Birss J held, applying Duke ofNorfolk Settlement Trusts [1982] Ch 61,that the court had an inherent powerto modify a trustee’s remuneration,either by varying existing powers ofremuneration or by conferring newpowers. The overriding principleguiding the court was whetheraltering remuneration provisions wasthe efficient administration of thetrust, even if this is achieved at someincreased cost to the beneficiaries.Accordingly, Birss J granted thetrustees’ remuneration application.Guidance was also sought on conflictsof interest related to clauses in certainof the trust instruments.





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Hamed v Tottenham Hotspur Football Club & Athletic Ltd [2015]EWHC 298 (QB) (Hickinbottom J, 16 February 2015)Breach of duty of care

The Football Association’s protocolrequires all new entrants to a footballacademy to undergo screening toidentify whether they were at risk ofheart problems, most importantly,hypertrophic cardiomyopathy (HCM).Before being signed by the defendantfootball club, Mr Hamed had anelectrocardiogram (ECG) whichshowed abnormalities indicative ofunderlying heart disease. Thecardiologist recommended a scan andclinical review. The scan did notreveal HCM, but did not exclude HCMeither. The cardiologist confirmed tothe defendant club that there were noindications of HCM, but that the ECGresults were worrying.The club’s doctor later recorded thatthe footballer was not at risk and thatthe cardiologist was “happy” for MrHamed to continue playing. Three

days after signing with the club, MrHamed suffered a cardiac arrestduring a match, resulting incatastrophic brain injury.The cardiologist admitted that he hadbeen negligent by failing to makespecific reference, in his letters to theclub, of the clinical review he hadpreviously recommended, and whichhad never been carried out. The clubdenied liability. The court held thatthe club’s doctor had acted in a waywhich no reasonably competentsports physician could have acted.The ECG had unequivocally shown anabnormality suggestive of a risk ofHCM. Although the scan had beeninconclusive, any reasonablycompetent sports physician wouldhave known that there was a smallchance of some other pathology thatcould not be excluded by the scan.

The cardiologist’s letters to the clubcould have been more explicit, butthe club’s doctor had been clearlynegligent nonetheless. Had sheappreciated, as she ought to havedone, the risk borne by the footballer,she would have ensured that he andhis parents were made aware of it byarranging a clinical review with thecardiologist. Had this been done, thefootballer would have stoppedtraining and playing football. Thedoctor’s failure to notice that noclinical review had taken place wascaused, in part, by the very poor stateof the club’s medical records.However, 30% of the liability wasapportioned to the cardiologist, in thelight of his admitted negligence infailing to flag the necessity for aclinical review in his letters to theclub.

IAAF v Yanit (Court of Arbitration for Sport, 6 March 2015)Athletics – doping scheme – Biological Passport

In June 2013, Nevin Yanit was foundguilty of an anti-doping violation bythe Turkish Athletics Federation(TAF) Disciplinary Board after twoprohibited substances were found ina sample she had provided. The TAFimposed a two-year sanction. TheInternational Association ofAthletics Federations (IAAF)appealed to the Court of Arbitrationfor Sport (CAS), seeking to increasethe ineligibility period to four years.The IAAF relied on aggravatingcircumstances within the meaningof IAAF Rule 40.6. The IAAFsupported this request with

evidence of violations of the IAAFRules based on data taken from MsYanit’s “Athlete Biological Passport”,which, while not admissible asevidence of an additional violation,could constitute an aggravatingfactor for the purpose ofdetermining the sanction. The CASconsidered that there wereaggravating circumstances whichwarranted the imposition of aperiod of ineligibility in excess ofthe two-year ban imposed by theTAF Disciplinary Board, notingspecifically that Ms Yanit had (1)used two prohibited substances

(stanzolol and testosterone); (2) usedthose substances on multipleoccasions between August 2012 andFebruary 2013; (3) committed aseparate anti-doping rule violation,namely blood doping, between June2012 and February 2013; and (4)committed all these violations aspart of a doping scheme. Takingaccount of the sentences passed insimilar cases, in particular AlemituBekele v. TAF (athlete suspended for2 years and 9 months), as well as theparticular circumstances of thiscase, the CAS substituted a period ofthree years ineligibility.

to fans, and made a substantial loss.T2F sued Wigan for fraudulentmisrepresentation, since Wigan hadexpressly represented that theperformance of the agreement (inparticular, the delivery of 10,000

tickets to T2F for finals day) was“within its power”. The court rejectedthe allegation of fraudulentmisrepresentation, but held thatWigan had made such arepresentation, which was false, and

which had induced T2F to enter intothe contract. Furthermore, therepresentation had been incorporatedas a term of the contract, and hadbeen breached. T2F was thereforeentitled to damages.

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CORPORATE VEIL

Piercing theCorporate VeilMarcus Haywood and his pupil, Oberon Kwok, explore the ways in which thecorporate veil can be bypassed in the aftermath of two Supreme Court decisions.

IntroductionIn what circumstances can the�corporate veil be pierced or lifted?This article reflects on the decisions�of the Supreme Court in VTB Capital�plc v Nutritek International Corp[2013] 2 A.C. 337�and Prest v Petrodel�Resources Ltd�[2013] 2 A.C. 415. Prest�in particular laid down a�rationalisation of past cases in which�courts have disregarded the doctrine�of separate corporate personality - a�doctrine laid down more than a�century ago by the House of Lords in�Salomon v A Salomon & Co Ltd�[1897]�AC 22.

The Decisions in VTB and PrestIn VTB, VTB advanced loan monies toRAP to purchase certain propertiesfrom Nutritek. The contract wasgoverned by English law andcontained an English non-exclusivejurisdiction clause. The loan wasalleged to have been induced byfraudulent misrepresentations fromNutritek. Given that RAP andNutritek were both non-EU

companies, VTB sought and obtainedpermission to serve claims inconspiracy and deceit against,amongst others, Mr Malofeev, whowas the ultimate controller of bothRAP and Nutritek. The defendantsapplied to set aside service.

Putting the issue of forum nonconveniens aside, VTB argued in theSupreme Court that Mr Malofeevcould be held liable for breach of theagreements on the basis that thecorporate veil could be pierced, thusestablishing the jurisdiction to serveout on Mr Malofeev. In effect, VTBargued that Mr Malofeev should betreated as if he were, or had been, aco-contracting party with RAP underthe relevant agreements. TheSupreme Court rejected thatambitious argument.

Lord Neuberger (with whom theother members of the Supreme Courtagreed) held that for Mr Malofeev tobe treated as a joint contractingparty alongside his company wouldbe contrary to Salomon v A Salomon,for a company must be “treated as

being a person by the law in the sameway as a human being” ([138]).Moreover, none of the partiesobjectively intended Mr Malofeev tobe a contracting party ([140]). Norcould it be said, on the facts, that RAPwas a mere façade for Mr Malofeev([142]-[143]). In Lord Neuberger’sview, if the corporate veil is to bepierced, “the true facts” must meanthat, in reality, it is the personbehind the company, rather than thecompany, which is the relevant actoror recipient (as the case may be). Bycontrast, here, on VTB’s case, “thetrue facts” related to the control,trading performance or to thegenuineness of the nature of theunderlying arrangement. None ofthese features could be said toinvolve RAP being used as a “façadeto conceal the true facts”. Anextension of the court’s jurisdictionto pierce the corporate veil in thesecircumstances was contrary toauthority and principle ([145]).

In VTB the Supreme Courtexpressly left open the question of

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whether, unless a statute expresslyor impliedly provides otherwise, thecourt could pierce the corporate veilat all ([130]).

A few months afterwards, theSupreme Court handed downjudgment in Prest. That was a claimfor ancillary relief by a wife for theassets owned by her husband’scompany. The question for theSupreme Court was whether thecompany’s assets could be treated asher husband’s. The Court ultimatelyallowed the claim on the basis thatthe husband was the beneficialowner of the property under aresulting trust. However, it rejectedthe wife’s argument that thecorporate veil could be pierced.

In Prest the Supreme Courtanswered the question it had leftopen in VTB and accepted that therewas a limited power to pierce thecorporate veil and to disregard theseparate personality of a company.

In Lord Sumption’s view that powerwas necessary if the law were not tobe disarmed in the face of abuse,provided that the limits wererecognised and respected.

Lord Sumption drew a distinctionbetween lifting and piercing the veil([16]). Lifting the veil concernedsituations in which the controller ofthe company can be held to bepersonally liable withoutdisregarding the company’s separatepersonality. The court could look tosee who the real actors in atransaction were, pursuant to whathe termed the “concealmentprinciple” ([28]). The concealmentprinciple could be invoked where a

company, or perhaps severalcompanies, had been interposed soas to conceal the identity of the realactors. This would not deter thecourts from identifying those realactors, assuming that their identitywas legally relevant. In these casesthe court is not disregarding the veil,but only looking behind it to discoverthe facts which the corporatestructure is concealing.

Piercing the veil concerned “trueexceptions” to Salomon; that is, thelimited situations where the owneror controller of a company isidentified with the company byvirtue of his ownership and control([16]). The court could pierce the veil

THE REAL ACTORS BEHIND A COMPANY CANNOT BE HIDDEN FROM THE COURT

It is veil-lifting, not the court’s insistence onthe corporate veil, that accords with common sense and justice (Conway v Ratiu)

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CORPORATE VEIL

Neuberger agreed with LordSumption’s approach in this regard.

Lord Mance and Lord Clarkediffered slightly in their approach toLord Sumption. They made it clearthat they were not foreclosing newsituations in which the courts couldpierce the veil. Indeed, theyconsidered that it would be“dangerous” to do so, though newsituations justifying piercing werelikely to be “novel and very rare”([100]).

Baroness Hale (with whom LordWilson agreed) also differed slightlyfrom Lord Sumption. She cited thebasic proposition that legislation,

including companies legislation,could not be used as an engine offraud, and said that piercing was butan example of that proposition ([89]).She was “not sure” that the law couldbe adequately analysed by referenceto the concealment vs. evasiondistinction, suggesting that thatdistinction stemmed from thebroader principle that controllers ofcompanies cannot “takeunconscionable advantage” of thepeople with whom they do business([92]).

While VTB and Prest provide amuch needed rationalisation of thelaw, the freedom with which judgescan develop and innovate this area ofthe law in the future is open todebate. We discuss this furtherbelow.

Piercing the Corporate Veil - TheEvasion PrincipleThe new formulation of piercing, laiddown by Lord Sumption in Prest,applies when a person is under anexisting legal obligation or liability orsubject to an existing legal restrictionwhich he deliberately evades orwhose enforcement he deliberatelyfrustrates by interposing a companyunder his control ([35]). Classicexamples include Gilford Motor CoLtd v Horne [1933] Ch 935 and Jones vLipman [1962] 1 WLR 832. In GilfordMotor, the defendant hadcovenanted not to solicit theplaintiff’s customers, butsubsequently did so through acompany he controlled. Both thedefendant and the company wererestrained against soliciting theplaintiff’s customers. In LordSumption’s view, the relief againstthe company involved piercingbecause “the company was restrainedin order to ensure that Horne wasdeprived of the benefit which he mightotherwise have derived from theseparate legal personality of thecompany”.

In Jones, a vendor who had a

only where the separate corporatepersonality was being “abused”([27]). This, Lord Sumption termedthe “evasion principle” ([28]). Piercingthe veil was limited to situationswhere “a person is under an existinglegal obligation or liability or subjectto an existing legal restriction whichhe deliberately evades or whoseenforcement he deliberately frustratesby interposing a company under hiscontrol”, in which case the court maypierce the veil solely to deprive himof the advantage deriving from thecompany’s separate personality([35]). That was the sole situation inwhich the veil could be pierced. Lord

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change of heart after contracting tosell a piece of freehold land conveyedthe property to a company hecontrolled so as to defeat thepurchaser’s right to specificperformance. The purchaser sued forbreach, with the result that both thevendor and the company wereordered to convey the property to thepurchaser.

In both Gilford Motor and Jones,the controller had a pre-existing legalobligation which he was attemptingto evade by setting up a company. Inboth cases, the court was prepared todisregard the separate personality ofthe company in order to grant aremedy not only against thecompany but also against the personwho owned and/or controlled it.

It appears clear from Prest that thecorporate veil may be pierced only toprevent the abuse of the separatelegal personality of a company. Theprinciple is a limited one because thecorporate veil should not be piercedunless it is necessary to do so. Ifsome other basis exists which wouldallow the same result without veilpiercing, it will not be appropriate topierce the corporate veil becausethere would be no public policyimperative to justify such a course.Indeed, Lord Sumption was of theview that in almost every case wherethe evasion principle was found toapply, it would not have beennecessary to pierce the corporate veilbecause the facts would havedisclosed some other legalrelationship between the companyand its controller. Veil-piercing is, inshort, a remedy of very last resort.

In these circumstances (andnotwithstanding that Lords Manceand Clarke explicitly stated that thedoor was not closed to novelsituations in which piercing may bejustified), the circumstances in whichthe corporate veil may truly be

pierced would appear to beextremely limited.

Lifting the Corporate Veil - TheConcealment PrincipleIn Prest, Lord Sumption seemedaltogether more enthusiastic for thelifting jurisdiction, referring to the“range of situations” in which theacts or property of a company can beattributed to those who control it.After Prest, the possibility of judicialcreativity and innovation to lift thecorporate veil appears to remainopen.

We suggest that the followingcategorisation is the best way toanalyse the cases in which the veilhas been lifted:

• ‘Cause of action lifting’• ‘Company law lifting’• ‘Agency lifting’• Fraud‘Cause of action lifting’ denotes the

situation where a claim is broughtdirectly against the company’scontroller or parent. This topic hasbeen comprehensively discussedelsewhere, and we do not propose togive a full account here1. In contract,the liberalisation of the process ofconstruction after Attorney Generalof Belize v Belize Telecom Ltd [2009] 1WLR 1988, combined with thedoctrine of rectification, gives thecourt substantial leeway to identifythe real parties to a contract. In tort,companies within the same groupcan conspire with each other (Digicel(St. Lucia) Limited v Cable & WirelessPlc [2010] EWHC 774 (Ch) at Annex I[77]), and so can a human controllerand his company - even if thecompany is his alter ego: TwentiethCentury Fox Film Corp v Harris [2014]EWHC 1568 (Ch) at [150]. Nor can aperson escape liability for fraudulentacts (e.g. deceit) by saying that hewas acting on behalf of his company(Standard Chartered Bank v Pakistan

OBERON KWOK

National Shipping Corpn [2003] 1 A.C.959 at [22]). In the tort of negligence,a parent company can justifiably besaid to have assumed a duty to itssubsidiary’s counterparties in certaincircumstances (Chandler v Cape plc[2012] 1 WLR 3111 at [69]). As toclaims to property, the controller ofthe company in Prest was held to bethe beneficial owner of thecompany’s assets under a resultingtrust.

It is, however, a mistake to thinkthat the veil can be lifted only byreference to specific causes of action.‘Company law lifting’ denotes the useof company law principles to lift theveil. In DHN Food Distributors Ltd vTower Hamlets LBC [1976] 1 WLR852, DHN operated its business fromland owned by its subsidiary. Whenthe land was compulsorily acquiredby the defendant, DHN sued forcompensation. The defendant reliedon the corporate veil to defeat DHN’sclaim. Lord Denning MR respondedthat the companies were partners:

“These subsidiaries are bound handand foot to the parent company and

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1/. For an in-depth discussion, see Day, “Skirting Around the Issue: the Corporate Veil after Prest v Petrodel” [2014] LMCLQ 269





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CORPORATE VEIL

Cory and Son Ltd v Dorman Long andCo Ltd [1936] 2 All ER 386.

The fourth category is fraud. Fraudunravels all, and the creation andrunning of a company as part of afraudulent scheme means that itsfounder must not be allowed toretain any advantage whatsoever,

including the protection of thecorporate veil. In Prest, LordSumption endorsed this as a meansto lift the corporate veil, and that“there are limited circumstances inwhich the law treats the use of acompany as a means of evading thelaw as dishonest for this purpose”

must do just what the parent companysays… This group is virtually thesame as a partnership in which all thethree companies are partners. Theyshould not be treated separately so asto be defeated on a technical point…The three companies should, forpresent purposes, be treated as one,and the parent company DHN shouldbe treated as that one.” (at 860)

There is no reason why the reverseshould not also be true. If the parentcompany is entitled to sue for theloss of its subsidiary’s property, thenit should also be liable for losscaused by its subsidiary to thirdparties on the ground that it and itssubsidiaries are in partnershiptogether and hence jointly andseverally liable for the partnership’sliabilities.

Although doubt has been cast onDHN in obiter dictum2 the Court ofAppeal has since applied it in LewisTrusts v Bambers Stores Ltd [1983]FSR 453 at 470-471. DHN was notdiscussed in Prest, and the SupremeCourt in VTB did not comment onDHN, despite the fact that it had beencited in argument. It is possible thatthe development of partnership lawalong the lines of DHN may provide apotential ground for veil-lifting.

As to ‘agency lifting’, in Smith,Stone and Knight Ltd v BirminghamCorp [1939] 4 All ER 116, it was heldthat the company was carrying onbusiness as agent for the members.At 121 Atkinson J identified sixprinciples by which he identified thecompany as the members’ agent,including how the profits weretreated, who made the businessdecisions, by whose effort profitswere generated and the degree ofcontrol over the company3. Theagency relationship has also beenapplied to corporate groups: William

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2/. Woolfson v Strathclyde RC 1978 S.C. (H.L.) 90 at 96 per Lord Keith of Kinkel.3/. While later first instance decisions have deprecated the importance of these 6 factors for the purpose of establishing agency (Yukong Line Ltd vRendsburg Investments Corp (No. 2) [1998] 1 WLR 294, Alberta Gas Ethylene Co Ltd v Minister of National Revenue (1988) 24 FTR 309), they havebeen directly applied by the Federal Court of Australia in Spreag v Paeson Ptd Ltd (1990) 94 ALR 679.

MICHAEL PREST AND YASMIN PREST

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([18]). But it is notable that none ofthe Justices, not even Lords Sumptionand Neuberger, restricted fraud to‘actual fraud’4 and it remains anopen question as to whetherequitable fraud (i.e.unconscionability) only would besufficient for these purposes5.

The concept of unconscionabilityin this context is illuminatingbecause it is a reminder that thecourt cannot and ought not to neglectthe techniques of equity whenmitigating the effects of thecorporate veil. Equity looks tosubstance over form. As LordRomilly MR said in Parkin v Thorold(1852) 16 Beav 59 at 66-67, “Courts ofEquity make a distinction in all casesbetween that which is matter ofsubstance and that which is matter ofform; and if it find that by insisting onthe form, the substance will bedefeated, it holds it to be inequitableto allow a person to insist on suchform, and thereby defeat thesubstance.” Thus the court’sassessment of unconscionabilityneed not be trammelled by the strait-jacket of Salomon.

A good illustration of the use of thecourt’s equitable techniques to liftthe veil is Gencor ACP Ltd v Dalby[2000] 2 BCLC 734. The claimantcompany brought an equitable actionfor account against its director,Dalby, who had directed a secretcommission from a third party intoBurnstead, corporate entity under hiscontrol. Dalby argued that he was notaccountable because he neveractually received anything whileBurnstead was not accountable as itowed no fiduciary duty to theclaimant. Rimer J at [26] rejected thatargument: “I do not accept thatargument which, if correct, wouldprovide the easiest possible escapefrom the rigours of equity’s strict

principle of accountability… If thearrival at this result requires a liftingof Burnstead’s corporate veil, then Iregard this as an appropriate case inwhich to do so… The introduction intothe story of such a creature companyis, in my view, insufficient to preventequity’s eye from identifying it with MrDalby”.

Ultimately, the policy behind arobust approach to veil-lifting is theneed for the court to have regard tothe realities of the situation. InConway v Ratiu [2006] 1 EGLR 125 (alibel case), Auld LJ at [75] referred to“the readiness of the courts, regardlessof the precise issue involved, to drawback the corporate veil to do justicewhen common sense and realitydemand it.” Laws LJ agreed at [186].Sedley LJ stated at [188] “I recognise

that there is an asymmetry betweenthe law’s long-standing insistenceupon the discrete legal personality oflimited liability companies and itswillingness to lift the veil, as theexpression is, in a case like thepresent. But it is the latter, not theformer, that accords with commonsense and justice”.

In view of the foregoing, theconcealment principle may beunderstood as both a restatement ofthe law as well as a prescription forits development. It underscores theimportant fact that the respectiverights and liabilities of companiesand their controllers can often bedetermined by reference toconventional principles without inany way encroaching on the separateentity rule.

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4/. If they had done so, then only dishonesty/common law fraud would suffice: see Armitage v Nurse [1998] Ch. 241 at 250 per Millett LJ.5/. See the approach of Baroness Hale in Prest at [92].

OFFSHORE COMPANIES ARE NO REFUGE FROM EQUITY’S JURISDICTION


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AUSTRALIA & NEW ZEALAND

Allens insolvency update:Recent developments in Australia

The vexing issue of “vesting”: the Personal PropertySecurities Act 2009 (Cth). Chris Prestwich andPrzemek Kucharski report.

More than three years have passed since the cominginto effect of the Personal Property Securities Act2009 (Cth) (the Act) in Australia. The Act hasundoubtedly had a profound effect on banking andfinance and insolvency practice in Australia. Thechanges include:

• Where previously credit transactions secured bypersonal property were governed by a myriad ofdisparate, State-based regimes and requiredrecording of interests on various registers, the Actrevolutionised law and practice in Australia byreplacing these regimes and registers with a newsingle Federal law regulating the creation, registration,enforcement and priority of interests over personalproperty that secure credit arrangements;

• The types of transactions recognised as givingrise to security interests in personal property havebeen broadened to include arrangements such asretention of title terms, hire purchase agreements andconsignments as well as certain types of long-term orindefinite leases or bailments of goods (together

termed “PPS leases”);• The legal lexicon has been transformed. Out

have gone fixed charges and floating charges,replaced with “non-circulating security interests” and“circulating security interests”; and

• To be enforceable, a security interest must have“attached” to relevant personal property. Where asecurity interest has “attached” to personal property,it may be “perfected” under the Act. That usuallyoccurs through registration of the interest on thePersonal Property Securities Register.

Below we reflect on one aspect of the operation ofthe Act that has proven particularly controversial in aninsolvency context, being the impact that the so-called“vesting” provisions have on unperfected securityinterests when the grantor of the interests entersadministration or liquidation.

The Act operates so that any security interest thatis unperfected at a time when an administrator orliquidator is appointed over the grantor “vests in thegrantor” at that time. Such a security interest may be

AUSTRALIA

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unperfected for any number of reasons, including afailure by the secured party to register it on the PPSRor some defect in any registration.

The outcome of such “vesting” may be that thesecured party, irrespective of whether or not theyhave title in the personal property the subject of thesecurity interest, could lose all rights to the property.

By way of example of the operation of vesting inpractice, where a supplier provides goods to acustomer on hire purchase or retention of title terms,the supplier will as against the customer have thebenefit of a security interest in the goods for thepurposes of the Act because the supplier has aninterest (that is, title) in personal property (that is, thegoods) that secures payment or performance of anobligation (that is, the customer’s debt owing to thesupplier for the goods). In such circumstances, if thesupplier fails to perfect this security interest over thegoods through registration on the PPSR against thecustomer, and the customer goes into administrationor liquidation, the security interest (that is, title to thegoods) will vest with the customer. The customer’sadministrator or liquidator may then deal freely withthe goods for the benefit of the customer’s unsecuredcreditors, subject to any perfected security interestwith priority granted by the customer to any securedcreditor (for example, an all-assets fixed and floatingcharge in favour of a financier).

This vesting effect represents perhaps the highwatermark of the degree to which the Act disregardsownership and title rights and reverses the status quoexisting prior to its operation. It is therefore notsurprising that vesting under the Act has attractedconsiderable controversy, especially where it hasresulted in loss of rights for suppliers and windfallgains for financiers.

Nonetheless, in a number first instances decisions,various Australian courts have confirmed theoperation of vesting under the Act as described above(most notably, in the decision of the Supreme Court ofNew South Wales in In the Matter of Maiden Civil(P&E) Pty Ltd [2013] NSWSC 852 and the decision ofthe Supreme Court of Western Australia in White vSpiers Earthworks Pty Ltd [2014] WASC 139). While arecent review of the PPSA has recommended somenarrowing of their operation, it has not proposed anysubstantial changes to the vesting provisions of theAct. It seems therefore that vesting is now a well-established part of Australian insolvency law.

Three years onHaving been in operation for a little more than threeyears, the Act is still relatively new and untested. It willprobably take some time yet for its effects topermeate through the Australia economy.

However, from an insolvency practitioner’sperspective, one impact of the Act that may be notedalready is the improved transparency that the PPSRoffers in allowing for easy identification of securityinterests granted by a particular grantor in specificpersonal property. In this respect, the emphasis of theAct on the substance over the form of transactionsand its disregard for ownership and title, has arguablygone some way to addressing the so-called‘ostensible ownership’ problem. This is the concernthat a secured party could take a security interest in agrantor’s property but leave the grantor in possessionof the property, and in so doing mislead outsiders intobelieving that the grantor has a better title to theproperty than is in fact the case. Through the Actcreating strong incentives to register security interestson the PPSR, including via the effects of vesting, itfacilitates the public notification of such interests. Inthis way the Act has arguably made it easier forinsolvency practitioners to determine competingclaims to personal property.

Chris Prestwich and Przemek Kucharski

Cross border insolvency: putting themodifications into modified universalismIn a cross-border insolvency under the UNCITRALModel Law, the usual position is that all of aninsolvent company’s foreign assets are collected,remitted to the company’s “centre of main interests”and all creditors will prove in the foreign mainproceeding. The Full Court of the Federal Court ofAustralia has recently upheld orders modifying theoperation of the Model Law to protect the interests ofa domestic creditor.1 The result of that decision is thatall of the Australian assets of an insolvent CaymanIslands company will be applied to pay an Australiantax debt rather than being remitted to the CaymanIslands for distribution amongst all creditors.

Saad Investments Company Ltd (SaadInvestments), a Cayman Islands company, collapsedin 2009 and the Grand Court of the Cayman Islandsmade orders for the company to be wound up. Theliquidators brought proceedings in Australia, andobtained orders recognising the Cayman Islands

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1/. Akers (as joint foreign representative) v Saad Investments Company Limited; In the matter of Saad Investments Company Limited (in officialliquidation)[2014] FCAFC 57

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proceeding as the foreign main proceeding. Theliquidators sold the company’s Australian assets,realising approximately $7 million, and gave notice tothe Australian Deputy Commissioner of Taxation (theCommissioner) of their intention to remit those fundsto the Cayman Islands for distribution to creditors.

The Commissioner claimed that Saad Investmentsowed $83 million in unpaid Australian tax andpenalties. However, that was a revenue debt whichwould not be admitted to proof in the Cayman Islands.As such, the Commissioner brought proceedingsseeking to have the recognition orders modified toprevent the Australian assets being remitted overseasand granting it leave to issue statutory notices andtake other enforcement steps.

At first instance, the Commissioner succeeded.2

The Court held that, as the Commissioner’s claim wasnot admissible to proof in the Cayman Islands, therecognition orders did not adequately protect theCommissioner’s interests and the remission of theAustralian assets overseas would result in a windfallto the other creditors of Saad Investments.

On appeal, the main issue was the whether the

Court’s exercise of its jurisdiction to protect theCommissioner was inconsistent with the universalistapproach under the Model Law. The Full Court heldthat:

• There is nothing in the Model Law that wouldjustify the stripping of rights of a local creditor byreason of making recognition orders (which would bethe practical impact on the Commissioner if theAustralian assets were remitted overseas);

• The modification orders did not have the effect ofelevating the Commissioner to the status of apreferred creditor. The orders made prevented theCommissioner from benefitting from the exercise ofrights beyond a pari passu amount that he would havereceived had the tax debt been recognised in theCayman Islands; and

• It was not necessary for the modification ordersto permit other foreign creditors to participate in thedistribution of the Australian assets. Drawing ananalogy with an ancillary liquidation, foreign creditorswould be required to bring to account, in the nature ofhotchpot, the value of their participation in theCayman Islands winding up. Even with the full benefitof the Australian assets, the Commissioner stood toreceive fewer cents in the dollar than foreign creditors,so no unfairness would follow from the Commissionerreceiving all of the Australian assets.

Drawing an analogy with Rubin, the liquidators alsosought to rely on the fact that the Commissioner had

All of the Australian assets of an insolvent Cayman Islands company willbe applied to pay an Australian tax debt

CHRIS PRESTWICH (LEFT) AND PRZEMEK KUCHARSKI (RIGHT)

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2/. Akers (as joint foreign representative) v Saad Investments Company Limited; In the matter of Saad Investments Company Limited (in officialliquidation)[2013] FCA 738

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submitted a proof of debt in the main liquidation aspreventing the Commissioner from seeking relief fromthe Australian courts. However, the Full Court heldthat submitting a proof of debt in the main liquidationdid not disentitle the Commissioner from bringing anapplication for a modification of the Australianrecognition orders.

In October 2014, the High Court declined anapplication by the liquidators for special leave toappeal, holding that it was not persuaded that thereare sufficient reasons to doubt the correctness of theappellate decision. As a result, all of the Australianassets of Saad Investments will be paid to theCommissioner.

The decision illustrates the potential, in a cross-border insolvency, for domestic courts to make ordersdeparting from a strict universalist approach, byprotecting local creditors if those creditors will receiveinsufficient protection in the foreign main proceeding.Other examples given by the Court where similarissues might arise are in relation to penalties that areunenforceable in the foreign main proceeding, or if thelaw of the foreign main proceeding refuses torecognise claims of citizens or companies of aparticular state. However, even in thosecircumstances, the Court will have regard to therequirement for rateable distribution.

Chris Prestwich

Shareholder class actions: proving reliance inmarket disclosure claimsIn March 2015, the Federal Court of Australia handeddown judgment in a shareholder class action broughtagainst an insolvent company: Grant-Taylor vBabcock & Brown Limited (In Liquidation) [2015] FCA149. The shareholders of Babcock & Brown Limited(BBL) were seeking to have a damages claimadmitted to proof in the liquidation arising from analleged failure by BBL to comply with the continuousdisclosure regime.

By way of background to that claim:• On 31 January 2007, the High Court held in Sons

of Gwalia Ltd v Margaretic3 that a claim by ashareholder for loss to the value of shares caused byfailure of the company to inform the market wouldrank equally with the claims of other unsecuredcreditors in an external administration;

• The prospect of the claims of unsecured creditorsbeing diluted in an insolvency by shareholder claimsled to significant criticism, and the Federal

Government introduced theCorporations Amendment(Sons of Gwalia) Act 2010 to reverse the position.Going forward, all claims by shareholders arising outof their buying and selling of shares in the companywould be postponed until such time as all other debtsand claims had been satisfied in full. However, thatlegislation was not retrospective.

The Babcock & Brown group collapsed in 2009,prior to that legislative change. 77 shareholderssought to establish a claim for damages arising out oftheir acquisition of shares on-market in circumstanceswhere they contended that Babcock & Brown Limited(BBL) had failed to comply with its continuousdisclosure obligations. The share price fell from over$34 to just 33 cents in the period of alleged non-compliance. It was alleged that in that period BBLhad, for example, failed to disclose to the market thatit was insolvent and that it had paid dividends otherthan out of profit.

The shareholder claim was brought by theshareholders as a class action and judgment washanded down in March 2015. The most interestingaspect of the judgment is the Court’s analysis of theshareholders’ causation arguments:

• The shareholders did not advance a positivecase that the matters that they said resulted in BBLcontravening its continuous disclosure obligationswere material to their individual decisions to acquireshares in BBL. In other words, no direct causationcase was advanced;

• Instead, the shareholders advanced a theory ofindirect causation, contending that they did not eachneed to prove individual reliance. The shareholders’case was that BBL’s alleged contraventions led to themarket price of the shares being artificially inflatedand that market based causation was sufficient tosatisfy the causation element of the shareholders’claims.

The question of whether market-basedcausation/indirect causation is sufficient underAustralian law is undecided in market-disclosureclaims. In this case, Justice Perram did not need to

The shareholders advanced a theoryof indirect causation, contending thatthey did not each need to prove individual reliance

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3/. (2007) 231 CLR 160

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determine the issue one way or another because heheld that BBL had not breached its continuousdisclosure obligations. However, Justice Perramconcluded that, if it had been necessary to come to aview, he would likely have decided that indirectcausation was sufficient for the following reasons:

• While reliance will be sufficient to establishcausation, it is nonetheless possible to establishcausation without reliance;

• The obligation on a listed entity is to discloseprice sensitive information, and the relevant statutoryprovision requiring disclosure assumes the existenceof a price effect on the market in general;

• There is no requirement for damages underAustralian law that the disclosing entity directlymisleads the plaintiff shareholder. It is sufficient if thatentity misleads the market generally and that ultimatelycauses loss to an individual shareholder; and

• While ordinarily a claim for misleading conductrequires a plaintiff to show that they would have actedin a different way but for that conduct, it is artificial tospeak of reliance in non-disclosure cases.

As such, his Honour’s obiter view was that providedthat the shareholder was not aware of the non-disclosed information, a shareholder who acquiredshares on market was entitled to recover compensationfor price inflation arising from a failure to disclose pricesensitive information.

While the legislative changes that followed the Sonsof Gwalia decision limit the significance of this issue inthe context of corporate collapses, the question of

RICHARD HARRIS causation remains very much alive in ordinary marketdisclosure shareholder class actions. Whether market-based causation is sufficient in a shareholder classactions is a question that will be of critical importance tothe conduct class actions in Australia. Should a conceptof indirect causation be adopted it would represent amaterial additional incentive to the commencement ofclass actions in the coming years.

Richard Harris

Court approved expropriation of shares?When a company in Australia goes into voluntaryadministration, the most commonly used restructuringtool is a deed of company arrangement (DOCA). To beimplemented, a DOCA requires the support of only50% of creditors by number and value (the voluntaryadministrator has a casting vote if only one majority canbe obtained). Court approval is not required. Ifapproved by the requisite majority, a DOCA binds allunsecured creditors of the company, along with anysecured creditors who voted in favour.

One feature of the Corporations Act 2001 (Cth) thathas been the subject of two recent cases in Australia issection 444GA. It provides that the administrator of aDOCA may transfer shares in a company with theconsent of the owner of the shares or leave of thecourt. The court may grant leave only if it is satisfiedthat the transfer ‘would not unfairly prejudice theinterests of the members of the company’. The recentcases have involved applications brought byadministrators for orders for the transfer of all of theshares held by the members to the proponent of theDOCA, for no consideration.

The first of two recent cases to consider thisprovision was In the matter of Mirabela Nickel Ltd(subject to deed of company arrangement)[2014]NSWSC 836. Mirabela Nickel was an ASX listed miningcompany with interests in an open pit nickel sulphidemine located in Brazil. Following financial difficultiesand a failed recapitalisation attempt, Mirabela enteredvoluntary administration. It was clear that theunsecured creditors were owed substantially more thanthe value of the company. A group of these noteholdersproposed a DOCA in which their claims againstMirabela would be met by transferring the company’sshares to them for nil consideration. The administratorsapplied to the Court for an order granting leave toenforce that transfer. In considering the application, theCourt developed the statements of principle that:

• the law gives deed administrators the ability tocompulsorily sell company shares for the purpose ofimplementing a DOCA, where payment to creditorsdepends on the share transfer occurring;

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• whether a transfer of shares is unfairly prejudicialto shareholders depends on the value of their shares ina (hypothetical) liquidation scenario. That test applies ifa winding up is the likely or necessary consequence ofthe transfer of shares not being approved; and

• members do not suffer any prejudice if the shareshave no value, the company has no residual value tomembers and if the members would be unlikely toreceive a distribution in a winding up.

The Court ordered that the listed shares betransferred to the noteholders for no consideration.

The issue arose again in Re Nexus Energy Ltd(subject to deed of company arrangement) [2014]NSWSC 1910. The Nexus group comprised NexusEnergy Ltd and several subsidiaries with interests innatural resources. From at least 2013, the NexusGroup was in financial distress, entering administrationin 2014. The voluntary administrators sought proposalsin respect of Nexus, its subsidiaries and theirrespective assets. Only one bid was received, from theprimary secured creditor, in the form of a DOCAproposal. The proposal was for the payment of securedcreditors in full, a 75c to the dollar return to unsecuredcreditors. That proposal was conditional on theadministrators obtaining court orders for the transfer ofall ordinary shares in Nexus to the bidder for nilconsideration. The court application was supported by

the bidder and various creditors, but opposed by a coregroup of shareholders.

In determining the matter, the court re-iterated theprinciples set out in Mirabela. Applying those principles,and on the basis of the expert evidence filed by theadministrators, the Court found that there would be noresidual value to shareholders in a liquidation, andtherefore no unfair prejudice to the compulsory transfer.As such, the Court granted leave under section 444GA.

In the context of an insolvent group of companies, it islikely that a DOCA can be used to transfer the operatingcompanies or businesses to an acquirer without theneed to acquire the ultimate shareholders’ shares(which in many cases will be a suitable alternativestrategy), particularly given the evidentiary challengesand costs of the court approval process. However, theCourt’s decision reinforces the effectiveness andflexibility of DOCAs as a tool to extract value for acompany’s creditors and to restructure its share capital.

Kim Reid

The Octaviar saga: extensions of time for bringingunfair preference claimsIn Australia, a 3 year limitation period applies to anyvoidable preference and uncommercial transactionclaims brought by liquidators. Section 588FF(3) of theCorporations Act (Cth) 2001 provides that liquidatorsmay only apply to bring voidable transactionproceedings within the later of 3 years after the day thewinding up is taken to have begun (the “relation-backday”) or 12 months after the first appointment of aliquidator.

That three-year limitation period imposes a tighttimeframe on liquidators to investigate and bringvoidable transaction proceedings, particularly incomplex liquidations. Liquidators might, for example,need additional time to investigate the claims or toarrange litigation funding to meet the costs of theproceedings.

In order to mitigate the rigours of those time limits,section 588FF(3)(b) confers a discretion on the court toextend the period of time in which voidable transactionproceedings may be commenced on application by theliquidator during the initial three-year limitation period.4

In two decisions arising from the Octaviar liquidation(Octaviar was an investment management groupwhich collapsed with debts in excess of $1 billion), theHigh Court has given guidance on liquidators’ ability toseek extensions of time under section 588FF(3)(b).5

KIM REID

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4/. Section 588FF(3)(b) provides that a liquidator may apply to bring a voidable transaction claim: “within such longer period as the Court orders onan application under this paragraph made by the liquidator during the paragraph (a) period.”5/. Grant Samuel Corporation Finance Pty Ltd v Fletcher; JPMorgan Chase Bank, National Association v Fletcher [2015] HCA 8 and Fortress CreditCorporation (Australia) II Pty Limited v Fletcher [2015] HCA 10.

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The decisions also highlight the risks of suchapplications.

In the case of Grant Samuel Corporation FinancePty Ltd v Fletcher; JPMorgan Chase Bank, NationalAssociation v Fletcher the High Court consideredwhether the court has the power to vary anextension order granted pursuant to s 588FF(3)(b)after the initial three year limitation period hasexpired.

In that case, before the expiry of the limitationperiod, the Octaviar liquidators obtained a four-month extension. Shortly before expiry of thatextension, the Octaviar liquidators made anotherapplication to the court, and obtained orders varyingthe earlier extension orders and extending the periodfor bringing claims by another six months. Thissecond application was obtained not unders588FF(3)(b), but using the court’s apparentprocedural powers to vary its earlier orders.

When the proceedings were eventually served onthe defendants, they challenged that six-monthextension, on the basis that the Corporations Actonly permits extensions of time to be made duringthe limitation period. The liquidators argued that thecourt rules permit a variation of earlier orders, andthat provided a means by which the limitation periodcould be further extended, even after the three yearperiod had passed.

On 11 March 2015, the High Court unanimouslyrejected the argument that the court rules could beused to vary its earlier orders in thesecircumstances. It was held that those rules cannotrise above the strict words of the Corporations Act,which provide that any application for an extensionof time ‘may only be made’ during the time limitstated in 588FF(3)(a). As such, once the three-yearperiod from the ‘relation-back day’ has expired, nofurther extensions of time are permitted, even ifframed as a variation of earlier orders. As aconsequence, the voidable transaction claims thatthe liquidators served during the six month extensionperiod were time-barred and those claims will fallaway.

In Fortress Credit Corporation (Australia) II Pty

Limited v Fletcher, the High Court consideredwhether, in relation to extensions of time for bringingvoidable transaction claims, an extension can onlybe ordered in relation to specified transactions, or ifthe extension can extend to transactions that are notable to be identified at the time of the order. Thelatter form of order is sometimes referred to as a‘shelf order’. Shelf orders are attractive to liquidatorswhose investigations of the company’s affairs arenot yet sufficiently advanced to identify specificclaims.

At the time that the first extension was granted,the Octaviar liquidators were still in the process ofinvestigating and uncovering transactions that maygive rise to potential claims. They were not aware ofthe possibility of a voidable transaction claim againstthe Fortress Investment Group LLC. Consequently,Fortress was not named in the application for theextension or notified of the application. A ‘shelforder’ was, however, made, extending the time forbringing all voidable transaction claims.

The liquidators subsequently brought a voidabletransaction claim against Fortress. Fortress soughtto have the extension of time against it set aside, onthe basis of a number of ‘policy factors’ as to whyshelf orders should not be permitted (such ascertainty for creditors and requiring liquidators topromptly identify claims and expedite theliquidation).

The High Court unanimously held that a liquidatormay seek an order extending time unders.588FF(3)(b) without having, specifically andexhaustively, to identify every transaction to whichthat order may apply. The ‘policy factors’ reliedupon by Fortress were a matter that could beconsidered by the court in the exercise of itsdiscretion when deciding whether or not to grant anorder on a case-by-case basis. As such, ‘shelforders’ are permitted.

The High Court decisions provide welcomeclarification about the options available to liquidators.However, any application for an extension of time bya liquidator is replete with risk. In this case, theconsequence for the liquidators of relying onextensions of time granted by the court and thatwere then successfully challenged was that theliquidators lost their ability to pursue some claimsaltogether. The safest course for a liquidator to takeis to file the proceeding within the limitation period,rather than risk later losing the ability to make theclaim at all.

Chris Prestwich

Any application for an extension oftime by a liquidator is replete withrisk… the liquidators lost their ability topursue some claims altogether

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Directors defencecosts denied

IntroductionThe collapse of New Zealand’ssecondary finance markets between2006-2008 led to a surge of importantinsolvency litigation, much of whichis only now reaching its conclusion.As receivers and liquidators pursuedthose responsible, many of whomlacked the assets necessary to meetthe claims against them, significantattention was focussed on oneimportant but infrequently-litigatedprovision: section 9 of the LawReform Act 1936. This provisionallows plaintiffs to assert a chargeover insurance monies payable todefendants in respect of their claim,and allows plaintiffs to enforce their

charge directly against defendants’insurers.1 Section 9 has taken centrestage in many cases, as defendants(and directors in particular) havebeen reliant on insurance to meet theclaims against them.

There have been three importantappellate decisions on the section inrecent years.

The first considered the situation inwhich a director is entitled to beindemnified under the same policylimit for both their defence costs andfor their substantive liability to thethird party. Which claim takespriority, when the limit of liabilityunder the policy is insufficient to payboth claims? Can the director’s

mounting defence costs erode orexhaust the insurance that wouldotherwise be available for the thirdparty? Or does a third party’s(unproven) claim effectively precludean insurer from paying defence coststhat are otherwise due under thepolicy? These were the questions theNew Zealand Supreme Court faced inBFSL 2007 Ltd v Steigrad [2013] NZSC156, [2014] 1 NZLR 304.

Separately, offshore insurers(including Lloyds syndicates) haveargued that section 9 does not applyto payments under their policies,because the section was not intendedto have extra-territorial effect. Doesthe section need to apply extra-territorially to apply to them? DidParliament intend to include orexclude payments from foreigninsurers to New Zealand insureds,payable in New Zealand, undercontracts governed by New Zealand

New Zealand Supreme Court rulings clarify third-partyrights to insurance monies. Murray Tingey and TimFitzgerald of Bell Gully report.

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1/. The claim may be made without leave of the Court if the insured party has died insolvent, is bankrupt, or (in the case of a corporation) is beingwound up. Otherwise, leave is required: s 9(2) and s 9(4) Law Reform Act 1936.

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law and enforceable only in NewZealand? The Supreme Courtconsidered these issues in LudgaterHoldings Ltd v Gerling AustraliaInsurance Co Pty Ltd [2010] NZSC 49,[2010] 3 NZLR 713, and for the Courtof Appeal in Bridgecorp Ltd (in recand liq) v Certain Lloyd’sUnderwriters [2014] NZCA 571, [2015]2 NZLR 285.

The statutory chargeSection 9 is designed to address theperceived unfairness of insuranceproceeds entering an insolvent

insured’s general pool of assets andbeing distributed pari passu amongits unsecured creditors, incircumstances where the moneywould never have been payable tothe insured but for the loss sufferedby the third-party claimant.

Although most comparablejurisdictions have legislation directedat the same goal, the mechanism theyuse is not consistent. In the UnitedKingdom, the Third Parties (Rightsagainst Insurers) Act 1930 (UK) relieson an assignment: it assigns to thethird party the insured’s rights under

the insurance policy to the claimant,which allows the claimant to proceeddirectly against the insurer (providedthat it can first establish the insured’sliability). In 2010, legislation waspassed to amend the 1930 Act. TheThird Parties (Rights against Insurers)Act 2010 (UK) has still not come intoforce, but will eventually allow thirdparties to bring claims againstinsurers directly without needing tofirst establish liability against theinsured.

Section 9 of the Law Reform Act1936 (NZ) operates by way of charge,rather than assignment. It creates astatutory charge in favour of thethird-party claimant over anyinsurance money that is or maybecome payable in respect of aninsured’s liability to pay damages orcompensation. The third-party

This left the insured directors in the unfortunate position of having no insurancecover available for their defence costs

THE SUPREME COURT HELD THAT PARLIAMENT DID NOT INTEND FOR S 9 TO APPLY EXTRA-TERRITORIALLY

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MURRAY TINGEY

claimant is able to proceed directlyagainst the insurer, in the samemanner and in the same Court as if itwere suing the insured. Legislation inNew South Wales and the AustralianCapital Territory operates onvirtually the same model as NewZealand’s section 9.

Defence costsBFSL 2007 Ltd v Steigrad concernedthe Bridgecorp property developmentgroup, which collapsed in July 2007owing investors nearly $500 million.

Bridgecorp (under the control of itsreceivers) commenced proceedingsagainst three former directors of thegroup. It alleged breaches of theirdirectors’ duties and sought damagesin excess of $340 million. Separately,the directors were prosecuted foralleged offences under the SecuritiesAct 1978.

The directors were insured partiesunder the group’s D&O liabilityinsurance policy. The policy providedan indemnity for any liabilityincurred to third parties as a result oftheir actions as directors. It alsoprovided cover for costs incurred indefending civil or criminalproceedings seeking to establish thedirectors’ liability. The limit ofliability was $20 million. In addition,the directors had a statutory liabilitypolicy with a $2 million limit ofindemnity. That policy covereddirectors’ defence costs, but did notcover the directors for any liability tothird party claimants.

By August 2011, all but one of thedirectors had exhausted theirentitlements under the statutoryliability policy. The directorsestimated that they would each incurat least another $3 million in costs todefend their criminal trial. Thedirectors sought to claim thesedefence costs, as well as themounting defence costs in theircriminal proceeding, under the D&Opolicy. If the insurer continued topay these defence costs, the limit of

liability under the D&O Policy waslikely to be exhausted beforeBridgecorp could obtain judgmentagainst the directors.

To avoid the available insurancemonies being eroded, Bridgecorpasserted its charge under section 9. Itput the insurer on notice that anyfurther defence costs paymentswould be made in breach of the

charge, and so would not reduce theamount available to Bridgecorp if itsuccessfully established its claim.This caused the insurer to cease topay defence costs. The insuredchallenged Bridgecorp’sinterpretation of section 9. The issuefor the Court was whether thestatutory charge secured the fullamount of the insured’s liability to

The debt must be located in the jurisdictionwhere the debtor resides, irrespective ofthe parties’ agreement as to the jurisdictionin which it is enforceable

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subject to the same overall limit ofliability (i.e. it was impossible to paydefence costs without reducing theamount available to third parties).2

The Court left open the question ofwhether the insurer or insuredshould bear the cost of this poordrafting. One possible consequenceof the Supreme Court’s decision isthat insurers may be contractuallyobliged to pay more than the limit ofliability in certain circumstances.This issue remains unresolved inNew Zealand.

This decision sets New Zealandapart from other jurisdictions thathave adopted comparable third-partyclaim regimes. The New South WalesCourt of Appeal reached the oppositeconclusion in relation to materiallyidentical legislation in ChubbInsurance Co of Australia Ltd v Moore[2013] NSWCA 212, (2013) 302 ALR101. In the United Kingdom, the issuearises in a different way because thelegislation operates by way of anassignment, rather than a charge.Under the 1930 Act, the issue isunlikely to arise, because the

statutory assignment only takeseffect once liability is established, bywhich time defence costs will alreadyhave been incurred. It is less clearwhether there is scope for a Steigrad-like argument under the 2010 Act,which will transfer the insured’s“rights… against the insurer inrespect of the liability” to the thirdparty even before the claim isestablished and enforceable. TheAustralasian cases may be ofrelevance in assessing the scope ofthe “rights in respect of the liability”,and the effect on the limit of liabilityof a claim having been transferredbefore it is enforceable, under thenew legislation.

Foreign insurersComplex jurisdictional issues canarise in relation to s 9 when there is aforeign element to the insurancepolicy.

In Ludgater Holdings Ltd v GerlingAustralia Insurance Co Pty Ltd [2010]NZSC 49; [2010] 3 NZLR 71, Ludgater’sbuilding in New Zealand was damagedin a fire allegedly caused by anegligently manufactured capacitor.The manufacturer, Atco Controls PtyLtd, was a company registered inVictoria, Australia. Atco had a liabilityinsurance policy with the defendantGerling, a New South Wales company.Atco went into liquidation soon afterthe fire, and the Ludgater brought aclaim directly against Gerling undersection 9. Gerling protested thejurisdiction of the High Court on thebasis that it lacked both personaljurisdiction and subject-matterjurisdiction to determine a claimunder section 9.

The case reached the Supreme Courton the question of subject-matterjurisdiction. The Court held thatParliament did not intend for section 9to apply extra-territorially, and that asa result the New Zealand courts would

Bridgecorp, even before that liabilityhad been determined.

The High Court found forBridgecorp. The Court of Appealfound for the insured. The case wentto the Supreme Court. Buy a 3-2majority, the Court restored the HighCourt’s judgment in favour ofBridgecorp. It reasoned that thestatutory charge arose immediatelyon the happening of the event givingrise to the claim, and secured the fullamount of the liability eventuallyestablished through liability orsettlement. The amount secured bythe charge was not to be diluted bypaying the insureds’ defence costsout of the money available to theclaimants.

This left the insured directors inthe unfortunate position of having noinsurance cover available for theirdefence costs. Glazebrook J, writingfor the majority, noted that this wasthe result of a poorly-designed policy,rather than any unfairness inherentin the Law Reform Act 1936. Theissue arose only because defencecosts and third-party liability were

! !

2/. As a result of this decision, most D&O Policies in New Zealand now provide separate limits of liability for defence costs and third party claims.

TIM FITZGERALD

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not have subject-matter jurisdictionover a claim under section 9 unlessthe relevant insurance debt wassituated in New Zealand.

The decisive issue in the case wasthe situs of the insurance debt. As tothis, the Court held that the situs of adebt is ordinarily where the debtor isresident. It then went on to consider arange of other factors, includingwhere the insured was located(Victoria, Australia), where the policywas issued (Australia), and where theinsurance monies were payable(Australia). It held that the debt wassituate in Australia, and that as a resultsection 9 did not apply to it.3

The reasoning in Ludgater led tosome uncertainty as to thecircumstances under which aninsurance liability is situate in NewZealand (and hence when section 9would apply to it). This was clarifiedlast year, in Bridgecorp Ltd (in rec andliq) v Certain Lloyd’s Underwriters[2014] NZCA 571; [2015] 2 NZLR 285.

The case concerned a policy issuedby a Lloyd’s syndicate. Though theinsured did not know it when thepolicy was incepted, the only name inthe syndicate was based in London.However, unlike the Ludgater policy,the insured was based in NewZealand, the policy was payable inNew Zealand, in New Zealand dollars,and was subject to the exclusivejurisdiction of the New Zealand Court.The third party claimant argued that,the parties having agreed that thepolicy was payable and enforceableonly in New Zealand, the relevantdebt must be located in New Zealand.

The High Court and Court of Appealdisagreed. They held that the debtmust be located in the jurisdictionwhere the debtor resides, irrespectiveof the parties’ agreement as to thejurisdiction in which it is enforceable,and irrespective of whether theinsured knew which jurisdiction the

underwriter resided in at the timethey entered into the policy. As theLloyd’s syndicate was resident inLondon, the New Zealand courtslacked subject-matter jurisdiction tohear the claim. The decision inBridgecorp is not being appealed tothe Supreme Court.

Unlike section 9, which contains noexpress indication of whether itshould apply in cases with a foreignelement, the Third Parties (Rightsagainst Insurers) Act 2010 (UK) whenit comes into force will provide for itsterritorial scope. The Act will applywhere one of a series of insolvency-type events listed in the Act occurswithin the United Kingdom. The thirdparty may bring proceedings inwhatever part of Great Britain it

resides or the insured resides. Thisreform should avoid many of thedifficulties that have arisen atcommon law.

ConclusionThere are many ways to validate therights of third-party claimants toinsurance money paid as indemnityfor damages. It is not surprising thatjurisdictions vary in their favouredsolution. The 2010 Act, when it comesinto force, will refine the existingmodel in the United Kingdom. TheNew Zealand cases discussed abovemay be of interest to practitionersboth in the interpretation of the newlegislation, and in illustrating thepractical consequences of the modelsused in different jurisdictions.

BRIDEGCORP: THE NEW ZEALAND COURTS LACKED SUBJECT-MATTER JURISDICTION TO HEAR THE CLAIM.

! !

3/. This meant that the Court did not have to consider the “more difficult question” of whether the Court lacked personal jurisdiction.

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Samba and its implications forinsolvency practitioners

IntroductionWhere insolvency proceedings havecommenced in respect of a companyor an individual, it is important for theliquidator or trustee in bankruptcy tobe able to identify the assets which fallwithin the estate available fordistribution to the creditors.

In many cases, third parties willassert that assets held in the name ofthe insolvent company or individualare subject to a trust in favour of thosethird parties and are therefore notavailable for distribution to thecreditors of the insolvent company orindividual. In other cases, theliquidator or trustee in bankruptcy willhave grounds for concluding thatassets held in the name of third partiesare owned beneficially by the estateand that the third parties shouldtherefore deliver them up so that theycan be realised for the benefit ofcreditors.

Express trusts generally pose noproblem: there will ordinarily be atrust deed and evidence to show that itis valid. Constructive and resultingtrusts pose more difficult questions:there is no trust deed and the existenceof the trust is a matter of law.

The question whether or not a trust

exists can, therefore, be difficult toanswer in a purely domestic case. In acase involving foreign elements, thequestion becomes even more difficult,because there is a preliminaryquestion that must be answered:which law is to be applied to decidewhether or not the trust exists? It maybe the case that the answer applyingone law would be different from theanswer applying another law. Forinstance, the law of the place wherethe supposed trust assets are locatedmay say one thing, but the law of thedomicile of the supposed trustee maysay another. In such a case, theidentification of the beneficial ownerof the assets in question will beprincipally a “choice of law” issue. Inother words, the identification of thelaw applicable to determine whetheror not a trust exists will itselfdetermine the question of beneficialownership of the assets in question.

The facts of SambaAkers v Samba Financial Group [2014]EWCA Civ 1516 involved theliquidation of a company incorporatedin the Cayman Islands. The beneficialowner of the company, Mr Maan Al-Sanea, had purported to sign six

declarations of trust in favour of thecompany in respect of the shares incertain Saudi Arabian banks. Some ofthose declarations were expresslygoverned by the laws of Bahrain.

After the presentation of a winding- up petition in respect of the company,Mr Al-Sanea purported to transfersome of those shares to a third party,Samba. The liquidators sought tochallenge the transfer under s 127 ofthe Insolvency Act 1986, contendingthat the shares in question wereowned beneficially by the company,pursuant to the declarations of trust.

Samba’s response was to say that thedeclarations were expressly governedby the laws of Bahrain, which wouldtherefore apply to decide whether ornot a trust existed, and that the laws ofBahrain did not recognise the conceptof a separation of legal and beneficialinterest, so that the declarations wereineffective and there could be no trustat all.

In reply, the liquidators relied on theHague Convention (the Convention),which applies to determine the lawapplicable to trusts. Art 6 of theConvention provides:

“A trust shall be governed by the lawchosen by the settlor...Where the law

KEY POINTS• This article considers the decision of the Court of Appeal in Akers v Samba Financial Group [2014] EWCA Civ

1516 and the relevance of this decision for insolvency practitioners in cross-border cases where assets are said to be held on trust.

• Previously it had been thought that Art 4 of the Hague Convention meant that the Convention did not apply to identify the law for determining whether or not a trust exists.

• The Court of Appeal has held that Art 4 has a more limited meaning.

David Alexander QC and Stephen Robins

http://www.southsquare.com/david-alexander-qc

http://www.southsquare.com/stephen-robins



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chosen...does not provide for trusts...thechoice shall not be effective and the lawspecified in Art 7 shall apply.”

Relying on this, the liquidatorssaid that, if Samba were right in sayingthat Bahranian law did not provide fortrusts or the category of trust involved,Art 6 rendered ineffective Mr Al-Sanea’s express choice of Bahranianlaw and that the law to be applied todetermine whether or not a trustexisted at all would have to beidentified by applying Art 7 of theConvention. The liquidators said that,applying Art 7, Caymanian law wasapplicable and that, according toCaymanian law, the declarations oftrust were valid and effective.

By way of rejoinder, Samba relied onArt 4 of the Convention, which

provides:“The Convention does not apply to

preliminary issues relating to thevalidity of...acts by virtue of whichassets are transferred to the trustee.”

Samba argued that Art 4 of theConvention excluded the preliminaryquestion as to whether or not a trusthad arisen. The argument put forwardby Samba on this point was awidespread view, which had receivedconsiderable support. See, for

example, para 29-076 of Dicey &Morris, which states:

“It is important to appreciate that the‘preliminary’ question of whether aresulting or constructive trust ofproperty arises lies outside the scope ofthe Hague Convention.”

The decIsIon of the�Court ofAppeal�The Court of Appeal rejected Samba’sarguments and adopted a narrowinterpretation of Art 4. Accordingto the Court of Appeal’s reasoning, Art4 is applicable only to the validity ofthe transfers of property to the trustee.The Court of Appeal held that Art 4does not exclude from the scope of theConvention the question of identifyingthe law applicable to decide whetheror not a trust exists, which is aseparate question.

Vos LJ identified the competingpositions in para 39 beforeconsidering, in paras 40 and 41, theScottish case of Joint Administrators ofRangers Football Club plc 2012 SLT599 and the views of various leadingacademics and commentators,including those of Professor DavidHayton, who sat on the Convention’sdrafting committee.

Vos LJ said in para 50: “It isimportant to start the evaluation of theparties’ competing positions byreference to the words of article 4 itself,in the context of the entirety of theConvention.”

He noted that Art 4 provides onlythat “[t]he Convention does not applyto preliminary issues relating to thevalidity of wills or of other acts byvirtue of which assets are transferredto the trustee”. He held that thosewords “should be construed as

“Although Samba was dealing with express trustsrather than constructive and resulting trusts, it wouldseem that the same approach may be applicable toconstructive and resulting trusts”

DAVID ALEXANDER QC

http://www.bailii.org/scot/cases/ScotCS/2012/2012CSOH55.html

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meaning what they say, namely thatthe article is concerned with‘preliminary issues’ (as Professor vonOverbeck pointed out) relating to actsby virtue of which ‘assets aretransferred to the trustee’ ... Adoptingthe most purposive possibleconstruction, one is forced to theconclusion that the line is to be drawnonce the assets have been transferredto the trustee, whether or not thatdistinction is entirely logical for allpurposes”.

In para 51 Vos LJ held:“The lex situs must govern

whether the trustee has the capacity toalienate the property at all. It would, asthey say, make no sense to hold that atrust could be created by a person whoowned inalienable property. But...onceit is clear that the trust property can bealienated in some form according to thelex situs, that law cannot govern thetrust or its validity or effects. All thatmust be a matter for the law identifiedby Chapter II of the Convention.”

ConstructIve and resultIng trusts�Although Samba was dealing withexpress trusts rather than constructiveand resulting trusts, it would seem thatthe same approach may be applicableto constructive and resulting trusts.

First, in England, the Convention hasforce of law by reason of theRecognition of Trusts Act 1987 (RTA1987). Section 1(1) of RTA 1987provides:

“The provisions of the Convention setout in the Schedule to this Act shall havethe force of law in the United Kingdom”.Section 1(2) of RTA 1987 then provides:

“Those provisions shall, so far asapplicable, have effect not only inrelation to the trusts described in Arts 2and 3 of the Convention but also inrelation to any other trusts of propertyarising under the law of any part of theUnited Kingdom or by virtue of ajudicial decision whether in the UnitedKingdom or elsewhere.”

Constructive and resulting trusts arecapable of being described as trusts

which arise under the law and/or byvirtue of judicial decisions. As aresult of s 1(2), therefore, theprovisions of the Convention may beapplicable in England to constructivetrusts and resulting trusts.

Secondly, while the Court ofAppeal in Samba considered how Art 4would apply to a two-stage processinvolving a conveyance of legal titlefollowed by a declaration of trust, theresult would appear to be the samewhere the two stages have beencompressed into a single step. TheCourt of Appeal’s analysis wouldtherefore seem to be applicablewhere, in the case of constructive andresulting trusts, the money arrives inthe hands of the trustee and at thatmoment is impressed by law with atrust in favour of a third partybeneficiary.

On this basis, para 29-076 of Dicey &Morris could be said to be incorrect instating that Art 4 of the Conventionexcludes “the ‘preliminary’ question ofwhether a resulting or constructivetrust of property arises”. According tothe Court of Appeal in Samba, Art 4would seem to exclude the preliminaryquestion of whether the transfer oflegal title to the trustee is effective. Itwould apparently not exclude thesubsequent question of identifying thelaw to decide whether the property sotransferred has become subject to atrust.

Choice of law applying�theconventIon�Assuming that the Court of Appeal wascorrect to say that the Conventionapplies, it is necessary to apply theprovisions of the Convention to

STEPHEN ROBINS

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identify which law is applicable to thequestion of whether a trust exists.

As stated above, Art 6 of theConvention provides that a trust shallbe governed by the law chosen by thesettlor. It further provides that thechoice must be express or be impliedin the terms of the instrument creatingor the writing evidencing the trust,interpreted, if necessary, in the light ofthe circumstances of the case.Importantly for cases in which theexpress law would not result in theexistence of a trust, Art 6 goes on toprovide:

“Where the law chosen under theprevious paragraph does not providefor trusts or the category of trustinvolved, the choice shall not be effectiveand the law specified in Art 7 shallapply”.

When considering Art 6, it isimportant to recognise that theConvention was drafted to apply toexpress trusts evidenced in writing:see Arts 2 and 3 of the Convention. Insuch a case, the creation of the trust isthe consequence of a voluntary act bythe settlor, who has expressed anintention to create a trust in a writteninstrument. As a matter of English law,however, as noted above, s 1(2) of RTA1987 extends the Convention to apply“not only in relation to the trustsdescribed in Arts 2 and 3 of theConvention but also in relation to anyother trusts of property arising underthe law of any part of the UnitedKingdom”. As a result, in English law,the Convention as a whole maybecome applicable to constructive andresulting trusts. The key differences inthe case of the additional types of trustbrought within the scope of theConvention as a result of s 1(2) of RTA1987 are that: !!

• the settlor may not actually havecontemplated the creation of a trust atall; !!

• the intention to create a trust(if itexists at all) may not have been clearlyspelt out by anyone; and

• there will ordinarily be no written

instrument by which the trust iscreated (and may not even be anydocument evidencing the creation ofthe trust).

In a case involving a constructive orresulting trust, therefore, it is verydifficult to apply Art 6 at all. There willnot be any express choice ofgoverning law for the trust and it maybe impossible to talk of a choice ofgoverning law “implied in the terms ofthe instrument creating or the writingevidencing the trust” because there isordinarily no such instrument.

Where Art 6 does not supply theanswer, it is necessary to consider Art7. Therefore, in the case of theadditional types of trust broughtwithin the scope of the Convention as aresult of s 1(2) of the RTA 1987, it maybe appropriate to pass over Art 6altogether and to move straight to Art7, which provides:

“Where no applicable law has beenchosen, a trust shall be governed by thelaw with which it is most closelyconnected. In ascertaining the law withwhich a trust is most closely connectedreference shall be made in particular to:(a) the place of administration of thetrust designated by the settlor; (b) thesitus of the assets of the trust; (c) theplace of residence or business of thetrustee; (d) the objects of the trust andthe places where they are to befulfilled”. (There is an open questionfollowing Samba as to whether“objects” in this context means“purposes” or “beneficiaries”.)

The answers to the questions posedby Art 7 will turn on the facts of eachcase. In a case involving insolvencyproceedings, the insolvencypractitioner and his or her adviserswill have to investigate the facts to

identify the relevant matters. Wheredid the persons who provided theassets intend that they should beadministered? Where are the assetsin fact located? Where is the place ofresidence or business of the trustee?Where are the beneficiaries located?If the trust has arisen as a result of aparticular purpose (as in the case of aQuistclose trust), what was thatpurpose and where was it intendedthat it should be fulfilled?

Article 8 provides that the lawspecified by Art 6 or 7 “shall governthe validity of, its effects and theadministration of the trust”. Thequestion whether the trust exists atall will be decided by the law sochosen.

ConclusionIn an era of increasing numbers ofcross- border insolvencies,officeholders and those advisingthem are encountering more complexissues of fact and law in the task ofidentifying whether assets held bythe insolvent company or individualbelong beneficially to third partiesand/or whether assets held by thirdparties belong beneficially to theinsolvent company or individual. Thedecision of the Court of Appeal inSamba sheds valuable light on thequestion of which law to apply toresolve such questions. However, thelaw in this field is novel anddeveloping and the Court of Appeal’sdecision in Samba is unlikely toprovide the final word on the issue. Itremains to be seen whether theSupreme Court adopts the sameanalysis to the meaning of Art 4.

This article first appeared in the April 2015edition of Corporate Rescue and Insolvency.

“In the case of the additional types of trust broughtwithin the scope of the Convention as a result of s 1(2)of the RTA 1987, it may be appropriate to pass over Art6 altogether and to move straight to Art 7”

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IntroductionThis article analyses the recent decision of MrJustice Morgan (“the Judge”) in JSC Bank ofMoscow v Vladimir Kekhman & Ors [2015]EWHC 396 (Ch) (“the Judgment”).

In the Judgment, the Judge considered anappeal by JSC Bank of Moscow (“JSC”) againsta decision of Chief Registrar Baister (“theChief Registrar”) in which the Chief Registrarhad dismissed applications by JSC andanother Russian bank, ZAO Sberbank Leasing(“Sberbank”), to annul and/or rescind abankruptcy order made on a debtor’s petitionby Mr Kekhman (“Mr Kekhman”) on 5October 2012.

The FactsMr Kehkman was and remains a Russiancitizen domiciled and resident in the RussianFederation.

Mr Kekhman went into the fruit business in1994, forming the JFC Group in 1997, theultimate holding company of which is JFC(BVI) Limited and which operates throughcompanies in Russia, the BVI, Costa Rica,Cyprus, Ecuador, Luxembourg and Panama.He is the beneficial owner of the VK FamilyPrivate Foundation (“the Foundation”), aDutch Antilles entity, which holds 70% of theshares in the JFC Group. From modestbeginnings the JFC Group expanded tobecome the largest importer of fruit into theformer Soviet Union.

Separately, Mr Kehkman was and remains

the general director of the St PetersburgTheatre of Opera and Ballet, commonlyknown as the Mikhailovsky Theatre.

In 2011 the businesses got into financialdifficulties. Negotiations and restructuringattempts failed, and a number of lendingbanks took steps to enforce their securitiesand called in their guarantees. On 20February 2012 insolvency proceedings wereinitiated by JFC Russia. A Russian supervisorwas appointed over a number of Russiancompanies in the JFC Group. On 11 September2012 JSC obtained a worldwide freezing orderagainst the BVI companies in the group. Areceiver in Curaçao was appointed over theFoundation in late 2012/early 2013.

On 25 September 2012, during a brief 48-hour stay in London (the petition specifies theCorinthia Hotel in Whitehall Place), MrKekhman presented a debtor’s petition in theHigh Court (“the Petition”). According to hisstatement of affairs he had creditors of over£300 million, was subject to nine sets of legalproceedings in Russia and his assets consistedof £200,000 cash-in-hand and some land in StPetersburg.

On 5 October 2012 the adjourned Petitioncame before the Chief Registrar. Mr Kehkmansubmitted that there were a number of pointsin favour of making a bankruptcy order,namely: 1) the absence of a personalbankruptcy regime in Russia; 2) theavailability of assets in the jurisdiction (being£200,000 cash-in-hand that Mr Kekhman

The Banana BankruptWilliam Willson considers the decision in JSC Bank of Moscow vKekhman & Ors [2015] EWHC 396 (Ch)

http://www.southsquare.com/william-willson





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undertook he would make available to theOfficial Receiver); 3) a connection to thejurisdiction in the form of an English lawchoice of law/jurisdiction clause in one of theguarantees; 4) the opinion of Mr Kekhman’sRussian lawyer that the courts in Russiawould recognise the bankruptcy; 5) the factthat the bankruptcy would allow for theinvestigation of Mr Kekhman’s financialaffairs; 6) the prospect of Mr Kekhman’sfinancial rehabilitation.

The Chief Registrar made a bankruptcyorder (“the Bankruptcy Order”) and trusteesin bankruptcy were appointed (“theTrustees”).

The JurisdictionUnder Section 264 (1)(b) of IA86 a debtor maypresent a petition for their own bankruptcy.

Section 265 identifies the conditions to besatisfied in respect of a debtor as follows:

“(1) A bankruptcy petition shall not bepresented to the court under section 264(1)(a)or (b) unless the debtor—

(a) is domiciled in England and Wales,(b) is personally present in England and

Wales on the day on which the petition ispresented, or

(c) at any time in the period of 3 years endingwith that day—

(i) has been ordinarily resident, or has had aplace of residence, in England and Wales, or

(ii) has carried on business in England andWales”.

As appears from Section 265 (1), the courthas jurisdiction in relation to a bankruptcypetition, including a debtor’s petition, if thedebtor is personally present in England andWales on the day on which the petition ispresented. If this qualification is satisfied, thedomicile or the ordinary residence or theplace of business of the debtor is irrelevanton the question of jurisdiction.

The ApplicationsIn early 2013 JSC and Sberbank applied underSection 282/Section 375 of the Insolvency Act1986 (“IA86”) to annul and/or rescind theBankruptcy Order (“the Applications”).

Neither of the banks disputed the court’sjurisdiction to make the Bankruptcy Order –merely the Chief Registrar’s exercise of hisdiscretion.

The application to annul was brought onthe basis that the order ought not to havebeen made having regard to the facts as theyexisted at the date of the Bankruptcy Order,and, in particular, that Mr Kekhman had notestablished a sufficient connection with theEnglish jurisdiction and shown that thebankruptcy would be beneficial to hiscreditors as a whole. Further, it was arguedthat Mr Kekhman had breached his duty offull and frank disclosure.

The Applications were vigorously opposedby Mr Kekhman, funded by undisclosed thirdparties.

The trial was atypical of the standardannulment/rescission application inbankruptcy. It lasted a week, featuring threeQueen’s Counsel, a simultaneous translationbooth, extensive evidence as to Russian law,voluminous evidence about the corporatestructure underpinning Mr Kekhman’sbanana empire in central/South America anda court room filled with some 50barristers/solicitors/interpreters/bankers/journalists.

The Chief Registrar’s judgment can befound at (1) JSC Bank of Moscow (2) ZAOSberbank Leasing v Kekhman & Ors [2014]BPIR 959.

As to the issues of Russian law, the ChiefRegistrar concluded that, having heard expertevidence, the Bankruptcy Order was

VLADIMIR KEKHMAN (RIGHT)TALKS TO THE PRESS ON HIS

ACQUISITION OF THEMIKHAILOVSKY THEATRE IN

ST. PETERSBURG

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PERSONAL INSOLVENCY

(contrary to what he had been told by MrKekhman’s Russian lawyers on 5 October2012) unlikely to be recognised or enforced inRussia and that the £200,000 which MrKehkman had brought from Russia toEngland had been brought in breach of aRussian “arrest” order (which should havebeen disclosed to him at the hearing on 5October 2012).

Having set out his reasoning, the ChiefRegistrar concluded that the discretion toannul ought not to be exercised for thefollowing reasons:

“The arguments are finely balanced. Twomajor bases on which the bankruptcy orderwas sought (recognition in Russia and theexistence of assets that that might come intothe bankruptcy estate) have fallen away.However, notwithstanding the fact that it nowappears there can be no recognition of thebankruptcy order in the Russian Federation,and notwithstanding what we now know to bethe true position regarding the assets in thatcountry, I conclude, for the reasons exploredabove, that the bankruptcy order still hadutility when it was made, and that the mattersabout which the Applicants complain do notoutweigh such utility, so that even if this courthad known the true position regarding theproblems of recognition and resulting from thearrest of the Russian assets, it still could andprobably would have made the bankruptcyorder on the basis that there was commercialsubject matter on which it could operate, itwould have enabled Mr Kekhman’s affairs tobe looked into, made possible an orderlyrealisation of his non-Russian assets andassisted his own financial rehabilitation even ifonly outside the Russian Federation (apotentially important consideration tosomeone with international interests).”

The AppealThe appeal was only pursued by one of theRussian banks, JSC.

JSC presented thirteen separate grounds ofappeal.

Though it accepted that jurisdiction hadbeen conferred on the court by MrKekhman’s presence, the bank submitted thatMr Kekhman had to persuade the court ofthree things for it to make a bankruptcyorder: 1) that there had been a sufficiently

close connection with England; 2) that therewas a reasonable possibility of a benefitresulting from the bankruptcy order; 3) thatthere was one or more persons interested inthe distribution of assets who were personsover whom the English court exercisedjurisdiction.

This three-limbed test can be found, ofcourse, in the jurisprudence relating to thewinding up of unregistered companies underSection 221 of IA86 (see in particular StoczniaGdanska SA v Latreefers Inc (No 2) [2001] 2BCLC 116), though it has more recently beenconsidered in a number of cases involvingschemes of arrangement under Part 26 of theCompanies Act 2006 (Re Rodenstock GmbH[2011] Bus LR 1245; Re Apcoa ParkingHoldings GmbH [2014] EWHC 3849)

The Judge dismissed Mr Kekhman’ssubmissions that the court only needed toconsider the utility of bankruptcy order(citing Re Thulin [1995] 1 WLR 165) and thatthis three-limbed approach was not relevantin the context of a bankruptcy (Judgment,[59]). Nor was he persuaded that a courtshould leave out of account the position ofcreditors when it considers whether toexercise its discretion to make a bankruptcyorder on a debtor’s petition (Judgment, [63]).

The principle ground of appeal relied uponwas that the Chief Registrar had applied thewrong test.

The Judge set out what he described as “thecorrect approach”, namely that when dealingwith an application to annul the courtnormally needs to decide: 1) what were thegrounds existing at the time the order wasmade (“Question 1”); 2) whether on thosegrounds, the order ought not to have beenmade (“Question 2”); and 3) if the answer toquestion 2 is: “the order ought not to havebeen made”, whether it should annul theorder (“Question 3”) (Judgment, [88]).

The Judge was not “persuaded that the ChiefRegistrar applied the right test” (Judgment,[96]) because he did not decide “in terms thatthe bankruptcy order ought not to be made”(Judgment, [97]): he therefore concluded thatthe “Chief Registrar erred in principle in hisapproach to his jurisdiction” and that it wasnecessary for him to form his “own view as towhether, on the grounds existing at the date ofthe bankruptcy order, that order ought to have





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been made” (Judgment, [99]-[100]).In re-exercising his discretion the Judge

concluded, applying the three-limb test, thatMr Kekhman’s liability under the guaranteesfor £86 million constituted a sufficientconnection to the English jurisdiction (wherethe Bankruptcy Order would lead to thedischarge of that liability) (Judgment, [109])and that there was a benefit from theBankruptcy Order to both Mr Kekhman,through this discharge (Judgment, [112]) andto his general creditors, through the orderlyrealisation of assets (Judgment, [116], [127]-[134]). The Bankruptcy Order was notopposed by the creditors generally and therewas not unfairness that should persuade thecourt not to make the order.

Finally, the Judge concluded that themaking of the order did not offendobligations of international comity. It was notcontrary to the principles of comity for anEnglish court to make an order which wouldbe effective in England and in jurisdictionswhich chose under their law to recognise it,but which would be wholly ineffective in ajurisdiction which under its law refused torecognise it. It was not contrary to theprinciples of comity for an English court tomake an order which would be effective todischarge the debtor’s liability under acontract which the parties had agreed shouldbe governed by English law and which wasthe subject of an English jurisdiction clause(Judgment, [121]-[124]).

Accordingly, though the Judge held that theChief Registrar’s reasoning was wrong inprinciple, in re-exercising his discretionapplying the “correct approach” he reachedthe same decision as the Chief Registrar andthe appeal was dismissed.

CommentsThe case is novel, being the first of its kind todeal with debtors’ petitions based on personalpresence by individuals from non-EUMember States.

The decision confirms the willingness, inprinciple, of English courts to allowinternational individuals to choose an Englishbankruptcy to manage the administration oftheir debts and assets.

However, unlike the scheme ofarrangement cases cited in the Judgment, it

would appear that a debtor can seek adischarge through bankruptcy from theirEnglish law liabilities even if the bankruptcyorder is not of legal effect in their homejurisdiction (c.f. Re Magyar Telecom and ReRodenstock). That has the potential todiscriminate between foreign creditors whochoose to submit to the jurisdiction of theEnglish court and those who choose to stayaway. Further, it potentially opens thefloodgates to a raft of non-EU foreign debtorsseeking bankruptcy in England on the basis oftemporary personal presence only. In short,the jurisdiction to make bankruptcy ordersunder Section 265 appears vulnerable toabuse whereas the jurisdiction to enterschemes is better protected by the need formajority voting and the ultimate sanction ofthe court.

William Willson acted for Sberbank at firstinstance. He has a particular interest in casesarising out of the CIS/the former Soviet Union.

WILLIAM WILLSON




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Plus ça change…. ?Recent insolvency-relatedlegislative reforms

In the dying days of the last parliament, Royalassent was given to two Acts which makesome significant changes to insolvencylegislation:

· The Small Business, Enterprise andEmployment Act 2015 (“SBEEA”); and

· Deregulation Act 2015 (“theDeregulation Act”)

What follows is a brief description of themost significant changes made by these Acts.These affect (among other things) directors’disqualification and liabilities ondisqualification, the powers of administratorsand the rights of creditors.

Some of the changes come into forceautomatically in May 2015 but others willrequire secondary legislation to be passed.There will be a possible window in October ofthis year, but those changes requiringmodification of the Insolvency Rules arelikely to be tied in with the introduction of thenew Insolvency Rules 2016.

PART 9 OF SBEEAIn July 2013, the Department for Business,Innovation and Skills consulted by seekingfeedback to a discussion paper, amongst otherthings, on measures to strengthen the directordisqualification regime. The Government’sresponse to that consultation was published

in April 2014, and the proposals madeincluded: providing a new ground fordisqualifying a director convicted abroad of acompany-related offence; changes to thematters that a court must take into accountwhen considering a disqualification; andmeasures to provide a process for pursuingcompensation for creditors following thedisqualification of a director. Part 9 of SBEEAcontains measures that seek to put theseproposals into legislation. No date has yetbeen set for the commencement of theseprovisions. The main amendments aredescribed below, and the changes, when theycome into force, will be significant.

Convictions abroadSection 104 of SBEEA introduces a newground for bringing disqualificationproceedings under the Company DirectorsDisqualification Act 1986 (“CDDA 1986”). Itallows the Secretary of State to apply to thecourt for the disqualification as a director of aperson who has been convicted of certainoffences overseas.

Persons instructing unfit directorsSection 105 of SBEEA inserts new sectionsinto the CDDA 1986 to introduce a newground for disqualification for persons who

The 17th edition of the Butterworths’ Insolvency Law Handbook has just beenpublished. Editors, Glen Davis QC and Marcus Haywood, describe some of therecent insolvency related legislative changes that will feature in this latest edition.

http://www.southsquare.com/glen-davis-qc

http://www.southsquare.com/marcus-haywood

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are not directors but who exert requisiteinfluence over a director. This applies wherea director has been disqualified, or has givena disqualification undertaking. If any of theconduct for which the director wasdisqualified was caused because the directorfollowed the instruction or direction ofsomeone else, the person giving that directionor instruction may also be disqualified.Applications to court for disqualificationorders on these grounds will be subject to apublic interest test.

Determining unfitnessSection 106 of SBEEA amends the CDDA 1986to broaden the matters to which the courtmust have regard when determining whethera person should be disqualified as a director.This includes a director’s conduct in relationto an more than one company, including anyoverseas companies.

Reports of office-holders on conduct ofdirectors of insolvent companiesSection 107 of SBEEA inserts a new section 7Ainto the CDDA 1986 with the aim ofsimplifying the procedure for office-holderreports on the conduct of directors ofinsolvent companies. Currently the CDDA1986 requires office holders to submit areport to the Secretary of State if it appears tothem that the conduct of the director makesthem unfit to be concerned in themanagement of a company. The new sectionrequires submission to the Secretary of Stateof a conduct report on every director of acompany that becomes insolvent. Theconduct report must describe any conductwhich may assist the Secretary of State indeciding whether it is in the public interest toapply for the making of a disqualificationorder. The report must be submitted in allcases within 3 months of the insolvency date.

Compensation ordersSection 110 of SBEEA gives the court a newpower to make a compensation order againsta person, on the application of the Secretaryof State, where the conduct for which thatperson has been disqualified has caused lossto one or more creditors of an insolventcompany of which they have at any time beena director. The factors which the court will

have regard to when deciding the amount ofany such compensation order include theamount of the loss caused, the nature of theconduct and whether the person has madeany other financial contribution inrecompense for the conduct.

Insolvency office holders and creditors ofinsolvent companies will, no doubt, beencouraged by the possibility of enhancedrecoveries possible under compensationorders when the relevant provisions comeinto force.

PART 10 OF SBEEAThe Insolvency Red Tape Challenge, whichwas established by the Government in 2012,identified a number of measures designed toimprove the efficiency of insolvencyprocesses and reduce the costs ofadministering insolvency proceedings. The

GLEN DAVIS QC

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Insolvency Service consulted on thesemeasures in July 2013 and published theGovernment’s response to the consultation inJanuary 2014. Part 10 of SBEEA containsmeasures that result from these proposals.The main changes to be brought about by Part10 of the SBEEA are described below.

Power for administrators to bring claimsfor fraudulent or wrongful tradingSection 117 amends the Insolvency Act 1986(“IA 1986”) to permit an administrator tobring an action for wrongful or fraudulenttrading where a director (or in the case offraudulent trading, any person) has causedthe business of an insolvent company to tradewrongfully or fraudulently. The new sections246ZA and 246ZB of the IA 1986 mirror theanalogous provisions which apply toliquidators under sections 213 and 214 of theInsolvency Act 1986. The new sections willonly come into force once further secondarylegislation has been passed. There is,however, no precise indication yet as to whenthis will be.

Power to assign statutory causes ofactionSection 118 of SBEEA amends the IA 1986 toallow a liquidator or administrator to assign

causes of action in respect of, amongst otherthings, fraudulent trading, wrongful trading,transactions at an undervalue andpreferences. The section allows the office-holder to assign not only the right to bring theaction itself but also the proceeds of such anaction. Again, these new sections will onlycome into force once further secondarylegislation has been passed.

MeetingsSection 122 and 123 of SBEEA amend the IA1986 so that physical meetings will no longerbe the default mechanism for seekingdecisions from creditors and contributories ininsolvency proceedings. The changes apply toEngland and Wales and Scotland in respect ofcompany insolvency, and to England andWales in respect of individual insolvency.Again, these new sections will only come intoforce once further secondary legislation hasbeen passed.

When they do come into force, the sectionsallow office-holders to choose the mostappropriate way of engaging with creditorsand contributories when required to do so,with the exception that there will only be aphysical meeting if this has been requested bycertain numbers of the creditors orcontributories, as the case may be. Thosenumbers are stated as being 10% of the totalvalue of claims, 10% of the total number ofcreditors or contributories, and an absolutenumber of 10 requests. There is provision forthese thresholds to be altered by regulations.

The new sections also set out a process ofdeemed consent, where office holders will beable to write to creditors or contributorieswith a proposal, and provided that objectionsare received from less than 10% of creditorsor contributories by total value of claims, theproposal will be deemed to be approved. Inthe event that more than that amount objectto the proposal, the office holder will berequired to use an alternative decisionmaking process if they still wish to seek adecision on the matter.

Deemed consent may not, however, be usedfor approval of an office holder’sremuneration, or where a particular decisionis expressly required to be made by way of adecision-making procedure, either inlegislation or by the court.

MARCUS HAYWOOD

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Extension of administrator’s term ofofficeAdministration automatically ends after oneyear. Currently paragraph 76(2)(b) ofSchedule B1 to the IA 1986 provides that anadministration may be extended with theconsent of creditors for a specified periodnot exceeding six months (extensions mayalso be granted by the court). Section 127 ofSBEEA amends paragraph 76 of Schedule B1to IA 1986 to extend the maximum timeperiod to which creditors may consent foran extension of an administration to aspecified period not exceeding one year.These changes come into effect on 26 May2015.

Administration: payments to unsecuredcreditorsSection 128 of SBEEA amends Part II andSchedule B1 of the Insolvency Act 1986 toprovide that the court’s permission is notrequired where the administrator makes theprescribed part payment to unsecuredcreditors. These changes also come intoeffect on 26 May 2015.

Administration: sales to connectedpersonsSection 129 of SBEEA creates a power for theGovernment to make regulations in respectof sales in administration to connectedparties. Such regulations could prohibitsuch sales or stipulate conditions to be metto allow such sales to proceed. This followsthe ‘The Graham Review into Pre-PackAdministration’ which recommended apackage of voluntary reforms to improvethe transparency and outcomes of pre-packadministrations. That report alsorecommended that the Government take apower along the lines set out in section 129to cover all business sales to connectedpersons in administrations, not just whatare traditionally thought of as pre-packs (incase the market did not adopt the Review’svoluntary reforms). The conditions andrequirements that could be stipulatedinclude, in particular, the requirement toseek the approval of creditors, the court oran independent person. These changes willonly come into force once further secondarylegislation has been passed.

Regulation of the regulatorsSections 137 to 146 of SBEEA amend Part 13 ofthe IA 1986 to introduce:

· regulatory objectives for the “RecognisedProfessional Bodies” (“RPBs”) that regulate IPs;

· a range of sanctions so that action can betaken where the Secretary of State (as oversightregulator) is satisfied that an RPB is notadequately fulfilling its role as a regulator, orwhere it is in the public interest to do so, applyto court for a direct sanctions order against anIP; and

· a reserve power for the Secretary of Stateto designate a single regulator of IPs. Thispower will lapse if not used within 7 years of itcoming into force.

Again these changes will only come into forceonce further secondary legislation has beenpassed.

The Deregulation ActThe main changes to be brought about by thisAct are as follows:

· A new regime will allow for the partialauthorisation of insolvency practitioners. In thefuture, insolvency practitioners will be able tobe authorised in relation to companies,individuals or both (as is currently the case).The Secretary of state will no longer directlyauthorise insolvency practitioners so, in future,all insolvency practitioners will be authorisedby RPB’s.

· Changes will be introduced to preventunnecessary delays to the appointment ofadministrators, for example, by clarifying thatwinding-up petitions presented during theinterim moratorium preceding administrationdo not prevent the appointment of anadministrator.

The majority of these changes will beintroduced in or after October 2015.

ConclusionAs always with such changes, the devil is likelyto be in the detail of the implementing rules,and it will only be after the provisions havebeen tested in practice and considered by thecourts that we fill find out how they reallywork.

The 17th edition of the Butterworths’Insolvency Law Handbook is available fromLexisNexis. 0845 3701234.

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The South Square Spring Reception was this year held at the Wallace Collection on Wednesday 13 Maywhen members and staff welcomed clients and friends of Chambers on one of the sunniest evenings of theyear so far. The Wallace Collection comprises a magnificent collection of French 18th-century painting,furniture and porcelain housed in an imposing building on Manchester Square.

The reception, held in the more modern Courtyard with a wonderful glass ceiling, included a private viewing of the first floor galleries. As can be seen from the photographs, a good time was had by all socialising and viewing the exhibits.

South Square at The Wallace Collection

CLOCKWISE FROM TOP: 1/. THE COURTYARD AT THE WALLACE COLLECTION. 2/. (L TO R) AMANDA BANISTER AND LIBBY ELLIOTT OF STEPHENSON HARWOOD. 3/. (L TO R) BRYAN SHACKLADY ANDCHRIS BACON OF FORSTERS. 4/. THE EXTERIOR OF THEWALLACE COLLECTION, HERTFORD HOUSE. 5/. (L TOR) SOUTH SQUARE’S TOBY BROWN AND WILLIAMWILLSON

Photography by Serena Bolton

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CLOCKWISE FROM ABOVE. 1/. (L TO R) JEREMY GOLDRING QC, ALLEN & OVERY’SMARC FLORENT, ROBIN DICKER QC AND MARK ARNOLD QC. 2/. (L TO R)CHARLES FERGUSON OF FERGUSON SOLICITORS, ERNST & YOUNG’S MAURICEMOSES AND SOUTH SQUARE’S STEPHEN ROBINS. 3/. (L TO R) GLEN DAVIS QC,GEORGE BROWN OF REED SMITH, RICHARD BAINES OF DRUCES. 4/. (L TO R) ANDREW GOODSON OF GRIFFINS AND RICHARD SAUNDERS OF MOON BEEVER. 5/. (L TO R) ZIP JILA OF AKIN GUMP, CHRISTINA FRANZESE OF FRESHFIELDS, BRUCKHAUS,DERINGER AND SOUTH SQUARE’S GEORGINA PETERS. 6/. (L TO R) ANTONY ZACAROLI QC AND PETER BLOXHAM OF BP LEGAL. 7/. (L TO R) JAMIE LEADER OFEVERSHEDS, MARK LAWFORD OF WEIL, GOTSHAL & MANGES, MARCUS PALLOT OFCAREY OLSEN AND SOUTH SQUARE’S ADAM GOODISON AND ANDREW SHAW

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SINGAPORE

2015 COMBAR Singapore Round Table Event

On 5 January 2015, at the opening of the legalyear in Singapore, the SingaporeInternational Commercial Court (“SICC”) wasofficially launched. The opening of the SICC isyet another feather in Singapore’s plumedcap furthering its position as a leader in the

provision of services for internationallitigation. According to the SICC website theSICC seeks “to further boost Singapore’s valueas a leading forum for legal services andinternational commercial dispute resolution,offering litigants the option of having theirdisputes adjudicated by a panel of experiencedjudges comprising specialist commercialjudges from Singapore and internationaljudges from both civil law and common lawtraditions.”

It is against this backdrop that the firstCOMBAR Round Table meeting for HonoraryOverseas Members was held in Singapore on30 and 31 January 2015. The event wasattended by a select group of COMBARmembers both from London and Singapore.The delegation of barristers from Londonconsisted of individuals who have developedor wish to develop their practices inSingapore and the surrounding regions.

The event opened with a buffet lunchwhich was a great opportunity to break theice with the other delegates prior to thecommencement of the round table meeting.The meeting itself was split into roughly foursessions with four key speakers.

The first discussion centred on Bribery andCommon Law Remedies. The discussionstarted with an introduction to the Englishperspective and the recent developments inthe law including the decision in FHREuropean Ventures LLP v Cedar CapitalPartners LLC [2014] UKSC 45. Following the

Matthew Abraham reports on the first COMBAR roundtable forHonorary Overseas Members, held in Singapore in January of thisyear.

SINGAPOREAN JUDGES OUTSIDE THE SINGAPORE INTERNATIONAL COURT

http://www.southsquare.com/matthew-abraham

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introduction there was a lively discussionwhich included issues that the Singaporeanlawyers have faced. Understanding how theSingaporean Courts have dealt with similarissues provided a fruitful comparativediscussion.

Following the opening discussion, MrJustice Eder gave a judicial perspective onheavy trial management. In particular, Eder Jwent through the various stages of a heavytrial and provided examples of both efficientand inefficient ways of dealing with complexcases. Complementing the discussions, thedelegates were given a presentation by arepresentative from Opus 2 InternationalPresentation on their computer platform forheavy trial management.

The final part of the round table meetingwas a presentation by a Singaporean lawyer,Paul Tan of Rajah & Tann LLP, on theproblems of enforcing arbitration awards inthe context of illegality and bribery. Paulprovided a detailed review of a recentdecision in Singapore which again laid downfertile ground for comparative discussion andwas a great way for the round table meetingto end.

The event closed with a dinner on 31

THE MERLION IS THE NATIONAL PERSONIFICATIONOF SINGAPORE, A CITY NOW

FAR-REMOVED FROM ITS ORIGINS AS A FISHING

VILLAGE

January hosted by the Singaporeandelegation, which provided a wonderfulopportunity to either develop on the priorlegal discussions and/or talk more generallyabout life at the respective bars.

On the whole the trip has made it clear tome that Singapore is a jurisdiction that is andwill continue to host very interesting andcomplex litigation especially given thecurrent rapid development in countries inAsia.

MATTHEW ABRAHAM WASPART OF THE DELEGATION OF

LONDON BARRISTERS ATTENDING THE ROUNDTABLE

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INSOL - SAN FRANCISCO

South Squareattends INSOL inBay CityAt the end of March, the INSOL InternationalAnnual Regional Conference took place in SanFrancisco. The event followed the verysuccessful conference in Hong Kong theprevious year and once again South Squarewas represented in numbers – MichaelCrystal QC, David Alexander QC, MartinPascoe QC, Glen Davis QC, Felicity Toube QC,Tom Smith QC and Hilary Stonefrost were allpresent.

Once again the conference drew a capacitycrowd, this time to the Fairmont Hotel in SanFrancisco, and delegates were treated to abeautiful spring weekend on the West Coast.With most delegates arriving on the Saturdayand the Sunday, the conference kicked off onthe Sunday evening with a drinks receptionand dinner. On Monday the conference beganin earnest with a thought-provokingpresentation on trends in the global economy

OPENING NIGHT DINNER ATTHE FAIRMONT

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from Ken Moelis of Moelis & Co. This wasfollowed by breakout sessions including,notably, a session on the recent US municipalbankruptcies discussing the novel issueswhich these raised and a session oninformation exchange in cross-borderinsolvency, chaired by Felicity Toube QC.

The Monday concluded with events hostedat a number of stylish locations across the cityincluding by KPMG at the “Top of the Mark”restaurant, where guests had the benefit ofbrilliant views across San Francisco and thebay, and by PwC at the Clift Hotel.

On the Tuesday the conference resumedwith a fascinating and topical session on bankresolution discussing the problems involvedwith restructuring banks and the techniqueswhich have been developed to deal with theseinstitutions. Another informative sessionfollowed discussing the important (andvarying) roles of hedge funds in manycorporate restructurings. After the lunchsponsored by South Square, the final sessionsdiscussed hot topics in corporatereorganisation and, ending on a philosophicalnote, the competing tensions of nationalismand universalism in cross-border insolvency.

The conference closed with the gala dinneron the Tuesday night. As ever, the SouthSquare contingent enjoyed catching up withso many of you in San Francisco, as well asmaking many new acquaintances. We lookforward to seeing you again soon, includingat the Dubai conference next January.

FELICITY TOUBE QC (RIGHT)HOSTS A SESSION ON INFORMATION EXCHANGE INCROSS-BORDER INSOLVENCY

PROFESSOR IAN FLETCHERGREETS PROFESSOR ROSALINDMASON TAKING OVER ASCHAIR OF THE INSOL ACADEMICS GROUP (ABOVE)AND THE TOP OF THE MARKVENUE WITH GREAT VIEWS(LEFT)

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EU/EAA UPDATE

EU/EEA LAW UPDATE

Gabriel Moss QC and Robert Amey look atEU/EEA developments outside the UK

Olympic Airlines SA (“Olympic”) wasordered to be wound up by an Athenscourt on 2 October 2009. Since then,main liquidation proceedings havebeen in progress in Greece. The rulesof Olympic’s pension scheme (the“Pension Scheme”) require it to bewound up upon the liquidation ofOlympic. Upon the Pension Scheme’swinding up, a deficit of around £16mwas discovered, which Olympic isbound to make good under section 75of the Pensions Act 1995. On 20 July2010, the Pension Scheme presented a

winding-up petition against Olympicin England on the ground that it wasunable to meet this liability. Olympichad very limited assets in England:the purpose of the petition was toallow the Pension Scheme to qualifyunder section 127 of the Pensions Act2004 for entry into the PensionProtection Fund, which requiredEnglish winding up proceedings to beafoot.

Since Olympic’s centre of maininterests (COMI) was in Greece, theEC Insolvency Regulation applied.

English winding up proceedingswould therefore only be possible ifOlympic had an “establishment” inEngland, an establishment being “anyplace of operations where the debtorcarries out a non-transitory economicactivity with human means andgoods.”

Olympic had had a number ofoffices in England, but the only onestill occupied on 20 July 2010 was itsformer UK head office in London.Olympic had ceased commercialoperations on 29 September 2009,and its remaining 27 staff had beenterminated with effect from 14 July2009. Three individuals wereretained thereafter on ad hoc

Trustees of the Olympic Airlines SA Pension and Life AssuranceScheme v Olympic Airlines SA [2015] UKSC 27

THE PENSION SCHEME PRESENTED A WINDING-UP PETITION AGAINST OLYMPIC IN ENGLAND ON THE GROUND THAT IT WAS UNABLE TO MEET THIS LIABILITY

http://www.southsquare.com/gabriel-moss-qc

http://www.southsquare.com/robert-amey

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In this case, the ECJ considered theinterplay between Articles 4 and 13 ofthe Insolvency Regulation. Article 4provides that the law applicable toinsolvency proceedings shall be thelaw of the place where thoseproceedings are opened. This lawshall govern all matters, including“the rules relating to the voidness,voidability or unenforceability of legalacts detrimental to all the creditors.”Article 13 provides, however, that thiswill not be the case where “the saidact is subject to the law of a MemberState other than that of the State of theopening of proceedings, and that lawdoes not allow any means ofchallenging that act in the relevantcase.”

Mr Lutz, an Austrian resident, hadpurchased a car from an Austriancompany, ECZ. ECZ turned out to be afraudulent operation, and did notdeliver the car. Mr Lutz thereforeobtained judgment against ECZ inAustria, and sought to enforce it byattaching ECZ’s Austrian bankaccount.

Main proceedings weresubsequently opened in August 2008respect of ECZ in Germany, and MsBäuerle was appointed asofficeholder. Shortly afterproceedings were opened, ECZ’s bankpaid Mr Lutz pursuant to his chargeover ECZ’s account. Ms Bäuerlesought to set aside the payment to MrLutz, and was initially successfulbefore the German court.

Mr Lutz, however, appealed on thebasis that his relationship with ECZwas governed by Austrian law, whichhad a one-year limitation period,commencing with the opening ofinsolvency proceedings. Ms Bäuerle’sapplication was issued just over ayear after the commencement ofinsolvency proceedings (the relevantperiod under German law was threeyears). Mr Lutz therefore argued thatAustrian law “does not allow anymeans of challenging” the securitywithin the Article 13 sense. MsBäuerle argued that Article 13 couldnot apply where the payment to MrLutz was made after her

appointment, and that in any event,Austrian law did allow a means ofchallenging such a payment, butsimply would have imposed aprocedural time bar in that particularcase. The German court referred thequestion to the ECJ.

The ECJ agreed with Mr Lutz. It didnot matter that Mr Lutz had onlybeen paid after the commencementof the German proceedings.Ordinarily it would, but Mr Lutz’security had been conferred beforethe commencement of proceedings, itwas therefore protected under Article5, and the payment was simply arealisation of that security. Nor did itmatter that the Austrian law time barcould potentially be characterised asprocedural rather than substantive:the Regulation did not distinguishbetween the two, but required thatthe action brought in Germany mustalso be capable of being brought inAustria. The EC Regulation thereforerequires not only that the lex foriconcursus and the lex causae bothhave a means of challenging therelevant transaction, but that therelevant transaction could in fact beattacked under both systems of law.

C-557/12 Hermann Lutz v Elke Bäuerle

contracts, essentially to deal withpaperwork on behalf of the Greekliquidator, to pay outstanding billsand to sell remaining officeequipment.

At first instance, the Chancellorheld that Olympic had been carryingon “economic activity” in England on20 July 2010, and was therefore liableto be wound up. The Chancellorthought it unnecessary that there beany “external market activity”. TheCourt of Appeal overruled him, andthought that “economic activity” mustconsist of more than simply windingup the company’s affairs.

Subsequently, the Secretary of Statepromulgated secondary legislationunder the Pensions Act 2004 toenable the Pension Scheme to qualifyfor entry into the Pension Protection

Fund. However, the issue whetherOlympic had been liable to be woundup in England on 20 July 2010 stillhad significance for the purpose ofpotential claw-back proceedings, sothe Pension Scheme appealed to theSupreme Court.

In a brief judgment, Lord Sumption(with whom the others all agreed)dismissed the appeal, holding that“economic activity” had to involve atleast some subsisting business withthird parties. Reliance was placedupon the Virgós Schmit Report, whichreferred to “economic activitiesexercised on the market (ieexternally)”, and upon the ECJ’sdecision in Interedil [2012] Bus LR1582, which held that anestablishment must be “ascertainableby third parties” and could not consist

solely of “the presence of goods inisolation or bank accounts”. HisLordship also approved Re OfficeMetro Ltd [2012] BCC 829, whereMann J held that a Luxembourgcompany could not be wound up inEngland simply because it had anEnglish office dealing with thesettlement of liabilities to associatedcompanies, the forwarding of postand the taking of legal andaccountancy advice.

Perhaps surprisingly, given the lackof direct ECJ authority on the matter(and the fact that the Chancellor hadpreviously reached the oppositeconclusion), the Supreme Court wassufficiently confident of the result ithad reached that it refused to referthe matter to the Court of Justice ofthe European Union.

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NEWS in brief

Glen Davis QC appointedto GFSC expert panelGlen Davis QC has been appointed tothe Guernsey Financial ServicesCommission’s (GFSC) panel of SeniorDecision Makers.

The GFSC is the regulatory body forthe finance sector in the Bailiwick ofGuernsey. Its primary objective is toregulate and supervise financialservices to uphold Guernsey’sinternational reputation as a leadingfinance centre.

Senior Decision Makers determinethe outcome of the Commission’smajor enforcement cases. Panelmembers hear cases involvingserious findings against a licensee orindividual director where thosefindings are contested and, in theevent a case is proven, determine thepenalties imposed.

Chairman of the Commission, CeesSchrauwers, said: “I am delightedthat Glen Davis QC has accepted this

appointment. His previousexperience and areas of expertisemake him an ideal member for ourpanel.”

GLEN DAVIS QC

Richard Snowden QCbecomes High CourtJudgeRichard Snowden QC of ErskineChambers has been appointedas a High Court Judge with effectfrom 30 April 2015 and will sit inthe Chancery Division. Hisappointment follows theelevation of Mr Justice Sales tothe Court of Appeal. RichardSnowden was called to the Barby Lincoln’s Inn in 1986, takingsilk in 2003. He was appointed asa Recorder in 2007. He was alsoapproved to sit as a deputy HighCourt judge.

The Honourable Sir BernardEder retired early from theHigh Court (Queen’s BenchDivision) with effect from 2April 2015 at the age of 62. SirBernard Eder was called to theBar in 1975, took silk in 1991 andwas appointed as a Judge of theHigh Court (assigned to sit inthe Commercial Court) in 2011.

British businessman on FBI’s Most WantedA British businessman has beenplaced on the FBI’s 10 Most Wanted‘white collar criminals’ list followingallegations he conducted a multi-million pound luxury car scam.

Afzal Khan, known to his clients as‘Bobby’, opened Emporio MotorGroup in New Jersey in 2013. Hefeatured on popular US realitytelevision series The Real Housewivesof New Jersey and counted membersof the show’s cast among his clients.

He is now accused of obtainingloans for cars which were never

delivered, obtaining loans for carswithout proper title, and offering tosell cars on consignment withoutreturning the vehicles or funds fromsales.

One company is understood to havelost $1.7 million from its dealingswith Khan and more than 70 furtherindividuals have come forward toissue complaints.

Federal agents hunting the 32-year-old, originally from Edinburgh, haveoffered a $20,000 reward forinformation leading to his arrest.

Sir Bernard Ederretires

Mr Registrar BriggsThe Queen has appointedNicholas Briggs as a Registrar inBankruptcy of the High Court,with effect from 2 February2015. Briggs, aged 50, was calledto the Bar in 1994 and wasappointed as a DeputyBankruptcy Registrar in 2007.

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A conman who brazenly walked freefrom Wandsworth Prison havingtricked staff into believing he hadbeen released on bail was jailed forseven years in April.

Neil Moore, 28, was on remand fora £1.8million fraud when he issuedwardens a bogus email posing as acourt clerk manager. Moore’s greatescape became apparent several dayslater, when solicitors attended theprison for a meeting with him only todiscover he was gone.

Using an illicit mobile phone fromhis prison cell, Moore registered awebsite in the name of investigatingofficer Detective Inspector ChristSoole, giving the address and contactdetails of the Royal Courts of Justice.He created a domain name similar tothe court service’s hmcts.gsi.gov.uk –emailing the custody mailbox froman account ending hmcts-gsi-gov.uk.

Moore pleaded guilty to escapefrom lawful custody in addition toeight counts of fraud having posed as

staff from Barclays, Lloyds andSantander to dupe organisations intohanding over significant sums ofmoney.

The conman used four aliases,occasionally putting on a woman’svoice so convincing that histransgender lover, Kirsten Moore,was initially believed to have beeninvolved in the scams.

Sentencing at Southwark CrownCourt, Recorder David Hunt QCdescribed the ploy as “ingenious”.

Conman bluffed his way out of prison

With recent high-profile decisionsin mind, including the PrivyCouncil in Saad Investments andSingularis, South Square incollaboration with Grant Thorntonhave carried out a survey pollingthe views of the internationalinsolvency community on dealingwith insolvencies across differentcommon law jurisdictions.

Lawyers and other experts from50 leading organisations across 12jurisdictions have taken part in theresearch. The findings will besummarised in a report due to bepublished in June.

South Square and GT are verygrateful to clients and contacts whohave taken part in the research andlook forward to sharing usefulinsights, to continuing the debate,and to helping address thechallenges together.

If you have any questions aboutthe research and/or would like acopy of the report findings, contactJo Colton [email protected].

Cross-BorderInsolvencyResearch

According to a report from the Bar Councilone in eight barristers are ‘emotionallyexhausted’ and more than half do not sleepproperly. These are among the shockingfindings of the most comprehensive surveyof barristers’ well-being yet conducted bythe Bar Council.

Stress and the absence of leadership rolemodels were among the factors that weighedmost on well-being among barristers, withmany practitioners reluctant to seek helpbecause of stigma around stress at the bar.

Of 2,456 respondents to the survey – onesixth of the profession – at least 300experienced emotional exhaustion, while1,364 said they did not get enough goodquality sleep.

Half of the respondents (1,152) said theyfaced high levels of stress at work, with two-thirds (1,614) admitting that their currentlevel of stress had a negative impact on theirperformance.

Financial concerns, high expectations,devaluation of the profession in the eyes ofthe public and government, and long

unsocial working hours were shown as themost challenging aspects of life at the bar.

At the self-employed bar, half ofrespondents said they felt disengaged atwork. At the employed bar the proportionwas one-third.

However, employed barristers reportedfacing challenges caused by a lack ofautonomy and a reduced sense of statuscompared with their self-employedcolleagues. Those experiencing the highestwork pressure and life satisfaction wereaged between 35 and 55, while those at thecriminal bar reported the highest level ofpressure.

Formal or informal mentoring was shownto ‘significantly’ reduce stress, although fewrespondents reported receiving mentoring.The bar plans to extend its mentoringservice and produce guidance for chambers.

Alistair MacDonald QC, chairman of thebar, said. ‘For too long, stress, mental healthand wellbeing have been taboo subjects ofdiscussion at the bar and in the wider legalsector.’

Barristers subject toemotional exhaustion

80

NEWS in brief

New Publications

Cross-Border Insolvency 4thEdition - eBookAs reported in the February issue of theDigest, the Cross-Border Insolvency FourthEdition, edited by Richard Sheldon QC, waspublished in January. The eBook is nowavailable in addition to the hardcopy. Fulldetails can be found on this issue’s insideback cover.

Insolvency Law HandbookThe latest edition of ButterworthsInsolvency Law Handbook will bepublished in May. Edited by Glen Davis QCand Marcus Haywood, the Handbook is themost comprehensive single collection ofstatutory source material and practicedirections relating to insolvency law inEngland, Wales and Scotland. Moreinformation is on the inside front cover.

Cross-Border InsolvencyGeneral Editor: Richard Sheldon QC

Contributors: Mark Arnold QC, Jeremy Goldring QC, Tom Smith QC, John Briggs, Lloyd Tamlyn, Richard Fisher, Adam Al-Attar

“This work should !nd a place on the shelves of anyone serious about international insolvency, be they judge, practitioner, academic or student in the !eld” International Company and Commercial Law Review

(review of the third edition)

Cross-Border Insolvency, Fourth Edition is the most comprehensive and up-to-date guide on all aspects of the law relating to cross-border insolvency. The book helps lawyers and other business professionals navigate their way through this complex area with direction, precision and ease.

Structured and accessible format New to this edition

OUT NOW

For more information and to order your copyW: www.bloomsburyprofessional.com/crossborderT: E: [email protected]

Hardcopy Pub date: ISBN: Price: £146.25 eBook Pub date: ISBN: 9781780437613 Price: £194.99 £146.24

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Hardcopy and eBook now available

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Company insolvencies in Englandand Wales have dropped to thelowest number since the end of 2007,figures from the Insolvency Servicerevealed in April.

According to the agency’s lateststatistics, 4,052 companies enteredinto formal insolvency in the firstquarter of 2015 – one per cent lessthan the last quarter of 2014, and 11per cent lower than thecorresponding period last year.Creditors’ voluntary liquidations

have also fallen to their lowest levelsince June 2008. During the firstquarter of this year, 2,481 companiesentered into a creditor’s voluntaryliquidation. This marks a four percent drop on the previous quarterand a six per cent decline from thesame period in 2014.

By contrast, 904 companies weresubject to a compulsory winding-uporder from January to March 2015, anine per cent increase on thepreceding quarter.

Corporate insolvencies atlowest level since 2007

INSOL One Day Seminar BermudaThe INSOL Bermuda Seminar

will take place on 4 June at the

Fairmont Hamilton Princess.

South Square’s Gabriel Moss

QC is a panellist, with William

Trower QC, David Alexander

QC, Hilary Stonefrost and

William Willson attending.

The day will cover the latest

cross-border insolvency issues

and developments, commencing

with a discussion led by

Bermuda Chief Justice, Dr Ian

Kawaley, entitled “Statutory

Star Trekkers vs. Common Law

Dinosaurs”.

The panel, which includes

Gabriel Moss QC, will debate the

relative merits of legislation vs.

common law. The next issue of

the Digest will include an

overview of this event.

WILLIAM TROWER QC

WILLIAM WILLSON HILARY STONEFROST

GABRIEL MOSS QC

MarathonMan....Congratulations to William Willsonfor surviving the London Marathonin a creditable time of 4 hours 2minutes.

This year William was running for

CRISIS, one of the UK’s leading

charities for the homeless. If you

would like to sponsor him, click

here http://tinyurl.com/q3pr6cb

http://uk.virginmoneygiving.com/fundraiser-web/fundraiser/showFundraiserProfilePage.action?userUrl=WilliamWillson

http://uk.virginmoneygiving.com/fundraiser-web/fundraiser/showFundraiserProfilePage.action?userUrl=WilliamWillson

81


Singer Lee Ryan has become thefourth - and final - member of theboyband, Blue, to declare himselfbankrupt.

Ryan now faces a challenge fromcreditors to reclaim cash he owes.

Ryan follows bandmates DuncanJames, Anthony Costa and SimonWebbe who have all been forced to dothe same.

Even the band’s company BlueworldLtd went bust in May 2013 - with theband members blaming poor decisionsmade by their former management.

Ryan was forced into bankruptcy bya company called CapquestInvestments Limited, who purchasedebts from various credit cardcompanies who have been unable tocollect cash - in the hope that a more

“persuasive” approach mightencourage payment. Ryan, currentlyon tour with the band, will now havehis assets frozen and be asked toattend an interview with his OfficialReceiver to determine if he is in aposition to repay.

The official order was made in theCentral London County Court lastmonth.

Lee Ryan the 4th member of Blue to go bankrupt

R3 names new presidentThe Association of BusinessRecovery Professionals (R3) hasannounced Phillip Sykes, head ofBaker Tilly’s London restructuringpractice, as its new president.

Sykes has specialised incorporate restructuring since 1980,working across multiple sectorsincluding retail, property andconstruction, financial services,insurance, manufacturing,commodities and internationaltrade, engineering and agriculture.His 12-month term as president hasnow commenced.

Sykes’ predecessor, GilesFrampton, will take up a new roleas R3’s policy group chairman.

Transfer of cases fromRegistrars to CentralLondon County CourtIn a bid to reduce long waiting timesto appear before a registrar in theHigh Court, the Chancellor hasproduced a note setting out thecriteria for the transfer of work fromthe registrars to the Central LondonCounty Court. It is important to notethe following:

1/. With effect from 6 April 2015 thefollowing proceedings will be issuedand heard in the Central LondonCounty Court: (a) applications for therestoration of a company to theregister; (b) applications to extend theperiod allowed for the delivery ofparticulars relating to a charge; and (c)applications to rectify the register byreason of omission or mis-statementin any statement or notice delivered tothe registrar of companies or toreplace an instrument or debenturedelivered to the registrar ofcompanies.

2/. When deciding whetherproceedings which have been issuedin the High Court should betransferred to the County Court sittingin Central London, the registrarshould have regard to the followingfactors: (a) the complexity of theproceedings; (b) whether theproceedings raise new or

controversial points of law; (c) thelikely date and length of the hearing;(d) public interest in the proceedings;and (e) (where it is ascertainable) theamount in issue in the proceedings.

3/. Subject to the matters set out in(2) above, where the amount in issuein the proceedings is £100,000 or less,the proceedings should be transferred.

4/. Subject to the matters set out in(2) above, the following will betransferred to be the Central LondonCounty Court: (a) privateexaminations (but not necessarily theapplication for the privateexamination); (b) applications for theextension of an administrator’s termof office; (c) applications forpermission to distribute theprescribed part; and (d) applications todisqualify a director and applicationsfor a bankruptcy restrictions orderwhere it appears likely that an orderwill be made for a period notexceeding five years.

5/. The matters set out above do notaffect winding up petitions,bankruptcy petitions and all HighCourt proceedings which are to belisted before a registrar in accordancewith the Practice Direction onInsolvency Proceedings. R3 PRESIDENT, PHILLIP SYKES

82

NEWS in brief

Reforming and charismatic barristerwith a fantastic court room presenceand former Bar Council Chairman,Anthony Scrivener QC, died on 27March 2015, aged 79.

Born in July 1935, the son of aCanterbury ironmonger, he waseducated at Kent College, Canterburyand then at University College,London. He was then called to theBar by Gray’s Inn in 1959.

After a spell lecturing in law inGhana he came back to the Bar.Scrivener took Silk in 1975 becominga Crown court Recorder in the sameyear. He was Chairman of the Bar in

1991. Scrivener was also a Bencher ofLincoln’s Inn.

Known to his friends andcolleagues as “Scriv” he was a

Anthony Scrivener QC

South Square’s Lucy Frazer QC elected as MP for SE CambridgeshireSouth Square’s Lucy Frazer QC hasbeen elected as the conservativemember of parliament for SouthEast Cambridgeshire.

Lucy won the seat with 28,845votes, with her liberal democratrival Jonathan Chatfield trailing on12,008 – increasing an alreadyhealthy majority by another 0.5%,and taking 48.5% of all votes cast.

She has replaced Sir Jim Paice,who had held the constituencysince 1987.

Speaking after her victory Lucysaid “I feel honoured andextremely excited to have won, andI'd like to thank everyone whovoted for me��..I'm aware there'ssome hard work ahead of me butI'm certainly not afraid of that."

We wish her all the very best ofluck in her new Parliamentarycareer.

champion of the cab-rank principleby which a barrister, if available towork, is required to take on any casehowever unpopular. Scrivenerrepresented diverse clients in some ofthe most high profile cases of the day.They included Guinness defendantJack Lyons, Guildford Four memberGerry Conlon, Winston Silcott,acquitted of the murder of PC KeithBlacklock, as well as Norfolk farmerTony Martin, who shot dead anintruder at his home, Dame ShirleyPorter over the homes-for-votesscandal and disgraced Polly Pecktycoon Asil Nadir. He once famouslyquipped: “A common law barristerlike myself has seen every type ofdepravity possible and can say it inLatin.”

LUCY FRAZER QC MP ON THE CAMPAIGN TRAIL

83


Flavio Robert de Souza said he hadbeen driving the car because thefederal police had no safe place forit and he was worried it would be"exposed to sun, rain and possibledamage." The Brazilian judicialombudsman cited the news reportsas the reason for Souza’s dismissal.A new judge has been assigned tothe trial.

The Brazilian judge presiding overcriminal proceedings against fallentycoon Eike Batista has beenremoved from the trial after hewas photographed by a newspapersdriving Batista's white PorscheCayenne. A number of vehicles andluxury goods belonging to Batista,once Brazil's richest man, had beenconfiscated by police.

EIKE BATISTA AND HIS PORSCHE

Judge removed from Brazilian billionaire trial

Dog DaysWilliam Willson’s short film, ‘DOG DAYS’, enjoyed its first screening at the Curzon Soho on 30 April.‘DOG DAYS’ tells the story (in 12 minutes) of a chance meeting between two young Londoners thatculminates in an illicit midnight swim at Hampstead Mixed Ponds. The film stars up-and-comers IvannoJeremiah and Melanie Gray – but congratulations to receptionist Emily Bell for a fine cameo (despiteperforming in the ‘extras’ scene, we hear that Hilary Stonefrost, Adam Al Attar, Hannah Pini, OriettaBergamo and Chris Brinklow all ended up ‘on the cutting room floor’). The premiere was attended by350 guests, followed by an after-party at The Ivy. The plan it to take it on the festival circuit in Europeand the US. If you want to follow and/or support the film, go to www.dogdaysshortfilm.com.

Lord Falconerreturns toshadow cabinetLord Falconer of Thoroton, theformer lord chancellor (2003-2007)under Tony Blair who oversaw thecreation of the Ministry of Justice, hasreplaced Sadiq Khan as shadowjustice secretary. Falconer, 63, wascalled to the bar in 1974 and made alife peer following the 1997 generalelection, when he joined thegovernment as solicitor general. Assecretary of state for constitutionalaffairs from 2003 he proposed theabolition of the post of lordchancellor, a plan eventuallyabandoned because of theconstitutional implications. LordFalconer has also famously lost morethan five stone over the last couple ofyears apparently on a diet of applesand Diet Coke.

LORD FALCONER

84

SOUTH SQUARE CHALLENGEWelcome to the South Square Challenge for the May 2015 edition of the Digest. This time all you have to do iswork out what the eight pairs of pictures represent. Then you have to identify what connects them. When you havedone that please send your answers to [email protected] or by post to Kirsten at the address on theback page. To the winner, if necessary drawn out of the wig tin, goes the usual magnum of champagne and aSouth Square umbrella – the latter is less useful at this time of year, but it will come into its own by October! Answers by Friday 3 July 2015 please. Good luck. David Alexander QC

1

2

3

4

85


FEBRUARY CHALLENGEThe correct answers to the February 2015 South Square Challenge were (1) Mount Fuji (Japan), (2) Mount Licancabur (Chile), (3) TableMountain (South Africa), (4) Mount Stanley (Uganda) (5) Mount Rushmore (USA), (6) Ben Nevis (UK), (7) Mount Cook (New Zealand)and Castle Mountain (Canada). The connection between the eight countries where the mountains are located is that they have alladopted legislation based on the UNCITRAL Model Law of Cross-Border Insolvency. As always there were a number of correct entries.But the winner is Iben Madsen of Wilkie Farr & Gallagher (UK) LLP to whom go our congratulations, a magnum of champagne and aSouth Square umbrella.

And the connection is?

5

6

8

7

86

Diary Dates

South Square members will be attending, speaking at and/or chairing the following events:

INSOL Bermuda One Day Seminar4 June 2015 - Bermuda

III 15th Annual Conference15-16 June 2015 - Naples

INSOL Europe Annual Conference1-4 October 2015 - Berlin

INSOL Dubai Annual Regional Conference24-26 January 2016

INSOL 2017 Tenth World International Quadrennial Congress19-22 March 2017 - Sydney

South Square also runs a programme of in-house talks and seminars – both in Chambers and onsite at our client premises – coveringimportant recent decisions in our specialist areas of practice, as well as topics specifically requested by clients. For more information contact

[email protected], or visit our website www.southsquare.com

For more information, contact [email protected], or visit our website www.southsquare.com.

The content of the Digest is provided to you for information purposes only, and not for the purpose of providing legal advice. If you have a legalissue, you should consult a suitably-qualified lawyer. The content of the Digest represents the views of the authors, and may not represent the views

of other Members of Chambers. Members of Chambers practice as individuals and are not in partnership with one another.







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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

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

Robert Amey

Andrew Shaw

Chambers 2015

‘MEMBERS ARE EXPERIENCED TRIAL ADVOCATES WITHWIDE-RANGING AREAS OF EXPERTISE’

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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