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DIGESTSOUTH SQUARE

www.southsquare.comSEPTEMBER 2017

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

DIGESTSOUTH SQUARE

Brexit focusSchemes of

Arrangement The Judgments

Regulation

Primeo v HSBCMadoff feeder fund

claim dismissed

Consequencesfor the world ofrestructuring

Harmony fromdiscord

Impact on forumshopping

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Corporate Administrations and Rescue ProceduresThird EditionWilliam Trower QC, Adam Goodison, Matthew Abraham and Andrew Shaw

Corporate Administrations and Rescue Procedures is an authoritative and leading work dealing specifically with corporate administration and CVAs in the context of business recovery and rescue.Taking a logical, practical approach to the subject area, the third edition has been fully revised and updated and includes comprehensive coverage of the new Insolvency Rules 2016, due to come into force on 6 April 2017. They aim to modernise insolvency practice and increase the efficiency and cost-effectiveness of insolvency procedures (and repeal and replace the Insolvency Rules 1986). This edition also features a brand new chapter on special administration regimes, including charitable incorporated organisations.Written by authors from South Square, consistently ranked in legal directories as the top set for insolvency and restructuring, Corporate Administrations and Rescue Procedures is a must have for anyone involved in this complex area of law.

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SEPTEMBER 2017 SOUTH SQUARE DIGEST

SEPTEMBER 2017

10

BREXIT - RESTRUCTURING

today, take for granted (or, in other words, areallowed to accept as facts) and which mighthave an impact on or which might stem fromBrexit.1 It needs, however, to be borne in mindthroughout that – even within the field ofprivate law (being itself only a small part of thewhole problem2 to be solved) – the topic ofrestructuring is just a tiny little piece of a hugejigsaw puzzle that the politicians are supposedto set together for the time after. It is, thus, notan unlikely scenario that the restructuringworld has to live for quite a while withuncertainty and reduced predictability.

I. FactsThe interpretation of the European InsolvencyRegulation in its new version (EU 2015/848 - EIRRecast) is likely to suffer from lackingimagination and what one might call stress-tests. Looking back to the beginnings of thethen (2002) new EIR the most innovative andheavily disputed actions and decisions weremade by English practitioners. It was they whohave – in clear contradiction to the quiteexplicit legislative intent3 - introduced a way tohandle group insolvencies by means of anunderstanding of the COMI (Centre of MainInterests) concept which, in the beginning, wasstrongly opposed on the continent4 but soonlater eagerly copied. Even the European Court

11

of Justice’s attempt to suppress thisinterpretation in its Eurofood decision (andlater ones) was bound to fail – not so much interms of verbal disagreement but in terms offactual circumvention.

Another example is the ingenuity to establisha virtual secondary proceeding in order to gaina win-win-situation. The Collins & Aikman casewas a teaching hour for continental Europe asto how to achieve the best possible result. Andit was a sort of childish know-it-all attitude ofpractitioners from this side of the Channelwhen they afterwards wrote articles under thetitle: we could also have done it.

Needless to point out that both examples havemade it into the EIR Recast – however, in a waythat defies the Institutional Agreement betweenthe European Parliament, the European Union


and the European Commission on Better Law-Making from April 13, 2016.5 Both set of rules inartt. 36 ff. and 61 ff. are so overly bureaucraticand complicated – metaphorically: theflexibility of the case law-approach has beenput in the Procrustes bed of generalapplicability – that it is quite justified to predictthat we will not see many cases (if any) inwhich they play a role.

Whereas fact no.1 brings a disadvantage tothe continent, fact no.2 is negative (or at least:demanding) for the UK In her relationship withthe U.S.A., the UK had the competitiveadvantage of automatic recognition of most (ifnot all) of its restructuring decisions. TheEuropean Judgment Regulation and the Rome I-Regulation worked very well as a supporter ofthe British restructuring and insolvency

It has always been in the keenest interest ofmankind to foresee the future. The Romanaugurs watched to this end the flight of thebirds, and Nostradamus compiled his collectionof major, long-term predictions in his(in)famous prophecies (“Les Propheties”).Today, we want to know what happens with themarkets when politician A wins the elections,and we make predictions about the UK’s role in2019 and onwards. All these efforts are aswelcome as they are built on shaky grounds –suffice it to remind of the predictions about thelast US-election or the one in the UK. Thegenerally accepted right to fail with one’spredictions makes participation in this businesshighly attractive so that it is no wonder that, asa consequence, the amount of writings aloneabout Brexit is exuberant and is likely to turnout to be entirely irrelevant when reading itagain in the year, let’s say, 2020. In Germany,one had the chance to experience a similarcorrelation between endless writings,discussions, and deliberations and the finaloutcome some 28 years ago when the re-unification fuelled the imaginations andcreated all sorts of proposals which, at the endof the day, in most cases turned out to beillusionary.

Given this, it should be appropriate to beginwith a few observations which we can, as of

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1/. A parallel to this scenario is dawning on the other side of the Atlantic when and if the termination of the NAFTAagreement stands to discussion.2/. Much more burning probably problems such as the membership questions around European Common Aviation Area; i.e.in case of “no contract” (as opposed to a bad contract) it could happen that all British planes cannot fly over the continent.3/. Just cf. Virgós/Schmit-Report, marg. No. 76.4/. Including, i.a., the present author.

■ ■

5/. Cf. ABl. EU L 123, 1.

Brexit and its consequencesfor the world of restructuring

THE CJEU FIRST USED THE TERM‘CENTRE OF MAIN INTERESTS’ IN

ITS JUDGEMENT OF 20 OCTOBER 2011, INTERDIL SRL,

IN LIQUIDATION V FALLIMENTO INTERDIT SRL AND INTESA

GESTIONE CREDITI SPA

Professor Christoph G. Paulus, of the Humbolt University, Berlin,considers what might happen with regard to cross-borderinsolvencies and/or insolvencies of British firms after Brexit

51

something of a nuisance, and gives rise to anumber of confusing jurisdictional issues.

The basic principle underlying Chapter II ofthe Judgments Regulation is that any persondomiciled in an EU Member State must be suedin the courts of that Member State (the“Domicile Rule”): see Article 4(1). It is unclearwhether and, if so, how the Domicile Ruleapplies to schemes of arrangement. It has beensuggested that scheme creditors could betreated as being “sued” by the scheme companyfor the purposes of the Domicile Rule. Thisanalysis would entail that creditors domiciledin EU Member States other than the UK shouldnot be included in schemes of arrangementunless one of the exceptions in Chapter II of theJudgments Regulation is found to be applicable.The correctness of this analysis is currentlyunresolved, and has been left open in a numberof cases: see Re Rodenstock GmbH [2012] BCC459 at [60] (Briggs J); Re Seat Pagine Gialle SPA[2012] EWHC 3686 (Ch) at [13] (David RichardsJ); Re Primacom Holdings GmbH v CreditAgricole [2013] BCC 201 at [11]-[13] (Hildyard J);Re Nef Telecom BV [2014] BCC 417 at [38]-[39](Vos J); Re Vietnam Shipbuilding Industry Group[2014] BCC 433 at [10] (David Richards J); ReApcoa Parking Holdings GmbH[2014] BCC 538 at[24] (Hildyard J); Re Magyar Telecom BV [2014]BCC 448 at [28]-[31] (David Richards J) and ReVan Gansewinkel Groep BV [2015] Bus LR 1046(Ch) at [41]-[45] (Snowden J), among others.

In order to avoid the need to resolve thisissue, the Court has developed the practice ofconsidering whether jurisdiction would existunder Chapter II of the Judgments Regulationon the assumption that it applies to schemes ofarrangement. If jurisdiction can be found, it isnot necessary to test that assumption. It isprudent to proceed, for present purposes, onthe basis that Chapter II of the JudgmentsRegulation applies to schemes of arrangement.

Chapter II of the Judgments Regulationcontains a number of exceptions to theDomicile Rule. An important task for anyscheme proponent (where the scheme affectsEU-domiciled creditors) is to identify which ofthose exceptions give the English Courtjurisdiction to sanction the scheme. The most

important exceptions, for present purposes, areset out in Articles 8 and 25.

Article 8 provides: “A person domiciled in aMember State may … be sued … (1) where he isone of a number of defendants, in the courts forthe place where any one of them is domiciled,provided the claims are so closely connected thatit is expedient to hear and determine themtogether to avoid the risk of irreconcilablejudgments resulting from separate proceedings…” Article 8(1) has been invoked in manyrecent cases to establish that, where some of thescheme creditors are domiciled in the UK, theEnglish Court has jurisdiction to sanction ascheme affecting the rights of creditorsdomiciled elsewhere in the EU. Since it isnormally possible to identify at least a handfulof UK-domiciled scheme creditors, this line ofargument has proven to be a powerful tool inpractice. Indeed, it is one of the key ways inwhich restructuring lawyers have been able toprevent the Judgments Regulation from limiting

SNOWDEN J’S JUDGMENT INGLOBAL GARDEN IS PERHAPS

PROBLEMATIC

50

SCHEMES: NEW AUTHORITIES

This article explores the application of theJudgments Regulation to schemes ofarrangement under Part 26 of the CompaniesAct 2006. The true scope of the JudgmentsRegulation is a notorious issue amongrestructuring lawyers, and has been debated innumerous cases over the years. The debate hasbeen reinvigorated by a series of new cases,including Re DTEK Finance plc [2017] BCC 165(Newey J) and Re Global Garden Products ItalySpA [2016] EWHC 1884 (Ch) (Snowden J). Thesecases consider, among other things, whether ascheme with only one UK-domiciled creditor iscapable of falling within Article 8 of theJudgments Regulation; and whether anasymmetric English jurisdiction clause iscapable of falling within Article 25 of theJudgments Regulation. It is respectfullysuggested that some of the provisional viewsexpressed in Global Garden should not befollowed.

IntroductionThe scheme of arrangement is a powerfulrestructuring tool. If a company proposes ascheme to restructure its debts, and the schemeis approved by a majority in numberrepresenting 75% of the creditors in each class,then the Court has the power to sanction the

scheme such that it is binding on all creditors:see section 899 of the Companies Act 2006.However, before the Court sanctions thescheme, the Court must be satisfied that it hasinternational jurisdiction to do so.

It is frequently the case that one or morescheme creditors are domiciled outside of theUK in another EU Member State. In thosecircumstances, the Court must considerwhether its jurisdiction to sanction the schemeis affected by Regulation (EU) No. 1215/2012 onjurisdiction and the recognition andenforcement of judgments in civil andcommercial matters (recast) (the “JudgmentsRegulation”, also known as the BrusselsRegulation or Brussels I).1

The Judgments Regulation applies in “civiland commercial matters”. Chapter II of theJudgments Regulation deals with jurisdiction,whereas Chapter III deals with the recognitionof foreign judgments. The JudgmentsRegulation is something of a double-edgedsword for scheme proponents. On the onehand, Chapter III has proven to betremendously useful in persuading the EnglishCourt that schemes will be automaticallyrecognised in other EU jurisdictions, andthereby achieve a substantial effect. On theother hand, Chapter II has proven to be

Schemes of Arrangement andthe Judgments Regulation:The New Authorities

Ryan Perkins considers the application of the Judgments regulation in thelight of the recent DTEK Finance and Re Global Products Judgments


■ ■

1/. The Judgments Regulation is the successor of Regulation (EC) No. 44/2001, which contains many similar provisions.

59

its official liquidators, Primeo issued a claimin the Grand Court of the Cayman Islandsalleging BBCL and HSSL had breached theircontractual duties under the 1996Administration and Custodian Agreementsrespectively. It was claimed that if theDefendants had taken certain additional stepsin relation to the BLMIS investments, Primeowould have withdrawn those investmentsprior to the fraud being uncovered, andprofitably reinvested the monies elsewhere.On this basis Primeo claimed approximatelyUS$ 2 billion in damages.

The trial was heard between November


58

MADOFF CLAIM

On 23 August 2017 Mr Justice Andrew Jones QCof the Cayman Islands Grand Court deliveredhis judgment dismissing the claim brought byPrimeo Fund against two HSBC entities, Bankof Bermuda (Cayman) Ltd (“BBCL”) and HSBCSecurities Services (Luxembourg) SA (“HSSL”).Primeo was a Cayman Islands fund thatinvested with Bernard L Madoff InvestmentSecurities LLC (“BLMIS”), whilst BBCL andHSSL acted as Primeo’s administrator andcustodian. As explained below, whilst theJudge found that contractual duties had beenbreached, he found in favour of theDefendants on strict liability, causation,limitation, reflective loss, and contributorynegligence (in relation to BBCL).

The Madoff fraudOn 11 December 2008, Bernard Madoff wasarrested by the FBI and admitted carrying outwhat is now known to be one of the largestinvestment frauds in history. Over decades,Madoff accepted money from investmentclients which he purported to invest in USequities and Treasury Bills, producing steady

returns year after year. In fact, no investmentswere made; rather, it was a classic Ponzischeme in which money from new investorswas used to pay redeeming investors.

In their sophisticated enterprise, Madoff andhis associates used computer systems to workout after the market had closed what tradesshould have been executed to produce thepositive returns required for the numerousinvestment clients. Backdated individual tradeslips and monthly statements were producedand mailed out or faxed to clients. Countlessinvestors, sophisticated financial institutionsand service providers were deceived. Thescheme, and Madoff personally, were soconvincing that neither the Securities andExchange Commission or KPMG uncovered thefraud notwithstanding their on-siteinvestigations at BLMIS’ offices.

The fraud was facilitated by Madoff’sinsistence on BLMIS acting in a triple capacityas investment manager, executing broker andcustodian of the assets (the so called “TripleFunction”). Madoff also maintained a highlevel of secrecy regarding his purported

trading strategy. The risks associated withthese aspects of the BLMIS business modelwere seemingly accepted by thousands ofclients in return for being one of the lucky fewclients of Madoff (so they thought).

Currently Madoff is serving a 150-yearprison sentence, whilst a number of hisassociates have been convicted of involvementin the fraud. The combined estate of BLMISand Madoff continues to be liquidated in theUS, with substantial payments having beenmade to the investors who lost money. Forthose interested in Hollywood portrayals,Robert De Niro convincingly played Madoff(and Michelle Pfeiffer his wife) in HBO’s recentfilm The Wizard of Lies, whilst RichardDreyfuss and Blythe Danner starred in therecent ABC miniseries Madoff.

PrimeoTurning to the case at hand, Primeo wasestablished by Bank Austria in 1993 as an open-ended investment fund. From inception, itinvested with BLMIS, as well as making otherinvestments. Over time, Primeo increased theamount and proportion of its investments withBLMIS, ultimately placing substantially all ofits assets directly or indirectly with BLMIS.Primeo invested “indirectly” with BLMIS from2003 via shareholdings in other Madoff feederfunds, first Alpha and later Herald, who placedtheir assets with BLMIS. In May 2007, Primeoswitched all of its direct investments in BLMISfor a shareholding in Herald (the “in specietransfer”), and thereafter only investedthrough Herald and Alpha.

From 1996, BBCL acted as the Administratorof Primeo, and was required under anAdministration Agreement (in very briefsummary) to maintain the books and recordsof Primeo, and to calculate each month theNet Asset Value (“NAV”) per share. From 1993,HSSL acted as the Custodian of Primeopursuant to two successive CustodianAgreements, under which it was required tohold cash deposited in bank accounts and tosafekeep securities delivered to it.

Soon after the collapse of BLMIS, Primeoentered liquidation. In 2013, acting through

Primeo v HSBC:Madoff feeder fund claimdismissed by Cayman CourtToby Brown reports on the Grand Court’s decision in Primeo Fund (in Official Liquidation) v.Bank of Bermuda (Cayman) Ltd and HSBC Securities Services (Luxembourg) SA where heappeared alongside Tom Smith QC, Richard Fisher, William Willson and Robert Ameyof South Square

TOBY BROWN

50

10

CASE DIGESTS

Banking and Finance p32

Civil Procedure p34

Commercial Cases p35

Company Cases p39

Corporate Insolvency p42

Personal Insolvency p45

Property and Trusts p47

Sport p48

FEATURE ARTICLES

No good exit from BrexitGabriel Moss QC introduces three articles inthis issue cealing with the thorny subject ofBrexit and its consequences for the world ofrestructuring and insolvency p8

Brexit and its consequences for theworld of restructuringProfessor Christoph G Paulus, of the HumboltUniversity, Berlin, considers what might happenwith regard to cross-border insolvencies and/orinsolvencies of British firms after Brexit p10

The UK opts to play solo while theEU aims to bring harmony fromdiscordHoward Morris, head of restructuring atMorrison & Foerster in London, considerswhether the EU can achieve its statedharmonisation goal p18

Brexit: its impact on insolvencyforum and law shoppingProfessor Federico M. Mucciarelli, Reader inlaw at the School of Finance Management,SOAS, looks at forum shopping in the era ofBrexit p48

Schemes of Arrangement and theJudgments Regulation: The NewAuthoritiesRyan Perkins considers the application of theJudgments Regulation in the light of the recentDTEK and Global Garden Judgments p50

REGULARS

From the Editor p4EEC/EEA Update p68News in Brief p76South Square Challenge p80Diary Dates p82

DIGESTSOUTH SQUARE

www.southsquare.comSEPTEMBER 2017

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

DIGESTSOUTH SQUARE

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BREXIT, THE CONSEQUENCESBREXIT STAY OR GO: (CREDIT: EXTRAVAGANTNI).

Primeo v HSBC: Madoff feeder fundclaim dismissed by Cayman CourtToby Brown reports on the Grand Court’sdecision in Primeo Fund (in Official Liquidation)v. Bank of Bermuda (Cayman) Ltd and HSBCSecurities Services (Luxembourg) SA p58

Book ReviewHamish Anderson: The Framework of CorporateInsolvency Law, reviewed by Simon MortimoreQC p66

58

COVER STORY

Simon Mortimore QC Simon Mortimore QC retires from full-timepractice p72

New tenant at South SquareWe welcome Rose Langram-Taylor p75

In this issue

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century. Our thoughts and prayers go out to allthose affected.

Great uncertainty hangs over what theregime in North Korea plans to do next, andwhat to do about it. Its seemingly relentlessmissile-testing prompted the President of theUnited States to state that the US would respondto any further provocations “with fire and furylike the world has never seen”. The regimeresponded by saying it was conducting a carefulexamination of a possible strike on the Pacificisland of Guam, host to a large Americanmilitary base. Then it fired a long-range missileover Japan. And then it conducted anunderground test of what it said was ahydrogen bomb. On 11 September, the UNSecurity Council unanimously resolved toimpose further and more far-reachingsanctions (although less stringent than thosethe US had called for). As we go to press,another missile has been fired over Japan. Wecan but watch and wait to see how the situationwill be resolved.

Meanwhile, with the wind back in the sails offlagship Europa, the President of the EuropeanCommission, master of all he surveys from thequarterdeck, has shared his vision of the future.It is one of ever closer union: a federalist visionof common EU policy, on tax, foreign policy anddefence, determined by a qualified majorityvote, using “passerelle clauses” to bypass thethreat of veto. Acknowledging a bit of sea-mist,the European landscape would become clearerif Europa was steered by a single captain, says

Welcome to the September edition of the SouthSquare Digest.

We have had a shocking reminder, if onewere needed, of the devastation that can becaused by natural phenomena. Irma, one of themost intense hurricanes ever experienced, hasbrought death and destruction to the Caribbeanislands and Florida. The British Virgin Islands,Anguilla and the Turks and Caicos Islands,though by no means alone, have beenparticularly hard hit and the damage sufferedhas been catastrophic. At the same time, Mexicohas suffered its strongest earthquake in a

Full and by?

JEAN-CLAUDE JUNKER: WENEED ONE CAPTAIN

FROM THE EDITORMARK ARNOLD QC

5


the sailor from Luxembourg: President of theCommission and President of the Councilshould become one and the same. One wonderswhether the view from the crow’s nest might beeven more revealing.

The interested observer, somewhere asternand with a watchful eye on the flagship’s wake,may be forgiven for thinking that Brexitnegotiations between the UK and the EU haveentered choppy waters. In public at least, theEU’s focus appears to be on the divorcearrangement including (but by no meansconfined to) the divorce bill. Whileacknowledging that the divorce arrangementsmust be addressed, the UK wants to look aheadand talk in addition about the “deep and specialrelationship” it seeks with the EU, including itsfuture trading relationship. We know fromexperience that it is difficult to force parties todiscuss something either or both of them haveno wish to talk about. For those of us whoengage in litigation, it is one reason why wehave a job. In relations between sovereignstates or unions of states (or even super states,if the President the European Commission’svision is to be realised) the process must surelybe even less straightforward. As we watch howthe negotiations develop, however, it is perhapsworth reminding ourselves that Art 50(2)requires the EU to “negotiate and conclude anagreement with [the UK], setting out thearrangements for its withdrawal, taking accountof the framework for its future relationship withthe Union”.

Meanwhile, not without some rumbling, theGreat Repeal Bill is making its way throughParliament. As we know, the principal aim ofthe Bill is to repeal the European CommunitiesAct 1972, which currently gives primacy toEuropean law – including the decisions of theCJEU – in the UK, while simultaneouslyadopting into UK domestic law existing EU law(“retained EU law”) to ensure “maximumcertainty as we leave the EU”. As the PrimeMinister herself said in her foreword to thewhite paper, “it will then be for the

democratically elected representatives in the UKto decide on any changes to that law, after fullsecurity and proper debate”. In her LancasterHouse speech on 17 January 2017, the PrimeMinister had specified, perhaps more precisely,that it would be for the British Parliament todecide on any changes.

At the time of writing, however, muchcriticism has been levelled at the so-called“Henry VIII clauses” currently included in thebill. For example, clause 7 of the bill providesthat any Minister of the Crown may byregulations make such provision as s/he

THERESA MAY: SCRUTINY ANDPROPER DEBATE

6

considers appropriate to prevent, remedy ormitigate any failure of retained EU law tooperate effectively or any other deficiency inretained EU law, arising from the UK’swithdrawal from the EU. The power would beexercisable for the period of two yearsfollowing (Br)exit day and during that timesuch regulations as are made may make anyprovision that could be made by an Act ofParliament.

The concern about the use of such clauses isthat they operate as something of a power-grabby the executive from the legislature: a ministermay effectively amend, even overrule, primarylegislation by means of such regulations, whichconstitute only secondary legislation. The use ofsuch clauses has proliferated in recent years.Hang on, say those in Henry VIII’s camp: it is

Parliament itself that agrees to confer suchpowers on the executive, by voting through thebill. And any such regulations made by theMinister would be subject to scrutiny byParliament and (in this case) by the devolvedlegislatures: see draft clause 16 and schedule 7.All true. The niggling concern for some,however, is whether they are really necessaryand, assuming they are, just how much scrutinythey would receive.

The name “Henry VIII clause” is actuallysomething of a misnomer, as the former LordChief Justice, Lord Judge, has explained.1 Itarises from the Statute of Proclamations of1539, pursuant to which (according to its title)“Proclamations made by the King shall beobeyed”. But this did not permit the use ofexecutive power to override existing legislation.

■ ■

1/. Ceding Power to the Executive: the Resurrection of Henry VIII, 12 April 2016, King’s College, London. In his speech,Lord Judge also made reference to what he had said on the same subject when addressing the Lord Mayor of London onbehalf of the Judiciary, in 2010. See too the Henry VIII clauses fact sheet prepared by Stephen Argument, Legal Adviser(Subordinate Legislation) to the Australian Standing Committee on Justice and Community Safety (2011)

LORD JUDGE, FORMER LORDCHIEF JUSTICE

7

In terms, the King’s proclamations were to beobeyed and kept as though they were made byAct of Parliament, subject to one or twoprovisos. It did not mean that the King could, byhis proclamation, deprive his subjects of theirpossessions, liberties or other rights. Nor did itmean that, by any proclamation made pursuantto the Act, any other statutes, common lawsalready in force or other “lawful or laudablecustoms of this realm” could be “infringed,broken or subverted”. In other words, the Kingby his proclamation could not change existinglaws nor interfere with existing rights. It will berecalled that the Chief Justice of the CommonPleas, Sir Edward Coke, subsequently said asmuch in the Case of Proclamations (1610),causing King James I and VI muchconsternation. By that time, of course, theStatute of Proclamations had already becomehistory, hardly surviving Henry VIII’s death in1547; and its champion, Henry’s loyal ministerThomas Cromwell, had lost his head in 1540,having been condemned to death without trial.

Doing our best to keep our heads, we focus inthis edition on Brexit, its opportunities andpotential consequences. Gabriel Moss QCintroduces articles generously written andcontributed by three acknowledged experts inthe restructuring field, to all of whom weextend a very warm welcome. ProfessorChristoph Paulus of the Humbolt University,Berlin, considers the consequences for theworld of restructuring. Howard Morris ofMorrison & Foerster ponders on the goal of EUharmonisation as the UK opts to leave theorchestra. Professor Federico M Mucciarelli ofthe University of Modena writes on the impacton insolvency forum-shopping.

There are also articles by Ryan Perkins, whoconsiders the authorities on the application ofthe Judgments Regulation to schemes ofarrangement; and Toby Brown, who reports onthe Cayman Islands Grand Court’s recentlydelivered judgment dismissing Primeo’s claimagainst two HSBC entities. As well as otherregular features, we digest recent cases,introduced in this edition by Felicity Toube QC.

Finally, in this edition we bid a fond farewellfrom South Square to Simon Mortimore QC,

who is retiring from full-time practice after 43years at the Bar. As Simon disembarks, wewelcome aboard Rose Lagram-Taylor who,having completed her pupillage, takes up hertenancy at South Square at the beginning ofOctober.

We hope you enjoy this edition, whether youagree or disagree with what is written. Needlessto say, the views expressed in the editorials andarticles in this and every edition of the SouthSquare Digest are those of the authorsthemselves. They are not to be takennecessarily to reflect the views of othermembers or of South Square generally.

HENRY VIII : HIS FLAGSHIP,GREAT HARRY, WAS TOP-HEAVY


8

BREXIT - IN FOCUS

This issue of the Digest is privileged to carry anarticle by Professor Christoph Paulus on ‘Brexitand its consequences for the world ofrestructuring’. Professor Paulus is a leadingGerman expert on cross-border insolvency lawand is known not only for his excellentscholarship and wide knowledge but also forbeing outspoken on restructuring andinsolvency matters.

Howard Morris is one of the mostexperienced and best known solicitors in theinsolvency and restructuring area in the UK.

His article picks up some of the key themesinvolved in Brexit for the restructuring andinsolvency profession, such as the “power ofsentiment” when we seek assistance from otherEU Member States’ courts and the importanceof proposed harmonisation. ProfessorMucciarelli teaches both at SOAS and theUniversity of Modena and his article deals withCOMI and forum shopping in the light of Brexit.

I should declare my own point of view: I am afanatical Europhile. Europe was, prior to theEU, last united under Charlemagne. From hisdeath in 814, until the founding of the EuropeanCommunities, the countries that are nowFrance, Germany, Italy, Belgium, Holland andAustria saw over 1,000 years of war,devastation and famine with intervals of peaceand prosperity. The countries of the UK havefrequently been drawn into these wars andhave suffered vast casualties in both soldiersand civilians. Those 1,000 years of conflict,death and destruction have been replacedwithin the EU by a permanent era of peace,justice and prosperity.

The prosperity involves co-operating at manylevels of business and financial law. Animportant part of that co-operation is the EU co-operation in the field of restructuring andinsolvency. This is currently a win-winsituation for all countries of the EU and inwhich the UK, and in particular English law andpractice, is the market leader.

Professor Paulus has in his article identifiedtwo key innovations made by English

No good exit from BrexitGabriel Moss QC introduces three articles in this issue contributed by two eminent EUacademics and a leading UK solicitor, all experts insolvency and restructuring, dealing withthe thorny subject of Brexit and its consequences for the world of restructuring andinsolvency

GABRIEL MOSS QC

9

practitioners and courts in their interpretationof the Regulation on Insolvency Proceedings.The first innovation was the so-called “GroupCOMI” under which a group of companiesregistered in different EU Member States wereheld to have their COMI’s in one jurisdiction,namely where the group headquartersfunctions were carried out. The secondinnovation was necessary to correct potentialadverse consequences from “Group COMI”,being the application of the law of the mainproceeding throughout the EU unless localterritorial proceedings are opened. In thepractical world it is often undesirable andwasteful to have secondary proceedings andthus English law developed what theCommission now calls the “virtual secondary”,i.e., an undertaking by the insolvencypractitioner to local creditors in another EUMember State that if they do not request theopening of a secondary proceeding, theinsolvency practitioner in the main proceedingwill respect local law priorities.

Professor Paulus sets out six possible modelsfor the exit from Brexit. My view is that allthese potential outcomes are bad. In particular,if no deal is reached, because for example theUK is unwilling to pay to settle its existingobligations in the massive sums apparentlyrequired, we will lose the Recast Regulation onInsolvency Proceedings and the Directivesdealing with the re-organisation and winding-up of banks, investment firms and insurancecompanies. In an EEA-type of deal, we wouldkeep the Directives but lose the Regulation. Ifwe had a customs union only, like Turkey, wewould probably lose the Directives and theRegulation. Likewise in a Swiss-type solutionand a bespoke solution. If we stayed in the EUon the Danish model, we would lose theRegulation, but could probably opt into it.

All these loss situations are, of course, subjectto any treaty negotiated between the UK andthe EU under which we stay in or re-enter someor all of these Instruments. Such a treaty wouldnot necessarily involve accepting the Court ofJustice of the European Union: the three EEAcountries which are not Member States of theEuropean Union (Norway, Iceland andLiechtenstein) are subject to the EFTA Courtrather than the CJEU. The EFTA court of courseis still an international court on which the UKjudge would be in a minority.

In the unlikely event that politicians choose

to be honest with the UK, they would acceptthat in the current negotiation, the 27 have thegreat majority of the bargaining power, that notgetting a deal would be disastrous for the UKand that any deal that is obtained would beworse than the current deal, certainly for theUK and probably for the 27 as well.

Since any conceivable outcome of thenegotiations is worse than the present situationand given that our Members of Parliament areelected to do their best for the country, it seemsto me that the only sensible option is to stay inthe EU. Whether or not we are able to do thatdepends on the agreement of the other 27 to therevocation of the Article 50 Notice or the CJEUholding that the Article 50 Notice is in factunilaterally revocable. There is no domesticlegal obstacle to staying in the EU: legallyspeaking the referendum was only advisoryand Parliament did not bind itself to accept oract upon the result. However politically, it mayrequire a second referendum for the UKGovernment to feel able to stay in the EU. Thistime it looks as if young people will vote ingreater numbers and swing the vote in favourof Remain. Brutally, but realistically, the oldBrexiters are dying out and young Remainersare reaching voting age.

CHIEF BREXIT NEGOTIATORS,DAVID DAVIES FOR THE UK

(LEFT) AND MICHEL BARNIERFOR THE EU (RIGHT):

NOT, PERHAPS, CURRENTLY THEBEST FRIENDS


10

BREXIT - RESTRUCTURING

today, take for granted (or, in other words, areallowed to accept as facts) and which mighthave an impact on or which might stem fromBrexit.1 It needs, however, to be borne in mindthroughout that – even within the field ofprivate law (being itself only a small part of thewhole problem2 to be solved) – the topic ofrestructuring is just a tiny little piece of a hugejigsaw puzzle that the politicians are supposedto set together for the time after. It is, thus, notan unlikely scenario that the restructuringworld has to live for quite a while withuncertainty and reduced predictability.

I. FactsThe interpretation of the European InsolvencyRegulation in its new version (EU 2015/848 - EIRRecast) is likely to suffer from lackingimagination and what one might call stress-tests. Looking back to the beginnings of thethen (2002) new EIR the most innovative andheavily disputed actions and decisions weremade by English practitioners. It was they whohave – in clear contradiction to the quiteexplicit legislative intent3 - introduced a way tohandle group insolvencies by means of anunderstanding of the COMI (Centre of MainInterests) concept which, in the beginning, wasstrongly opposed on the continent4 but soonlater eagerly copied. Even the European Court

It has always been in the keenest interest ofmankind to foresee the future. The Romanaugurs watched to this end the flight of thebirds, and Nostradamus compiled his collectionof major, long-term predictions in his(in)famous prophecies (“Les Propheties”).Today, we want to know what happens with themarkets when politician A wins the elections,and we make predictions about the UK’s role in2019 and onwards. All these efforts are aswelcome as they are built on shaky grounds –suffice it to remind of the predictions about thelast US-election or the one in the UK. Thegenerally accepted right to fail with one’spredictions makes participation in this businesshighly attractive so that it is no wonder that, asa consequence, the amount of writings aloneabout Brexit is exuberant and is likely to turnout to be entirely irrelevant when reading itagain in the year, let’s say, 2020. In Germany,one had the chance to experience a similarcorrelation between endless writings,discussions, and deliberations and the finaloutcome some 28 years ago when the re-unification fuelled the imaginations andcreated all sorts of proposals which, at the endof the day, in most cases turned out to beillusionary.

Given this, it should be appropriate to beginwith a few observations which we can, as of

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1/. A parallel to this scenario is dawning on the other side of the Atlantic when and if the termination of the NAFTAagreement stands to discussion.2/. Much more burning probably problems such as the membership questions around European Common Aviation Area; i.e.in case of “no contract” (as opposed to a bad contract) it could happen that all British planes cannot fly over the continent.3/. Just cf. Virgós/Schmit-Report, marg. No. 76.4/. Including, i.a., the present author.

Brexit and its consequencesfor the world of restructuring

Professor Christoph G. Paulus, of the Humbolt University, Berlin,considers what might happen with regard to cross-borderinsolvencies and/or insolvencies of British firms after Brexit

11

of Justice’s attempt to suppress thisinterpretation in its Eurofood decision (andlater ones) was bound to fail – not so much interms of verbal disagreement but in terms offactual circumvention.

Another example is the ingenuity to establisha virtual secondary proceeding in order to gaina win-win-situation. The Collins & Aikman casewas a teaching hour for continental Europe asto how to achieve the best possible result. Andit was a sort of childish know-it-all attitude ofpractitioners from this side of the Channelwhen they afterwards wrote articles under thetitle: we could also have done it.

Needless to point out that both examples havemade it into the EIR Recast – however, in a waythat defies the Institutional Agreement betweenthe European Parliament, the European Union


and the European Commission on Better Law-Making from April 13, 2016.5 Both set of rules inartt. 36 ff. and 61 ff. are so overly bureaucraticand complicated – metaphorically: theflexibility of the case law-approach has beenput in the Procrustes bed of generalapplicability – that it is quite justified to predictthat we will not see many cases (if any) inwhich they play a role.

Whereas fact no.1 brings a disadvantage tothe continent, fact no.2 is negative (or at least:demanding) for the UK In her relationship withthe U.S.A., the UK had the competitiveadvantage of automatic recognition of most (ifnot all) of its restructuring decisions. TheEuropean Judgment Regulation and the Rome I-Regulation worked very well as a supporter ofthe British restructuring and insolvency

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5/. Cf. ABl. EU L 123, 1.

THE CJEU FIRST USED THE TERM‘CENTRE OF MAIN INTERESTS’ IN

ITS JUDGEMENT OF 20 OCTOBER 2011, INTERDIL SRL,

IN LIQUIDATION V FALLIMENTO INTERDIT SRL AND INTESA

GESTIONE CREDITI SPA

12

BREXIT – RESTRUCTURING

industry. Critics have seen it turning even intoa brothel of Europe. This advantage is likely tofall apart after the Brexit.6 The USA, in contrastcan still offer their huge advantage – namelythe effective stand-still of interfering actionsworldwide thanks to its powerful globaleconomic position.

But not only this is unfavourable to the UK. Atthe same time, in the far East, Singapore isincreasingly and powerfully advancing itself asa restructuring hub for Asia. By enacting highlyattractive restructuring tools (a mixturebetween the English scheme of arrangementand the U.S. Chapter 117) and by setting up a“consumer-friendly” infrastructure for theprofessionals it is working hard on its visibilityand to improve its global positioning. But since“decorating the show-case” is one thing,Singapore is very well aware that the othermain trigger for the international success of itsinsolvency regime and hence of the state as anattractive and powerful business location is therecognisability of their courts’ decisions. Andhere Singapore might get into directcompetition with the UK. Officials are alreadyintensely examining the possibilities –beginning with Bilateral Investment Treatiesand ending at a multilateral agreement. It isfair to assume that Singapore would not mindtoo much if her services would also be asked forby Europeans, even if they are from thecontinent.

There is another twist to this competitionissue, though. By an almost ironic coincidence,the member states of the European Union areconfronted with the need to transform intonational legislation a Directive which is, as ofnow, still a draft but which is very likely to get

enacted rather soon. This new instrument canbe described as a mixture of the Frenchprocédure de sauvegarde and the Englishscheme of arrangement. It introduces EU-widea restructuring tool which is on purposedesigned to avoid judge involvement to thehighest degree possible. And, funnily enough, itis supposedly applicable to debtors for whomno requirement whatsoever is set up as to theircentre of main interest. In other words, it canbe applied to anybody no matter where thisanybody is domiciled or seated. Up to now, itappears as if the continental lawyers have notyet discovered the potential of this legislativeomission – at least, as far as I can see, no onehas so far openly discussed this issue. However,it is to be assumed that rather sooner than latersomebody will jump on the enormous potentialwhich is connected with this instrument’sopenness and then the UK is in directcompetition not only with Singapore and theUS, but also with the member states of the EU.

II. Choosing the right wayWhat will happen with regard to cross-borderinsolvencies and/or insolvencies of British firmsafter a possible Brexit? The latter observationshave lead us already into the realm ofprediction. Accordingly, let us see whichoptions seem to exist from the somewhatlimited perspective of a German academic;what are the goals that the UK is likely to gofor? – seen from the limited horizon ofrestructuring and insolvency law; and, finally,which of the options described before wouldserve best the purpose.

1/. The optionsThe EIR will cease to stay in force in the UK, andBritish insolvency proceedings/judgments willnot automatically be recognized in the EUmember states pursuant to the EIR. Hence,something has to be done. Following the niceand comprehensive listing, for instance,Mankowski’s,8 one can distinguish between the

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6/. Cf. Burton, Insolvency and Brexit, International Insolvency & Restructuring Report 2017/18, p. 30.7/. Cf. Sec. 211A ff. of the Companies (Amendment) Bill, Bill No. 13/2017.8/. Mankowski, Brexit and European Insolvency Law, Hamburg Law Review 2017 (to appear in the next issue).

Some critics have seen the UK turning into a brothel of Europe

13

“EEA” version, the “Swiss model”, the “Danishmodel”, the “Turkish model”, the “Canadianmodel”, and a tailor-made solution.

a) The “EEA” model9 implies that the UKaccedes the European Economic Area. TheEEA is an extension of the Single Market tothe EFTA countries Iceland, Liechtenstein,and Norway; accordingly, what would beneeded is the UK also entering the EFTAgroup. This option carries with it theadvantage of having quite unrestricted accessto the European Market but comes at theprice of, i.a., accepting the right to freemovement.b) The Swiss model10 is insofar separate fromthe previous one as Switzerland has not

joined the EEA but is a member of EFTA.However, she has not (yet) agreed to fallunder the supervision of the EFTASurveillance Authority and the EFTA Court.Instead, her relationship with the EU is basedon a large number of bilateral agreements.c) Denmark has opted out from participationin the area of judicial cooperation.Nevertheless, the EU and Denmark haveentered agreements in 2005 by which anextension of the Brussels I-Regulation and theService Regulation was agreed upon.Someway, somehow other instruments doalso reach out to the northern peninsula, not,however, the European InsolvencyRegulation. It is to be noted, though, that

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9/. Also called “Norway model”, cf. D. Paulus, Der “Brexit” als Störung der “politischen” Geschäftsgrundlage?, in:Kramme/Baldus/Schmidt-Kessel (eds.), Brexit und die juristischen Folgen, 2016, p. 101 ff.10/. From the overboarding literature, cf. just Epiney, Die Beziehungen Schweiz – EU als Modell für die Gestaltung desVerhältnisses Großbritanniens zur EU?, in: Kramme/Baldus/Schmidt-Kessel (eds.), Brexit und die juristischen Folgen, 2016,p. 77 ff.

PROF CHRISTOPH G. PAULUS


14


Denmark is a member state of the Union.d) The Turkish model (irrespective of itschances for further realisation) is based onAssociation Agreements. They do not include,however, any cooperation or alleviationsregarding insolvency law but are more or lessa basic tariff union.11

e) The Canadian model would echo the CETAbilateral free trade relationship; similarefforts are underway with Korea and Japan.These instruments, however, do not includejudicial cooperation along the lines of theBrussels I- and the Insolvency Regulation.f) A tailor-made solution could be designed asa mix of the abovementioned models or assomething entirely innovative. Suchinnovations would have to take into accountwhat goals the UK politics is striving for.

2/. The goalsAssuming that the UK’s political will continuesto be, i.a., strengthening the service andjurisdictional industry within and outside thecountry, recognition of decisions is key. Theconsequence of Brexit is that the UK is nolonger a member state of the Brussels-I and theEuropean Insolvency Regulation, therebycutting off the recognition automatism of thosetwo instruments within the EU. The, so far, highattractivity of, especially, London as a majoreconomic hub relies to a great extent on thereliability of the British law (also: insolvency)system and its effects and their recognitionoutside of the UK, especially the EU.

This applies both to companies (andindividuals) founded and registered within theUK with activities in other member states, as

well as those high number of companiesfounded and registered in the UK but beingseated in another member state where theypursue their economic activities.

What is needed, therefore, is a mechanism asclose as possible – and tolerable (for both sides)– to full membership or recognisability of courtdecisions. And, indeed, something like that doesexist.

a) To begin with the (insofar) most attractiveone, the Lugano Convention 2007 has the lead– at least with regard to judgments outside ofthe insolvency realm. It parallels to a highdegree the Brussels I-Regulation including theautomatic recognition. However, access to theConvention is granted primarily incombination with either EU membership orEFTA membership. To accede EFTA (which isprecondition for acceding EEA), unanimousconsent is required from the existing memberstates (Iceland, Liechtenstein, Switzerland,and Norway), artt. 56, 43 par. 5 of the EFTAConvention.12 It should be borne in mind thatNorway is not entirely happy about suchprospect, for the somewhat banal reason thatshe would, thereby, lose her leadership rolein this group.13 Even though this sentimentwould probably not be the final word in theprocess, the incident reminds us that politicsis not just unemotional, cool reason inprogress! Once, the UK were an EFTAmember, it could accede the LuganoConvention according to art. 70 par. 1 a), 71Lugano Convention.There is, though, another road to Luganowhich, however, is thornier as it requiresconsent from all The Contracting Parties, artt.70 par. 1 c), 72 par. 3 Lugano Convention. TheContracting Party is the EU, not the memberstates. It would take, thus, the consent of the EUto allow the UK access to the LuganoConvention. Even if that were to be granted – astep which would not be easy to explaindomestic voters in a number of EU member

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11/. Cf. Mayer/Manz, Der Brexit und seine Folgen auf den Rechtsverkehr zwischen der EU und dem Vereinigten Königreich,BB 2016, 1731 ff.12/. Consolidated version, last amended on July 1, 2013.13/. Cf. Baudenbacher, After Brexit: is the EEA an option for the United Kingdom?, European Law Reporter 2016, 134, 137.

The high attractivity of London as amajor economic hub relies to a great extent on the reliability of British law

15

states – the EU would still be in the position toopt out, as it were, from being bound by theaccess: art. 72 par. 4 allows the ContractingParties to object the accession – with theconsequence that, in relation to the EU, theConvention does not enter into force. This is athreat which is hard to imagine that the UKgovernment would want to be confronted with.b) On the insolvency side, the UNCITRALModel Law could be helpful. After all, the UKhas adopted it and it will be applicable withregard to the previous fellow member states ofthe EU since Brexit means exit also from theEIR.14 The Model Law does not provide forautomatic recognition but yet, it is based onthe assumption that there is, globally speaking,just one main proceeding and that non-mainproceedings are permissible but withterritorial limitations.

Precondition for this somewhat improvedrecognition mechanism is, as a matter of fact,that there is indeed an insolvency proceedingat stake. And the question is whether this is thecase at all when it comes to the British law“export hit”, the scheme of arrangement. It iswell known that the UK has fought fiercely15 toget it acknowledged by the EIR Recast that it isnot an insolvency proceeding16 The somewhatdelicately construed compromise in art. 1 ofthe Recast EIR according to which aninsolvency proceeding has to be based on a“law relating to insolvency” is the badge ofvictory for this fight. In commentaries, we arenow writing that the scheme is not covered bythe EIR since it is based on the Companies Act2006.17 The huge advantage for the UKrestructuring industry is that the scheme isapplicable for entities with their COMI outsideof England.

Well, under the given circumstances it is tobe assumed that one judge or another will beinclined to rethink this position and to have acloser look at the elements of an insolvencyproceeding as defined in art. 1 EIR Recast:there is no need of insolvency, there is noneed of an all-creditors-encompassingproceeding, there is no need for anyliquidation option as a last resort, etc. Thereis, at the end of close inspection, only thisbasement-requirement. But if this were theonly distinguishing element – what should wesay about the French insolvency law whichno one ever, so far, has disputed to be a “real”insolvency tool in the sense of the EIR? It isregulated in the Code de Commerce! Shall we,therefore, save the scheme exception and giveit justification post mortem (post Brexit), as itwere, and tell the French that they are outsidethe applicability of the Regulation? Of coursenot! Therefore, again – it is to be feared thatsome may think that the time would be ripefor characterising the scheme differentlyfrom before.

However, even if we do so and accept thescheme to be an insolvency proceeding, theUNCITRAL Model Law would help onlyinsofar as other states have also adopted it.This is strongly promoted all over the globe;but – at least with regard to the EU and for thetime being – there are only few memberstates who have done so: Greece, Poland,Romania, and Slovenia. Therefore, the ModelLaw is only of limited help.c) Some argue that the UK still iscontractually bound and connected withother EU member states by the BrusselsConvention 1968.18 If this is the case, twothings are to be concluded: Firstly, insolvency

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14/.It is hereby supposed that the EU member states do not qualify as “relevant country” under sec. 426 par. 4 of theEnglish Insolvency Act.15/.Not entirely tongue-in-cheek, Prof. Ian Fletcher once, at a conference in Paris, stated that it could be seen as ajustification for a Brexit if a scheme would be declared an insolvency proceeding by the Brussels authorities.16/. Cf. Rinze/Lehmann, Brexit – Mögliche Auswirkungen auf Restrukturierungen und Insolvenzverfahren in Deutschlandund dem Vereinigten Königreich, DB 2016, 2946, 2950.17/. Advocating for recognisability also after Brexit Sax/Swierczork, The Recognition of an English Scheme of Arrangementin Germany Post Brexit: The Same But Different?, ICR 2017, 38.18/. Ungerer, Brexit von Brüssel und den anderen IZVR-/IPR-Verordnungen, in: Kramme/Baldus/Schmidt-Kessel (eds.),Brexit und die juristischen Folgen, 2016, p. 297, 299 ff.; Lehmann/Zetsche, Die Auswirkungen des Brexit auf das Zivil- undWirtschaftsrecht, JZ 2017, 62, 70. Opposing Hess, Back to the Past: Brexit und das deutsche europäische internationalePrivat- und Verfahrensrecht, IPRax 2016, 409, 413.

16


matters are excluded; the Gourdain/Nadlerdecision of the ECJ19 from 1979 indicated howfar reaching this is. Secondly, apart from theUK contracting parties to the Convention arethose states which acceded the thenCommunity before 2002, thereby reducing thenumber of convention parties to 14. As aconsequence of this limitation, theConvention has to be applied in its shape of2002; the amendments and extensions of hersuccessor Regulations cannot be attributed tothe Convention. Nevertheless, with regard tothe scheme of arrangement, the struggle forits non-insolvency-nature might continue inthis regard.d) A further recognition tool are bilateralagreements. Many of them do already exist –also with member states of the EU. It is verydoubtful, though, whether they have“survived” the period of commonmembership until the Brexit takes effect.Everything depends here on theinterpretation of the word “replace” in art. 85EIR (Recast) and “supersede” in art. 69 of theJudgment Regulation.20 Irrespective of the fateof those pre-existing conventions, the UK willalways have the option to negotiatebilaterally or multilaterally for recognitionconventions.e) As long and insofar as this is not (yet) thecase the relationship will be built on thestatus of common WTO membership. Theconsequence would be that the UK would facethe same tariffs with the EU as any thirdcountry with which the EU does not have afree trade agreement or a customs union.Also, all EU free trade agreements andcustoms unions would no longer apply to theUK. This would immediately raise the costs ofboth imports and exports in the UK andseverely disrupt value chains.21

3/. ChoiceAt this point, when it comes to the question ofwhich choice would be best, one is inimmediate vicinity to the above-mentionedancient Roman augurs; i.e. every statement isno more than mere guess-work.

Therefore, it must suffice to just name a fewoptions – leaving it explicitly open thatsomething entirely new and unforeseenmight emerge from the negotiations of thecoming (less than) two years. Quiteinteresting ideas exist and are proposed – forinstance, CANZUK which would comprise aUnion between Canada, Australia, NewZealand, and the UK; alternatively, a “newNAFTA” which would be the old one(assuming thereby, that it survives the presentU.S. administration) plus UK; or theContinental Partnership Agreement (CPA)22 asdeveloped and described by the Brussels-based think tank Bruegel with very thoughtprovoking ideas and ignoring traditionaltaboos.

If there is any consistency between the pre-referendum political statements and thefuture way to go, it seems to be precluded thatthe UK will join EFTA or even EEA.Irrespective of a number of quite convincingarguments and deliberations in favour of thisoption,23 it is to be feared that it would be - asAllen & Overy puts it nicely in a researchpaper - a different name for (pretty much) thesame game.24

With regards to schemes of arrangementthe post Brexit status quo might save the day(i.e. recognition) at least with respect to 14member states of the EU because of the so fardormant applicability of the BrusselsConvention. However, a slight caveat comesfrom the scheme’s qualification as possiblybeing an insolvency proceeding.

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19/. From 22.2.1979 – Rs. 133/78, Neue Juristische Wochenschrift (NJW) 1979, 1771.20/.On this, see Paulus, Europäische Insolvenzverordnung, Kommentar, 5th ed., 2017, Art. 85 marginal no. 4.21/.On this, see, e.g, Mears/Paulus/Takagi, Global Supply Chains and Free Trade Agreements: A Suggested Vehicle forHarmonization of Insolvency and Contract-Enforcement Laws, Pratt’s Journal of Bankruptcy Law 2015, 284 ff.22/. Cf. http://bruegel.org/2016/08/europe-after-brexit-a-proposal-for-a-continental-partnership.23/. Cf. Baudenbacher (fn. 10).24/. Available at: http://www.allenovery.com/Brexit-Law/Documents/Macro/EU/AO_BrexitLaw_-_EEA_Membership_Jul_2016.PDF.

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18

courts have until now been providedwith suitable expert opinions that ascheme of arrangement will berecognised in another country mightbe affected by a change in sentimentamong those European expertstowards the UK. We may seechallenges to the recognition andenforcement of schemes in EU states, amuscular resistance to the weakeninggrip of the UK on the Europeanrestructuring market.

In many areas and certainly in thedevelopment of an EU approach toinsolvency and restructuring, the UKhas played a significant role in debateand the decisions that have beenmade. If not a driving force, we havecertainly been vocal in the counsels ofthe EU. At the EYES on Insolvencyconference in Amsterdam in Januarythis year, looking at the road ahead for

EU insolvency development,distinguished speakers expressedregret that the EU will soon be withoutthe voice of the UK.

When the UK leaves the EU, even ifwill is found in the negotiations toagree a multilateral treaty to recreatethe EIR, that is not the end of the storyby any means. The EU is looking tocreate a pan-European insolvencyregime, a “framework”, each memberstate meeting minimum standards thatwould bring them to a previouslyunimagined level of harmonisationand a restructuring environment witha distinctly Chapter 11 character3 andout of the EU, the UK won’t be a part.The subject of this article is whetherthe EU can achieve its harmonisationgoal and, by implication, what thatmeans for the restructuring businessin the UK. The proposed Directive will

Leaving the orchestraVery quickly the legal profession got togrips with the likely consequences ofBrexit for restructuring andinsolvency. We published our briefingsand our articles, all saying the samething. And since then we’ve beentrying to read the runes and urginggovernment in its negotiations withthe EU to pay attention to insolvency asthe economy’s plumbing but notexpecting much1. No one I know in therestructuring business has expressedanything but regret that the UK willupon leaving the European Union nolonger enjoy the recognition of itsinsolvency proceedings in the EUunder the European InsolvencyRegulation (EIR). I’ve not heard anyonesuggest, either, that the UK should stopgiving recognition to insolvencyproceedings in the EU2. Forrestructurings, we comfort ourselvesthat the recognition and enforcementof schemes of arrangement in othercountries ought not to be affected asthis is a matter of private internationallaw. But some do harbour a fear thatthe comparative ease and lack ofcontroversy with which the English

BREXIT – HARMONISATION

The UK opts to play solowhile the EU aims to bringharmony from discord

Howard Morris, head of restructuring at Morrison &Foerster in London, considers whether the EU canachieve its stated harmonisation goal, and what thatmeans for the restructuring business in the UK

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1/. The UK government’s position in its paper “Providing a cross-border judicial cooperation framework” is that it wants, post-Brexit, “an agreement with the EU that allows for close and comprehensive cross-border civil judicial co-operation on a reciprocal basis, which reflects closely the substantive principles for cooperation under the current EU framework”. The UK has identified the EIR as falling within the scope of that framework. https://www.gov.uk/government/publications/providing-a-cross-border-civil-judicial-cooperation-framework-a-future-partnership-paper.2/. This may now be moot. The effect of the European Union (Withdrawal) Bill (EUWB), if enacted as drafted, will be to repeal the European Communities Act 1972 (ECA) thus, in effect, repealing the EIR as it automatically became UK law by virtue of S.2(1) of the ECA, and then immediately to enact it as UK law, again, by clause 4 of the EUWB. However, dissatisfied that the EU’s Member States will no longer be obliged to recognize UK proceedings, the UK government might use its so-called “Henry VIII” power (clause 7, EUWB) to repeal that rump of the EIR. The reasoning would be that with the Model Law and the common law, recognition of insolvency proceedings in Member States can be acquired in the UK exactly as for any other country. If the EIR is to be restored in any shape or form it would be better that it is mutual.3/. Proposal for a Directive of the European Parliament and of the Council on preventative restructuring frameworks, second change and measures to increase the efficiency of restructuring, insolvency and discharge and amending Directive 2017/30/EU COM(2016)723http://ec.europa.eu/information_society/newsroom/image/document/2016-48/proposal_40046.pdf

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insofar as careful thought is given tothe issue, is wrapped up in the decisionon governing law and forum. We mustnot underestimate the power ofsentiment in making these decisions.Sentiment is not simply irrationalemotion but an intuitive response topolitical, cultural, social andpsychological factors including what is“market”, what is common or usual or,even, the fashion for that type of deal.And these factors, sentiment, influencedecision making by individuals,businesses and courts. At conferencesacross Europe our competitor lawyersare now suggesting that English law isbroken in consequence of the vote toleave the EU. With Paris and Frankfurtand Berlin holding trials in English as ameans of attracting legal business,along with broader governmentinitiatives to tempt business from the

mandate the harmonisation ofsubstantive insolvency laws across theUnion. The UK may even still be amember when the Directive comesinto force.

We, too, were set on significantreforms4, a new moratorium with thedebtor in possession, a plan ofreorganisation permitting cross-classcram down and a species of ipso factorule. The idea of super priority DIPfinancing was dropped during theextended consultation (as it was whenlast canvassed in 2009). Now it seemsthat with so much legislative businessfocused on Brexit and the governmentweakened by the general election, theprospect of introducing those reformshas grown distant.

When commercial deals are madethe thinking as to what law should beused to solve a restructuring problem,

UK, the country is in a ferociouscontest to retain its primacy as a legalcentre and our disproportionate shareof complex, internationalrestructurings.

The World Bank chimes inThe insolvency system the proposedDirective contemplates and our ownproposed reforms are eerily similar.Both sets of reform proposals areintended to meet the best practiceprinciples on which the World Bankhas, since 2015, based its vision of anefficient insolvency system, its“resolving insolvency” analysis. It wasthen that the World Bank changed itsmeasures and the UK, which had for solong, done ever so well in theinsolvency rankings of the WorldBank, took a dive. That’s because theWorld Bank changed its metrics to


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4/.https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/525523/A_Review_of_the_Corporate_Insolvency_Framework.pdf.

DATA: THE WORLD BANK

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Flourishing by Becoming Familiar6

argued that capital market investorswill feel at home if the insolvencysystem is efficient and familiar. Themore those conditions are met, thecheaper insolvency risk will be priced.In short if US investors, and mosthedge funds and specialist investors indistressed corporate debt, actors thatare now key to the internationalrestructuring industry, are either USbased or are culturally stronglyAmerican in character and personnel,feel familiar with how a debtor can berestructured and the role andinfluence they can have as an investorin debt or equity, the more willing theywill be to invest. So an efficient systemthat looks like Chapter 11 is going to bemore attractive to internationalcapital. Philosophically we might pickholes in Chapter 11 and variations onits themes but economically andpragmatically, it is the global directionof travel.

The European Commission is of thisopinion. The purpose of the EUCommission’s ambitious insolvencyharmonisation plan, something neverbefore attempted, is an important partof creating Europe’s single capitalmarket. The “Five Presidents Report”7

of June 2015 lists ‘insolvency lawamong the most important bottleneckspreventing the integration of capitalmarkets in the euro and beyond.’Advantage will be gained by the EU, itbelieves, by having a homogenousapproach to restructuring andinsolvency. If that approach looks likeChapter 11 then the hedge fund andother investors will be morecomfortable.

The European Commission’s themeThe EC’s proposed Directive is not a

embrace an approach to insolvencymuch more like Chapter 115 and theUK’s system is light on those features.

The World Bank uses amathematical expression for a nation’soverall performance, “distance tofrontier”, meaning the distance to the“best performance across alleconomies in the Doing Businesssample since 2005”. The UK’s resolvinginsolvency distance to frontier,applying the new measures, fell from95.33 to 82.04. The Secretary of Statefor Business, Sajid Javid, in introducingthe UK’s proposed insolvency reformsin May 2016, was frank in wanting theUK to move up the World Bank’s

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5/. See the World Bank’s “Creditor Rights and Insolvency Standard” http://siteresources.worldbank.org/GILD/Resources/FINAL-ICRStandard-March2009.pdf and the World Bank’s “Principles for effective insolvency and creditor and debtor regimes”http://documents.worldbank.org/curated/en/518861467086038847/pdf/106399-WP-REVISED-PUBLIC-ICR-Principle-Final-Hyperlinks-revised-Latest.pdf.6/. https://media2.mofo.com/documents/160727brexitrestructuringinvestors.pdf.7/. The Five Presidents’ Report: Completing European Economic and Monetary Union https://ec.europa.eu/commission/publications/five-presidents-report-completing-europes-economic-and-monetary-union_en.

rankings for Doing Business. It mayseem juvenile for countries to be incut-throat competition for places onthis league table – do internationalcommercial deals really depend on aWorld Bank ranking? – but inrestructuring there is a powerfulreason for aiming to reduce thatdistance to frontier. And if the UKdoesn’t reform we could become, inthe eyes of investors, a backwardoutlier unable to respond to all thevoices in increasingly complex andatomised capital structures.

Flourishing by becoming familiarJames Peck and I in our article

SAJID JAVID, IN INTRODUCING THE UK’S PROPOSED INSOLVENCY REFORMS IN MAY 2016, WAS FRANK IN WANTING THE UK TO MOVE UP THE WORLD BANK’S RANKINGS FOR DOING BUSINESS.

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diabolical scheme to undermine thepost-Brexit UK robbing it of itsrestructuring business. Far from it.The genesis of the proposed Directivegoes back at least seven years andduring that time, right up to the Brexitvote, the UK was an important playerin the process of deciding upon andpursuing this ambitious reformagenda.

In 2010 INSOL, at the instance of theEuropean Parliament’s Committee onLegal Affairs, produced a report8 thatshowed the widely differingapproaches to restructuring across theUnion, the encouragement thedifferent systems give to forumshopping and the obstacles this createsto the recognition of cross-borderrestructurings and reorganisations.The European Parliament accepted theconclusions in November 2011, the keyrole of the law in enabling corporaterescue recommended harmonisationof insolvency laws. Tasked with thismission the European Commission ayear later set itself the goal ofintroducing “modern insolvency lawsthat help basically sound companies tosurvive”.

Over the next two years, through thefinancial crisis and no doubt informedby its effects, the EC developed itsthinking. It gauged the public attitudethrough consultations and in March2014 published its Recommendation9

calling for member states to reformand align their insolvency laws. Theproposed Directive goes farther thanthe Recommendation not just inmandating reform and harmonisationbut in specifying deeper reforms thanin the Recommendation. In so doingthe Commission makes its task ofgetting all member states to introducethe minimum standards for insolvencylaws more difficult. But before we lookat this, it is worth considering the

broader difficulty the EU encounters inharmonising laws.

At the heart of the proposedDirective is the harmonisation of lawsin two areas; restructuring and givinga second chance to bankruptentrepreneurs. There will also beimprovement to the associatedinsolvency rules and processes and thecollection and publication of data oninsolvencies.

The EC believes that viable

businesses are being liquidatedbecause there is no accessible meansfor their restructuring. With an eye tothe continuing heavy weight carriedby European banks, the Commissionconsiders that a more efficient andconsistent means of restructuring willreduce the problem of accumulatednon-performing loans. A central goal

of the insolvency framework is theintroduction of a debtor in possessionreorganisation process, compassedabout by a moratorium on hostilecreditor action, with access to newcredit and protection from thetermination of executory contracts.

“A well-functioning EU single marketrequires a coherent restructuring andsecond chance framework capable ofaddressing the cross-borderdimensions of firms, as interaction

between companies located indifferent Member States has becomeincreasingly common. EU action willtherefore add value by facilitatingcross-border investing in the EU,ensuring that viable businesses infinancial difficulty, wherever they arelocated in the single market, will beable to benefit from a wider range of

The proposed 2017 Directive goes furtherthan the 2014 Recommendation

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8/. Harmonisation of insolvency law at EU levelhttp://www.europarl.europa.eu/meetdocs/2009_2014/documents/empl/dv/empl_study_insolvencyproceedings_/empl_study_insolvencyproceeding s_en.pdf.9/. Commission Recommendation on a new approach to business failure and insolvency C(2014)1500 finalhttp://ec.europa.eu/justice/civil/files/c_2014_1500_3n.pdf.

HOWARD MORRIS

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accessible tools to prevent theirinsolvency. At the same time,entrepreneurs will benefit from beingable to use reasonable dischargeperiods in their Member States. Thiscould not realistically be achieved bythe Member States acting alone. Inaddition, ensuring that cross-bordercreditors and investors involved insuch a restructuring process have attheir disposal appropriate safeguardswill have positive economic effects.The proposed rules will create legalcertainty for creditors and investorswho want to lend in other MemberStates; the necessary information willbe available so that they can takeinformed decisions.”10

FugueThis article is not a critique of theproposed EU framework but it is worthnoting issues that will make theharmonisation harder. First, the ECwants to keep court involvement inrestructuring minimal. But, in areorganisation process that dividescreditors into classes, permits cramdown of classes (so long as the absolutepriority rule is applied) almostinevitably, therefore, threatensarguments about valuation(anticipated by Article 13 of the DraftDirective). Chapter 11 is a court-drivenprocess, relying on specialist judges ina specialist bankruptcy court. Topicture a similar regime without accessto sufficient judicial and professionalinfrastructure is naïve.

Secondly, the EC is fixed on itsreorganisation plan as the means ofrestructuring, it does not allow for thepre-pack sale, the quick businessdisposal that has become so efficientalbeit not without a share of criticismin the UK. Thirdly, the EC has in mindsome early-warning tools to alertdebtors to trouble ahead. What can

new approach focuses only on theessentials, the core rules that must bechanged while all else is a matter ofmutual recognition.

The current state of the EU’sinsolvency and restructuring laws isbest described as the product ofregulatory competition, another meansof harmonising laws. In harmonisationby regulatory competition each statedecides on its own laws and businessflows to the state with the regulatoryclimate that best suits the business.Other countries follow suit. Look atDelaware in the US; through regulatorycompetition it has become thepreferred location for incorporation ofsubstantial businesses and, as weknow, for Chapter 11 filings. Delawarealso demonstrates that businessdoesn’t necessarily flow to thejurisdiction with the weakest rule oflaw or most lax regulation.Reputational and political factors seeto this.

To arrest the flow of businesselsewhere states change theirregulation to adopt the standards ofthe winner in the regulatorycompetition and we have indeed inrecent years seen European countriesreform and develop their insolvencylaws to provide means ofrestructuring to avoid their companiesgoing to London. And yet regulatorycompetition has not seen MemberStates adopting consistent insolvencylaws.

Harmonisation of the standards ofphysical products is one thing butharmonisation of rights andresponsibilities, entitlements andobligations is quite different and it isin this area that EU harmonisation hasmade the least progress.

Simon Deakin12 describes howharmonisation of corporate law “hasstalled, above all, on the question of

they be?But, as I said, my purpose is not to

identify flaws in the detail but to lookat whether constructing thisframework of minimum standards andlifting it into place across the whole EUis likely, in practice, to be a successfulreality.

One of the aspects of the EU loathedby some is the perceivedhomogenisation of law byharmonisation. The UK has been farfrom alone in resisting changes to itslaws to achieve harmonisation.Harmonisation has in fact provedextremely difficult to achieve. Theharmonisation of laws isn’t itself acentral goal of the EU but rather a toolto establish and implement the FourFreedoms.

Originally harmonisation of lawsrequired unanimity among EUmember states. This changed with theSingle European Act from 1987followed by the Maastricht,Amsterdam and Nice treatiesintroducing and expanding qualifiedmajority decisions.11

Much of the harmonisation that hasbeen achieved has been by decisions ofthe EU Court, ruling against laws asbeing discriminatory or in breach ofthe Union’s fundamental rights. Thebest -known decision was in 1979 inthe Cassis de Dijon case obliging EUmember states to accept moststandards set by other EU states. Thiscompelled member states to acceptcompromise on harmonisation toavoid the lowest standard being thegeneral law.

In 1985 the EC published a WhitePaper on a “new approach” toharmonisation. A pragmatic andrather more subtle method ofharmonisation was posited and it isthis new approach that the proposedDirective on insolvency adopts. The


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10/. See footnote 1.11/. Article 95 of the Treaty Establishing the European Community as amended by the Maastricht Treaty, introduced qualified majority voting forthe majority for most of the directives to create the single market.12/. Regulatory Competition Versus Harmonisation in European Company Law https://ideas.repec.org/p/cbr/cbrwps/wp163.html.

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how to treat stakeholder groups, inparticular employees.” The failure, hesays, reflects a fundamentallydifferent philosophical outlookbetween member states on corporategovernance.

In insolvency and restructuring thechallenge to harmonisation is anotherset of local interests informed by theculture of the member states and theexpectations of local stakeholders andactors as described by ProfessorFederico Mucciarelli13, who calls themthe “distributional rules”, like thedifferent rankings of creditors,treatment of shareholders’ set-offs andthe termination of executorycontracts. Professor Mucciarelliargues that there is an intrinsicdifficulty in harmonising the law inthese areas. “These distributionalrules” affect equal treatment ofcreditors in the distribution of adebtor’s assets and are a highly-sensitive matter as they embody aspecific balance of values andinterests. Reform of distributionalrules therefore requires a high level ofpolitical legitimacy and consensus.”

“Another defining element ofharmonisation is the object to beharmonised. On a macro-level it seemsto be the legal orders that converge asa whole due to the process ofharmonisation even though it is quiteclear that the result will not be auniform law within Europe. Yet, theactual object of harmonisation is muchsmaller and subject to many debates. Itis the “law”. What is law? This is amoot question and the understandingof law diverges in the Member Statesand the various schools of thought, butfor our purpose it suffices to state thatlaw is more than rules, it is also theapplication and use of these rules bycourts, administrative bodies and even

control, suppressing creditor actionsand, in the personal sphere, thedischarge of bankrupts and theconcept of giving debtors anotherchance, runs straight into the deeplyheld attitudes about how, whethercorporate or individual, those whowelch on their debts should betreated. I’d hazard that societalattitudes to debtors are rather morevisceral than the rules aroundincorporation of companies, whichhave proved so difficult toharmonise.15

The proposed Directive calls for thetraining of judges and insolvencyprofessionals. The EC sees that itsharmonisation plan is not simplyabout rules but calls for radicallychanged attitudes, a new dispensation– the rescue culture. The UK knowsfrom its own experience of the greatreform of 1985/1986 that creating arescue culture is not easy. The EUwill find emplacing its insolvencyframework and actuating it acrossthe community with attitudesdirected to the expressed ambitionsof the EC, will take time, effort andinvestment. Will something short ofthe project’s completion be a realthreat to the UK’s powerful positionin restructuring? With the loss of theEIR and the wider consequences ofBrexit, the UK is going to be less well-equipped to attract restructuringbusiness. But we must be mindful ofsentiment and an EU inspired by ourrejection of the project, to bring itself,in time, into harmony.

sometimes private actors, i.e. the legalpractice. Art 95 EC speaks of “laws,regulations or administrativeprovisions’ referring primarily toapproximation by the means ofpositive (statutory) law. This must,however, also include approximationat the level of application andinterpretation. Negativeharmonisation, on the contrary, affectsany national measure at a broaderscale, hence also administrative andjudicial practice, and case-law.Indirectly, the approximation of lawsmeans also an approximation ofpolicies, as Member States are barredfrom enacting their own legislationonce an area has been harmonized.Legislation is meant to govern thebehaviour of individuals in order toattain the purpose of the norm. Afterharmonisation has taken place this isguaranteed at the European level, thuscreating a common European policy”.14

SonataThe Recommendation fought shy ofcalling for the adjustment ofdistributional rules. But the proposedDirective is not so timid. To make itscorporate reorganisation tool workthere must be a priority given to DIPlending. Secondly it calls for theintroduction of an ipso facto rule,barring the termination of executorycontracts because of insolvency -contracts necessary for the debtor inrestructuring proceedings to survive.The entire reorganisations process,leaving the debtor’s management in


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13/. Not Just Efficiency: Insolvency Law in the EU and Its Political Dimension, European Business Organisation Law Review 14: 175-200http://eprints.soas.ac.uk/16957/1/Not%20Just%20Efficiency%20EBOR%202013.pdf14/. Professor E J Lohse on “The Meaning of Harmonisation” is the Context of European Community Law – a Process in Need of Definition” fromthe “Theory and Practice of Harmonisation” edited by M. Andersen and Camilla Bark Andersen.15/. See Deakin, footnote 10 infra.

The shift from fugue to sonata is plagued withproblems - composers have long wrestled with finding a way to reconcile these two ways of thinking

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BREXIT - FORUM SHOPPING

Brexit: its impact oninsolvency forum andlaw shoppingBy Professor Federico M. Mucciarelli, Reader in law at the School of FinanceManagement, SOAS, and associate professor at the Dept of Economics of theUniversity of Modena

1. What is ‘forum shopping’?Forum shopping is one of the mostdebated policy issues in cross-borderinsolvency regimes and yet the contoursof this phenomenon are not alwaysclear. A preliminary definition could befound in the Insolvency Regulation,since one of its goals is avoiding‘incentives for the parties to transferassets or judicial proceedings from oneMember State to another, seeking toobtain a more favourable legal positionto the detriment of the general body ofcreditors’.1 Forum shopping, therefore,is the situation whereby a debtorrelocates relevant factors from his orher original country to another, with theaim of shifting the competence to hearthe insolvency case and applyinginsolvency rules of the new country. Inorder to shift the competence, a debtorshould relocate the private internationallaw connecting factor, namely its centreof main interests (hereinafter ‘COMI’)from one jurisdiction to another.2 It is tobe noted that, under the InsolvencyRegulation recast ‘forum shopping’ is tobe avoided only if detrimental for ‘the

general body of creditors’.Assessing when a debtor has actually

shifted its COMI is, however, far frombeing an easy task. Equally complex isassessing whether such a shift isdetrimental for the general body ofcreditors. Until the United Kingdomeventually withdraws from theEuropean Union, the answers to thesequestions are to be found by consideringthe Insolvency Regulation and bylooking at case law of the EuropeanCourt of Justice, while other sources ofUK insolvency law (in particular theInsolvency Act 1986 and the conflict oflaw rules based on common law) onlyplay an ancillary function.

As I have noted above, the InsolvencyRegulation is based upon the debtor’sCOMI as choice-of-law and jurisdictioncriterion for main proceedings havinguniversal effects.3 A debtor’s COMI, inparticular, is ‘the place where the debtorconducts the administration of hisinterests on a regular basis and which isascertainable by third parties’.Additionally, the insolvency regime ofthe Member State where a debtor’s

COMI is situated should apply.4 TheCOMI is a fact-sensitive criterion, whichcould be uncertain in the eyes ofcreditors at the moment when debtswere incurred. To increase thepredictability of a company’s COMI, theregulation presumes that it is situated inthe place of a company’ registeredoffice.5 Therefore, unless suchpresumption is not rebutted, the countryof incorporation governs both companylaw issues and the insolvencyproceeding. Regarding individualsexercising a business or a professionalactivity, the Insolvency RegulationRecast presumes that their COMI iswhere their ‘principal place of business’is situated, unless the contrary isproven6. By contrast, the COMI of over-indebted private persons andconsumers is presumed to be in thecountry of their habitual residence,unless the contrary is proven.

2. Companies’ insolvency tourismDue to EU freedom of establishment,companies and other legal entities canbe incorporated in a Member State and

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1/. Recital 5 Regulation (EU) 2015/848 of the European Parliament and the Council on insolvency proceedings (recast), hereinafter the ‘InsolvencyRegulation Recast’. See G Moss – Ian F Fletcher – S Isaac The EU Regulation on Insolvency Proceedings (Oxford: 2016); R Bork – R Mangano EuropeanCross-Border Insolvency Law (Oxford: 2016).2/. Article 3(1) Insolvency Regulation Recast. 3/. Article 3(1) Insolvency Regulation Recast.4/. Article 7(1) Insolvency Regulation Recast.5/. Article 3(1) Insolvency Regulation Recast.6/. Insolvency Regulation Recast, article 3(1) sub-paragraph 3.

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have all their assets, business and/orheadquarters in any other MemberState. For the purposes of this work,three main hypothetical cases are to beisolated: (a) Alpha plc, incorporated inEngland, having its headquarters and itsbusiness exclusively in another MemberState (for instance in France); (b) Betaplc, incorporated in England, having itsheadquarters in France, but assets,plants and activities both in Englandand France; (c) Gamma plc,incorporated in France, having itsheadquarters in London, but assets,plants and activities both in Englandand France. All these companies mightdecide to relocate one of the relevantelements (registered office, assets,activities or headquarters) from oneMember State to another. As aconsequence, the question arises as towhat extent such relocations areallowed under domestic rules and EUfreedom of establishment.

Pursuant to case law of theEuropean Court of Justice of the lastdecade, Member States can not barcompanies incorporated in otherMember States from having theirentire activities or their headquarterson their territory, providing, however,that the state of incorporation allowsthis.7 The reason is that companies andother legal entities ‘are creatures of thelaw and, in the present state ofCommunity law, creatures of nationallaw’8, so that the jurisdiction ofincorporation can restrict theoutbound mobility of own companies’headquarters. Regarding therelocations of a company’s registeredoffice, which invariably leads to achange of applicable company law,

case law of the Court of Justice is stillpartially uncertain. In the decisionVale, the Court has made clear that thecountry of arrival can not ban inboundreincorporations, unless such a ban isjustified by overriding reasons in thepublic interest, is ‘appropriate forensuring the attainment of theobjectives pursued and does not gobeyond what is necessary to attainthem’.9 It is unclear, at least so far,whether the country of origin faces aduty to allow cross-border relocationsof own companies registered offices:the Cartesio decision answers in thepositive, and yet this statement isprobably to be seen as a mere obiterdictum with uncertain binding force10,so that a new decision, based upon a

submission from a Polish court, isexpected to clarify this issue.11

What is interesting, and quite ironicin light of the recent Brexitreferendum, is that the UnitedKingdom has emerged as the winner ofregulatory competition amongMember States. In this regard, a recentresearch conducted for the EuropeanCommission shows (with reference toprivate companies only) that the UK isby far the most popular target countryfor incorporating pseudo-foreigncompanies (such as our case (a) above)and that the main reason is itsadoption of a clear-cut incorporationtheory under the conflict of lawstandpoint.12 If we shift our attentionto COMI relocations, we would also

COMPANIES INCORPORATED IN ANOTHER MEMBER STATE MIGHT DECIDE TO RELOCATE THEIR HEADQUARTERS, ASSETS OR ACTIVITIES ONTO THE BRITISH TERRITORY, WHILE KEEPING THEIR REGISTERED OFFICE IN THE COUNTRYOF ORIGIN

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7/. C-212/97, Centros Ltd v Erhvervsog Selskabsstyrelsen [1999] ECR I-1459; C-208/00, Überseering BV v Nordic Construction Company BaumanagementGmbH [2002] ECR I-9919; C-167/01, Kamer van Koophandel en Fabrieken voor Amsterdam v. Inspire Art, [2003] ECR I-1095.8/. C-81/87, The Queen v HM Treasury and Commissioners for Inland Revenue, ex parte Daily Mail and General Trust plc [1988] ECR 5483, at 19.9/. C-378/10 VALE Építési kft. [2012] (ECLI:EU:C:2012:440) at 39.10/. C-210/06 Cartesio Oktato es Szolgaltato bt [2008] ECR I-9641 (ECLI:EU:C:2008:723).11/. Request for a preliminary ruling from the Sąd Najwy"szy (Poland) lodged on 22 February 2016, C-106/16, Polbud v Wykonawstwo sp. z.o.o and thepinion of AG Kokott C-106/16 Polbud v Wykonawstwo sp. z.o.o., 4 May 2017 (ECLI:EU:C:2017:351). See: C Gerner-Beuerle, F Mucciarelli, M Siems and E PSchuster, ‘Cross-border reincorporations in the European Union: the case for comprehensive harmonisation’ Journal of Corporate Law Studies (2017) 1-42.12/. C Gerner-Beuerle, F Mucciarelli, M Siems and E P Schuster, Study on the law applicable to companies (2107)https://publications.europa.eu/en/publication-detail/-/publication/259a1dae-1a8c-11e7-808e-01aa75ed71a1.

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In Eurofood, the ECJ dismissed the notion thata debtor’s COMI is in the place of its centraladministrationexpect the UK being a popular targetcountry for insolvency tourism andforum shopping.

First of all, companies incorporatedin another Member State might decideto relocate their headquarters, assetsor activities onto the British territory,while keeping their registered office inthe country of origin. This decisionleads to a relocation of a company’sCOMI only by rebutting thepresumption of coincidence with thecompany’s registered office. In theEurofood decision, the European Courtof Justice addressed the case ofwhether the COMI of Eurofood, anIrish subsidiary of the Italian groupParmalat, was located in Ireland or inItaly. It was maintained, inter alia, that

in determining the centre of the maininterests of a debtor company, thesimple presumption laid down by theCommunity legislature in favour of theregistered office of that company can berebutted only if factors which are bothobjective and ascertainable by thirdparties enable it to be established thatan actual situation exists which isdifferent from that which locating it atthat registered office is deemed toreflect.13

The decision is significant in that theECJ dismissed the notion that adebtor’s COMI is in the place of itscentral administration, where theinternal head office functions are

carried out on a regular basis.14 Thesolution endorsed by the Eurofooddecision, by contrast, grants a highdegree of legal certainty as to thelocation of the COMI, since it becomesmore burdensome overcoming thepresumption that a company’s COMIcoincides with its registered office.

The Eurofood ruling, however, wasnot related to situations of conflitmobile, in which a shift of connectingfactor also shifts applicable law. TheCJEU addressed these cases some yearslater, in the decision rendered in thecase Interedil, in which it provided ananswer to the question of the factualelements that courts should considerin assessing a company’s COMI after across-border relocation of itsregistered office. The facts of that caseare revealing of the problems behindthis question. An Italian company(Interedil srl) transferred its registeredoffice to London and was henceforthremoved from the local register.15

Almost two years later, an importantcreditor filed for insolvency in Italy;the local court assessed that Interedilstill owned assets and a bank accountin Italy and concluded that its COMIwas still in Italy. On Interedil’s appeal,the Italian Corte di Cassazione referredto the CJEU for a preliminary rulingaiming at clarifying, among otherthings, which factual elements canrebut the presumption that a debtor’s

COMI coincides with a company’sregistered office in a situation wherethis registered office has been shiftedfrom one country to another beforethe filing for insolvency. According tothe European Court of Justice, in thesecases, the presumption that acompany’s COMI coincides with thenew registered office can be rebutted if

a comprehensive assessment of all therelevant factors makes it possible toestablish, in a manner that isascertainable by third parties, that thecompany’s actual centre ofmanagement and supervision and of themanagement of its interests is located inthat other Member State.16

This evidence is still shrouded inuncertainties, as it has not beenclarified yet which factual elementsstill existing in the country of originare sufficiently objective andascertainable by third parties to rebutthe presumption that a company’sCOMI is in the country of its newregistered office. When a companyincorporated in another Member Stateshifts its headquarters or otherphysical elements onto the Britishterritory, the question arises as towhether a British court wouldrecognize that the presumption laiddown in the Insolvency Regulation hasbeen rebutted. In this regard, amongother cases, we can mention twosignificant decisions.

In the first decision, a Germancompany managed to convert into aBritish Ltd, to whom all the assets andactivities of the former aretransferred.17 Shortly thereafter, thecompany became insolvent andinsolvency proceedings were

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13/. European Court of Justice, Eurofood IFSC Ltd, C-341/04 [2006] ECR-I 1078, at 34.14/. This solution was however followed by some British decisions. See, for instance: BRAC, [2003] EWHC (Ch); Daisytek-ISA [2004] BPIR 30; MG Rover[2005] BWHC 874 (Ch); Re Collins & Aikman Corp Group [2005] EWHC 1754 (Ch); Re Lennox Holdings Ltd [2009] BCC 155.15/. For a more detailed analysis of the facts (more complex than what seems at a first glance) See F. Mucciarelli ‘The hidden voyage of a dying Italiancompany: from the Mediterranean See to Albion’, 9 European Company Financial law Review (2012) 571.16/. Interedil at paragraph 53. This language will become part of the new Recital 29 (see Insolvency Regulation Reform).17/. Hans Brochier Holding Ltd v. Exner [2006] EWHC 2594. In theory, German companies can not convert into foreign entities; a strategy, however,exist to circumvent such prohibition: the German company converts into a partnership, a GmbH & Co KG, one of whose partners is a newly formedforeign corporation (a British company in the Brochier case); thereafter, all German partners withdraw from the partnership with the result that allassets of the partnership accrue to the foreign shareholder under §738 BGB (the German civil code).

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simultaneously opened in Germanyand in the UK. In that case, the Britishcourt recognized the COMI being stillin Germany, on the basis of quiteevident factual elements that stilllinked the debtor’s activity to thatcountry. In particular, the insolventcompany still had creditors andemployees only in Germany, its bankaccount was still in Germany and, mostimportantly, all contracts were writtenin German.

The opposite conclusion wasreached in the case Re HellasTelecommunication18. ALuxembourgish company transferredits head office and its principaloperating office to London beforefiling for insolvency. Lewison J.considered the presumption ofcoincidence between registered officeand COMI rebutted, on the basis thatthird parties could clearly ascertainthat Hellas’ COMI was in London. Hemaintained that creditors were awarethat Hellas’ head office functions werecarried out in London for the followingreasons: (a) creditors ‘were notified ofits change of address’; (b) ‘anannouncement was made by way of apress release that its activities wereshifting to England’; (c) Hellas hasopened a bank account in London ‘andall payments are made into and fromthat bank account’; (d) Hellas ‘hasregistered under the Companies Act inthis country, although its registeredoffice remains in Luxembourg and itmay remain liable to pay tax inLuxembourg too’19; (e) ‘all negotiationsbetween the company and its creditorshave taken place in London’.20

Eventually, we should address thequestion of whether foreign EUcompanies can transfer their

registered office to the UK and convertinto British companies. The currentEnglish conflict of law rule does notallow a ‘domicile of choice’ whether todomestic companies or to foreignentities. In the words of JudgeMacnaughten ‘[t]he domicile of origin,or the domicile of birth, using withrespect to a company a familiarmetaphor, clings to it throughout itsexistence’.21 From the standpoint ofEnglish conflict of laws rules, either anew company is incorporated inEngland or a company is registered inEngland as a foreign company havinga ‘place of business’ in England. Suchapproach, however, when referred toinbound relocations of registeredoffices, is in breach of the freedom ofestablishment, as interpreted by theEuropean Court of Justice in Vale, tothe extent that it is applied to foreigncompanies incorporated in the EEA.22

It is worth mentioning, however, thatforeign companies can incorporate a‘shell’ company in England and mergeinto it under the Cross-Border MergerDirective.

3. Individuals’ bankruptcy tourismBankruptcy tourism of individualprofessionals is made more complexby the lack of any objective place ofregistration, such as companies’registered offices, and by the quiteuncertain concept of ‘residence’ or‘place of business’, which trigger thepresumption of COMI under theInsolvency Regulation Recast. Muchmore importantly, natural persons canrelocate their activities or residencesmore easily than companies and low-cost flights and fast transportsthroughout Europe allow Europeans todissociate their main residence from

the place where they work.The seminal case Shierson v Vlieland-

Boddy is to be addressed in the firstplace.23 Mr Shierson divorced his wifeand then moved from the UK to Spain;after his divorce, he maintained aproperty in the UK, where he cameregularly to visit his children. After MrShierson’s default, the question arose ofwhether English courts had jurisdictionregarding the main insolvencyproceeding. The registrar stated that, ‘inorder to give effect to the policy of the[Insolvency Regulation], the court must,in my judgment, have regard to thetime at which the debt is incurredbecause that is the time at which thecreditors need to assess the risks ofinsolvency.’ The registrar’s opinion wascoherently based upon creditors’request for predictability. This solution,however, is not compatible with theEuropean Court of Justice case law24

and, therefore, the Court of Appealreversed this decision.25 The Court ofAppeal, however, also maintained thathistorical facts could be considered inassessing a debtors’ COMI. Indeed,

PROFESSOR FEDERICO MUCCIARELLI

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18/. Re Hellas Telecommunication (Luxembourg) II SCA [2009] EWHC 3199 (Ch.)19/. Hellas at paragraph 4.20/. Hellas at paragraph 5.21/. Gasque v Inland revenue commissioners[1940] 2 KB 80, 84. See also National Trust Company v. Ebro Irrigation & Power Ltd. [1954] DLR 326;International Credit and Investment Co v. Adham [1994] 1 BCLC 66.22/. P Davies and S. Worthington, Gower Principles of Modern Company Law (Sweet and Maxwell 10th edn, 2016) 142.23/. Malcolm Brian Shierson v Clive Vlieland-Boddy [2005] EWCA Civ 974.24/. The reference date to assess the COMI is the filing for insolvency: C-1/04, Staubitz-Schreiber [2006] ECR-I 00701.

SEAN QUINN. BEFORE ITS BANKRUPTCY IN 2010 THE QUINN GROUP WAS HAILED BY FORBES AS ONE OF IRELAND’S MOST SUCCESSFUL COMPANIES

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Chadwick L.J. concluded that, althoughthe COMI ‘is to be determined in thelight of the facts as they are at therelevant time for determination […]those facts include historical factswhich have led to the position as it is atthe time for determination’ and that ‘itis important […] to have regard to theneed, if the centre of main interests isto be ascertainable by third parties, foran element of permanence.’26

Therefore, in order to prove that thenew administrative seat has becomepermanent and is, therefore,ascertainable by third parties, courtsshall consider also historical facts, butonly to the extent that these facts haveproduced the ‘position’ existing at therelevant time (the date of filing).

The second decision that deserves tobe mentioned was rendered in the caseIrish Bank Resolution v Quinn27. MrQuinn, a professional resident in theRepublic of Ireland, went bankruptand claimed that his business wasbased in Northern Ireland, not farfrom the border with the Republic ofIreland. A court of Northern Irelandissued a bankruptcy order, which theHigh Court of Justice in NorthernIreland however reversed, recognizingthat Mr Quinn’s COMI was in theRepublic of Ireland. The Court raisedthe question as to the circumstancesunder which a new head office isdeemed ‘sufficiently accessible’ tocreditors. The criterion that thelocation of the COMI must be

ascertainable by third parties“would indicate something different

from being actually notified. If not madepublic it must be ‘sufficiently accessible’.[…] It should be reasonably orsufficiently ascertainable orascertainable by a reasonably diligentcreditor28”.

In the Court’s view, in order to makethe new head office ascertainable bythird parties it is necessary

“...[t]o make the COMI available onthe internet or through telephonedirectories or trade directories orotherwise generally available in theMember State in which he hasestablished his centre of main interestwould make it public29.”

In that specific case, however, MrQuinn did not publish his telephonenumber in a public directory or hisweb page, hence this location was notsufficiently ascertainable by thirdparties. In turn, had Mr Quinn madehis place of business publicly available,through telephone directories oronline, the Court would have probablyreached a different conclusion.

4. Brexit: an uncertain futureWhat I have described so far is likely tobecome outdated as soon as the UKwithdraws from the European Union.At the moment, the final result of thewithdrawal negotiation isunpredictable; what is clear is only theintention of the British governmentnot to accept the supremacy of theEuropean Court of Justice and of EUlaw. Several scenarios might beimagined, ranging from a ‘soft Brexit’at the one extreme, to a ‘hard Brexit’ atthe other. A ‘soft Brexit’ scenario might

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25/. The Court of Appeal denied competence to UK courts by stating that the relevant date to assess the COMI is the hearing date of the petition:Shierson, paragraph 55. This part of the decision has been clearly overruled by the CJEU decisions in the cases Staubitz-Schreiber and Interedil, whichmaintained that debtors’ COMI is to be assessed at the date of the filing for insolvency: Brian O’Donnell, Mary Patricia O’Donnell v The Governor andCompany of the Bank of Ireland [2012] EWHC 3749 (Ch) at paragraph 36. See: G Moss ‘A very peculiar “establishment”’, Insolvency Intelligence (2006) 20;D Petkovich ‘The correct time to determine the debtor’s COMI – case note and commentary on Staubitz-Schreiber and Vlieland-Boddy’ Ins. L. &Practice (2006) 76 – 80. 26/. Shierson, paragraph 55.27/. Irish Bank Resolution Corp Ltd v Quinn [2012] NICh 1 = [2012] B.C.C. 608.28/. Irish Bank at paragraph 28.29/. Irish Bank at paragraph 28.

29


mirror, for example, the specialagreements between the EU, and theMember States, with certain thirdcountries, such as Switzerland. At themoment, it is, however, still unclearwhether the parties will include theInsolvency Regulation among thepieces of EU legislation that willcontinue to be applied in the UK andwhether the freedom of establishmentwill be still valid vis-à-vis the UK.

Under the opposite ‘hard Brexit’scenario, however, things are muchmore clear: both freedom ofestablishment (being an essentialelement of the single market) and theInsolvency Regulation will not apply tothe UK anymore. The UK would beconsidered a ‘third country’ by EUMember States, which will apply ownprivate international law rules vis-à-visthe UK with regard to both companylaw and insolvency regime. UKcompanies’ private international law isbased upon the ‘incorporation’theory30, hence not much will changeregarding foreign EU companies:companies incorporated in an EUmember State and having its assets orits headquarters in the British territorywill continue being automaticallyrecognised in the UK as a foreign entitygoverned by the law of the country ofincorporation. The country ofincorporation, however, could followdifferent private international lawcriterions towards extra-EU countries(such as the UK in a ‘hard Brexitscenario), ranging from a pureincorporation theory at the oneextreme to a pure real seat theory atthe other. To simplify a complexmatter, we can analyse these twoopposite examples. If the country oforigin follows the ‘incorporation

theory’, a relocation of headquarters,assets or activities onto the Britishterritory is perfectly acceptable anddoes not lead to the company’sliquidation. By contrast, countries thatfollow the ‘real seat theory’ are morelikely to consider a relocation ofheadquarters as a shift of the relevantconnecting factor, which should lead toa change of applicable law or to thecompany’s liquidation.

The second issue that needs to bebriefly addressed is how the hierarchyof sources will change in a ‘hardBrexit’ scenario regarding insolvencylaw. The Insolvency Regulation willnot be applicable in the UK, with theconsequence that insolvencies ofdebtors having a ‘cross-border’relevance will be assisted by theInsolvency Act 1986, the UNCITRALModel Law on Cross-Border Insolvency200631 and the conflict of law rulesbased on common law. The InsolvencyAct 1986 provides for a quasi-automatic recognition andenforcement of foreign insolvencyproceedings only from a list ofcountries designated by the Secretaryof State32; in practice, such designatedcountries are only Commonwealthcountries, among which the only EUMember State is Ireland.33 Unless allEU Member States will be designatedby the Secretary of State, therefore, s.486 of the Insolvency Act 1986 wouldnot be of much help in sorting outcross-border insolvencies connected

with other EU Member States. TheModel Law, by contrast, seems to be amuch more promising instrument todeal with cross-border insolvencies,mostly so because the UK provisionsdo not include a ‘reciprocity clause’,which would have paralysed itsapplication due to the very limitedimplementation of the UNCITRALmodel in other Member States.34 Thefundamental idea of the Model Law isthat, similarly to the InsolvencyRegulation, foreign main proceedingsshould be recognised and enforcedbased upon the criterion of COMI.Differently from the InsolvencyRegulation, in the Model Law it is notmentioned that a debtor’s COMI shouldbe ascertainable by third parties;British courts, however, seem to followthis criterion also with regard to casesregulated by the Model Law.35

Just a final remark is needed. Theeconomic and business connections ofthe UK with the rest of Europe are sodeep that insolvencies with cross-border elements will continue to occurdespite the UK withdrawal from theEU: companies will continue to tradeand individuals will keep on travellingto and from Britain for business andwork purposes. It is, therefore, rationalto expect that the UK will strike a dealwith the EU that will take into accountthese basic facts and that will mimicthe present legal situation. Rationality,however, is not always what shapeshuman actions.

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30/. See D Prentice, ‘The incorporation theory – The United Kingdom’ 14 European Business Law Review (2003) 1.31/. Cross-Border Insolvency Regulation 2006 Sch. 1.32/. S. 486 Insolvency Act 1986.33/. See Co-operation of Insolvency Courts (Designation of relevant Countries and Territories) Order 1986 (SI 1986/2123); Co-operation of InsolvencyCourts (Designation of relevant Countries and Territories) Order 1996 (SI 1996/253); Co-operation of Insolvency Courts (Designation of relevantCountries and Territories) Order 1998 (SI 1998/2766).34/. The UNICTRAL Model Law was only implemented in Greece, Slovenia, Romania, Poland and the UK.35/. Re Stanford International Bank Ltd [2010] 2 WLR 941.

Under a ‘hard Brexit’ scenario both freedom ofestablishment and the Insolvency Regulationwould no longer apply to the UK

30

This edition of the Digest carries with it aplethora of interesting cases. Members ofChambers have been involved in numerousleading cases in the insolvency world,including two judgments of Hildyard Jhanded down at the end of July (relating tothe settlement of the Waterfall III Lehmanproceedings, and including approval ofpayments to members by directors in anadministration), as well as judgmentsrelating to Nortel (bar date for expenses),Lemos (extending the issues with privilegeddocuments in bankruptcy even further thanAvonwick), and International Bank ofAzerbaijan (recognition application underCBIR).

In the general commercial arena, however,the most important decision is undoubtedlythat of the Supreme Court in GlobaliaBusiness Travel S.A.U. (formerly TravelPlanS.A.U.) of Spain (Respondent) -v- FultonShipping Inc of Panama [2017] UKSC 43 inwhich the Supreme Court handed down aunanimous judgment about whetherdamages suffered by shipowners followingacceptance of a charterers’ repudiatorybreach of charter should be reduced as aresult of the avoidance of a fall in the capitalvalue of the ship. The essential factualbackground to the case was that the ship (the“New Flamenco”) was sold after acceptance

of the charterers’ repudiatory breach whenvalues were higher than they would havebeen at the time of contractual redelivery.The Supreme Court held that this rise invalue was irrelevant. The benefit gained bythe owners was not caused by the breach andtherefore should not be taken into accountwhen considering damages. The SupremeCourt emphasised 11 points derived from theauthorities as set out by Popplewell J at firstinstance. They are worth setting out in full:

“(1) In order for a benefit to be taken intoaccount in reducing the loss recoverable bythe innocent party for a breach of contract,it is generally speaking a necessary conditionthat the benefit is caused by the breach.

(2) The causation test involves taking intoaccount all the circumstances, including thenature and effects of the breach and thenature of the benefit and loss, the manner inwhich they occurred and any pre-existing,intervening or collateral factors whichplayed a part in their occurrence.

(3) The test is whether the breach hascaused the benefit; it is not sufficient if thebreach has merely provided the occasion orcontext for the innocent party to obtain thebenefit, or merely triggered his doing so. Noris it sufficient merely that the benefit wouldnot have been obtained but for the breach.

(4) In this respect it should make no

Case Digests

&%,)#)49�4/5"%�1#

31

difference whether the question isapproached as one of mitigation of loss, ormeasure of damage; although they arelogically distinct approaches, the factual andlegal inquiry and conclusion should be thesame.

(5) The fact that a mitigating step, by wayof action or inaction, may be a reasonableand sensible business decision with a view toreducing the impact of the breach, does notof itself render it one which is sufficientlycaused by the breach. A step taken by theinnocent party which is a reasonableresponse to the breach and designed toreduce losses caused thereby may betriggered by a breach but not legally causedby the breach.

(6) Whilst a mitigation analysis requires asufficient causal connection between thebreach and the mitigating step, it is notsufficient merely to show in two stages thatthere is: (a) a causative nexus betweenbreach and mitigating step; and (b) acausative nexus between mitigating step andbenefit. The inquiry is also for a directcausative connection between breach andbenefit, in cases approached by a mitigationanalysis no less than in cases adopting ameasure of loss approach. Accordingly,benefits flowing from a step taken inreasonable mitigation of loss are to be takeninto account only if and to the extent thatthey are caused by the breach.

(7) Where, and to the extent that, thebenefit arises from a transaction of a kindwhich the innocent party would have beenable to undertake for his own accountirrespective of the breach, that is suggestivethat the breach is not sufficiently causativeof the benefit.

(8) There is no requirement that thebenefit must be of the same kind as the lossbeing claimed or mitigated, but such adifference in kind may be indicative that thebenefit is not legally caused by the breach.(In the opinion of the Supreme Court, thisfactor was of particular importance in thecase of the New Flamenco.)

(9) Subject to these principles, whether a

benefit is caused by a breach is a question offact and degree which must be answered byconsidering all the relevant circumstances inorder to form a common sense overalljudgment on the sufficiency of the causalnexus between breach and benefit.

(10) Although causation between breachand benefit is generally a necessaryrequirement, it is not always sufficient.Considerations of justice, fairness and publicpolicy have a role to play and may preclude adefendant from reducing his liability byreference to some types of benefits or insome circumstances even where thecausation test is satisfied.

(11) In particular, benefits do not fall to betaken into account, even where caused bythe breach, where it would be contrary tofairness and justice for the defendantwrongdoer to be allowed to appropriatethem for his benefit because they are thefruits of something the innocent party hasdone or acquired for his own benefit.”

Applying these factors, the Supreme Courtfound that the fall in the value of the vesselwas irrelevant because the owners’ interestin the capital value of the vessel wasunrelated to the interest injured by thecharterers’ repudiation of the charterparty.There was not a sufficiently close linkbetween the loss and the benefit. It matterednot that the loss and the benefit were similarin nature. The sale of the vessel was simplythe exercise of the owners’ property rightwhich exists independently of thecharterparty and its termination.

It is sometimes concerning when theSupreme Court hands down a judgment inwhich we are invited to “form a commonsense overall judgment” in the light of aconsideration of all the relevantcircumstances. This usually introducesuncertainty and an element of “making it upas we go along”. However, in this arena it isprobably the only solution to the knottyquestions of causation and mitigation. Thegood news is that it produces more trickyissues of construction for us to get our teethinto! Felicity Toube QC


32

CASE DIGESTS

BANKING & FINANCE Digested by TOBY BROWN

TOBY BROWN

Barclays Bank Plc, Re [2017] EWHC 1482 (Ch) (Sir Geoffrey Vos C,Snowden J, 26 May 2017)Ring fencing transfer schemes – prospective directions under inherent jurisdiction

One of the reforms in response to thefinancial crisis is the ring-fencing ofvital banking services from riskselsewhere in the financial system.Part VII of the Financial Services andMarkets Act 2000 (FSMA) enables theCourts to make orders to facilitatetransfers of a banking or insurancebusiness. The Financial Services(Banking Reform) Act 2013 providedfor an additional process known asRing Fencing Transfer Schemes(RFTS). Banks with an average total ofdeposits from individuals or SMEs ofmore than £25bn are required to havea RFTS in place by 1 January 2019,and thus to isolate their retailingbanking activity from their wholesaleor investment banking activities. Barclays, HSBC, Lloyds, Santanderand associated entities issued 4separate claims in the CompaniesCourt seeking prospective directionsin advance of future applications tobe made under s. 107 of FSMA tosanction RFTSs. The claims arosebecause the banks cannot makesanction applications without theconsent of the PRA, but the PRAcannot give their consent until theyhave considered a scheme reportprepared by a Skilled Person under s.109A of FSMA.Unusually, given the importance ofthe claims, the Chancellor directed

that two judges hear them as theDivisional Court. On the question ofwhether the Court had jurisdiction toprovide the prospective directionsrequested by the banks, theChancellor (with whom Snowden Jagreed) held that “the proceduralinnovation” was within the Court’sinherent jurisdiction to regulate itsown procedure.On an application made under s. 107of FSMA for sanction of a scheme, s.110 provides that in addition to thePRA and FCA, “any person…whoalleges that [they] would be adverselyaffected by the carrying out of thescheme” is entitled to be heard at thehearing. The directions sought by thebanks principally concerned thenotification to be given to suchpersons, together with casemanagement directions. The banks proposed differentcommunication plans, which wouldbe separately considered for approvalby the Court. At present the Courtwas asked to approve the generalprinciple that the banks were onlyobliged to consider giving notice tothose persons who are likely to beadversely affected. The Chancellorheld that the starting point must bethat individual notice will need to begiven to all customers and consumersas defined in section 1G of FSMA,

because it had not yet been shownthat any of them were not in thecategory of persons who “might wishto allege that he would be adverselyaffected by the carrying out of thescheme”. The Chancellor also gavevarious other directions, includingapproving the use of electroniccommunication for notifications andthe use of websites as the principalsource of information.Under s. 110(5), a person alleging tobe adversely affected is not entitled tobe heard unless they had filed andserved a written statement of theirrepresentations. The Court was askedby the banks that when a timetablewas set for the sanction application, itdirected that such representations beserved in sufficient time failing whichthe person would not be entitled to beheard without leave. Whilstapproving directions for timetablingof the representations, the Chancellorrefused to direct that a person wouldnot be heard, as long as they had filedand served their representationsbefore the hearing.Finally, the Chancellor gavetimetabling directions for the casemanagement and hearing of thefuture applications to sanction theRFTSs, with various hearingsscheduled to occur betweenNovember 2017 and June 2018.

African Export-Import Bank v Shebah Exploration and Production CoLtd [2017] EWCA Civ 845 (Longmore LJ, Henderson LJ, 28 June 2017)

Syndicated loans – standard contracts – unfair terms

The 3 claimants were Egyptian andNigerian financial institutionswhich acted as lenders under a$150m pre-export Facility

Agreement. The first defendant, theborrower, was engaged in oilexploration and production inAfrica. The second and third

defendants were guarantorspursuant to the Facility Agreementand a Personal Guarantee. Theclaimants advanced $150m under

TOM SMITH QC

33


the Facility Agreement, however,the borrower defaulted on all itspayment obligations other thanmaking a $6.1m repayment. Theclaimants accelerated the entiredebt and made demands under theguarantees. They issued proceedingsto recover the outstanding sums,and at first instance Phillips Jgranted summary judgment.The defendants appealed. First, theycontended that they hadcounterclaims of c. $1bn to be set offagainst their liabilities under theFacility Agreement and PersonalGuarantee. The claimants, however,asserted that both agreementscontained clauses excluding anyright of set off. The defendantsattempted to counter this by relyingon section 3 of the Unfair ContractTerms Act 1977 (UCTA), alleging thatthey were dealing with theclaimants’ written standard terms ofbusiness, and therefore the clausescould not be relied upon unless theysatisfied the reasonableness test.The Facility Agreement was basedon the form of syndicated facilityagreement recommended by theLoan Market Association (LMA) as astarting point for negotiation.The key question for the Court ofAppeal was the meaning of therequirement under section 3 that aparty “deals…on the other’s writtenstandard terms of business”.Longmore LJ (with whomHenderson LJ agreed) reviewed thelimited relevant case law. On theissue of whether the term was partof the other party’s standard terms,Longmore LJ approved British

Fermentation Products Ltd vCompair Reavell Ltd [1999] 2 All ERComm 38 and held that it must beshown that the other partyhabitually uses the terms. It wasessential that there was proof thatthe model form was invariably or atleast usually used by the party inquestion, either by practice or byexpress statement by a contractingparty.As to the issue of whether the partywas dealing on those terms,Longmore LJ held that it is relevantto inquire whether there have beenmore than insubstantial variationsto the terms which may otherwisehave been habitually used by theother party to the transaction. Ifthere have been substantialvariations, it is unlikely to be thecase that the party relying on UCTAwill have discharged the burden onthem to show that the contract hasbeen made “on the other’s writtenstandard terms of business”.In the present case, the Court ofAppeal upheld the first instancedecision that it was not arguablethat the defendants were dealingwith the claimants’ standard terms.The defendants had the onus ofproof, but had not filed anyevidence to support their belief thatthe Facility Agreement was made onthe claimants’ standard terms. Aparty who wishes to contend that itis arguable that a deal is onstandard business terms mustproduce some evidence that it islikely to have been so. In contrast,the claimants’ evidence was that theFacility Agreement was not a

standard form agreement, and thatsince the claimants entered into thetransaction as a syndicate suchdocumentation was negotiated andagreed on an individual basis.Longmore LJ also rejected thedefendants’ argument that thecomplexity of the concept ofstandard business terms wasrelevant to whether summaryjudgment was granted. Once it wasdecided what were the terms of thecontract, it was not difficult todecide whether the terms beingrelied on were standard businessterms of that party.In any event, Longmore LJ woulduphold the judgment on the basisthat there were in fact detailednegotiations in the present casewhich render it impossible to saythat either the LMA model formwas, or the terms ultimately agreedwere, the claimants’ “standard termsof business”. On their second ground of appeal,the defendants asserted that thepresent proceedings were broughtin breach of an oral agreement notto commence proceedings pendingthe conclusion of negotiations torefinance the Facility Agreement.Longmore LJ upheld Phillips J’sdecision that this was not arguable.It was impossible to regard thediscussions as giving rise to abinding agreement given they weresubject to contract, and theclaimants were entitled to withdrawfrom the negotiations and issue thepresent proceedings.The appeal was therefore dismissed.[Tom Smith QC, Ryan Perkins]

34

CASE DIGESTS

CIVIL PROCEDURE Digested by ALEXANDER RIDDIFORD

Harrison v University Hospitals Coventry & Warwickshire NHS Trust[2017] EWCA Civ 792, (Court of Appeal, 21 June 2017)

Costs budgets – issue of proceedings – detailed assessment

This was an appeal raising issues ofsome general importance in thecontext of costs. In particular, the twoprincipal issues were ones whichconcerned the relationship betweencosts budgeting and detailedassessment and which had attractedsharply divided views among thosespecialising in this area.The two principal issues in relation tocosts were, in essence, as follows:1. Where a Costs Management Orderapproving a costs budget has beenmade in the course of civilproceedings, whether a costs judge ona subsequent detailed assessment isprecluded from going below thebudgeted amount unless satisfied thatthere is good reason for doing so; orwhether there is an entitlement to doso without any prior requirement ofgood reason for going below the

budgeted amount.In relation to this issue, the Court ofAppeal held that, where there was aproposed departure from a costsbudget, be it upwards or downwards,the court on a detailed assessmentcould sanction such a departure onlyif satisfied that there was good reasonfor doing so. That was the naturaland ordinary meaning of the wordsused in CPR r.3.18(b).2. Whether, with regard to costsincurred prior to the budget, there isor is not a like requirement of goodreason if a costs judge on asubsequent detailed assessment is todepart from the amount put forwardat the relevant costs managementhearing.In relation to this issue, the Court ofAppeal held that costs incurred priorto the budget would be the subject of

detailed assessment in the usual way,without any added requirement of“good reason” for departure from theapproved budget. CPR 3.18(b), in itsthen form, related to a departurefrom “the approved or agreedbudget”. But the costs incurred beforethe date of the budget were neveragreed in the instant case, nor werethey ever “approved” by the CostsManagement Order.The appeal also raised a discretepoint as to when, for the purposes ofthe transitional provisions relating toproportionality contained in CPR44.3(7), a case is to be treated as“commenced.” As to this discretepoint, the Court considered it to beplain that a case was “commenced”for the purposes of CPR 44.3(7)(a)when the relevant proceedings wereissued by the Court.

ALEXANDERRIDDIFORD

Marsh v Ministry of Justice [2017] EWHC 1040 (QB) (Thirlwall LJ, 21July 2017)Application to strike out Defence – witness statements

The Claimant, a prison officer,claimed to have suffered psychiatricinjury as a result of breaches ofcontract and duty of care by theMinistry of Justice in the course of itsinvestigation into allegations ofsexual misconduct against theClaimant. The allegations against theClaimant were eventually found to beunproved but the delay prolonged adepressive illness which the Claimantsuffered from following hissuspension and meant that he wasultimately unfit to return to work.The Defendant asserted that, in all

probability, the Claimant didmisconduct himself, including byhaving sexual intercourse with theComplainant. At the end of the trial,the Claimant applied to strike out theDefence as an abuse of process inlight of various alleged shortcomingsin the Defendant’s conduct of its case.Thirlwall LJ held that, although theClaimant had raised a number ofjustified concerns about theDefendant’s approach to the litigation(e.g. there were flaws in the waysome of the statements had beendrafted; witnesses had been

interviewed but statements notdrafted for months or years; oneDefence witness had contacted theClaimant’s legal team to complainabout an inaccuracy in hisstatement), nonetheless theDefendant’s solicitor had removedthe relevant passages and no harmhad been done to the Claimant’s case.The Defendant’s conduct had notprevented a fair trial. Accordingly,the Claimant’s application to strikeout was refused. However, on thesubstantive issues judgment wasgiven in favour of the Claimant.

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COMMERCIAL LITIGATION Digested by MADELEINE JONES

Caretech Community Services Ltd v Oakden & Ors[2017] EWHC 1944 (QB)(Master McCloud, 31 July 2017)Claim forms – service – retrospective effect

The Claimant applied for directionsthat steps that had been taken to bringthe claim form to the attention of oneof the defendants (D) amounted togood service. In particular, theClaimant sought retrospectivevalidation of service of the claim formby an alternative method under CPRr.6.15(2) on the basis that a copy of theclaim form had been delivered by postand also by email to the solicitors whowere advising D. The Master refusedthe application. When consideringrelief under CPR 6.15(2) it was anecessary, but not sufficient, conditionthat the claim form and its contents

had come to the defendant’s attention(Abela v Baadarani [2013] UKSC 44,[2013] 1 W.L.R. 2043 followed).However, relief would not be availableunder r.6.15(2) if the claim form hadbeen delivered expressly on the basisthat it was “for information only”, andnot for service (Asia Pacific (HK) Ltd vHanjin Shipping Co Ltd [2005] 2 C.L.C.747 applied; Brown v Innovatorone Plc[2010] 2 All E.R. (Comm) 80considered). If that was wrong, astatement that a document wasprovided for information formed partof all the circumstances as to whetherthere was a good reason, or not, for

validating service. The statement inthe covering letter that the claim formwas supplied for information, in thecontext that the solicitors were notinstructed to accept service wasinconsistent with the retrospectivevalidation of those steps as goodservice. If that was wrong, there wouldbe no good reason to permitdocuments expressly delivered on thebasis that they were not being served,to be retrospectively validated as goodservice. When lawyers receiveddocuments which on their face werenot being served, they should be ableto rely on that indication.

Mott & Anor v Long & Anor [2017] EWHC 2130 (TCC) (HHJ DavidGrant, 2 August 2017)

Costs budgets – delay – relief from sanctions

This was a case where the Defendant’ssolicitors had filed their costs budget10 days late and relief from sanctionswas sought. The Court, applying theusual threefold Denton test, grantedthe application.Of particular relevance in the presentcase was the fact that the Defendant’s

solicitors had served a costs budgetand done so some time before theCMC. Moreover, the Court also gavedirections at the CMC relating to expertopinion evidence and the estimatedlength of the trial which had given riseto the need for the Defendant to fileand serve a revised costs budget in any

event. As a result, the parties werenow in precisely the same proceduralposition in which they would havebeen so far as the process of costsbudgeting was concerned had thedefendants served their costs budget intime. This was a highly significantcircumstance in the present case.

MADELEINE JONES

Ted Baker Plc, No Ordinary Designer Label Ltd v AXA Insurance UK Plc, FusionInsurance Services Ltd, Tokio Marine Europe Insurance Ltd [2017] EWCA Civ 4097(Court of Appeal - Lord Justice Treacy, Lord Justice David Richards and SirChristopher Clarke, 11 August 2017)

Estoppel by silence - good faith - expert evidence

This appeal related to a claim underan insurance policy. The appellantretailer had wished to claim for lossof profit under its insurance policywhen it discovered that one of itsemployees had been stealing stock

over a lengthy period of time. TheCourt ruled in the appellant retailer’sfavour on liability (with SirChristopher Clarke giving thejudgment on this aspect) but in therespondent insurer’s favour on

quantum (with David Richards LJgiving the judgment on this aspect),meaning the appeal failed overall.When the retailer first notified therespondent insurers of the claim, theinsurers asked for documents

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relevant for the assessment of thequantum of the claim and falling intoseven categories. The insurancepolicy made the provision of suchinformation within a certain time acondition precedent to the making ofa claim. The policy contained a ProfessionalAccountants Clause (PAC), by whichthe insurers would cover certain ofan insured’s costs of gatheringinformation. However, the insurersindicated that they would notcommit to paying costs under thePAC before they had determinedliability. The retailer communicatedto the insurers that it did not wish toincur the cost of gathering therequisite information, includingdocuments in “Category 7” of theinformation requested, before theinsurers admitted liability for theclaim in principle. The insurerresponded that it would take adviceon liability. The retailer thereforeunderstood the issue with thedocuments, including the Category 7documents, to have been “parked”,so that the insurer could not rely onthe provision of these documentswithin the contractual timeframe asa condition precedent. The insurerscontended that there had been noestoppel, or that if there had been itdid not include the Category 7documents.Eder J had found there was anestoppel relating to the additionalwork required which would havebeen covered by the PAC, but thatthis had not covered the Category 7documents. He had construed thePAC as excluding the costs ofproducing the Category 7 documents,which did not need to be producedby external accountants. However,Sir Christopher Clarke ruled thatEder J had erred in his constructionof the PAC. This referred todocuments which “may be producedby professional accountants.” Thus,

documents which did not need to beso produced were not necessarilyexcluded. Therefore, the Court ofAppeal concluded, the question ofproducing Category 7 documentshad also been “parked”, and theretailer was not in breach of thecondition precedent.It had been open to Eder J,notwithstanding his construction ofthe PAC, to find the insurers wereestopped from relying on theretailer’s failure to provide theCategory 7 documents. However, thejudge declined to make this finding.On the facts, he concluded that itwas clear that the insurer did notregard itself as in principle liable forthe cost of producing the Category 7documents under the PAC.The retailer challenged this findingbefore the Court of Appeal. It arguedthat the failure to find an estoppelwas a “consequence of a finding offact” not a finding of fact itself. TheCourt of Appeal ruled that thisdistinction was misplaced. However, the Court went on toconsider whether the insurers hadhad a “duty to speak” – a positiveduty to inform the retailer that theyconsidered the retailer’s duty toproduce the Category 7 documentswas still live. An insurer is, generallyspeaking, under no duty to warn aninsured as to the need to complywith policy conditions. However,notwithstanding that there had beenno representation about the Category7 documents and that the judge hadfound that the insurers had not beendeliberately silent on these throughbad faith, nonetheless the insurershad created a situation in which itwas reasonable for the retailer toassume the Category 7 documentshad been parked, and in failing tomake clear they had not been, theywere estopped from relying on theprovision of the Category 7documents as a condition precedent.

An estoppel arises where a partystays silent where a reasonableperson would expect him, actinghonestly and responsibly, to bringthe true facts to the attention of theother party known to him to beunder a mistake as to theirrespective rights and obligations. TheCourt of Appeal’s finding of a duty tospeak in this case was not dependentupon the contract being one ofuberrimae fidei, but the duty arises afortiori in the circumstancesdescribed where, as with aninsurance contract, the parties havea duty of good faith.The Appeal was, however, dismissed,because the Court of Appeal agreedwith Eder J’s findings on quantum:the retailer failed to establish any lossunder the policies.There was an excess of £5,000 underthe policies for each and every loss.The direct evidence for the actualthefts and hence the losses arisingfrom them was limited, because thethefts had been going on for a longtime before they were discovered.Both parties relied on expertaccountancy evidence. DavidRichards LJ noted that the veryexperienced trial judge had found theexpert evidence “something of aswamp”, because of its volume andcomplexity, and he criticized this,noting that it had consequences notonly at first instance but also for theanalysis of a trial judge’s findings onappeal. A judge’s finding of fact mayonly be overturned where it is“plainly wrong” and David RichardsLJ implied that an appeal court willbe slower to find this where theevidence is confusing. DavidRichards LJ reviewed the judge’sfindings and concluded that he hadbeen entitled to find that the retailerhad not proved that its lossesexceeded the excess on the policy.Accordingly, the retailer could notrecover.

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Globalia Business Travel S.A.U. (formerly TravelPlan S.A.U.) of Spain(Respondent) v Fulton Shipping Inc of Panama (Appellant) [2017] UKSC 43(Supreme Court - Lord Neuberger PSC; Lord Mance JSC; Lord Clarke JSC; LordSumption JSC; Lord Hodge JSC, 28 June 2017)Damages – mitigation - causation

The Supreme Court considered theassessment of the damages due to ashipowner (the Appellant, “Fulton”)arising out of the repudiation of acharterparty by the charterer (theRespondent, “Globalia”) of a cruiseship called the New Flamenco.Globalia had chartered the NewFlamenco from Fulton under acharterparty which had beenextended by agreement. However,Globalia had disputed the validity ofthe extension and redelivered thevessel as if the charterparty had notbeen extended. There was by thisstage no dispute that this was ananticipatory breach of the contract.The Supreme Court considered thedamages due to Fulton for thisanticipatory breach. There had beenno available market to charter theboat upon its redelivery. However,shortly before redelivery, Fulton hadsold the vessel. If Globalia hadredelivered the vessel two years later,after the global financial crisis hadoccurred, in accordance with theamended terms of the charterparty,the resale value of the ship wouldhave been more than two thirds lessthan the amount it was in fact soldfor: around USD 7m as against theUSD 23.7m in fact achieved. Should the benefit Fulton received byselling the ship two years earlier thanit otherwise would have be taken intoaccount in assessing the quantum ofdamages? When the issue was firstarbitrated, the arbitrator had heldthat Globalia should be given a creditfor the ship’s depreciation in value.On appeal, Popplewell J held that

there should be no such credit,“because it was not a benefit whichwas legally caused by the breach.” TheCourt of Appeal had reversed thisfinding, on the basis that this was amitigation of loss that shouldproperly be taken into account inassessing the loss. Lord Clarke gave the unanimousjudgment of the Supreme Court. Afterexamining the reasoning of bothPopplewell J and the Court of Appeal,he concluded that “the fall in value ofthe vessel was in my opinion irrelevantbecause the owners’ interest in thecapital value of the vessel had nothingto do with the interest injured by thecharterers’ repudiation of thecharterparty”: [29].Popplewell J had formulated 11propositions about when a benefitshould be taken into account as amitigation of loss, which Lord Clarkecited in full at [16]. Lord Clarkeconfirmed the eighth of these “inparticular” (implying his approval ofthe other propositions too), namelythat in considering whether a benefitshould be taken into account inassessing loss, “[t]here is norequirement that the benefit must be ofthe same kind as the loss being claimedor mitigated… but such a difference inkind may be indicative that the benefitis not legally caused by the breach.” Lord Clarke further said, at [30] that“The essential question is whetherthere is a sufficiently close linkbetween [the benefit and the loss] andnot whether they are similar in nature.The relevant link is causation. Thebenefit to be brought into account

must have been caused either by thebreach of the charterparty or by asuccessful act of mitigation.” In thiscase, the causal link was absent,because “there was nothing about thepremature termination of thecharterparty which made it necessaryto sell the vessel, either at all or at anyparticular time”: [32]. If there hadbeen an available market at the timeof the breach, the loss would havebeen the difference between theactual charterparty rate and theassumed substitute contract rate. Inthe absence of such a market “themeasure of the loss is the differencebetween the contract rate and whatwas or ought reasonably to have beenearned from employment of the vesselunder shorter charterparties, as forexample on the spot market”: [34]. Thesale of the ship could not havemitigated the loss, because it was notmitigating the income streamachievable.The sale of the vessel might berelevant in that it would shorten theperiod during which the owners couldclaim to have lost the income streamunder the old charterparty andtherefore the period during whichthere was a lost income stream tomitigate. Also, if the vessel achieved alower price on sale than it would havedone if the charterparty had been inplace, the difference might berecoverable on the basis that theeffect of the sale would have been tocapitalise the value of a year’s hirepayments. However, this did not alterthe fact that sale was irrelevant toquestions of mitigation.

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Blue v Ashley [2017] EWHC 1928 (Comm) (Leggatt J, 26 July 2017)

Oral contracts - intention to legally bind

Mr Justice Leggatt considered thelegal implications of a conversationin January 2013 between MichaelAshley (D), the founder and majorityshareholder of Sports DirectInternational Plc (the Company), theUK’s largest retailer of sportinggoods, and Jeffrey Blue (C), a strategicconsultant to the Company. C and Dmet three investment bankers in apub. The purpose of the meeting wasinformally to introduce D and thebankers prior to possible discussionsabout their bank acting as corporatebroker to the Company. All the menexcept one of the bankers weredrinking. In the course of the eveningthe men discussed sports and thenthe Company’s share price. C and thebankers recalled D saying that if Ccould get the share price to double,he would pay him a large sum ofmoney, which C recalled to be £15m.D could not remember making thisoffer, but said that if he did make it, itwould have been clear that it was justbanter, and not seriously meant. C did not make any written record ofthe conversation and did not discussit again with D, except indirectlyalmost a year later. The Company’sshare price did double in February2014. C pointed this out to D but didnot ask for the bonus. At the end ofMay 2014, D transferred £1m to C. Csaid this was in furtherance of theagreement; D said it was a differentbonus. C resigned in December 2014,and in March 2015, during his noticeperiod, he finally asked for the £15mbonus.Leggatt J had to decide if there hadbeen a contract. On the basis ofvarious findings of fact and principle,he concluded that there had not been.

He reiterated that a contract may beoral and that the basic requirementsof a contract are that: (i) the partieshave reached an agreement, which(ii) is intended to be legally binding,(iii) is supported by consideration,and (iv) is sufficiently certain andcomplete to be enforceable.He found that there was no contractbecause there was no intention thatthe agreement be legally binding, andbesides this, it was not sufficientlycertain and complete. He gave eight reasons for hisconclusion that it was not legallybinding:(1) The conversation took place in apub after the taking of alcohol.(2) The conversation took place at anoutward-facing occasion whose aimwas to enable the bankers to meet Din an informal setting in order tobuild a commercial relationship withD and the Company. It was inherentlyunlikely that a matter personal to Cwould have been discussed, and thiswould have been completelyextraneous to the serious purposewhich the meeting had.(3) The nature and tone of theconversation was informal andjocular. (4) The bonus made no commercialsense. C was not particularly centralto the Company’s business and didnot know D particularly well. Itseemed D had been trying to make Cseem important because he wantedhim to be the main point of contactwith the bankers.(5) It did not seem likely that C wascapable of influencing the share pricein this way. No human being has suchpowers and certainly not one in C’srole.

(6) The offer was too vague to beserious.(7) The bankers had all consideredthat the conversation had not beenserious.(8) C himself had, on the evidence ofone of the bankers, not taken theconversation seriously at first, butonly some time later. The facts that Chad not made a record of theconversation and waited a yearbefore mentioning it to D made itwholly incredible that C had believedthere was a binding oral agreement. Chad done some work outside thescope of his contract, but Leggatt Jfound he had not done it as a result ofthe pub conversation.Accordingly, no reasonable personwould have considered that the offerwas intended to be legally binding. Leggatt J further said that the offerlacked an essential term, as it did notinclude a timeframe within which theshare price was to be doubled. Thismade it too uncertain to beenforceable. He also noted thatcontracts hardly ever fail for lack ofconsideration and that D’s submissionon this point had been hopeless.In making his findings of fact, LeggattJ quoted his own remarks in GestminSGPS SA v Credit Suisse (UK) Limited[2013] EWHC 3560 (Comm), at paras16-22, about the unreliability ofhuman memory and giving the viewthat in a commercial trial it is best fora judge to place little, if any, relianceon witnesses’ recollections and tobase factual findings on inferencesdrawn from the documentaryevidence and known or probablefacts. These remarks have been citedin several cases, and are likely tocontinue to be influential.

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COMPANY LAW Digested by EDOARDO LUPI

Deutsche Bank AG, London v CIMB Bank Berhad [2017] EWHC 1264(Comm) (Blair J, 25 May 2017)Letters of credit

Mr Justice Blair heard dispute undera series of letters of credit betweenthe London branch of Deutsche BankAG, the claimant confirming bank(“CB”), and Singapore branch ofCIMB Bank Berhad, the defendantissuing bank (“IB”). The contractunderlying the letters of creditcontract concerned the sale of cottonby the beneficiary to a customer ofIB.IB sent CB a “Swift message MT 700”as to the issue of a documentarycredit, stated to be irrevocable andsubject to the Uniform Customs andPractice for Documentary Credits(“UPC”) 600. The letters of creditstipulated the documents to bepresented.CB sent Swift messages to IB in theappropriate format, advising that ithad paid the beneficiary under theletters of credit, and seekingreimbursement pursuant to IB’sundertaking to reimburse aconfirming bank which “hashonoured” a complying presentationunder UCP 600 art.7(c).IB declined to make the payment on

the basis that the transactions wereshams. CB asserted that it had paidby way of setting off monies owed toit by the beneficiary. In principle thiswas an acceptable method ofpayment. IB put CB to proof inrespect of its assertion that it paidthe beneficiary. CB sought to read into Art. 7(c) anobligation by IB to pay when thenominated bank states that it hashonoured a complying presentation,so that IB was obliged to treat theCB’s statement as conclusive. Itargued this by analogy with Art.13(b), which provides that an issuingbank will be responsible for loss ofinterest and expenses incurred “ifreimbursement is not provided on firstdemand by a reimbursing bank”,where reimbursement is to beobtained by the claiming bank (herethe confirming bank) from a partyother than the issuing bank(described as the “reimbursingbank”).Blair J found that this analogy wasflawed. There is no reimbursing bankinvolved under Art. 7, and there is no

reason why the same principlesshould apply as between issuing bankand confirming bank where no suchbank is involved. Case law draws aclose comparison between letters ofcredit and first demand bonds in thecontext of the bank’s liability to paythe beneficiary – but this does notmean that an issuing bank’sundertaking to reimburse anominated or confirming bank isanalogous to the payment obligationunder a first demand bond. Furthermore, CB’s argument did notenjoy the support of any authorities,whereas IB had cited numerousauthorities and textbooks in supportof its position. The relevant operativewords in Art. 7(c) of UCP 600 are thatan “issuing bank undertakes toreimburse a nominated bank that hashonoured … a complyingpresentation” (Blair J’s emphasis).This supports the conclusion in FortisBank SA/NV v Indian Overseas Bank[2009] EWHC 2303 (Comm) that“What matters is the fact ofhonouring or negotiating a complyingpresentation.”

EDOARDO LUPI

Marcus Watson, Rob Hersov, Twysden Moore v Watchfinder.co.uk Limited [2017] EWHC1275 (Comm) (HHJ Waksman QC, sitting as a Judge of the High Court, 25 May 2017)

Share Option Agreement – Directors’ Discretion – Braganza v BP Shipping

The Claimants were the directors of abusiness consortium, who hadentered into a share optionagreement with the Defendantcompany. There was a furtherservice agreement between thebusiness consortium and theDefendant. The Claimants soughtspecific performance of theobligation to allot 5% of the

Defendant’s shares under the optionagreement.The Defendant primarily resisted theclaim on the basis that a clause in theoption agreement (Clause 3.1)provided that the option could onlybe exercised with the consent of amajority of the board of directors ofthe company. No such consent hadbeen given. Further, the Defendant

contended that, in substance, theClause 3.1 discretion conferred onthe board amounted to an“unconditional veto”.His Honour Judge Waksman QC(sitting as a Judge of the High Court)rejected the Defendant’s constructionof Clause 3.1 because theconsequence would have been torender the grant of shares under the

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option agreement entirely within thegift of the Defendant so as to put theClaimants in the position of anywould-be purchaser of theDefendant’s shares. The next question was whether thediscretion under Clause 3.1 had beenexercised unreasonably, capriciouslyor arbitrarily. The Judge took intoaccount the guidance of the SupremeCourt in Braganza v BP Shipping[2015] 1 WLR 1661 and accepted thateither as a result of the implication ofa term or as a matter of construction,the Clause 3.1 discretion was subjectto the limitations described inBraganza, which were akin to theapproach taken in relation todecision-makers in public law.The Judge observed that Clause 3.1did not provide clear guidance on the

‘target’ of the discretion, that is to saywhat the decision-maker wassupposed to be considering whendeciding whether or not to exercise it.The Judge accepted, however, that therelevant target of the discretion waswhether the Claimants hadcontributed to the growth of value orprospects of the Defendant in somesignificant way.Having identified the focus of thediscretion, the Judge then consideredwhether the discretion had beenproperly exercised in thecircumstances. First, the Judge notedthat there had barely been anyconsidered exercise of the discretionat all. Second, there was insufficientevidence documenting the directors’reasons for exercising theirdiscretion to refuse consent. Third,

the Defendant’s directors candidlyadmitted that they had been underthe impression that they enjoyed anunconditional veto. Fourth, thedirectors had plainly placed undueemphasis on the Claimants’ failure toobtain the investment in theDefendant by a third party investor.Accordingly, the Judge held that therehad hardly been any real exercise ofthe discretion at all.It was common ground that if theDefendant was found not to havecomplied with the duty set out inBraganza, the Court would have toproceed as if consent had been givenby the Defendant’s board to theexercise of the option. Accordingly,the Judge made the order for specificperformance of the optionagreement.

Cullen Investments Ltd v Brown [2017] EWHC 1586 (Ch) (Barling J, 5 July 2017)Directors’ duties – joint venture agreements – unlawful means conspiracy

The proceedings arose out of abreakdown of the relationshipbetween the second claimant, E, andthe first defendant, J. E was thefounder of Cullen InvestmentsLimited (“Cullen”) and was a well-known New Zealand businessman.The third defendant, KauriInvestments Limited (“KIL”) wasincorporated as the corporate vehiclefor a joint venture between E/Cullenand J. Cullen and J were 50:50beneficial owners of KIL, whosedirectors were E, J and J’s brother, Q(the second defendant). Barling Jheard the consolidated claims ofCullen against J alone, and aderivative claim brought by Cullen onbehalf of KIL against both J and Q.In 2005, E and J agreed on a jointventure embodied in a documententitled “Draft Heads of Agreement”(the “HoA”), which was expressed tobe between J and Cullen. The mainpurpose of the joint venture was toexplore property investmentopportunities in the UK and Europe

using KIL as a vehicle to do so. Underthe HoA, J was not to be prohibitedfrom entering into UK and Europeanproperty transactions in his personalcapacity or otherwise as long as (i)KIL was given first right of refusal,KIL declined, and as long as thetransaction concerned would notmaterially affect J’s duties as KIL’sCEO or result in a conflict with KIL,or (ii) with Cullen’s prior writtenconsent.The breakdown in the relationshipbetween E/Cullen and J arose out of Jmaking a personal investment in ajoint venture with a partner thatinvolved the redevelopment ofresidential sites in Germany. Thiswas referred to at trial as “theGerman opportunity”. E and Cullencontended that J’s personalinvestment in the GermanOpportunity was (i) impermissibleunder the HoA and/or (ii) a breach ofJ’s and Q’s obligations as directors ofKIL and/or (iii) an unlawful meansconspiracy by J and Q to injure KIL.

As to the claim for breach of theduties owed by J and Q to KIL, thedefendants contended that providedtheir conduct as directors of KIL wasin accordance with the overarchingjoint venture agreement then theirconduct would not give rise to anactionable breach of duty claim.Further, distinguishing the line ofauthorities on the “no conflict” and“no profit” rule, the informationconcerning the German Opportunityhad come to J pursuant to hiscontractual obligation under the HoAwithin the broader context of thejoint venture agreement and hadnothing to do with his position asdirector of KIL.Barling J rejected the defendants’submission, noting that “it is in myview a wrong analysis to regard [J’s]day to day work in seeking outbusiness opportunities, reviewingthem, and if appropriate structuringand implementing them, as not carriedout in his capacity of CEO of KIL,merely because those actions at the

41


same time discharged his contractualobligations under the HoA.” Further,there was nothing in the case law tosupport the disapplication of J’snormal duties as a director simplybecause he was also appointed CEOunder the HoA.The German Opportunity had plainlybeen an opportunity for KIL in whichJ had made, without Cullen’s consent,a personal investment which gaverise to a conflict of interest betweenhimself and KIL. Accordingly, thebreach of section 175 of theCompanies Act 2006 (and

corresponding common law duties)was made out as were breaches ofsection 172 and section 177 by reasonof J’s failure to disclose his interest.By reason of his own unauthorisedpersonal interest in the GermanOpportunity, Q was in breach of hisduty under section 175 of theCompanies Act 2006, as well assection 176 and section 177.The claims in contract against J forbreaches of the HoA succeeded. Theclaim for unlawful means conspiracyagainst J and Q succeeded in part.Barling J accepted that there was a

combination between J and Q for Q tohave a personal financial interest inthe German Opportunity, knowingthat this created a potential conflict ofinterest for Q which, beingunauthorised, resulted in a breach ofQ’s fiduciary and statutory duties toKIL as director. It follows that BarlingJ accepted that a breach of fiduciaryduty could constitute unlawful meansfor the purpose of the tort. Theintention to injure KIL wasestablished but no actual injury orloss to KIL had, as yet, been provedand further argument was required.

Re BW Estates Limited [2017] EWCA Civ 1201 (Court of Appeal, 1 August 2017)

Directors’ appointment of administrator – Duomatic principle – abuse of process

The Applicants were two creditors ofBW Estates Limited (the “Company”).The Respondents were the Company’sjoint administrators.The question before the Court ofAppeal was whether the sole directorof a company, whose articles requiredtwo directors for its board meeting tobe quorate, could validly appointadministrators under paragraph 22 ofSchedule B1 to the Insolvency Act1986. The complicating factor was that,whilst the sole director held 75% of theshares in the company, the remaining25% were held by a long-dissolvedManx Company.The trial judge held that the jointadministrators’ appointment was validbecause: (i) the articles of associationhad been informally varied by themembers’ informal course of conduct;(ii) the consent of the only existingregistered shareholder was sufficientto trigger the Duomatic principle; (iii)all the relevant parties had acquiescedin the appointments; and (iv) in anyevent the Applicants’ application was aHenderson v Henderson (1843) 3 Hare100 abuse of process, because they hadpreviously failed to challenge theappointment in the context of anearlier application. The judgment in

the Court of Appeal was given by theChancellor, Sir Geoffrey Vos, withwhom Underhill and Henderson LJJagreed.First, the Chancellor considered thatupon the dissolution of the Manxcompany, the Company did notautomatically become a singlemember company because the Manxcompany remained on the Company’sregister.Second, the Chancellor rejected thejoint administrators’ contention thatpara 22(2) of Schedule B1, whichconfers a power on the directors of acompany to appoint directors, couldnot be constrained by the Company’sarticles of association, which in thiscase required a quorum of twodirectors. Approving Sir AndrewMorritt’s reasoning in Minmar (929) vKhalastchi [2011] EWHC 1159 (Ch), theChancellor agreed that there was nonotion of informality imported bypara 22(2) of Schedule B1.Third, when considering theapplication of the Duomatic principle,it was important to note that thosewho must assent to the relevantmatter are “all shareholders who havea right to attend and vote at a generalmeeting of the company”. The

Chancellor noted that, “it seems to methat the Duomatic principle simplycannot apply in a situation where oneof the registered shareholders is acorporation which does not exist,because it requires the consent of all theregistered shareholders and one ofthem is incapable of consenting.Duomatic is a valuable principle, but itwould be wrong to assume that it mustalways be capable of applying.” TheManx company could not and did notassent. Further, its assent could not beinferred by looking to what those whomay previously have had an interestin the Manx company subsequentlythought about the appointment.Fourth, the Judge was wrong toconclude for the same reasons that thearticles of association had beenamended by conduct given that thiscould only have taken effect by theDuomatic principle. Fifth, theChancellor disagreed that theapplication before him smacked ofabuse of process, or that theApplicants could be estopped byacquiescence from challenging thejoint administrators’ appointment.Accordingly, the Court of Appeal heldthat the appointment of the jointadministrators was invalid.

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CORPORATE INSOLVENCY Digested by RYAN PERKINS & RIZ MOKAL

RYAN PERKINS RIZ MOKAL

Re OJSC International Bank of Azerbaijan [2017] EWHC 2075 (Ch)(Barling J, 6 June 2017)

Cross-Border Insolvency Regulations 2006 – administration moratorium

The foreign representative of a bankapplied for the recognition of arestructuring in Azerbaijan as aforeign main proceeding under theCross-Border Insolvency Regulations2006. Article 20 of Schedule 1 to theRegulations provides that, upon therecognition of a foreign mainproceeding, the debtor’s ability todispose of its assets is “suspended”,and a stay equivalent to a winding-uporder is imposed. Such a “suspension”would not have been appropriate inthe present case, since the bankintended to continue trading

throughout the restructuring inAzerbaijan. That being so, the foreignrepresentative sought an orderreplacing the stay and suspensioncontemplated by Article 20 with anadministration moratorium in theterms of paragraph 43 of Schedule B1to the Insolvency Act 1986. This wouldensure that the bank could continue totrade, whilst preventing hostilecreditor action for the duration of therestructuring. Granting the reliefsought, Barling J held that the stay andsuspension imposed by Article 20 isnot appropriate where the foreign

proceeding is a debtor-in-possessionrestructuring rather than a terminalliquidation. Barling J referred to anumber of cases in which a similarorder was made in the past, andexpressed his agreement with theapproach adopted in those cases.Barling J noted that the Regulationsspecifically empower the Court toimpose an administration moratorium(pursuant to Article 21(1) of Schedule1 to the Regulations), and to disapplythe automatic liquidation-style stayand suspension under Article 20.[Ryan Perkins]

Re Nortel Networks UK Ltd [2017] BCC 325 (Snowden J, 16 June 2017)

Administration expenses – bar date

The administrators of variouscompanies in the Nortel Groupapplied under paragraph 63 ofSchedule B1 to the Insolvency Act1986 for directions in relation to thepayment of administration expenses.The administrators had substantialfunds available for distribution, butcould not make any distribution tounsecured creditors until all expenseclaims had been ascertained andpaid or reserved for. Although theInsolvency Rules 2016 set out adetailed regime for the filing ofproofs and the payment of dividendsin respect of unsecured claims, theRules do not set out any regime forthe payment of administrationexpenses. In those circumstances,the administrators proposed a seriesof directions for dealing withexpense claims (modelled, to a

significant extent, on the regime forunsecured claims in the Rules).Among other things, the directionsimposed a “bar date” for theassertion of expense claims, with aview to enabling the administratorsto make distributions to unsecuredcreditors after the prescribed bardate. Granting the relief sought bythe administrators, Snowden J heldthat the imposition of a bar date forexpense claims did not involve animpermissible attempt to modify thestatutory waterfall. Directions couldnot be given which wouldillegitimately extinguish the rights ofcreditors, or vary the statutorywaterfall or amount to judiciallegislation. However, the directionssought did not purport to extinguishany legal rights or to vary thestatutory waterfall. The directions

affected the available fund fromwhich any expense claims assertedafter the bar date could be satisfied,because late expense claimantswould not be able to disturbdistributions that had already beenmade or provided for: but latecomerswould still be entitled to assert theirexpense claims through subsequentdistributions of any remainingassets. Prior to the end of theadministration, expense claimantshad no express statutory right topayment of their claims out of anyparticular assets, or at any particulartime; and the imposition of a bar datefell within the discretion of theCourt. On the facts, it wasappropriate for the Court to exerciseits discretion in the manner proposedby the administrators.[William Trower QC, Alex Riddiford]

WILLIAM TROWER QC

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Re Peak Hotels and Resorts Ltd [2017] EWHC 1511 (Ch) (HHJ Davies-White QC(sitting as a Judge of the High Court), 23 June 2017)

Payment into court

This case considers the proprietaryconsequences of paying money intoCourt. The Court examined a numberof authorities, some of which appearto be inconsistent, and reached thefollowing conclusions. (1) Where

money is paid into Court in thecourse of litigation, the Court doesnot hold the money on trust. (2)However, the parties to the litigationhave a right to demand that themoney is properly administered and

applied. (3) This right, althoughfalling short of a conventionalbeneficial interest, is capable of beingcharged as security for a debt owingto a third party.[Stephen Robins]

STEPHEN ROBINS

Saw (SW) 2010 Ltd v Wilson [2017] EWCA Civ 1001 (Briggs andArden LJJ, 25 July 2017)

Appointment of administrators – qualifying floating charges

The appellant, a shareholder andcreditor of a company inadministration, sought to argue thatthe company’s administrators hadbeen invalidly appointed. Theadministrators were appointed out-of-Court by a building society under adebenture, on the footing that thedebenture gave the building society a“qualifying floating charge” over allor substantially all of the company’sassets. The appellant contended thatthe debenture could not constitute aqualifying floating charge withinparagraph 14 of Schedule B1 to theInsolvency Act 1986 because therewas not, at the time of its purportedcreation, any property of thecompany to which it could attach,and the company had no powerthereafter to acquire any property towhich it could attach in future (dueto the existence of a prior-rankingcharge). The appellant further arguedthat the debenture was not

enforceable at the time of theadministrators’ appointment becausethere remained no property to whichit could attach. Dismissing the appeal,and affirming the validity of theadministrators’ appointment, Briggs LJheld as follows: (1) The validity of aninstrument as a floating charge, at thetime of its creation, does not dependon the existence of uncharged assets ofthe company creating it, or on a powerin the company to acquire assets in thefuture, free from any fixed chargearising from the crystallisation of aprior charge. (2) A company mightreasonably wish to grant a floatingcharge when setting itself up inbusiness by borrowing working capitalbefore it had any significant assets towhich the charge could attach. (3) Aprior fixed charge over all or part ofthe company’s assets nonetheless lefta subsequent floating charge to attachto the company’s equity ofredemption under the fixed charge.

Briggs LJ referred to section 251 of theInsolvency Act 1986 (the “1986 Act”),which provides that the assessment ofwhether a charge is a floating charge isto be carried out at the time of itscreation. Following consideration of ReYorkshire Woolcombers AssociationLimited [1903] 2 Ch 284 and ReSpectrum Plus Limited [2005] 2 AC 680,he held that there was no support forthe proposition at the heart of theappellants’ case that the validity of aninstrument as a floating charge at thetime of its creation depended upon theexistence of uncharged assets of thecompany creating it or upon the powerof the company to acquire such assetsin the future. Indeed, this proposition was directlycontradicted by Re Croftbell Ltd [1990]BCC 781. Briggs LJ therefore rejectedthe appellants’ primary case. Arden LJagreed with Briggs LJ on the outcomeof the appeal, but for differentreasons.

44

CASE DIGESTS

Re Lehman Brothers Europe Ltd [2017] EWHC 2031 (Ch) (Hildyard J,3 August 2017) Administration – surplus – distribution to sole member – no statutory provision

The company in administration had asubstantial surplus and theadministrators proposed a strategy bywhich the company’s sole membermight be paid dividends and thecompany then dissolved withouthaving to be wound up. There is noprovision in the law governingadministration enabling dividends tobe paid to members, and a brief 2012judgment by Briggs J confirming thatadministrators could not themselvespay such dividends. Members mayreceive dividends in winding-up, butplacing the company in liquidationproceedings would, it was thought,have adverse tax consequences sincethe dividend would be treated as adistribution of capital for tax

purposes and be susceptible tocapital gains tax. A transition towinding-up might also create hurdlesin the settlement of the so-called‘Waterfall III’ proceedings. Againstthis background, the administratorsproposed appointment of a director,who together with the company’smember would be empowered bythe administrators to implement acapital reduction under Part 17 ofthe Companies Act 2006. Theproceeds would be paid over to themember and, it was suggested,treated for tax purposes as incomerather than capital. Having requirednotifications to be given to the taxauthorities and certain of thecompany’s affiliates, Hildyard J

permitted the administrators toproceed to implement their proposal.In doing so, they would beperforming their functions asadministrators and were thus boundto do so only in pursuit of thatadministration’s purpose ofproviding better returns for creditorsas a whole than would be possible ina winding-up. Implementation of theproposal would advance theadministration’s purpose byfacilitating the Waterfall IIIsettlement, and the Judge tookcomfort from the fact that noobjection had been raised by thecreditors, including the taxauthorities.[Felicity Toube QC; Hannah Thornley]

HANNAH THORNLEY

Re Lehman Brothers Europe Ltd [2017] EWHC 2032 (Ch) (Hildyard J, 3 August 2017)

Administration – connected companies – proposed settlement of inter-company claims – administrators’powers to settle – conflict management – rationality

The administrators of four LehmanBrothers group companies soughtdirections in respect of a proposedsettlement of intra-group claims.Hildyard J confirmed that the

court’s role is not to determinewhether a settlement proposed byadministrators is the best available,but whether it was proper andrational for the administrators to

have proposed it. On the facts,several administrators held office inrelation to more than one of thecompanies involved, so anindividual administrator had been

Officeserve Technologies Ltd (In Liquidation) v Anthony-Mike [2017] EWHC 1920 (Ch) (HH Judge PaulMatthews (sitting as a High Court Judge), 28 July 2017)

Settlement agreement – section 127 of the Insolvency Act 1986 – whether disposition of property – should the court validate?

Taking a robustly purposive approachto section 127 of the Insolvency Act1986, HHJ Matthews held, obiter, that“disposition” includes any act withlegal consequences by whichidentifiable property ceases to be inthe ownership of the company inwinding-up so as no longer to beavailable to its liquidator, with theresult that value accrues to some otherperson even if that person does not

become owner of that property.Accordingly, the release of a debt orother contractual right is capable ofbeing a “disposition” and is thussusceptible to being avoided. So is apromise by the company not to sue ona debt. However, mere effluxion oftime of a wasting asset would not fallwithin section 127, and nor woulddeliberate consumption or waste ofassets by the company. In considering

whether the court should validate adisposition avoided by section 127,HHJ Matthews held that eventsoccurring after the disposition could betaken into account, with credit beinggiven if the transaction of which thedisposition formed part turned out tobe of benefit to creditors. Should thetransaction turn out badly, however,there was no policy justification forplacing its costs on creditors.

45


Vinyls Italia SpA v Mediterranea di Navigazione SpA (C-54/16) (Court of Justice of the EuropeanUnion, Fifth Chamber)Italian company – Italian liquidation proceedings – Italian avoidance law action – English choice of law clause –whether English or Italian avoidance applies

The liquidators of an Italian companyundergoing liquidation in Italy appliedto set aside two payments made toanother Italian company that were saidto be avoidable under Italianinsolvency law on the basis that theywere detrimental to the company’screditors. The contract under which thepayments were made had an Englishchoice of law clause. The recipient ofthe payments resisted, invoking Article13 of the EC Insolvency Regulation(predecessor to Article 16 of the Recast

EU Insolvency Proceedings Regulation),on the basis that the recipient couldprove that the challenged paymentswere governed by English law and werenot susceptible to challenge under thatlaw. The liquidators countered that thedefence had not been raised within thetime limits required by Italian law. Onreference by the Italian Court, the Courtof Justice of the European Union held,first, that the procedural laws of theforum, including those as to any timelimits, applied to a defence under

Article 13. Second, the defendantseeking to invoke Article 13 had toestablish on the particular facts of thecase that the it could retain the benefitof the challenged transaction under therelevant procedural and substantiveprovisions of the transaction’sgoverning law. And third and abuseand fraud apart, the parties to atransaction were permitted to choosethe law of a state with no otherconnexion to them or the transaction.(see also EU/EEA Update p70)

PERSONAL INSOLVENCY Digested by MATTHEW ABRAHAM

Frosdick v Fox [2017] EWHC 1737 (Ch) (Birss J, 11 July 2017)

Disclaimer of onerous property – causes of action – trustees in bankruptcy

A trustee in bankruptcy successfullyapplied for a claim brought againsthim by a former bankrupt to bestruck out. The claim was broughtagainst the trustee as a result of thetrustee having disclaimed a cause ofaction that the former bankrupt hadagainst a law firm.The former bankrupt had sought tobring a claim against his formersolicitors who had petitioned for hisbankruptcy. Following hisbankruptcy the former bankruptwrote to the Official Receiver askinghim to litigate or to assign back thealleged causes of action against hisformer solicitors. Following thatletter the former bankrupt issued aclaim against his former solicitors.

After some time the OR appointed thetrustee following a nomination by amajority of creditors. The formerbankrupt wrote to the trustee seekingto acquire the cause of action againsthis former solicitors. Following thatletter the trustee disclaimed anyrights of action and claims against theformer solicitors (which included analleged claim for defamation).The former bankrupt’s claim againstthe trustee was based on the effect ofs.316 of the Insolvency Act 1986which provides that a trustee has aperiod of 28 days on the day whennotice of interest in a property wasgiven to elect whether to disclaim theproperty or not. The former bankruptargued that his letter to the OR and/or

the trustee amounted to notice unders.316 and that the 28 day period hadexpired without a notice of disclaimerhaving been made.The issues were whether (1) the claimagainst the solicitors could constituteonerous property within s.315; and (2)the bankrupt could make anapplication under s.316 so as to startthe 28-day period.The Court struck out the claim.In relation to issue (1), the Courtfound that the cause of action waspart of the estate which vested in thetrustee and was capable of fallingwithin s.315 of the Insolvency Act1986. The Court applied the cases ofKhan-Ghauri v Dunbar Bank Plc [2001]B.P.I.R. 618 and Young v Official

MATTHEW ABRAHAM

designated in relation to eachcompany to take primaryresponsibility for negotiating thesettlement on its behalf with a viewto the interests of that company’screditors. This was sufficient to mitigate the

conflict of duties arising foradministrators holding office formore than one company. As torationality, the settlement wouldreduce the number of issues incontinuing contention between thevarious parties and would enable

distributions to unsecured creditorsto be expedited. On these grounds,the administrators were permittedto proceed to commit the companiesto the settlement.[William Trower QC; Felicity Toube QC;Hannah Thornley; Alexander Riddiford]

46

CASE DIGESTS

Leeds v Lemos [2017] EWHC 1825 (Ch) (HHJ Hodge QC, sitting as aJudge of the High Court, 17 July 2017)Vesting of Legal Professional Privilege

An application was made fordirections by trustees in bankruptcyin relation to the use that could bemade of certain potentially privilegeddocuments that they had obtainedfrom the former solicitors of the firstrespondent (the bankrupt).The first respondent was adjudgedbankrupt on 11 March 2015 and hesecured his discharge frombankruptcy on 12 March 2017. Thetrustees in bankruptcy had in theirpossession certain documents whichthey obtained from the firstrespondent’s former solicitors in thecourse of the discharge of the trustees’functions. Some of those documentswere said to potentially be subject tolegal professional privilege belongingto the first respondent either alone orjointly with his wife. The trusteesbelieved that a number of thedocuments were likely to be useful asevidence for the purposes ofproceedings under section 423 of theInsolvency Act 1986 (the “1986 Act”)relating to transactions defraudingcreditors.The issues dealt with by the Courtwere (1) the effect of the authorities inrelation to whether privilege wasproperty that vested in the trustee inbankruptcy; in particular, the partiesdisagreed about what the Court of

Appeal had decided in Shlosberg vAvonwick Holdings Ltd [2016] EWCACiv 1138; (2) whether s.333 and s.363of the 1986 Act could be used to orderthe first respondent to waive hisprivilege in any documents releasedto the trustees.In relation to issue (1), the Courtconsidered that the Court of Appealdecision in Avonwick held that on theproper interpretation of the relevantprovisions of the 1986 Act, privilegewas not property of a bankrupt whichvested in the trustee in bankruptcy.Further, that the bankrupt could onlybe deprived of privilege if the 1986Act expressly so provided or if thatwas a necessary implication of theexpress language of its provisions.The Master of the Rolls found that allthe relevant provisions in the 1986Act were in general terms and didnot expressly treat privilege asproperty of the bankrupt whichautomatically transferred from thebankrupt to the trustee, nor was thata necessary implication of theprovisions. In explaining the decisionof the Court of Appeal, the Courtmade it clear that as a result of thedecision in Avonwick: (1) theprinciple expounded in CrescentFarm (Sidcup) Sports v Sterling Offices[1972] Ch. 553, namely that legal

professional privilege enured for thebenefit of a successor in title, had nocontinuing application in bankruptcycases; and (2) Insofar as Peter GibsonJ held in Konigsberg (A Bankrupt), Re[1989] 1 W.L.R. 1257 that the CrescentFarm principle did apply in the caseof the passing of property to a trusteein bankruptcy, his decision waswrong. As a result the trustees inbankruptcy were not entitled todeploy the relevant documents in thes.423 proceedings.As for issue (2), Court held that theright to privilege was such afundamental principle that only anexpress statutory power to waiveprivilege would confer jurisdiction onthe court to order such a waiver. TheCourt stated that: “In my judgment, itis a matter going to jurisdiction rathersimply than to discretion. But if I amwrong in that, it seems to me that, inprinciple, a very powerful case indeedwould have to be made out before thecourt should properly order abankrupt to waive legal professionalprivilege in relation to documents. Asat present advised, I find I find itdifficult, particularly in the light of theDerby Magistrates’ Court case, to thinkof any circumstances in which it wouldbe appropriate to make such an order.”[Felicity Toube QC]

Receiver [2010] EWHC 1591 (Ch),[2010] B.P.I.R. 1477 noting that acause of action could be disclaimed bythe trustee in appropriatecircumstances.As to issue (2), the Court held that thecorrect interpretation of s.316 wasthat the bankrupt could not make avalid application under the section inrelation to property within the

bankrupt’s estate which had vested inthe trustee. This was because thebankrupt was not a person interestedin the property, as a result of thevesting of property in the trusteeunder s.306. In coming to thisconclusion the Court held that s.315was not there to protect bankruptsbut to protect other persons whomight have an interest in property

which is subject to the insolvency.The Court, in striking out the claim,noted that the only way the formerbankrupt could bring an actionagainst the trustee was to challengethe trustee’s exercise of discretion inrelation to the disclaimer. The Courtalso noted that there were no groundswhich would justify grantingpermission to bring such a claim.

47


Richards v Vivendi SA [2017] EWHC 1581 (Ch) (Morgan J, 27 June 2017)Provision of new material on an annulment application and fair hearings

This case was an appeal by abankrupt against the dismissal of hisapplication for the annulment of abankruptcy order made in relationto him.The appellant was adjudgedbankrupt in December 2014 on acreditor’s petition. Almost two yearslater, his discharge having beensuspended, the appellant applied forthe annulment of the order on thebasis that it had been made withoutjurisdiction because he was notdomiciled in England and Wales. Inwritten submissions and anunsworn affidavit he stated that hehad never been ordinarily residentin England and Wales, that he hadbeen in Geneva on the date thepetition had been presented, andthat he had not undertaken businessin England in his own right in thethree years before the petition wasserved. In a hearing that was onlylisted for 30 minutes the creditorpersuaded the district judge neitherto read the new material nor toadjourn the matter. Concluding thatthe bankrupt was effectively tryingto appeal an order which had beenmade after consideration of all thejurisdictional issues, she dismissedhis application.The appellant argued that thedistrict judge had been wrong toconclude that he had not providednew material in support of his

application and that he had not hada fair hearing. The Court allowed theappeal holding that the DistrictJudge had erred in concluding thatthere was no new material beforeher and that the appellant did nothave a fair hearing.The Court held that under s.282(1) ofthe Act, the court had a discretion toannul a bankruptcy order if satisfiedthat, on any grounds existing at thetime the order was made, the ordershould not have been made. Inasking what grounds existed whenthe order was made, the court wasnot restricted to the evidence beforethe court which made the order andcould consider new material. Interms of the admission of freshevidence the Court held that theLadd v Marshall test had no bearingin the bankruptcy jurisdiction andthe fact the new material could havebeen put before the court hearingthe bankruptcy petition did notnecessarily prevent its admission onan annulment application. In thisregard the Court considered Harveyv Dunbar Assets Plc [2017] EWCA Civ60, applied Ahmed v Mogul EasternFoods [2005] EWHC 3532 (Ch),Debtor (No.32/SD/1991) (No.1), Re[1993] 1 W.L.R. 314 and Mowbray (ABankrupt), Re [2015] EWHC 296 (Ch)and followed Crammer v WestBromwich Building Society [2012]EWCA Civ 517.

The Court held that on the face of it,the fresh submissions and draftaffidavit produced by the appellantconstituted new material. Had thedistrict judge declined to admit thatmaterial after making anassessment of it, her decision couldnot have been challenged. However,she erred in that she did not read,assess or make findings about thematerial before ruling that it wasinsufficiently new and different tobe admitted. As to the fairness of thehearing the Court held that thedistrict judge had been unable toassess the nature and content of thenew material. However, rather thanexcluding the material on the basisof its late submission or givingdirections for a further hearing, sheheard submissions from the creditorwithout giving the bankrupt anyreal opportunity to explain himself.As a result, the district judge’sdismissal of the application withoutevaluating the new material was aserious procedural irregularityrendering her decision unjust withinthe meaning of CPR r.52.21(3). TheCourt, applying Distri, Frey vLabrouche [2012] EWCA Civ 881 andDunbar Assets Plc v Dorcas HoldingsLtd [2013] EWCA Civ 864, held thatgiving both parties the opportunityof making submissions wasfundamentally important in terms ofthe fairness of the hearing.

PROPERTY & TRUSTS Digested by ANDREW SHAW

ANDREW SHAW

Midtown Acquisitions LP v Essar Global Fund Ltd (Blair J, 30 August 2017)

Aviation – enforcement - licences

The claimant obtained judgmentagainst the first defendant in the NewYork courts for US$171,769,169. Theclaimant sought to enforce thisjudgment against a Boeing 747 fitted

out as a private jet which was worthUS$60 million (the “Aircraft”). TheAircraft was legally owned by thethird defendant, which was asubsidiary of the second defendant,

itself a subsidiary of the firstdefendant. A bank held a mortgageover the Aircraft which secured thesum of US$101 million.The claimant contended that the third

48

CASE DIGESTS

Joseph Barton v The Football Association (Appeal Board of the Football�Association, 25 July 2017)

FA Betting Rules – excessive penalty

The appellant, Joseph Barton, had along history of gambling on a widerange of sports. Among the sportingevents on which he placed wagerswere professional football matches,including matches involving his ownteam. Since Mr Barton was aprofessional footballer, this was abreach of FA Rule E8.Mr Barton pleaded guilty to placing1260 bets on professional footballmatches over a 10-year period, andwas sentenced to an 18-month ban.He appealed against his sentence onthe ground that it was excessive. The Appeal Board noted that there

was no suggestion of Mr Bartonhaving cheated, or havingdeliberately caused his team to lose amatch. Mr Barton had never playedin, nor was he in the match daysquad, when he backed his team tolose. He had absolutely no influenceat all on the results of those matches.There was nothing suspicious aboutthe actual betting and returns frombetting. He did not win money fromthe bets he placed and he did poorlywhen he bet on his own team,especially when he bet on his ownteam to lose. The bets Mr Barton hadmade on his own team had been

made a long time ago. Some of thesebets were relatively modest in size,though some were not. The betsformed a very small part of hisbetting rule breaches. It was rare forhim to bet on his own team, and itwas most exceptional for him to beton his own team to lose. He neversought to conceal his identity whenmaking the bets. He did so using hisown name and account, such that hecould have been (and was) quiteeasily identified.Mr Barton first argued that an 18-month ban was excessive by referenceto bans imposed in other, similar

SPORT Digested by ROBERT AMEY

ROBERT AMEY

defendant held the Aircraft on trustfor the first defendant. Believing thatthe Aircraft was located at an airfieldnear Bolton and was due to departfor Portugal the following day, theclaimant obtained a writ of controlunder CPR Part 83. A High Courtenforcement officer subsequentlyobtained a warrant of entry pursuantto paragraph 15 of Part 2 of Schedule12 to the Tribunals, Courts andEnforcement Act 2007 (the “Act”).While en route to Bolton, theenforcement officer discovered thatthe Aircraft was in fact at Stansted,where he took control of it. The nextday, the enforcement officer obtaineda warrant of entry correctly statingthat the Aircraft was at Stansted.The first defendant challenged theseizure of the Aircraft on the basisthat the first warrant of entry wasinvalid because it specified that theAircraft was at Bolton and, further,that it was wrong in principle to issuea warrant under Schedule 12 to theAct because the sale proceeds wouldall be payable to the mortgagee bank.

The claimant argued that theenforcement officer was lawfully ableto take control of the Aircraft becausestaff at Stansted had given him alicence to enter the premises.Blair J held that the power conferredby a writ of control was onlyexercisable under the procedure atSchedule 12 to the Act, paragraph 9 ofwhich provides that an enforcementofficer may only take control of goodsif they are on a highway or onpremises that he has a power to enterunder Schedule 12. By paragraph 15,a warrant of entry would only begranted if, inter alia, there was reasonto believe that there were goods onspecified premises over which theenforcement power to take controlwould be exercisable. Theenforcement officer could not rely onthe writ of control where there wasno warrant of entry granting accessto the premises in question ieStansted. It was to be inferred fromthe enforcement officer obtaining asecond warrant of entry correctlyspecifying Stansted that he was

aware that such a warrant wasrequired. The enforcement officer didnot have lawful authority to takecontrol of the Aircraft under the writof control in the absence of a validwarrant of entry.Even if the enforcement officer hadhad power to enter Stansted, hisapplication for the second warrant ofentry stated that it was required totake control of the Aircraft. This wasinconsistent with the claimant’sposition that control had alreadybeen taken.Blair J agreed that the firstdefendant’s obligations to the banksignificantly exceeded the value ofthe Aircraft and thus that theclaimant would not realise anythingfrom the sale. Although enforcementshould not be used to put pressure ona debtor to pay, he held that takingcontrol of the Aircraft would notnecessarily lead to a sale and it wasnot unreasonable for the claimant totake control of the Aircraft, whichwould otherwise likely leave thejurisdiction.

49


JOEY BARTON: IN BREACH OF FA RULE E8

cases. In addition, cases in which theoffender had bet against his ownteam, but did not play in the relevantgame, had never attracted a banlonger than 6 months. In addition, MrBarton (who was in the later stages ofhis career) argued that the length ofthe ban effectively ended his career.This submission was rejected, theAppeal Board holding that every caseturns on its own facts, and theprecedents relied upon by Mr Bartoninvolved gambling on a far less

serious scale. As for the effect on MrBarton of a ban at such a late stage inhis career, the Board held that “thesuspension must lie where it falls”.The Commission had correctly hadregard to the sentencing guidelinesand had reached a conclusion whichwas open to it.Mr Barton then complained that theRegulatory Commission had failed togive adequate weight to the expertevidence of a psychiatrist, who hadgiven evidence as to the effect of Mr

Barton’s gambling addiction. On thispoint, the Appeal Board agreed. Theevidence of Mr Barton’s expert hadeffectively been unchallenged, and theCommission had effectively rejectedpart of that evidence without properlyexplaining why. This was sufficientlyunreasonable that the Appeal Boardwas entitled to look at the matterafresh. Taking into account the expertevidence, Mr Barton’s ban wasreduced so that it would expire on 1June 2018.

50


This article explores the application of the

Judgments Regulation to schemes of arrangement under Part 26 of the Companies Act 2006. The

true scope of the Judgments Regulation is a

notorious issue among restructuring lawyers, and has been debated in numerous cases over

the years. The debate has been reinvigorated by a series of new cases, including Re DTEK Finance

plc [2017] BCC 165 (Newey J) and Re Global Garden Products Italy SpA [2016] EWHC 1884 (Ch)(Snowden J). These cases consider, among other

things, whether a scheme with only one UK-domiciled creditor is capable of falling within

Article 8 of the Judgments Regulation; and

whether an asymmetric English jurisdiction

clause is capable of falling within Article 25 of the

Judgments Regulation. It is respectfully suggested

that some of the provisional views expressed in

Global Garden should not be followed.

IntroductionThe scheme of arrangement is a powerful restructuring tool. If a company proposes a

scheme to restructure its debts, and the scheme is

approved by a majority in number representing

75% of the creditors in each class, then the Court has the power to sanction the scheme such that it is binding on all creditors: see section 899 of the

Companies Act 2006. However, before the Court

sanctions the scheme, the Court must be satisfied

that it has international jurisdiction to do so.It is frequently the case that one or more

scheme creditors are domiciled outside of the UK

in another EU Member State. In those

circumstances, the Court must consider whether

its jurisdiction to sanction the scheme is affected

by Regulation (EU) No. 1215/2012 on jurisdiction

and the recognition and enforcement of judgments in civil and commercial matters(recast) (the “Judgments Regulation”, also

known as the Brussels Regulation or Brussels I).1

The Judgments Regulation applies in “civil and

commercial matters”. Chapter II of the Judgments

Regulation deals with jurisdiction, whereas

Chapter III deals with the recognition of foreign

judgments. The Judgments Regulation is

something of a double-edged sword for scheme

proponents. On the one hand, Chapter III has

proven to be tremendously useful in persuading

the English Court that schemes will be

automatically recognised in other EU

jurisdictions, and thereby achieve a substantial effect. On the other hand, Chapter II has proven

to be something of a nuisance, and gives rise to a

number of confusing jurisdictional issues. The basic principle underlying Chapter II of the

Judgments Regulation is that any person

domiciled in an EU Member State must be sued in

Schemes of Arrangement andthe Judgments Regulation:The New Authorities

Ryan Perkins�considers the application of the Judgments Regulation in the�light of the recent DTEK and Global Garden�Judgments

■ ■

1/. The Judgments Regulation is the successor of Regulation (EC) No. 44/2001, which contains many similar provisions.

51

the courts of that Member State (the “Domicile

Rule”): see Article 4(1). It is unclear whether and, if so, how the Domicile Rule applies to schemes of arrangement. It has been suggested that scheme

creditors could be treated as being “sued” by the

scheme company for the purposes of the

Domicile Rule. This analysis would entail that creditors domiciled in EU Member States other

than the UK should not be included in schemes of arrangement unless one of the exceptions in

Chapter II of the Judgments Regulation is found

to be applicable. The correctness of this analysis

is currently unresolved, and has been left open in a number of cases: see Re Rodenstock GmbH[2012] BCC 459 at [60] (Briggs J); Re Seat Pagine

Gialle SPA [2012] EWHC 3686 (Ch) at [13] (David

Richards J); Re Primacom Holdings GmbH v Credit Agricole [2013] BCC 201 at [11]-[13] (Hildyard J); Re Nef Telecom BV [2014] BCC 417 at [38]-[39] (Vos J); Re Vietnam Shipbuilding Industry Group

[2014] BCC 433 at [10] (David Richards J); Re Apcoa Parking Holdings GmbH[2014] BCC 538 at [24](Hildyard J); Re Magyar Telecom BV [2014] BCC

448 at [28]-[31] (David Richards J) and Re Van

Gansewinkel Groep BV [2015] Bus LR 1046 (Ch) at [41]-[45] (Snowden J), among others.

In order to avoid the need to resolve this issue, the Court has developed the practice of considering whether jurisdiction would exist under Chapter II of the Judgments Regulation on

the assumption that it applies to schemes of arrangement. If jurisdiction can be found, it is

not necessary to test that assumption. It is

prudent to proceed, for present purposes, on the

basis that Chapter II of the Judgments Regulation

applies to schemes of arrangement.Chapter II of the Judgments Regulation

contains a number of exceptions to the Domicile

Rule. An important task for any scheme

proponent (where the scheme affects EU-domiciled creditors) is to identify which of those

exceptions give the English Court jurisdiction to

sanction the scheme. The most important exceptions, for present purposes, are set out in

Articles 8 and 25.Article 8 provides: “A person domiciled in a

Member State may …Êbe sued …Ê(1) where he is

one of a number of defendants, in the courts for the place where any one of them is domiciled, provided

the claims are so closely connected that it isexpedient to hear and determine them together toavoid the risk of irreconcilable judgments resultingfrom separate proceedings …” Article 8(1) hasbeen invoked in many recent cases to establishthat, where some of the scheme creditors aredomiciled in the UK, the English Court hasjurisdiction to sanction a scheme affecting therights of creditors domiciled elsewhere in the EU.Since it is normally possible to identify at least ahandful of UK-domiciled scheme creditors, thisline of argument has proven to be a powerful toolin practice. Indeed, it is one of the key ways inwhich restructuring lawyers have been able toprevent the Judgments Regulation from limitingthe scheme jurisdiction of the English Court.

The other key provision is Article 25, of whichparagraph (1) provides: “If the parties, regardlessof their domicile, have agreed that a court or thecourts of a Member State are to have jurisdictionto settle any disputes which have arisen or whichmay arise in connection with a particular legal

SNOWDEN J’S JUDGMENT INGLOBAL GARDEN IS PERHAPS

PROBLEMATIC


52


relationship, that court or those courts shall havejurisdiction … Such jurisdiction shall be exclusiveunless the parties have agreed otherwise.” Article25 is typically invoked where the underlyingcontracts between the scheme company and itscreditors contain an English jurisdiction clause.In such cases, it has been argued that the EnglishCourt has jurisdiction to sanction the schemeirrespective of where the scheme creditors aredomiciled, because the scheme creditors havecontractually submitted to the jurisdiction of theEnglish Court.

Thus far, every known scheme of arrangementhas been held to fall within either Article 8 and/orArticle 25 of the Judgments Regulation. However,if a future scheme does not fall within Article 8 orArticle 25, and none of the other exceptions to theDomicile Rule are applicable, then the schemecompany would have to argue that Chapter II ofthe Judgments Regulation does not apply to

schemes at all. This would be a hard-fought argument, which would be fit for consideration

by the Supreme Court and/or the European Court of Justice. Rather than engaging in such an

argument, scheme companies have a strong

incentive to find a way of establishing that their

schemes fall within Article 8 and/or Article 25. Two issues often arise in practice. The first

issue is whether the existence of a single UK-domiciled creditor (potentially holding a very low

proportion of the total scheme liabilities) is

capable of bringing a scheme within Article 8. The second issue is whether an asymmetric

jurisdiction clause is capable of falling within

Article 25. These issues are considered below.

Article 8: how many UK creditors are�required?Pursuant to Article 8, the English Court has

jurisdiction to sanction a scheme involving a

creditor (C1) who is domiciled in an EU Member

State other than the UK if two conditions are

satisfied. The first condition is that at least one

other scheme creditor (C2) is domiciled in the UK. The second condition is that the “claims” by the

scheme company against C1 and C2 are so closely

connected that it is “expedient” for the scheme to

bind both creditors so as to “avoid the risk of irreconcilable judgments resulting from separate

proceedings”.It has never been entirely clear how Article 8

operates in the scheme context. The reference to

“avoid[ing] the risk of irreconcilable judgments” is

particularly difficult to apply to a scheme, which

is designed to restructure a company’s debts

rather than to avoid irreconcilable judgments. Questions of numerosity also arise. How many

creditors should be domiciled in the UK (by

number and value) in order for Article 8 to

apply? Is one creditor enough? Or will the Court expect more?

The authorities do not provide consistent answers to this question. Some of the authorities

indicate that Article 8 can be satisfied if a single

scheme creditor is domiciled in the UK: see Re

NEF Telecom Co BV [2014] BCC 417 at [43] (Vos J); Re Zlomrex International Finance SA [2014] BCC

440 at [15] (Mann J); and Re Metinvest BV [2016] EWHC 79 (Ch) at [32] (Proudman J). An

RYAN PERKINS

53

alternative view was espoused, at least to some

degree, by Snowden J in Re Van Gansewinkel Groep BV [2015] Bus LR 1046 (Ch) at [51]:

“On the assumption that the recast Judgments

Regulation applies, art.8(1) would be potentially

engaged provided that at least one creditor is

domiciled in England and it is expedient to hear the

‘claims’ against all other scheme creditors together

with the ‘claim’ against him. In the instant case, the numbers and size of the scheme creditors

domiciled in England were far from immaterial, and in my judgment they were sufficiently large

that the test of expediency was satisfied. I therefore

considered that I was entitled to regard all scheme

creditors as coming within the jurisdiction of the

English court under art.8(1) for the purposes of the

exercise of the scheme jurisdiction in relation to

them.”Snowden J thus looked at whether the numbers

and size of the scheme creditors domiciled in

England “were sufficiently large that the test of expediency was satisfied.” Snowden J returned to

this topic in his judgment in Re Global Garden

Products Italy SpA [2016] EWHC 1884 (Ch) at [25]:“In a number of cases, the courts have expressed

the view that on the assumption that the recast Judgments Regulation applies to schemes, and

treating the company as claimant which is suing

the scheme creditors, provided that at least one

such creditor is domiciled in the United Kingdom, art.8 is potentially engaged. The question will then

be whether it would be expedient to hear and

determine the application for sanction of the

scheme as regards the other creditors to avoid

inconsistent judgments from separate proceedings. On one view, this question will necessarily be

answered in the affirmative because of the

desirability of binding all scheme creditors to the

same restructuring: see Re Metinvest BV [2016] EWHC 79 (Ch) at [33]. Alternatively, the answer

may depend upon a consideration of the number

and value of the creditors domiciled in the United

Kingdom: see Re Van Gansewinkel Groep BV at[41]-[45].”

Snowden J went on to conclude (at [28]) that jurisdiction could be established under Article 8

“on the basis that sufficient creditors by number

and value are domiciled in the United Kingdom

and that it is expedient to determine whether the

scheme should bind the other scheme creditors in

these proceedings in England.” Further, Snowden

J specifically required the scheme company to

adduce detailed evidence as to the number and

value of UK creditors, and held that the original evidence was “inadequate” and“unsubstantiated”: see the judgment at [27].

The most recent and detailed consideration of this matter is to be found in the judgment of Newey J in Re DTEK Finance plc[2017] BCC 165(convening hearing) , which adopts a rather

different approach. In that case, only two scheme

creditors holding less than one per cent of the

total scheme liabilities (by value) were domiciled

in the UK. Newey J held that Article 8 applied, such that the Court had jurisdiction to sanction

the scheme. Moreover, Newey J expressed the“provisional view” that the Court would have had

jurisdiction to sanction the scheme even if only

one creditor, holding a very low proportion of the

total scheme liabilities, had been domiciled in the

UK. He referred to the authorities set out above, and said (at [17]-[18]):

“Article 8(1) of the recast Judgments Regulation

does not in terms require more than “any one”

defendant to be domiciled in the jurisdiction. The

article goes on to make reference to whether“claims are so closely connected that it is expedient to hear and determine them together to avoid the

risk of irreconcilable judgments resulting from

separate proceedings”, but again it is not said that the number of domiciled defendants determines

whether it is “expedient” to hear and determine

matters together. On the face of it, the focus is on

how “closely connected” the claims are rather than

where other defendants are domiciled. In the

circumstances, it seems to me, at any rate

provisionally, that assessing “expediency” in this

context must involve more than merely looking at how many creditors beyond one are domiciled in

the jurisdiction or the value of the debts that they


In Global Garden Snowden J specifically required the scheme company to adduce detailed evidence as to the number andvalue of UK creditors

54

hold.There is a persuasive argument that at least in

the case of a company such as this one, which isincorporated in this jurisdiction and has its centreof main interests (or “COMI”) in England, theexistence of just one creditor with a domicile herewill make it expedient for an English court to hearan application for a scheme of arrangement to beapproved. In the case of an English incorporatedcompany, with its COMI in the jurisdiction, theremight be said to be a legitimate expectation on thepart of creditors that any restructuring wouldoccur either in this jurisdiction or, perhaps, in thejurisdiction of the law governing the debts.Creditors would seemingly have no expectation ofa restructuring being the subject of proceedings intheir own home jurisdictions, where those aredifferent. In any case, the claim against the“defendant” domiciled here might be thought to beso “closely connected” to the claims against other“defendants” as to make it “expedient” for theclaims to be dealt with together. As Snowden Jnoted [in Global Garden], the desirability ofbinding all scheme creditors to the samerestructuring is, on one view, sufficient to establishthe requisite expediency.”

It is suggested that the provisional viewexpressed by Newey J is correct, and is preferableto the approach taken in Van Gansewinkel. Thecritical requirement under Article 8 is that atleast one scheme creditor is domiciled in the UK.Beyond that, Article 8 does not impose anyrequirement for the Court to consider thenumber or value of UK-domiciled creditors, andthe Court should not ordinarily need to considerthis issue in detail.2 The Court must, of course, besatisfied that it is “expedient” for all relevantcreditors to be bound by the scheme in order to“avoid the risk of irreconcilable judgmentsresulting from separate proceedings”. But thisdoes not, or does not principally, involve anyconsideration of the precise number or value ofUK-domiciled creditors. The better view is that, inthe vast majority of cases, it is inherently

expedient for all creditors in a given class to bebound by the scheme, because any creditors whowere not so bound would be able to obtainjudgment against the scheme company on the fullamount of their claims, thereby undermining therestructuring. Although Newey J restricted hisanalysis to companies incorporated in the UK, thesame analysis should logically apply to anyforeign company which has a sufficientconnection to the UK.3 From that perspective, itshould not be difficult to show that a scheme fallswithin Article 8.

At the DTEK sanction hearing, the judge (NorrisJ) adopted largely the same approach: see [2016]EWHC 3563 (Ch). He said (at [22]-[25]):

“The gateway to article 8 is opened by thepresence of a single defendant within the Englishand Welsh jurisdiction. It would therefore seemodd if the test of “expediency” should somehow subsilentio require more than one defendant in thejurisdiction. What the proviso to me seems tofocus upon is not the number of defendants whoare present in England and Wales, but the numberof defendants who are domiciled in other MemberStates, and upon the significance of the risk of anirreconcilable judgment in the courts of thedomiciles of those other defendants …

In the instant case it seems to me that anirreconcilable judgment in another Member Statewould be destructive of the scheme of arrangementas a whole …

I therefore take the view that if there is onedefendant in England and Wales who is a schemecreditor then the risk of some other schemecreditor proceeding in the courts of his owndomicile to resist a claim that he be bound as adissentient creditor is such that that risk of anirreconcilable judgment of itself satisfies theproviso.”

It is suggested that, contrary to Global Garden,scheme companies should not be required toadduce detailed evidence as to the precisenumber and value of creditors domiciled in theUK. Such evidence is not ordinarily relevant to


■ ■

2/. See also Re Hibu Group Ltd [2016] EWHC 1921 (Ch) at [67] (Warren J): “When applying the test of expediency underArticle 8(1), there is no basis for imposing a precise threshold on the number or value of creditors who are required to bedomiciled in the UK.3/. As to the concept of sufficient connection, see Re Magyar Telecom BV [2014] BCC 448 at [14] (David Richards J).

55

worldwide, it is important to determine whether

the clause falls within Article 25 of the Judgments

Regulation so as to confer jurisdiction on the

English Court to sanction a scheme of arrangement between a company and any of its

creditors who are bound by the clause.Four recent cases have considered this issue.

The first case is Re Vietnam Shipbuilding Industry

Group[2014] BCC 433 at [15]-[16], in which the

scheme creditors were parties to a facility

agreement modelled on one of the standard LMA

forms. David Richards J held that the LMA’s

asymmetric jurisdiction clause fell within Article

25, such that the English Court had jurisdiction to

sanction the scheme. He noted that non-exclusive

jurisdiction clauses plainly fall within Article 25

(as is apparent from the second sentence of Article 25 itself); and that, in those circumstances, there is no reason why the LMA clause should fall outwith Article 25.

The second case is the decision of Snowden J in

Re Van Gansewinkel Groep BV[2015] Bus LR 1046


IN RE VIETNAM SHIPBUIDINGDAVID RICHARDS J HELD THAT

ARTICLE 25 APPLIED

determining whether Article 8 is engaged.

Article 25 and asymmetric jurisdictionclausesIn the rare case where no scheme creditor isdomiciled in the UK, Article 8 will not apply, andthe scheme company will need to rely on Article25 instead. The paradigm case for the applicationof Article 25 is where the finance documentsbetween the scheme company and the schemecreditors contain a conventional andstraightforward exclusive jurisdiction clause infavour of the English Court. Article 25 will, insuch cases, confer jurisdiction on the EnglishCourt to sanction the scheme.

However, many finance documents do notcontain a straightforward exclusive jurisdictionclause. By way of example, the standard forms ofsyndicated facility agreements promulgated bythe Loan Markets Association include thefollowing asymmetric jurisdiction clause:

“(a) The courts of England have exclusivejurisdiction to settle any dispute arising out of orin connection with this Agreement (including adispute relating to the existence, validity ortermination of this Agreement or any non-contractual obligation arising out of thisAgreement) (a “Dispute”).

(b) The Parties agree that the courts of Englandare the most appropriate and convenient courts tosettle Disputes and accordingly no Party will argueto the contrary.

(c) This Clause is for the benefit of the FinanceParties and Secured Parties only. As a result, noFinance Party or Secured Party shall be preventedfrom taking proceedings relating to a Dispute inany other courts with jurisdiction. To the extentallowed by law, the Finance Parties and SecuredParties may take concurrent proceedings in anynumber of jurisdictions.”

This clause confers exclusive jurisdiction onthe English Court, but it does so “for the benefit” ofthe finance parties (i.e. the scheme creditors)rather than the scheme company, and thefinance parties are expressly permitted tocommence proceedings against the schemecompany in other jurisdictions. Having regard tothe extensive use of the LMA’s asymmetricjurisdiction clause in finance documents

56


(Ch). The jurisdiction clause in that case stated asfollows: “For the benefit of each of the financeparties, each obligor irrevocably submits to theexclusive jurisdiction of the courts of England forthe purpose of hearing and determining anydispute arising out of this agreement and for thepurpose of any enforcement of any judgmentagainst its assets.” Snowden J held that the clausefell outwith Article 25, such that the schemecompany could not rely on that Article toestablish jurisdiction under the JudgmentsRegulation. He stated (at [49]):

“… this was not a clause by which any of thescheme creditors submitted to the jurisdiction ofthe English court at all. It was a submission to thejurisdiction only by the scheme companies. But thescheme companies were voluntarily invoking thescheme jurisdiction of the English court in anyevent. In my view, the issue under article 25(1)whether the English court had jurisdiction over thescheme creditors. In that respect, the fact that thejurisdiction clause was for the benefit of thescheme creditors did not assist …”

It should be noted that the clause in VanGansewinkel was rather different from thestandard LMA asymmetric jurisdiction clausewhich featured in Vietnam Shipbuilding. The LMAclause states that the parties (including thefinance parties) submit to the jurisdiction of theEnglish Court; whereas the clause in VanGansewinkel merely states that the obligors (notincluding the finance parties) submit to thejurisdiction of the English Court. It is suggestedthat this is an important distinction. Under theVan Gansewinkel clause, the finance parties arefree to challenge the jurisdiction of the EnglishCourt if the company commences proceedingsthere. By contrast, under the LMA clause, thefinance parties are not free to advance such achallenge. They are entitled to commenceproceedings against the company outside ofEngland, but they are not entitled to contest thejurisdiction of the English Court once it is seised(because they have submitted to its jurisdiction).Accordingly, Van Gansewinkel and Vietnam

Shipbuilding should be regarded as consistent. The third case is the convening judgment in Re

Hibu Group Ltd [2016] EWHC 1921 (Ch), beforeWarren J. The finance documents contained thestandard LMA asymmetric jurisdiction clause.Warren J held that the clause fell within Article25, and cited Vietnam Shipbuilding in support ofthis conclusion. He said (at [71]) that “paragraph(c) [of the LMA clause], whilst preserving acreditor’s right to sue elsewhere, does not allow achallenge to the jurisdiction conferred byparagraph (a) when the company commencesproceedings in this court”. Warren J acceptedcounsel’s submission that the clause in VanGansewinkel is distinguishable from the standardLMA clause.

The final and most problematic case is ReGlobal Garden Products Italy SpA[2016] EWHC1884 (Ch), before Snowden J, in which the financedocuments contained the standard LMAasymmetric jurisdiction clause. Snowden Jsuggested, obiter, that the clause did not fallwithin Article 25. He stated (at [31]):

“I would, however, indicate that my provisionalview was that the alternative source of jurisdictionsuggested by Mr Dicker, namely Article 25 of theRecast Judgments Regulation, would not havegiven jurisdiction … The jurisdiction clause in theFacilities Agreement … was expressed to be for thebenefit of the finance parties only and, hence, couldnot be relied upon by the Company against thosefinance parties: see (for a similar point) Re VanGansewinkel Groep at paragraphs 46 to 49.”

It is respectfully suggested that this provisionalview is wrong, for three principal reasons.

First, Snowden J’s provisional view isinconsistent with Vietnam Shipbuilding and theHibu convening judgment.4

Second, Van Gansewinkel does not support theview that the LMA clause falls outwith Article 25.This is because the clause in Van Gansewinkel isdrafted in different terms from the LMA clause:see above. Snowden J rightly observed that theLMA clause is expressed to be “for the benefit” ofthe finance parties: but this simply enables the

■ ■

4/. The Hibu convening hearing took place shortly before the Global Garden judgment was released, but shortly after theGlobal Garden sanction hearing. In the Hibu sanction judgment, [2016] EWHC 2222 (Ch) at [6]-[7], Arnold J held that itwas unnecessary (on the facts) to decide whether the provisional view expressed in Global Garden was correct.

57

finance parties to sue the obligors in other

jurisdictions, and does not negate the finance

parties’ submission to the jurisdiction of the

English Court. Were it otherwise, the first two

paragraphs of the LMA clause would be very

difficult to understand.Third, the correct construction of the LMA

clause has been considered by the Commercial Court in a number of cases, unrelated to schemes

of arrangement, and the views expressed by the

judges in those cases are inconsistent with the

provisional view expressed in Global Garden. For example, in Mauritius Commercial Bank Ltd v Hestia Holdings Ltd [2013] 2 Lloyd’s Rep 121 at[40], Popplewell J held that the LMA clause

involves a submission to the jurisdiction of the

English Court by the finance parties, even though

the clause is expressed to be for their benefit:“Clause 24.1 [the LMA clause] is for the benefit

of [the lender] in the sense that [the borrowers] are

obliged to sue in England but [the lender] is not. But that does not disapply clause 24.1(a) to [the

lender] completely. Where [the borrowers] bring

suit against [the lender] in England, clause 24.1(a) is not disapplied by the operation of clause 24.1(c).[The lender] is thereby agreeing to be sued in

England subject to the liberty conferred by clause

24.1(c). In those circumstances [the lender] has

agreed to be subjected to the exclusive jurisdiction

of the English courts, subject to its right to bring

claims (which may overlap) abroad pursuant to

clause 24.1(c). Were it otherwise, clause 24.1(a) would be superfluous: if clause 24.1(c) permitted

[the lender] to insist on suing or being sued

anywhere, or anywhere of competent jurisdiction, that would include England (given that this is an

English law agreement and forum conveniens is

conclusively determined by sub-clause (b)).”Popplewell J’s remarks have been cited with

approval by the Commercial Court in a number

of other cases – including, most recently, Commerzbank Aktiengesellschaft v Liquimar

Tankers Management Inc [2017] 1 Lloyd’s Rep

273, in which Cranston J held, after considering

a number of legislative materials and

authorities, that the LMA clause falls squarely

within Article 25 of the Judgments Regulation. Mauritius Commercial Bank is not cited in Global Garden, and Commerzbank was decided several

months later.In conclusion, it is suggested that the LMA

asymmetric jurisdiction clause falls within Article25 of the Judgments Regulation, and confersjurisdiction on the English Court to sanction ascheme against any creditors who are bound bythe clause. The same analysis may not apply toother bespoke clauses, e.g. the provision in VanGansewinkel.

ConclusionOn any view, the language used in Chapter II ofthe Judgments Regulation is ill-suited to schemesof arrangement. The valiant attempts ofpractitioners and judges to bring schemes withinChapter II often lead to something of a paralleluniverse, in which words take on unexpectedmeanings.

However, unless and until the Court is requiredto determine whether Chapter II applies toschemes at all, the Court will be faced with thedifficult task of shoehorning schemes into thevarious jurisdictional gateways set out therein.When approaching this task, it is hoped that theCourt will not seek to impose unnecessaryconstraints which go beyond the text of theJudgments Regulation itself, so as to avoid thecreation of artificial limitations on the schemejurisdiction.

As matters stand, it is unclear how theJudgments Regulation will be affected by Brexit.In the absence of a convention for theenforcement of judgments and the allocation ofcivil jurisdiction between the UK and EU, theperennial jurisdictional debates about schemes ofarrangement may finally be killed off: but so toowould the UK restructuring market, which reliesheavily on the automatic recognition of UKjudgments throughout the EU. The difficultdrafting of the Judgments Regulation may, onbalance, be a low price to pay.


On any view, the language used inChapter II of the JudgmentsRegulation is ill-suited to schemes ofarrangement

58

MADOFF CLAIM

On 23 August 2017 Mr Justice Andrew Jones QCof the Cayman Islands Grand Court deliveredhis judgment dismissing the claim brought byPrimeo Fund against two HSBC entities, Bankof Bermuda (Cayman) Ltd (“BBCL”) and HSBCSecurities Services (Luxembourg) SA (“HSSL”).Primeo was a Cayman Islands fund thatinvested with Bernard L Madoff InvestmentSecurities LLC (“BLMIS”), whilst BBCL andHSSL acted as Primeo’s administrator andcustodian. As explained below, whilst theJudge found that contractual duties had beenbreached, he found in favour of theDefendants on strict liability, causation,limitation, reflective loss, and contributorynegligence (in relation to BBCL).

The Madoff fraudOn 11 December 2008, Bernard Madoff wasarrested by the FBI and admitted carrying outwhat is now known to be one of the largestinvestment frauds in history. Over decades,Madoff accepted money from investmentclients which he purported to invest in USequities and Treasury Bills, producing steady

returns year after year. In fact, no investmentswere made; rather, it was a classic Ponzischeme in which money from new investorswas used to pay redeeming investors.

In their sophisticated enterprise, Madoff andhis associates used computer systems to workout after the market had closed what tradesshould have been executed to produce thepositive returns required for the numerousinvestment clients. Backdated individual tradeslips and monthly statements were producedand mailed out or faxed to clients. Countlessinvestors, sophisticated financial institutionsand service providers were deceived. Thescheme, and Madoff personally, were soconvincing that neither the Securities andExchange Commission or KPMG uncovered thefraud notwithstanding their on-siteinvestigations at BLMIS’ offices.

The fraud was facilitated by Madoff’sinsistence on BLMIS acting in a triple capacityas investment manager, executing broker andcustodian of the assets (the so called “TripleFunction”). Madoff also maintained a highlevel of secrecy regarding his purported

Primeo v HSBC:Madoff feeder fund claimdismissed by Cayman CourtToby Brown�reports on the Grand Court’s decision in Primeo Fund (in Official Liquidation) v.�Bank of Bermuda (Cayman) Ltd and HSBC Securities Services (Luxembourg) SA in which Tom�Smith QC,�Richard Fisher, William Willson�and Robert Amey�also appeared

59

its official liquidators, Primeo issued a claimin the Grand Court of the Cayman Islandsalleging BBCL and HSSL had breached theircontractual duties under the 1996Administration and Custodian Agreementsrespectively. It was claimed that if theDefendants had taken certain additional stepsin relation to the BLMIS investments, Primeowould have withdrawn those investmentsprior to the fraud being uncovered, andprofitably reinvested the monies elsewhere.On this basis Primeo claimed approximatelyUS$ 2 billion in damages.

The trial was heard between November


trading strategy. The risks associated withthese aspects of the BLMIS business modelwere seemingly accepted by thousands ofclients in return for being one of the lucky fewclients of Madoff (so they thought).

Currently Madoff is serving a 150-yearprison sentence, whilst a number of hisassociates have been convicted of involvementin the fraud. The combined estate of BLMISand Madoff continues to be liquidated in theUS, with substantial payments having beenmade to the investors who lost money. Forthose interested in Hollywood portrayals,Robert De Niro convincingly played Madoff(and Michelle Pfeiffer his wife) in HBO’s recentfilm The Wizard of Lies, whilst RichardDreyfuss and Blythe Danner starred in therecent ABC miniseries Madoff.

PrimeoTurning to the case at hand, Primeo wasestablished by Bank Austria in 1993 as an open-ended investment fund. From inception, itinvested with BLMIS, as well as making otherinvestments. Over time, Primeo increased theamount and proportion of its investments withBLMIS, ultimately placing substantially all ofits assets directly or indirectly with BLMIS.Primeo invested “indirectly” with BLMIS from2003 via shareholdings in other Madoff feederfunds, first Alpha and later Herald, who placedtheir assets with BLMIS. In May 2007, Primeoswitched all of its direct investments in BLMISfor a shareholding in Herald (the “in specietransfer”), and thereafter only investedthrough Herald and Alpha.

From 1996, BBCL acted as the Administratorof Primeo, and was required under anAdministration Agreement (in very briefsummary) to maintain the books and recordsof Primeo, and to calculate each month theNet Asset Value (“NAV”) per share. From 1993,HSSL acted as the Custodian of Primeopursuant to two successive CustodianAgreements, under which it was required tohold cash deposited in bank accounts and tosafekeep securities delivered to it.

Soon after the collapse of BLMIS, Primeoentered liquidation. In 2013, acting through

TOBY BROWN

60

MADOFF CLAIM

in which Primeo’s securities would be held,(b) use DTC’s Institutional Delivery (“ID”)System to provide independent informationon trades, and/or (c) establish a separateaccount at Bank of New York (“BNY”) in whichPrimeo’s Treasury Bills would be held.

Preferring the views of Primeo’s custodyexpert, the Judge held that these additionalsafeguards should have been recommended byHSSL to Primeo and therefore that HSSLbreached its contractual duties. The Courtacknowledged that none of these steps werestandard commercial practice. The Defendantsargued that none of the solutions were at thetime recommended in any of the industry orregulatory materials as methods for assetprotection (although the Judge found thesolutions were “readily available”), nor havethey been recommended since.

The Judge, however, held that the BLMISstructure was not addressed by normalcommercially acceptable practices because ofthe unique Triple Function. He reasoned thatthe normal procedures were ineffectivebecause the custodian did not reconcileinformation received from the manager orbroker. Given the operational risks inherent inBLMIS, the Court held it was negligent not tolook at procedures capable of producing the“normal result”. However, as discussed below,the breach was not causative, in particulargiven Primeo knew of, and accepted, the risksinherent in investing with BLMIS.

In respect of the period after the May 2007“in specie transfer”, Primeo did not allege anybreach of safekeeping duties in relation to itsshares in Alpha and Herald but claimed thatHSSL breached implied advisory and reportingduties. The Judge, however, accepted theDefendants’ arguments that it would becontrary to the terms of the CustodianAgreement to imply such terms.

Strict liabilityPrimeo also claimed that HSSL was strictlyliable pursuant to the Custodian Agreement forBLMIS’ negligent or wilful breaches of duty.The Defendants argued that the parties did notintend HSSL to become guarantor for Primeo’s

2016 and February 2017, and involved 10factual witnesses and 17 expert witnessesincluding on various issues of foreign law.

Custody claimPrimeo alleged that HSSL was the custodian ofthe BLMIS investments from inception butfailed to safekeep the assets, and that HSSLappointed BLMIS as sub-custodian under anunwritten sub-custody agreement from 1993and then formally in 2002 under a writtenSub-Custody Agreement. The 2002 Sub-Custody Agreement was governed byLuxembourg law, and the Court heardevidence from three different Luxembourglaw expert witnesses in relation to thecontested validity and effect of the agreement.

The Judge rejected the assertion that HSSLwas custodian of the BLMIS investments priorto 2002, holding instead that BLMIS wascustodian directly to Primeo from 1993pursuant to the Brokerage Agreements inplace between Primeo and BLMIS. However,the Judge held that the Sub-CustodyAgreement executed by HSSL and BLMIS in2002 was effective to constitute BLMIS as sub-custodian as part of an apparent “impliedtri-partite agreement” between BLMIS, Primeoand HSSL.

Primeo alleged that HSSL breached itscontractual obligations in relation to theappointment and ongoing monitoring ofBLMIS as a sub-custodian. The CustodianAgreement in particular required that sub-custodians be required to implement the“most effective safeguards” to protect Primeo’sassets. The key issue was whether areasonably competent global custodian wouldhave appointed and continued to appointBLMIS as sub-custodian without requiringthat BLMIS (a) establish a separate accountwith the Depository Trust Corporation (“DTC”)

The Primeo trial involved 10 factualwitnesses and 17 expert witnesses

61

multi-million dollar exposure to BLMIS,especially where Primeo had selected Madoffand initially appointed BLMIS. The GrandCourt, however, considered that, as a matter ofconstruction, the Custodian Agreement didimpose strict liability.

Nonetheless, the strict liability claim wasrejected on the basis that no loss was sufferedfrom a breach of duty for which HSSL wasliable (to be contrasted with the loss caused byPrimeo’s own decision to place funds withBLMIS for investment). In particular, BLMISmet its obligations as sub-custodian byreturning cash to HSSL when requested fromtime to time, and in May 2007 by effecting the“in specie transfer” already mentioned.Accordingly, there was no default or loss forwhich HSSL was liable on or prior to 1 May2007. Further, from May 2007, BLMIS was no

longer sub-custodian of Primeo’s assets.The result of the “in specie transfer” was

subsequently recognised by the BLMIS trusteewhen it reached a settlement with Primeo andHerald, under which Herald was entitled tomake a customer claim in the BLMISliquidation on the basis it acquired all ofPrimeo’s rights. Indeed, the validity of the “inspecie transfer” was upheld in otherproceedings between Primeo and Herald’sadditional liquidator where the Grand Courtheld that Primeo had validly subscribed forshares in Herald valued as at 2 May 2007 at$465.8 million.

Administration claimPrimeo claimed that BBCL as Administrator(acting through HSSL as delegate) breached itsduties in connection with the determination of


ROBERT DE NIRO AS BERNIEMADOFF IN HBO’S BIOPIC,

RELEASED THIS YEAR, WIZARD OF LIES

62

MADOFF CLAIM

the NAV and in relation to the keeping ofaccounts and books and records. Under theterms of the Administration Agreement, BBCLwould only be liable if it was grossly negligentor in wilful default of its duties.

The Judge stated that administrators are notexpected to perform audit procedures, but areconcerned to satisfy themselves that thepublished NAV is accurate. There was nocriticism of BBCL in relation to the pricing oftrades reported by BLMIS; rather it was allegedthat a reasonably competent administratorwould have satisfied itself about the existenceof the BLMIS investments by reconcilinginformation obtained from BLMIS to anindependent source (so called “independentconfirmation”).

The Judge rejected the assertion it was animplied term of the Administration Agreementthat the Administrator would confirmindependently the correctness of theinformation received from BLMIS as to

transactions and assets. The parties must haveknown that it would not be possible to verifythis information as long as the BLMIS businessmodel remained unchanged.

Yet the Judge found that the failure of BBCLto address the fact that there was only a singlesource of information in relation to the BLMISinvestments was negligent. This wasnotwithstanding the evidence of theDefendants’ administrator expert from hishands-on experience in Cayman that it wascommonplace to rely upon single sourcereporting. The Judge decided that single sourcereporting for a Triple Function model such asBLMIS was unique, and the inherent high riskof fraud “must have been manifestly obvious toall concerned, including the funds’ promotersand investment managers/advisers”.

The Court found there was no grossnegligence and therefore no liability until 2005.At this point HSSL as Custodian issued a“custody confirmation” to Primeo’s auditors,Ernst & Young (“E&Y”). The Judge found that

TOM SMITH QC

RICHARD FISHER

63

E&Y (who did not give evidence at trial) wereno longer willing to rely upon the work ofBLMIS’ auditors, Friehling & Horowitz. He heldthat BBCL could no longer rely upon E&Y’sunqualified annual audit opinions becausethey were based to a material extent oncustody confirmations issued by HSSL, whowas unable to independently reconcile theBLMIS information. BBCL was therefore foundto be grossly negligent in the preparation of theNAV from 2005.

As already stated, from May 2007, Primeoinvested only in Alpha and Herald rather thandirectly with BLMIS. Ordinarily anadministrator of a fund of funds will rely uponthe NAVs published by the underlying fundsand there will be no “look through” torecalculate their NAVs. However, the Judgefound that BBCL was grossly negligent becauseHSSL’s work as administrator of Herald andsub-administrator of Alpha was flawed for thesame reasons, and that BBCL knew or ought tohave known this.

The Judge, however, rejected Primeo’sadditional claims based on preparation by theAdministrator of Primeo’s books and records,and in relation to alleged “advisory andreporting” duties.

CausationPrimeo claimed that if the Defendants hadproperly discharged their duties, Primeo’sdirectors would have decided to withdraw theassets managed directly or indirectly by BLMISand would have invested them elsewhere. TheJudge decided Primeo had not established thatthe breaches were an effective or dominantcause of the loss. Three key scenarios wereanalysed in the judgment.

First, in relation to the custody claim, theCourt considered the position in 2002 if theDefendents had recommended to Primeo thatBLMIS be required to put in place separate DTCand BNY accounts and the ID System. Primeo,however, had not tendered evidence from the

ROBERT AMEY


WILLIAM WILLSON

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MADOFF CLAIM

key decision makers in Primeo or itsinvestment advisers, nor obtained documentsfrom Bank Austria. Of the three Primeodirectors that gave evidence, the Judge foundthe evidence of the director who commentedon causation to have been “unsatisfactory” andthat he was far removed from the decision-making process. In any event, the Judge statedthat the circumstantial evidence pointed to theconclusion that the directors “were firmlycommitted to Madoff” and that they would have“worked hard” to avoid withdrawing fromBLMIS.

Second, in relation to breaches in 2005, theCourt considered a scenario in which “custodyconfirmations” had not been issued to E&Y.The Judge considered that Madoff might wellinstead have permitted E&Y to access BLMIS’books and records, given that one year later hedid allow KPMG access to conduct a fraudreview for HSBC. Even if Madoff had refused,the Judge decided that in all likelihood Primeowould still have continued with the sameinvestment strategy by investing in otherMadoff feeder funds.

Finally, the Court considered breaches in2007 when the control of Primeo was soon tobe transferred from BA Worldwide in Austriato Pioneer in Ireland, and therefore thedecision regarding withdrawal from BLMISwould have been made by the new board. Noevidence had been adduced from the newdecision makers and if anything the causationanalysis was “even more speculative” than thatapplicable to 2005. The Judge commented thatan internal report showed that Pioneer wasaware of the operational risks associated withBLMIS, and notwithstanding Pioneer musthave had some concerns regarding the BLMISmodel, it continued to maintain Primeo as aMadoff feeder fund to the very end.

Contributory negligenceIn the event Primeo made out a causationcase, the Defendants relied on a defence ofcontributory negligence under section 8 of theTorts (Reform) Law (1996 Revision). The Courtheld that the liability for breach of theAdministration Agreement was the same andco-extensive with liability under the tort ofnegligence, and therefore a plea ofcontributory negligence was available toBBCL. However, the Judge held this was notthe case with respect to HSSL in relation to theCustodian Agreement.

Based on his assessment of the evidence, theJudge decided that “Primeo was, to a verysubstantial degree, the author of its ownmisfortune”. Primeo’s directors were industryprofessionals, and decided to establish PrimeoSelect with BLMIS having the Triple Functioneven though the “relatively high operationalrisks inherent in the BLMIS business modelwere obvious”. The directors accepted Madoffwould not change his business model, evenafter the risk of single source reporting wasbrought to their attention. The Courtaccordingly would have reduced any award ofdamages against BBCL by 75 percent.

LimitationThe Defendants relied upon section 7 of theLimitation Law, which they contended barredcauses of action that accrued prior to 20February 2007 (i.e. 6 years before issue).Primeo’s first response was that theDefendants were in continuous breach oftheir duties. Whilst the Judge held that certainduties were of a continuing nature in thesense of being performed periodically, therewas no continuing breach in the sense itoccurred on a daily basis. In any event, theprinciple of continuing breach could onlyenable Primeo to recover damage caused after20 February 2007.

Primeo’s second response was to allegedeliberate concealment and deliberate breachof duty in order to extend the limitationperiod under section 37 of the Limitation Law.The Judge rejected Primeo’s contention therewas positive concealment on the facts, and

The Judge decided that “Primeo was, toa very substantial degree, the author ofits own misfortune”

65

also rejected there was any concealment byomission, including because there was noduty to report matters to Primeo and giventhere was an “equivalence of knowledge”regarding the operational risks inherent inthe BLMIS model.

Primeo argued that the Defendantsrecklessly breached their duties and that thiswas to be treated as deliberate concealment.Applying the House of Lord’s decision in Cavev Robinson Jarvis & Rolf [2002] UKHL 18, theJudge held that deliberate rather than recklessbreach was required, and that the Defendantshad not deliberately breached their duties.Causes of action that accrued prior to 20February 2007 were therefore statute barred.

Reflective lossThe Defendants relied on the rule againstreflective loss on the basis that Alpha andHerald, the funds in which Primeo invested,were the proper parties to bring claims inrelation to the loss claimed by Primeo. Therule is that a shareholder (Primeo) may notrecover loss that is merely reflective of a losssuffered by the company (Herald/Alpha), i.e.loss which would be made good if thecompany enforced its rights in full against thedefendant wrongdoer (HSSL). This principlestems from the Court of Appeal’s decision inPrudential Assurance Co Ltd v NewmanIndustries Ltd (No. 2) [1982] Ch 204,subsequently considered by the House ofLords in Johnson v Gore Wood [2002] 2 AC 1.

The rule is designed to guard against doublerecovery and to ensure the company is able toprosecute its claims for the benefit of all itsshareholders and creditors. The Judgeaccordingly held that the principle does notdepend on the plaintiff being a shareholder atthe time the cause of action arose. Rather, therule must be applied to claims actually madein the shareholder’s action that are reflectiveof the company’s loss. Accordingly, the rule iscapable of application to Primeo even thoughprior to May 2007, Primeo invested directlywith BLMIS.

The principle requires the Court to considerthe merits of the company’s (i.e. Herald’s and


Alpha’s) claims. The Judge rejected thesuggestion that he must be satisfied on thebalance of probabilities that the claims wouldsucceed, as Primeo argued, holding ratherthat the claims needed to have “a realprospect of success”, as the Defendantscontended.

Herald in fact has an ongoing claim inLuxembourg for approximately US$ 2 billionagainst HSSL, who acted as its custodian andadministrator. The parties’ Luxembourg lawexperts agreed that Herald has a real prospectof success in relation to its breach of dutyclaim. Alpha has issued ongoing proceedingsin Luxembourg against HSSL, who acted as itssub-custodian and sub-administrator,claiming US$ 346 million. Alpha has alsoissued cross-claims in the US BankruptcyCourt and proceedings in Bermuda in whichHSSL is a defendant.

Having heard the evidence at trial, theJudge decided it was “clear that the factualcircumstances relating to the claims of Heraldand Alpha (the company claims) are practicallythe same as those relating to Primeo’s claim(the shareholder claim)”. Further, he decidedthat the merits of the claims of Primeo, Heraldand Alpha are comparable even if they cannotbe said to be identical. The Judge accordinglyheld that the claims of Herald and Alpha havea realistic prospect of success and thereforePrimeo’s claims are barred by the rule againstreflective loss.

ConclusionFor the reasons summarised above, the GrandCourt dismissed Primeo’s claim. Shortlybefore the Digest went to press, Primeo filed anotice of appeal with the Cayman IslandsCourt of Appeal.

Shortly before the Digest went topress, Primeo filed a notice of appealwith the Cayman Islands Court ofAppeal.

66

Requiredreading...Hamish Anderson: The Framework of Corporate Insolvency Law,reviewed by Simon Mortimore QC

It is now more than thirty years since theInsolvency Act 1986 came into force. HamishAnderson, like me, spent the first ten years ormore of his practice as an insolvency lawyerhaving to contend with the old law aboutreceivership of companies and liquidation,the essential features of which could betraced back to the Companies Act 1862 withlittle change. That law was to be found at theback of venerable text books on company law(Palmer’s Company Law and Gore-Browneon Companies), in notes to the provisions ofthe Companies Acts (Buckley on theCompanies Acts), in the winding-up volumeof Palmer’s Company Precedents or, forreceivership, in Kerr on Receivers, whichdevoted most of its text to courtappointments, rather than the more usual outof court appointments. For a more roundedguide to liquidation law and practice, it wasoften more profitable to turn to theoutstanding Australian text book, McPherson:The Law of Company Liquidation (2nd ed,1979).

The publication of the Cork Report onInsolvency Law and Practice (Cm 8558) inJune 1982 was a watershed moment in theunderstanding of insolvency law. Not only didit recommend much needed reforms, many ofwhich were enacted in the Insolvency Acts1985 and 1986, but it also provided a clearand authoritative summary of the distinctstructures of corporate and personalinsolvency law as they then stood. That

summary was extremely useful topractitioners, but the corporate insolvencylandscape has changed dramatically since1982. Apart from the reforms introduced bythe 1986 Act and subsequent amendments toit, the growth in corporate insolvency work,often involving cases of vast scale andcomplexity (BCCI, Maxwell, Barings, Enron,Lehman etc), has led to numerousjudgments, which have developed, refined orreassessed our understanding of corporateinsolvency law. These developments haveencouraged an exponential growth in booksand articles about corporate insolvency law,including books that identify and discuss itsprinciples (Goode: Principles of CorporateInsolvency Law (4th ed, 2011) and Fletcher:The Law of Insolvency (5th ed, 2017)).

Hamish Anderson’s The Framework ofCorporate Insolvency Law (OUP, July 2017) isdifferent to all that post-1986 literature. As theauthor says in his preface, his book is neithera text book nor a reference book, but isintended to complement both. Instead, it is anauthoritative, concise and clear exposition ofthe essential features of corporate insolvencylaw. Where it is possible to do so, the bookidentifies a rational explanation of the formthat the rules and institutions of moderncorporate insolvency law take or, where thatcannot be done, it provides a historicalexplanation of the current state of the law. Inthis respect, the book fulfils a similar functionto the summary of insolvency law in the Cork

Report. Having understood the essentialfeatures of the subject, as described byHamish, the practitioner may exploreparticular issues in more detail, without fear oftaking a wrong turn or getting lost.

Hamish Anderson is well-qualified toprovide this authoritative guidance. He haspracticed in corporate insolvency law formore than forty years, first as a partner ofBond Pearce in Plymouth, where he wasrecognised as the best insolvency lawyer inthe South West, and then at Norton RoseFulbright in London, where he headed theinsolvency and restructuring team until heretired as a partner in 2016. During this time,Hamish became a great friend of SouthSquare, working with me and many othermembers of South Square on importantcases, including Re HIH Casualty andGeneral Insurance Ltd1 in the House ofLords. He has put his exceptionalunderstanding of corporate insolvency law togood use by assisting the Government onreform projects (including the Restated ECInsolvency Regulation and the InsolvencyRules 2016) and by writing about thesubject.2

The first five chapters set the scene;describing the functions and objectives ofinsolvency law, the concept of insolvencyproceedings, the meaning of insolvency andthe sources of corporate insolvency law. Indiscussing the concept of insolvencyproceedings, Hamish suggests that they havefour defining characteristics, which distinguishthem from other proceedings: (i) they arecollective, (ii) they are premised on the actualor anticipated insolvency of the subjectcompany, (iii) the purpose of the proceedingsmust be either terminal or reorganizational,and (iv) there must be some element ofofficial control over the subject company. Hisdiscussion of actual and anticipatedinsolvency of the subject company highlightsthe fact that it is only in the last ten years orso that the courts have explored in detailwhat these concepts mean.3 The next fourchapters describe the types of insolvency

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1/. [2008] 1 WLR 852, HL.2/. E.g. as a joint editor of Lightman & Moss: The Law of Administrators and Receivers of Companies (6th ed, 2017).3/. Re Cheyne Finance plc [2008] Bus LR 1562; BNY Corporate Trustee Services Ltd v Eurosail-UK-3BL plc [2013] 1 WLR 1408, SC; Re Casa Estates (UK) Ltd [2014] 2 BCLC 49, CA; Evansv Jones [2017] Ch 1, CA.

BOOK REVIEW

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proceedings (liquidations, administrationsand CVAs).

Chapter 10 explains that a consequence ofproceedings being collective is that creditors’rights are a class remedy. This limitation onindividual creditors’ rights has often beenoverlooked in the past. For example, Hamishcites, as the leading case on the applicationof the class remedy principle to the power ofcreditors to requisition a meeting, Re Baringsplc (No 6),4 where the majority creditorsrequisitioned a meeting in the confidentexpectation that it would resolve to removethe liquidators and replace them with personsof the majority creditors’ choosing. They werethwarted by the class remedy principle, whichled Sir Andrew Morritt V-C, relying on two oldbankruptcy cases,5 to direct the liquidatorsnot to convene the meeting. If, in 2001, themajority creditors and their lawyers had beenable to consult Hamish’s book, they mighthave acted differently.

After three chapters discussing office-holders, the jurisdiction of the court and theregulation of insolvency practice, Hamishmoves on to consider the insolvent estate,transaction avoidance, investigation andwrongdoing. Chapter 15 about transactionavoidance is particularly illuminating, inidentifying three types of avoidance: (i)retentive avoidance (Section 127 of theInsolvency Act, the anti-deprivation and paripassu rules, etc); (ii) restorative avoidance(preferences at undervalue, transactions atundervalue or defrauding creditors etc); and(iii) dispositive avoidance (disclaimer). AsDavid Richards LJ points out in his foreword,the unanimous decision of the SupremeCourt in Akers v Samba Financial Group6

was handed down after Hamish’s book hadbeen completed. It would be interesting knowwhether Hamish anticipated the SupremeCourt’s decision that Section 127 does not

apply to the disposition by the legal owner ofproperty beneficially owned by a companysubject to a winding-up petition, or whether,like many if not most insolvency lawyers, heassumed that it did.

After a chapter devoted to phoenixism andpre-packing, Hamish moves on to discuss thedistribution waterfall, including thetransformative cases of Toshoku Finance UKplc,7 about the mandatory nature of the rulesabout liquidation expenses, and Re NortelGmbH,8 about administration expenses andcontingent claims, and Jervis v Pillar Denton,which restored orthodoxy in the application ofthe Lundy Granite principle.9 The unexpectedsurplus of assets in the Lehmanadministration has raised many issues aboutpriorities, subordination and claims toparticipate in the surplus. Hamish describessome of the conclusions reached in theLehman cases, but, in view of the outstandingappeal to the Supreme Court, Hamish wiselyavoided discussion about the range of non-provable claims. While it is now clear that acreditor cannot assert a non-provable claimfor exchange rate loss between theadministration or liquidation date andpayment date, because the Insolvency Rulesare a complete code for currency conversionclaims,10 the extent of the range remainsunresolved.11

Hamish concludes with a well-organisedchapter on cross-border insolvency in whichhe succeeds in making a difficult subjectseem entirely logical and straightforward. Hebegins with a discussion of modifieduniversalism, which he describes as theunilateral pursuit by a court of the goal of oneset of insolvency proceedings, applicable toall the debtor’s assets and liabilities, so far aspossible, having regard to local laws. Sincethe courts’ views on how far that goal isattainable have fluctuated, Hamish wisely

takes the cases chronologically, letting thejudges speak for themselves by quoting keypassages in the judgments.12 Havingdescribed the underlying principle of modifieduniversalism, Hamish describes the sourcesof cross-border insolvency law (the EUInsolvency Regulations, the Cross-BorderInsolvency Regulation 2006, Section 426 ofthe Insolvency Act and the common law). Thisis followed by a discussion of co-operationand communication between courts, focusingon the trans-Atlantic telephone calls betweenDavid Richards J and US bankruptcy judges inthe T&N and Lehman cases. Finally, there is adiscussion about English proceedings inrespect of foreign companies and the extra-territorial effects of English proceedings.

In short this is a valuable book, which allpractitioners in corporate insolvency lawshould read and consult. I foresee that it willoften be used in crafting written submissionsto the court. As a result, Hamish’s concise andaccurate explanation of the law may becomeembedded in judgments and thus part of ourcorporate insolvency law.

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4/. [2001] 2 BCLC 159.5/. Re Mansel (1887) 19 QBD 679, CA; Re Burn [1932] 1 Ch 247, CA.6/. [2017] UKSC 6.7/. [2002] 1 WLR 671, HL.8/. [2014] AC 209, HL.9/. [2015] Ch 87, CA.10/. Joint Administrators of LB Holdings Intermediate 2 Ltd v Joint Administrators of Lehman Brothers International (Europe) [2017] 2 WLR 1497, SC.11/. Much turns on the difference of view, expressed obiter, between Lords Neuberger, Kerr and Reed on the one hand and Lords Clarke and Sumption on the other hand on the question ofwhether payment in full of the proved debt in effect discharges the contractual obligation and precludes any further non-provable claim under the contract.12/. Cambridge Gas Transportation Corpn v Official Committee of Unsecured Creditors of Navigator Holdings plc [2007] AC 508, PC at [16], [22]; Re HIH Casualty and General Insurance Ltd[2008] 1 WLR 852, HL, at [30]; Rubin v Eurofinance SA [2013] 1 AC 236, SC, at [16]; Singularis Holdings Ltd v PricewaterhouseCoopers [2015] AC 1675, PC, at [19]; Stichting ShellPensioenfonds v Krys [2015] AC 616, PC.

‘A VALUABLE BOOK’

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EU CASES

In the South Square Digest issue forJune 2017 at page 58 we carried adetailed summary of the AdvocateGeneral’s Opinion in this case. HisOpinion has been followed by theCourt of Justice of the EuropeanUnion, together with an extra reasonwhich may be of significance in othertypes of case.

To summarise the case, the Dutchpre-pack method is to appoint both aproposed insolvency judge and aprospective insolvency administratorand also to prepare a pre-pack whichis to come into force as soon asinsolvency proceedings are filed. Thequestion was whether such aproceeding fell within the insolvencyexception in Directive 2001/23 onsafeguarding employees’ rights in theevent of transfer of undertakings. Thegeneral rule is that employeecontracts are transferred upon atransfer of the undertaking, but thereis a special insolvency exceptionallowed by Article 5(1) of theDirective. The key requirements ofArticle 5(1) are that, for theinsolvency exemption to apply, thetransferor must be the subject ofbankruptcy or an analogousinsolvency proceedings, that thesemust have been instituted with aview to the liquidation of the assets of

the transferor and that they must beunder the supervision of a competentpublic authority.

In the Smallsteps case, the pre-packinvolved the transfer of the viableparts of the business and the relevantemployees into a new entity. The pre-pack having been prepared inaccordance with Netherlandscustomary procedure, the debtor on4th July 2014 filed an application forsuspension of payments, which wasamended on 5th July 2014 to anapplication for a declaration ofinsolvency, which was granted thesame day. Also on 5th July 2014, thepre-pack was signed up as betweenthe insolvency administrator and theNewco, Smallsteps. Under the termsof the pre-pack Smallsteps purchased250 of the childcare centres operatedby the transferor and undertook tooffer employment to almost 2,600employees of the transferor. On 7th

July 2014, the insolvencyadministrator dismissed all thetransferor’s employees.

A union and four individualapplicants who worked in childcarecentres taken over by Smallsteps butwho had not been offered newcontracts of employment brought anaction seeking a declaration that theywere protected under Directive

2001/23 and should be regarded asworking for Smallsteps.

The CJEU agreed with the Opinionof the Advocate General to the effectthat the pre-pack was a procedureaimed at ensuring the continuation ofthe undertaking in question andtherefore did not fall within theinsolvency exception. The court citedwith approval the distinction madeby the Advocate General betweenproceedings instituted with a view tothe liquidation of the assets of thetransferor on the one hand, andprocedures aimed at ensuring thecontinuation of the undertaking onthe other:-

“… A procedure is aimed atensuring the continuation of theundertaking where that procedure isdesigned to preserve the operationalcharacter of the undertaking or of itsviable units. By contrast, a procedurefocussing on the liquidation of assetsis aimed at maximising satisfaction ofcreditors’ collective claims. Althoughthere may be some overlap of thesetwo objectives within the aims of anygiven procedure, the primaryobjective of a procedure aimed atensuring the continuation of theundertaking is, in any event, thesafeguarding of the undertakingconcerned.”

EU/EEA LAW UPDATE

Gabriel Moss QC looks at Pre-pack cases in the European Economic Area

GABRIEL MOSS QC

Pre-packs further unpackedFederatie Nederlandse Vakvereniging v Smallsteps BV Case C-126/16, Judgment of the CJEU of 22 June 2017

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The CJEU considered that in thecase of the Smallsteps pre-pack theaim was to prepare the transfer of theundertaking “down to its every lastdetail” in order to enable a swiftrelaunch of the undertaking’s viableunits once insolvency was declaredand to avoid the disruption thatwould result from an abruptcessation of the undertaking’sactivities on the day of thedeclaration of insolvency. In thesecircumstances, the procedure “… isnot ultimately aimed at liquidatingthe undertaking …”. Accordingly,such a procedure cannot justify theloss of employment rights on thepart of the employees. Moreover,the mere fact that the pre-pack mayalso be aimed at maximisingsatisfaction of the creditors’collective claims does not make thisa procedure instituted with a viewto the liquidation of the assets of thetransferor within Article 5(1) of theDirective 2001/23. The “primaryobjective” is the safeguarding of theinsolvent undertaking.

In addition to approving theAdvocate General’s reason forholding that the pre-pack did notqualify as an exception to theprotection of employment rights, theCJEU also pointed out that thepreparatory parts of theNetherlands pre-pack procedure,which preceeds the declaration ofinsolvency, has no basis in nationallegislation. To that extent, the pre-pack procedure is not carried outunder the supervision of a court.Although the prospective insolvencyadministrator is appointed by acourt, both he and the prospectivesupervisory judge have no formalpowers. Accordingly, they’re notsupervised by a public authority.That constitutes a further reasonwhy the Netherlands form of pre-pack procedure does not qualify forthe Article 5(1) insolvencyexception.

This additional reason gives rise

to a question as to whether theEnglish Creditors’ VoluntaryLiquidation qualifies for theinsolvency exception in Article 5(1).The voluntary liquidator is notappointed by the court, although theCVL proceedings are regulated bystatute and the liquidator hasformal statutory powers.

The first point on this is that inorder to be effective at the EU levela CVL requires confirmation by thecourt: see Annex A to Regulation(EU) 2015/848 of 20 May 2015 onInsolvency Proceedings (Recast). Ifconfirmation by the court isobtained, then there will besupervision by a public authority.

Otherwise, if no confirmation bythe court is obtained, the questionwill arise as to whether the potentialsupervision by the court under thecourt’s powers in the Insolvency Act1986 constitute supervision by

SMALLSTEPS IS A CHAIN OF NURSERIES THAT EMERGED FROM THE ASHES OF THE ESTRO GROUP

public authority for this purpose. Itmay be relevant that in Recital (1) ofRegulation 2015/848 it states inrelation to “control or supervisionof a court”:-

“In this context, the term“control” should include situationswhere the court only intervenes onappeal by a creditor or otherinterested parties.”

In this context, the use of theword “appeal” should not berestricted to the technical Englishmeaning: the concept plainly refersto applications by a creditor orother interested parties. If that isright, for the purposes of theDirective 2001/23 a proceeding couldbe regarded as being supervised by apublic authority if it is under the“control” of a court in the sense that acourt will only intervene if anapplication is made by a creditor oranother interested party.

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EU CASES

In this case, two Italian companies(Vinyls and Mediterranea) hadentered into a contract governed byEnglish law, for the transportation ofgoods aboard an Italian-flaggedvessel. Vinyls made payments underthe contract to Mediterranea, butthen went into liquidation in Italy.Vinyls’ liquidator alleged that certainpayments made by Vinyls amountedto preferences under Italianinsolvency law, and commencedproceedings in Italy againstMediterranea, seeking to claw backthe relevant payments. Mediterraneaargued, by way of defence, that therelevant payments were governed byEnglish law (as the law governing thecontract) and so the English law ofpreferences was applicable. UnderEnglish law, the relevant paymentscould not be clawed back (it appearsthat Italian law focussed onMediterranea’s state of mind whenreceiving the payments, whereasEnglish law focussed on Vinyls’ stateof mind when making the payments).

The case was governed by the oldInsolvency Regulation (1346/2000),although the relevant provisions arematerially the same in the RecastRegulation (2015/848). Article 4(2)(m)(now Article 7(2)(m) of the RecastRegulation) provided that

“The law of the State of the openingof proceedings shall determine …the rules relating to the voidness,nullity, voidability orunenforceability of legal actsdetrimental to all the creditors”. However, Article 13 (now Article 16

of the Recast Regulation) providedthat

“Article 4(2)(m) shall not applywhere the person who benefitedfrom an act detrimental to all thecreditors provides proof that thesaid act is subject to the law of aMember State other than that of the

State of the opening of proceedings,and that that law does not allow anymeans of challenging that act in therelevant case”.Also said to be relevant was the

Rome I Regulation, Article 3:“(1) A contract shall be governed bythe law chosen by the parties……“(3) Where all other elementsrelevant to the situation at the timeof the choice are located in a countryother than the country whose lawhas been chosen, the choice of theparties shall not prejudice theapplication of provisions of the lawof that other country which cannotbe derogated from by agreement.”The Italian court referred five

questions to the CJEU:1. Did it matter that Mediterraneahad raised its Article 13 argumentoutside the time limits prescribedby Italian procedural law?2. When deciding whether (underArticle 13) the law applicable to theact “does not allow any means ofchallenging that act in the relevantcase”, is the focus on whether suchacts are capable of beingchallenged in general, or whetherthe particular act in question iscapable of being challenged on thespecific facts of the case?3. Does the Article 13 exceptionapply where two companies basedin the same Member State haveentered into a contract governed bythe law of another Member State?4. Did the present case involvea conflict of laws?5. Does the exception in Article3(3) of Rome I referring to“provisions … which cannot bederogated from by agreement” meanthat the parties’ choice of Englishlaw cannot override the operationof Italian insolvency law?The CJEU held that the first

question was a matter of Italian law,provided that Italian law observedthe principles of equivalence (the lawmust not be any less favourable whenexercising EU law rights than whenexercising local law rights) andeffectiveness (the law must not makeit excessively difficult or impossiblein practice to exercise the rightsconferred by EU law).

In respect of the second question,the CJEU observed that it had alreadyanswered this question in NikeEuropean Operations Netherlands,C‑310/14 (see the March 2016 editionof the South Square Digest at p.82):the focus is on whether theparticular act in question is capableof being challenged on the specificfacts of the case. Any otherconstruction would deprive Article13 of its effectiveness, since anydeveloped system of insolvency lawprovides a general mechanism forreversing unlawful preferences.

The third to fifth questions weremore difficult, and were examinedtogether. The contract was governedby the Rome Convention, not theRome I Regulation, since it wasconcluded prior to 17 December2009. But the CJEU does not havejurisdiction under the RomeConvention. The CJEU thereforeconsidered what the answer wouldbe if Rome I applied.

The third to fifth questionsessentially asked whether, when twoItalian companies enter into acontract, and all other elements ofthe contract and the parties’relationship point to Italy, Article 13can be relied upon simply becausethe parties have chosen English lawto govern their contract. The CJEUheld that Article 3(3) of Rome I isirrelevant when considering whetherArticle 13 of the InsolvencyRegulation applies. However, theCourt also noted that EU law cannotbe relied on for abusive orfraudulent ends.

In considering whether EU law is

Vinyls Italia SpA (in liquidation) v Mediterranea di Navigazione SpA(C-54/16)(CJEU, Fifth Chamber)

71


being relied on for abusive orfraudulent ends, the Court observedthat there is an objective and asubjective element to the test. It mustbe apparent that the purpose of therelevant EU rules has not beenachieved, and that the essential aimof the relevant transactions was toobtain an undue advantage.Accordingly, Article 13 may only bedisregarded in a situation where itwould appear objectively that theobjective pursued by thatapplication, in this context, ofensuring the legitimate expectationof the parties in the applicability ofspecific legislation, has not beenachieved, and that the contract was

made subject to the law of a specificMember State artificially, that is tosay, with the primary aim, not ofactually making that contract subjectto the legislation of the chosenMember State, but of relying on thelaw of that Member State in order toexempt the contract, or the actswhich took place in the performanceof the contract, from the applicationof Italian law.

The Court concluded by observingthat the mere fact that the partiesexercised the option to choose, in asituation such as that at issue in themain proceedings, the law of aMember State other than the MemberState in which they are established

does not create any presumptionregarding an intention to circumventthe rules on insolvency for abusive orfraudulent ends. Accordingly, theanswer to the third to fifth questionsis that Article 13 of Regulation No1346/2000 may be validly relied uponwhere the parties to a contract, whohave their head offices in a singleMember State on whose territory allthe other elements relevant to thesituation in question are located,have designated the law of anotherMember State as the law applicable tothat contract, provided that thoseparties did not choose that law forabusive or fraudulent ends, thatbeing a matter for the Italian court.

MEDITERRANEA DI NAVIGAZIONE SPA IS A FAMILY-RUN SHIPPING COMPANY ESTABLISHED IN 1910. THEIR VESSEL ROMAGNA WAS ALLEGEDLY THE FIRST IN EUROPE - ANDPERHAPS THE WORLD - TO USE DIESEL RATHER THAN STEAM PROPULSION

72

SIMON MORTIMORE QC

Simon Mortimore QC has announced hisretirement from full time practice at the Bar,after a long and successful career spanning 43years at South Square. Happily, Simon will notbe leaving us completely. He will remain as anAssociate Member of South Square and willcontinue to act, and to accept instructions toact, as an expert witness in litigation outsidethis jurisdiction.

Called to the Bar in 1972, Simon joinedChambers in 1974, when it operated as acomparatively small common law set from 3Paper Buildings. He took silk in 1991.

As a Junior, Simon had the distinction ofbeing involved in at least three legal firsts. AsAndrew Morritt QC’s junior, he sought andobtained the first extraterritorial Anton Pillarorder, reported as Cook Industries Inc v Galliher[1979] Ch 439. As readers may recall, that wasthe case where a judgment creditor applied foran order for inspection of the Parisianapartment acquired by Mr Galliher in his ownname but allegedly on behalf of a Mr Sarlie, afraudster with a taste for the high life and aneye for Picasso, of whose paintings he ownedtwenty. The Picassos and other objets d’art,previously residing in New York with Mr Sarlie,had been removed to France in order to avoidcreditors’ claims, or so it was alleged. Whetherthe Picassos remained or had been sold andreplaced was unknown, but it was believed thatmany, or their replacements, had foundsanctuary in the Paris apartment. Hence thedesire to see what was inside. Templeman J,being satisfied that he both could and should,ordered this Pandora’s Box to be opened forinspection.

What was revealed is not to be found in theChancery reports. Suspense can sometimes becruel: it is often the case that, as barristers, wedo not know what happened next. In this case,however, we can now disclose that, although ofPicassos there was no sign, there was a valuablecollection of tribal art; and that was sufficient.

The administration regime was introduced bythe Insolvency Act 1986 when it came into forceon 29 December 1986. Late in the afternoon on16 January 1987, it was Simon who applied forand obtained from Vinelott J the firstadministration orders, in relation to membersof the Charnley Davies group of companies.

Incidentally, it was while addressing VinelottJ, who was bed-bound with a bad back, thatSimon found himself making submissions (thistime in relation to the administration of British& Commonwealth) to a distinctly unusual,possibly unprecedented, tribunal comprisingthe Judge, well tucked-up beneath thebedclothes, and his faithful dog, a springerspaniel. There is a legend within Chambers thatSimon found himself in competition with thebed-bound Judge’s restless companion. Withoutpausing for breath in his submissions or forjudicial intervention, all the while displayingthe level of expertise generally to be expectedof experienced Counsel but rarely witnessed inthe court-room (and for which there isapparently no space on the current applicationform for silk), Simon grabbed the troublesomecanine by the scruff of its neck and removed itwithout ceremony from the judicialbedchamber.

Colourful as this story is, however, Simonhimself maintains that it is apocryphal. What

Simon Mortimore QC retiresfrom full-time practice

73


actually happened, as Simon recalls, is thatVinelott J’s dog – evidently an uncommonlywell-behaved springer – sat silently andrespectfully on the pillow beside his master,and followed proceedings with rapt attention.Be that as it may, no law report currentlyavailable records the canine contribution to theadministration of justice.

Finally, to revert to Simon’s “firsts” as aJunior, this time with Anthony Clarke QC andCharles Haddon-Cave, Simon sought andobtained the first worldwide freezing order inBabanaft International Co SA v Bassatne [1990]Ch 13 (order varied on appeal).

Since taking silk, Simon has appeared in casesfar too numerous to mention here by name.Records of many of them will survive long intothe future for study by anyone with access tothe law reports. As often as he has acted withinthis jurisdiction he has also done so in others,having been called to the Bar of the BritishVirgin Islands in 1991 and admitted to the Barsof Bermuda and the Cayman Islands for specificcases. He has provided expert evidence onEnglish law for the courts of New York, Canada,Germany, Hong Kong, the Netherlands, SouthKorea and other jurisdictions, and will continueto do so.

While maintaining his busy practice, Simonhas found time, both as consultant editor and ascontributor, to create Mortimore: CompanyDirectors: Duties, Liabilities and Remediespublished by OUP, the third edition of whichappeared earlier this year. It is widelyrecognised as a – if not the – leadingpractitioner’s text in this area of law, in whichfew can match Simon’s immense experienceand expertise. Those of us who practice in thisfield are fortunate indeed that Simon willcontinue to be closely involved in theproduction of future editions of this work.

Simon has no plans for a quiet retirement. Asalready mentioned, he will continue to act as anexpert witness, and to accept instructions assuch. He is Chairman of the PeasmarshChamber Music Festival, which brings world-class chamber music to Peasmarsh and Ryeevery June. The 20th anniversary of itsfoundation as the Florestan Trio’s FlorestanFestival will be celebrated with a concert at the

Wigmore Hall on 25 November next year. He isalso a director of Opera Rara, whichrediscovers, restores, records and performsrare 19th century operas, and of which SirMark Elder is artistic director. Its recentsuccesses include winning Opera News’recording of the year in 2015 and 2016 forOffenbach’s Fantasio and Donizetti’s LesMartyrs. Plans for 2018 include concertperformances at the Royal Opera House ofDonizetti’s L’ange de Nisida and, at the RoyalFestival Hall, Puccini’s Le Villi. And, withoutdoubt, the golf course will continue to exerciseits mysterious charms.

We wish Simon and his wife Fiona a long andhappy (semi) retirement.

SIMON MORTIMORE QC WITHHIS DOG, FREYA

For more information visit www.oup.com/uk/law

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75


South Square is pleased to welcome Rose Lagram-Taylor as a new tenant from October 2017.

Prior to joining the Bar, Rose read History at King’sCollege London obtaining a first class honours degreeand being awarded the Elizabeth Levett Memorial Prizefor the highest marked medieval dissertation whichconsidered the impact of the Norman Conquest on St.Milburga’s, a small religious establishment based inMuch Wenlock, Shropshire dating back to the 7thcentury. Inspired by this, Rose continued to specialise inthis period during her Master of Studies in MedievalHistory at Oxford University in which she was awarded adistinction and again achieved the highest markeddissertation in her cohort, which this time focused on theeconomic and tenurial changes in her home county ofShropshire between 1071 and 1094.

Following this, Rose then completed her GraduateDiploma in Law, being awarded a Benefactor’sScholarship and Blackstone Exhibition Award fromMiddle Temple, who also awarded her with theprestigious Queen Mother’s Scholarship for her BPTCyear.

Rose has also spent time working in the GeneralCounsels’ Office at American Express, in which sheassisted the litigation team in preparing for claimsbrought under section 75 of the Consumer Credit Act1974, and at Hausfeld law firm where she primarilyworked on a LIBOR claim against RBS. Pro Bono workhas also been important to Rose, and she has workedwith Greenwich Housing Rights in representing tenantsfaced with applications for the re-possession of theirhomes.

During pupillage at South Square, Rose has beenexposed to all chambers’ core areas of practice,including cross-border and domestic insolvency,banking, company law, insurance, commercial litigationand offshore. She sat with Daniel Bayfield QC, RichardFisher, Stephen Robins, William Willson, GeorginaPeters, Adam Al-Attar, Charlotte Cooke and HenryPhillips. She gained extensive experience in draftingand advisory work with the notable cases she assistedon as a pupil including the various Waterfall applicationsboth in the Court of Appeal and Supreme Court, CreditSuisse v Titan & Ors in the Court of Appeal and the

ongoing Tchenguiz v Grant Thornton & Ors in theCommercial Court. She has particularly enjoyedassisting with restructuring work, as well as casesinvolving conspiracy and fraud claims.

In her spare time, Rose enjoys playing the piano,having achieved Grade 8 when she was younger, and isalso an avid fan of Shakespearean theatre, with only theproductions of Henry VIII and Timon of Athens left tosee. She also enjoys travelling, having spent 6 monthsliving in New Zealand whilst studying for herundergraduate degree.

Rose is immensely pleased and proud to have beenoffered tenancy at South Square, and she is nowlooking forward to getting started as a fully-fledgedbarrister.

New tenant at South Square

ROSE LAGRAM-TAYLOR

76

NEWS IN BRIEF

Going Dutch

Gold wins the Payment Race

NEWS in brief

The first ever ‘Payments Race’ was held inJune this year for a Money 20/20 industryevent in an effort to showcase that having achoice of payment methods is a positivething. For the race, eight participants had totravel from Trafalgar Square in London toCopenhagen using only one form ofpayment each.

The payment types included a suitcasefull of coins, credit cards which were one ofswipe and sign, chip and pin andcontactless, mobile technology, Bitcoin andgold. No advanced planning was allowedand every transaction had to be filmed.

The unlikely winner was gold – the oldestand most primitive payment methodincluded. The winner walked into a jewellersand offered gold in exchange for flightsbeing bought for him, and London

Underground allowed him to travel to theairport free of charge as they don’t acceptgold as payment!

The most technologically advancedpayment form, Bitcoin, failed to make itoutside the M25 because the public havenot adopted it as a payment method yet.

On 5 September 2017 the Dutchgovernment published a new draft billseeking to introduce pre-insolvencyproceedings in the Netherlands. Thedraft is open for consultation until 1December 2017.

Under the proposed bill, both thedebtor and, under certaincircumstances, a creditor can proposeor initiate a restructuring plan andbears some similarities with theEnglish scheme. For example, therestructuring plan can be implementedoutside formal insolvency proceedings,and can bind all types of creditors andshareholders, need not include all butcan be directed to only a subset ofthem.

However, unlike the English scheme,neither a convening hearing nor anycreditors meetings are required. Votingcan take place electronically and,

subsequent to this, the court mustconfirm the plan for it to becomebinding for dissenting parties. Theprocedure features a Chapter 11-stylecram down mechanism, which give thecourt the power to confirm the planover the objections of dissentingclasses.

Flanking measures are included inthe proposals, such as a stay, the abilityto set aside ipso facto clauses, thepower to terminate onerous contractsand the right for the debtor to requestthe court to give binding earlydeterminations on matters of disputesuch as jurisdiction, class formation orvaluation. The entire procedure isconfidential until the confirmationdecision has been delivered. It isdesigned to avoid unnecessary courtinvolvement and to be as swift,efficient and flexible as possible.

South Square Shortlistedfor AwardsWe are delighted that South Squarehas been nominated in theCompany/Insolvency category for the2017 Chambers UK Bar Awards. Notonly is Chambers once againshortlisted for ‘Set of the Year’ butalso two of our silks, Antony ZacaroliQC and David Allison QC, have beennominated for ‘Silk of the Year’ in thesame category. Announcement of thewinners and the award ceremony willbe held at The London Hilton on ParkLane on Thursday, 26th October 2017.We thank all our clients for theirsupport.

DAVID ALLISON QCANTONY ZACAROLI QCGOLD - CURRENTLY THE MOST SOLID CURRENCY

William Trower QCWilliam Trower QC has been appointedas a non-executive member of theBoard of the Insolvency Service. TheBoard of the Insolvency Service isresponsible for the long-term success ofthe agency. This includes setting strategic aims

and objectives; making sure thatleadership and resources are in place tomeet these aims; challenging andsupportingmanagementperformanceand reporting tothe Departmentfor BusinessInnovation andSkills. Williamcontinues hisfull-timepractice atSouth Square. WILLIAM TROWER QC

77


On 2 October Baroness Hale will beofficially sworn in as president of theUK’s Supreme Court, along with threenew justices – Lady Justice Black andLords Justice Lloyd Jones and Briggs.She will be the first female presidentof the Supreme Court. This is not thefirst ‘first’ for the lady fromRichmond. In 2004 she became theUK’s first woman Law Lord and then,in 2009, the first woman Justice of theSupreme Court – and, incidentally,the first family law member to fill thepost. Since 2013 she has been thecourt’s Deputy President and she willsucceed Lord Neuberger who retiresin September.Baroness Hale began her careerteaching law at the University ofManchester, becoming Professor ofLaw in 1986. She was appointed tothe Law Commission in 1984 andspent ten years re-defining the face of

family law. She was made QC in 1989,and a High Court judge in 1994.Baroness Hale is an outspokenadvocate of greater diversity in thejudiciary and has criticised the

judicial appointments system for self-selecting from a pool ofpredominantly white men fromsimilar economic and academicbackgrounds. On her appointment Lady Hale said:"I look forward to building upon(Lord Neuberger's) pioneeringachievements, including developingcloser links with each part of theUnited Kingdom, for example bysitting outside London, andimproving the ways in which wecommunicate our work to the public."Recent high-profile cases mean thatmore people than ever before haveheard of the Supreme Court, and wehope that this will help to create abroader understanding of how thejudiciary serves society." Lord Neuberger said herappointment was “a fitting pinnacleto a truly ground-breaking career”.

Another first for historic Hale

commercial litigation.It is currently the US that leads the way with

lawtech start-ups, with US inventors filingmore than 1000 lawtech patents over the lastdecade, ahead of China at 298, South Koreaat 300, Australia at 154.

In comparison, the UK lawtech segment isrelatively small. However, the LegalGeek/Thomson Reuters report has identified64 lawtech startups operating in the UK andfounded less than seven years ago. The‘Tube Map’ they have created showing thefirms and their market categories, is shownbelow.

The robots are comingThe UK legal services market is worth almost£26bn a year, and growing. A joint report byThomson Reuters and Legal Geek, publishedin July of this year, investigates howtechnology is making inroads into the waylegal services might be delivered in the nearfuture, and its potential to disrupt the currentlegal marketplace.

Demand for lawtech services is driven bythe demand for faster and cheaper ways toprovide legal services. As reported by theFinancial Times, Joathan Brayne of Allen &Overy and head of its innovation centre, Fuse,has said “In the past, a legal team might have20 lever arch files to sift through to find keyevidence. Now that is 2m emails”.

Advanced analytics programs can hunt forkeywords and phrases in millions ofdocuments. New US lawtech start-up BatteaClass Action Services, searches companies’securities investments to spot losses resultingfrom false disclosure, manipulation or other

forms of fraud. Lex Machina, part of theLexisNexis Group, analyses millions of courtdecisions for insights on how judges reachtheir decisions, those arguments which aremost likely to be effective in court and also theweaknesses and strengths of the opposinglegal team. Whilst it previously focused onpatents and intellectual property disputes, LexMachina announced over the summer that itis expanding into employment and

LADY HALE

78

NEWS IN BRIEF

Air Berlin’s frequent flyer programme filedfor insolvency in August, bad news formembers with points on their accounts,which they can no longer use.

The frequent flyer programme Top Bonushad already stopped members from usingand collecting points amid uncertainty aboutits future after Air Berlin itself filed forinsolvency.

“Because of the situation with Air Berlinand the direct connection with the frequentflyer programme, Top Bonus had no otherchoice than to take this step,” Top Bonussaid in a brief statement.

Air Berlin was forced to file for insolvencyafter major shareholder Etihad pulled theplug on further funding, although it is stillflying thanks to a 150 million euro ($177million)loan from the German government.

Etihad bought a 70 percent stake in TopBonus for 184 million euros in 2012, and theproceeds helped Air Berlin turn a net profitthat year, the only time it has done so overthe past decade.

Bidders are currently jostling for theassets of Air Berlin, Germany's secondlargest carrier.

Dominic Chappell, the former ownerof BHS, is to be prosecuted by thepensions watchdog for failing toprovide information for aninvestigation into its sale. Chappellwas summonsed to appear atBrighton magistrates court on 20September to face three charges offailing to comply with notices forinformation issued by the PensionsRegulator under s 72 of the PensionAct 2004. Failure to provide suchinformation without a reasonableexcuse is a criminal offence that canresult in a fine.

Keir Greenaway, national officerfor the GMB union which representedsome BHS staff, said: “It’s about timethe Pensions Regulator realised itdoes have teeth and starts using themto protect the interests of working

On 18 August 2017 US District JudgeSteven Merryday denied a motion byan Assistant US Attorney to delay acase for eclipse-related reasons.

The Assistant Attorney had arguedthat a key government witness in thecase United States of America v JosephBishop would be unavailable on therequired day because, as it was put tothe Court “Cruel fate has dictated thatthe August 21 eclipse will occurduring the trial of an action in whichthe agent is a principal participant onbehalf of the United States”, or, rathermore shortly, the witness had pre-paid for a ticket to visit an area in thepath of totality.

Notwithstanding that JudgeMerryday agreed that “[a] solareclipse understandably occupies aprovocative and luminous place inhistory and in art” - before

continuing to reference Herodotus,Prince Igor’s fight against thePolovtsians in 1185, an 1820 eclipsementioned by Wordsworth and the1972 song “You’re So Vain” by CarlySimon – the learned judge was notpersuaded by the argument.

In his view, “An eclipse is justanother astral event, preciselypredictable since the day theBabylonians discovered the governingformula (although some contend foran earlier discovery).” His view wasthat the witness had, in effect, laid abet that the trial would not goforward as scheduled when pre-paying for the ticket.

Sadly for the witness, unlike the betplaced by Carly Simon’s former suitor,whose “horse, naturally, won” his betdid not pay off and the motion wasdenied.

people. GMB hopes [the] decision bythe Pensions Regulator to step up isnot just motivated by the profile ofthis case but a sign of things to come.”

The regulator has already agreed a£363m cash settlement with Green torescue the BHS pension scheme andhalted legal proceedings against thebillionaire. However, it is understoodto be seeking as much as £17m fromChappell and Retail Acquisitions inrelation to the scheme.

The former bankrupt haspreviously pledged to fight that legalaction, saying the black hole in thescheme was not his fault.

Frank Field MP, who led aparliamentary inquiry into thedemise of BHS, said: “Act two was along time coming and this play willget more exciting as it goes on. There

are many further acts to be playedbefore full justice is gained for the11,000 people who lost their jobs andso that pensioners can rejoice.”

CHAPPELL: FACING CHARGES

Florida Judge denies motion todelay case to witness eclipse

Crash landing

BHS rumbles on....

79


Women in the robing roomThe all-male robing room at SouthwarkCrown Court has at last opened its doors tofemale barristers for the first time, followingjudicial intervention.

Until recently, Southwark — whichhandles some of London’s most seriousfinancial crime trials — had three robingrooms in the 1980s building, a large men-only one and two smaller ones just forwomen.

For those unfamiliar with the somewhatarchaic terminology, robing rooms areessentially areas housed within a court

building that allow barristers to change intotheir wig and gown, discuss cases and hidefrom clients!

Now, thanks to senior circuit judgeDeborah Taylor, Southwark’s testosterone-filled recreation room is no more. Explainingthe rationale behind the decision, she toldthe Evening Standard:

“Firstly, the male robing room had betterfacilities including tables and chairs forworking. It was unfair to the femalebarristers to be in cramped rooms.Secondly, there are now far more female

Scandal-ridden Bell Pottinger in administrationThe UK entities of controversial publicrelations firm, Bell Pottinger, havebeen placed into administration as thefirm struggled to recoup losses(thought to be in the region of £5m)whilst it haemorrhaged clients such asWaitrose, Investec, HSBC, TalkTalk andthe Clydesdale Banking Group in thewake of its latest scandal.

Administrators, BDO, hadunsuccessfully sought a buyer for theembattled company but on Tuesday 12September made the followingstatement:

“Following an immediateassessment of the financial position,the administrators have made anumber of redundancies. Theadministrators are now working withthe remaining partners and employeesto seek an orderly transfer of BellPottinger’s clients to other firms inorder to protect and realise value forcreditors,”

Tuesday’s announcement marks abitter conclusion to the ignominiousdemise of one of the UK’s most well-known public relations firms which,only the week before, had beenstripped of its membership of the

Public Relations and CommunicationsAssociation (PRCA).

The PRCA had launched aninvestigation into Bell Pottinger –whose clients had ranged frommultinational businesses togovernments, public sectororganisations, entrepreneurs andsome of the world’s richest individuals– following a complaint from SouthAfrica’s main opposition party, theDemocratic Alliance (DA). The DA hadcomplained that a campaign run byBell Pottinger in South Africa for itsclient Oakbay Capital, sought to stir upanger about “white monopoly capital”and the “economic apartheid”. FrancisIngham, director general of the PRCAsaid:

“Bell Pottinger has brought the PRand communications industry intodisrepute with its actions and hasreceived the harshest possiblesanctions. The PRCA has never beforepassed down such a damningindictment of an agency’s behaviour.”

The PRCA said the Bell Pottingercampaign was “likely to inflame racialdiscord in South Africa”.

The firm was certainly no stranger

to controversy. In a Newsnight interview for BBC

Two in early September, Lord Bell(who resigned from Bell Pottinger inAugust 2016) said “As long as there iscontroversy about things there will becontroversial characters. You can’tspend your life regretting what youdo.”

Bell handled a string ofcontroversial clients, including thePinochet Foundation; Syria’s firstlady, Asma al-Assad; the governmentsof Bahrain and Egypt; Oscar Pistorius,after he was charged with murder;FW de Klerk, when he ran againstNelson Mandela for president; andAlexander Lukashenko, theBelarusian dictator. It also emergedlast year that Bell Pottinger had beenpaid £500m to make propagandavideos in Iraq on behalf of the USgovernment. They included shortnews segments made to look likeArabic news networks, and fakeinsurgent videos.

None of Bell Pottinger’s subsidiariesin Asia and the Middle East areaffected and are now in negotiations tobe spun off and rebranded.

barristers involved in fraud cases. Not beingin the same robing room meant that theywere sometimes excluded fromconversations prior to court which took placebetween the male barristers. Some saidthat, as a result, agreements were madebefore they were consulted.”

Her Honour Judge Taylor, who wasappointed a senior circuit judge to the SouthLondon criminal court back in April,continued:

“[It] reinforces that gender should play nopart in the role or status of a barrister.”

80

SOUTH SQUARE CHALLENGEWelcome to the South Square Challenge for September 2017. Your task this time is to correctlyidentify each of the individuals in the photographs below, and work out the connectionbetweenthem. Please send your answers to Kirsten by Friday 20 October, either by post to the addresson the back page, or by e-mail to [email protected]. To the winner, drawn from the wig tin if necessary, will go a Magnum of Champagne and the ever-so-useful South Square umbrella.

David Alexander QC

3 4

1 2

81


JUNE CHALLENGE

The correct answers to the June 2017 ‘Dog’ Challenge are:

1/. Larkie and David Allison QC. 2/. Hobbes and Felicity Toube QC. 3/. Dylan and Gabriel Moss QC. 4/. Rum and Edoardo Lupi. 5/. Coco and

Mark Phillips QC. 6/. Coby and John Briggs. 7/. Brucie and Martin Pascoe QC. 8/. Conchita and Glen Davis QC.

We had very many entries to this popular challenge, but no-one matched more than one dog and owner correctly. The winner, therefore,

drawn from the wig tin, is Andrew McClay of BDO, to whom go not only our congratulations for correctly identifying Martin as Brucie’s owner,

but also a Magnum of Champagne and a South Square Umbrella. We have many more dog-owners in Chambers, so look out for round 2!

5 6

7

The connection is?

8 9

82

Diary Dates

Members of South Square will be attending, speaking at and/or chairing the following events:

South Square & Mourant Ozannes Joint Litigation Forum27 September 2017 – 200 Aldersgate, St Paul's, London

INSOL Europe Annual Congress5 October 2017 – Warsaw

IBA Annual Conference 20178 – 13 October 2017 – Sydney

Chancery Bar Association Gibraltar Conference12 October 2017 – Sunborn Yacht Hotel, Gibraltar

R3 London & South East Region Ladies Lunch13 October 2017 – The Grosvenor Hotel, London

13th International Insolvency & Restructuring SymposiumOctober 19 – 20 2017 – The Westin Dublin, Ireland

RISA Conference 2017 (In association with South Square)20 November 2017 – Grand Cayman

Insol International Kuala Lumpur One Day Seminar28 November 2017 – Hilton Hotel, Kuala Lumpur, Malaysia

ILA Academic Forum and Annual Conference 201820 – 21 April 2018, London

INSOL New York Annual Regional Conference29th April – 1st May 2018, Grand Hyatt Hotel, New York

International Insolvency Institute 18th Annual Conference23 – 25 September 2018 - New York

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

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.

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

RELX (UK) Limited, trading as LexisNexis®. Registered office 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 registered trademarks of RELX Inc. © 2017 LexisNexis SA-0417-065. The information in this email is current as of May 2017 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.

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• Advise clients with confidence as legislation is printed as currently in force with all amendments, repeals and revocations

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• Work more efficiently with a user-friendly, chronological and industry recognised layout

What’s New?Now in its 19th edition, this essential reference source for lawyers, accountants, insolvency practitioners, regulators and students is fully brought up to date to 6 April 2017 to include all recent amendments and new legislation:

• Substantial amendments to the Insolvency Act 1986 (applying in relation to England and Wales) made by the Small Business, Enterprise and Employment Act 2015 which came into force on 6 April 2017;

• The Insolvency (England and Wales) Rules 2016 (as amended by the Insolvency (England and Wales) (Amendment) Rules 2017) which apply from 6 April 2017;

• The Disqualified Directors Compensation Orders (Fees) (England and Wales) Order 2016 and the Disqualified Directors Compensation Orders (Fees) (Scotland) Order 2016;

• Various amendments made by the Insolvency (England and Wales) Rules 2016 (Consequential Amendments and Savings) Rules 2017

• New Scottish Regulations including the Bankruptcy (Scotland) Regulations 2016, the Bankruptcy (Applications and Decisions) (Scotland) Regulations 2016, and the Protected Trust Deeds (Forms) (Scotland) Regulations 2016.

Publication details:Publication scheduled: April 2017Formats available:

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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]

Legal 500 2016

“MEMBERS WHO ARE ‘KNOWLEDGEABLE AND INTELLECTUALLYSTRONG, BUT ALSO A DELIGHT TO WORK WITH’”

Michael Crystal QC

Christopher Brougham QC

Gabriel Moss 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

David Allison QC

Tom Smith QC

Daniel Bayfield QC

John Briggs

Adam Goodison

Hilary Stonefrost

Lloyd Tamlyn

Richard Fisher

Stephen Robins

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

Ryan Perkins

Riz Mokal

Madeleine Jones

Edoardo Lupi

Rose Langram-Taylor