Posts Tagged Freeport

PrivatBank v Kolomoisky and Boholiubov. The High court puts the spotlight on the abuse of the anchor mechanism, on reflexive effect of lis alibi pendens, and on Article 34’s new rule.

In [2018] EWHC 3308 (Ch) PrivatBank v Kolomoisky and Boholiubov et al the High Court has set aside a worldwide freezing order (‘WFO’) granted earlier at the request of Ukraine’s PrivatBank, against Ihor Kolomoisky and Hennadiy Boholiubov – its two former main shareholders.

The case considers a high number of issues to which even a long blog post cannot do justice – I will consider these further in a paper in progress.

The issues to be determined, are

  • First, whether the Bank has a good arguable case (as pleaded in the particulars of claim) that loss of US$1.91 billion plus interest was caused to it by the alleged fraud of the Defendants. For the purposes of these applications, all Defendants do not dispute that there is a good arguable case that US$248 million of loss was caused to the Bank by the pleaded fraud, but they deny any good arguable case of loss in excess of that amount.
  • Second, whether the worldwide freezing orders should be set aside in whole or in part for non-disclosure or misrepresentation, or reduced to or reimposed in a lesser maximum sum than the current maximum sum of US$2.6 billion.
  • Third, whether the Court has jurisdiction over the First and Second Defendants under Article 6.1 Lugano by reason of the claim against the English Defendants as “anchor defendants”. Although the claims as pleaded against the First and Second Defendants and the English Defendants are closely connected, the particular issue is whether the claim against the English Defendants was brought with the sole object of removing the First and Second Defendants from Swiss jurisdiction and so was an abuse of Article 6
  • Fourth, if there is jurisdiction against the First and Second Defendants, whether the claims against them and the English Defendants should be stayed on grounds of lis pendens in Ukraine. This raises separate questions:
    • a) Whether the Court has power to stay proceedings against the First and Second Defendants (where jurisdiction only exists (if at all) under the Lugano Convention) in favour of proceedings in a non-Convention state, namely Ukraine. The First and Second Defendants argue that Article 28 of the Convention, which empowers a Convention State to stay proceedings on grounds of lis pendens in another Convention State, should be applied by analogy (or “reflexively”) in favour of proceedings in a non-Convention State.
    • b) Whether the Court should stay proceedings against the English Defendants (who are sued in accordance with Article 4 of the recast Brussels Regulation) in favour of proceedings in Ukraine. The issue here is as to the meaning, effect and application of Article 34 of the Regulation, which as from 10 January 2015 conferred a power on EU States in defined circumstances to stay proceedings in favour of proceedings in a non-Member State (“a third State”).
  • Fifth, to the extent that the Court has power to stay on grounds of lis pendens in Ukraine, whether it should exercise that power given the nature of the proceedings in Ukraine, the degree of connection between the Bank’s claim and Ukraine and the risk of irreconcilable judgments if no stay is granted.
  • Sixth, whether the Court should set aside the permission granted without notice to serve the claim form on the BVI Defendants out of the jurisdiction, or alternatively stay the proceedings against the BVI Defendants on grounds of forum non conveniens.

 

Fancourt J’s judgment implies in essence

First of all, very careful and complete consideration of the Lugano Convention’s anchor defendant mechanism.

(hence also implicating Brussels I Recast case-law, particularly Reisch Montage, Freeport and CDC), but also Sabbagh v Khoury, in which as I noted at the time the Court of Appeal struggles with the precise role for merits review in examining a potential abuse of the anchor defendant mechanism.

One assumes counsel for the defendants did an excellent job in deciphering precedent. This includes Ali Malek QC who is clearly a counsel of choice for international litigation, witness his involvement in other cases, too, this week: on which more soon on the blog.

Kolomoisky and Boholiubov may be sued in England and Wales, despite their Swiss domicile, only if the claims against them and the claims against the English Defendants 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: that is the wording of Article 6.1 of the Lugano Convention, as it is of (now) Article 8(1) Brussels I Recast.

As I have pointed out on various occasions (use ‘fraud’ or ‘fraus’ as a search term in the blog’s search box), abuse is not a concept easily caught in statute and given the need for high predictability in the application of the Brussels and Lugano regimes, the CJEU is not finding it easy to provide much instruction.

Justice Fancourt excellently reviews the issues 85 ff and it is best to let those paras speak for their insightful selves. One readers have done so, they will see that at 93, his conclusion is ‘any artificial fulfilment (or apparent fulfilment) of the express requirements of Article 6.1 is impermissible, and this includes a case where the sole object of the claim against the anchor defendant is to remove the foreign defendant from the jurisdiction of domicile. Bringing a hopeless claim is one example of such abuse, but the abuse may be otherwise established by clear evidence. In principle, the fact that there is a good arguable case against the anchor defendant should not prevent a co-defendant from establishing abuse on some other ground, including that the “sole object” of the claim is to provide jurisdiction against a foreign domiciled co-defendant.

Onus of proof of abuse lies on the defendant, and it was met here: the English Defendants serving as anchor, are not considered legitimate targets in their own right. Five reasons for same are listed in para 99 ff: it is clear that a single criterion will not be enough to meet the burden of proof, rather a number if indications will contribute to an overall finding of abuse.

 

Having established that the Switzerland-based defendants ought to be sued there or indeed in the Ukraine, the Court turns to the English defendants’ attempt to have it apply Brussels I Recast’s new Article 34 rule on lis alibi pendens in favour of third States. 

At 129, Justice Fancourt reviews the cases which might potentially be said to be ‘related’ to the English proceedings. At the heart of that analysis lies a defamation claim which (at 144) ‘Although the causes of action in the Ukrainian claim of the First Defendant and the claim of the Bank in the current proceedings are quite different, I am satisfied that there is considerable factual overlap between the allegations made against the Defendants in the Bank’s claim and the allegations published by the Ukrainian journal that the First Defendant seeks to challenge as unfounded and defamatory in the Ukrainian proceedings. The general subject-matter is one and the same: a fraudulent scheme to embezzle huge sums of money from the Bank, orchestrated by the First and Second Defendants and making use of a large number of shell companies, including the English and BVI Defendants, to circulate monies and conceal their whereabouts. Key issues that may have to be determined in each claim will be: whether there was a fraudulent scheme; who set it up and operated it; how did it work; what was its purpose; who benefited from the scheme, and how much money was unlawfully removed from the Bank.’

This analysis presumes, in my view correctly, that the term ‘related’ in the Article 34 rule, is to be interpreted in line with (now) Article 30 Brussels I Recast on related intra-EU actions.

At 145: ‘if the appeal in the defamation proceedings were to fail, or the claims be otherwise disposed of on a limited point of law, any stay granted under Article 34 (or by analogy with it) will be lifted.

Upon reflection, a stay of proceedings in favour of the Ukranaian case, is granted, for the reasons that

  • (the ultimate condition for applying Article 34) a potential eventual judgment in Ukraine on the defamation case is likely to be recognised and enforced in England; this is the so-called [but not so by the High Court 🙂 ] Anerkennungsprognose;
  •  the claim has a high proximity to the Ukraine: the issues raised in common by the defamation claim and the current proceedings are almost exclusively concerned with events in Ukraine; the majority of witnesses will be Ukrainian, and Ukrainian law will apply to decide both sets of proceedings. By contrast, none of the harmful acts complained of occurred in England; the matters in issue have no connection with England at all, and the existence of three English defendants is of no materiality. The proximity of the claim to Ukraine therefore points strongly in favour of a stay.
  • finally, at 158 ff: The Bank nevertheless argues that a stay would be contrary to the proper administration of justice – a core criterion to Article 34. ‘It contends that the current proceedings cry out for determination by a truly independent tribunal. But the Bank does not contend that the Ukrainian court is unable to resolve the issues or that it cannot obtain justice in Ukraine. There is no evidence on the basis of which this court can conclude that the Ukrainian courts would not provide justice to the parties. Similarly, there is no evidence before the court that would justify a conclusion that the Ukrainian judiciary is not independent. The Bank complains about how the First Defendant obtained an interim injunction against the Bank and Hogan Lovells on 15th December 2017, without proper process taking place; but this order was set aside in Ukraine on appeal, demonstrating that justice can be achieved by the Bank.’

Note that at 161 Justice Fancourt emphasises the unfinished character of the stay: ‘The argument against a stay would have greater weight if the stay to be granted under Article 34 (or by reference to its principles) were a once and for all decision, but it is clear that it should not be so confined. Under Article 34.2, these proceedings may be continued at any time when it is appropriate to do so, and so potential prejudice to the Bank in granting a stay is thereby limited. If the appeal in Ukraine is dismissed, or if though successful the claim is disposed of without a judgment on the merits, or if the First Defendant does not properly pursue the claim to judgment, the grounds for a continuing stay are likely to fall away’.

 

Fancourt J also adds obiter that had he accepted jurisdiction against the Switzerland-based defendants on the basis of the anchor mechanism, he would have granted a stay in those proceedings, too, applying the lis alibi pendens rule of Lugano reflexively, despite the absence of an Article 34 mechanism in Lugano. Consideration of this issue is at 114 ff, with of course reference to Ferrexpo. (Although even there this particular point may have been made obiter, as Justice Fancourt himself points out at 123). The suggestion is made that in accepting such reflexive, ex-Lugano effect of the Lugano lis alibi pendens rule, the courts should take instruction from the Article 34 Brussels I-Recast conditions. This is not a straightforward proposition by any means and the debate is far from settled.

 

Finally, jurisdiction against the BVI defendants is dismissed at this time on the basis of forum non conveniens: at 172 and necessarily entangled with the other findings: ‘So far as forum conveniens is concerned, the claim against the First and Second Defendants will not proceed in England. The natural forum for a trial of that claim is Ukraine though, as regards Lugano Convention States, the First and Second Defendants are entitled to be sued in Switzerland. The task of the court in exercising its discretion is to identify the forum in which the case can be suitably tried in the interests of all the parties and for the ends of justice: see Altimo Holdings at [88]. The natural forum is Ukraine, in that all the parties are Ukrainian, almost all the events occurred in Ukraine and Ukrainian law is the governing law. There is no suggestion by any party that they cannot have a fair trial in Ukraine. However, the Bank may not be willing to sue the First and Second Defendants in Ukraine: if it cannot sue them in England it may sue them in Switzerland.

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With PrivatBank v Kolomoisky and Boholiubov we now have a much more reasoned application of Article 34 than the more concise considerations in B.win v Emerald Bay and also interesting additional analysis as compared to Zavarco.

Geert.

(Handbook of) European Private International Law – 2nd ed. 2016, Chapter 2, Heading 2.2.14.5

 

 

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Sabbagh v Khoury. The Court of Appeal struggles on merits review for anchor defendants.

Update 7 June 2018 on 31 May the High Court [2018] EWHC 1330 (Comm)] backed up the CA’s finding with an interim anti-suit (in arbitration) injunction.

Sabbagh v Khoury at the High Court was the subject of a lengthy review in an earlier post. The Court of Appeal has now considered the issues at stake, in no lesser detail.

In line with my previous post (readers unfamiliar with it may want to refer to it; and to very good Hill Dickinson summary of the case), of particular consideration here is the jurisdictional test under (old) Article 6(1) Brussels I, now Article 8(1) in the Recast, in particular the extent of merits review; and whether the subject matter of the claim comes within the succession exception of Article 1(2)(a) of the Brussels I Regulation.

As for the latter, the Court, after reviewing relevant precedent and counsel argument (but not, surprisingly, the very language on this issue in the Jenard report, as I mention in my previous post) holds in my view justifiably that ‘(t)he source of the ownership is irrelevant to the nature of the claim. ..The subject matter of the dispute is not whether Sana is an heir, but whether the defendants have misappropriated her property.‘ (at 161).

With respect to the application of Article 6(1) – now 8(1), the majority held in favour of a far-reaching merits review. Lady Justice Gloster (at 166 ff) has a minority opinion on the issue and I am minded to agree with her. As she notes (at 178) the operation of a merits test within Article 6(1) does give rise to risk of irreconcilable judgments, which can be demonstrated by reference to the present facts. She successfully, in my view, distinguishes the CJEU’s findings in Kolassa and in CDC, and the discussion at any rate one would have thought, merits CJEU review.

Geert.

(Handbook of) EU Private International Law, 2nd ed. 2016, Chapter 2, Heading 2.2.12.1

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Sabbagh v Khoury. The High Court considers the ‘wills and succession’ exception, (reflexive application of) the exclusive jurisdictional rule for company matters, and anchor defendants under the Jurisdiction Regulation.

Sabbagh v Khoury is great for oral exam purposes. Hand the student a copy of the case and ipso presto, there is plenty to talk about for at least half an hour.

Sana Sabbagh, who lives in New York, claims that the Defendants have variously, since her father’s stroke, conspired against both him and her to misappropriate his assets (“the asset misappropriation claim”) and, since her father’s death, to work together to deprive her of her entitlement to shares in the group of companies which her father ran (“the share deprivation claim”). Wael, first defendant, is the anchor defendant for jurisdictional purposes. He resides and has at all material times resided in London. The other Defendants live or are based abroad.

Defendants contend in essence  (at 83):

a) that the claims against Wael (as noted, the anchor defendant) are so weak that there is no risk of irreconcilable judgments from separate proceedings and so no basis for joinder under Article 6(1) of the Brussels I Regulation (“the merits issue”);

b) that the claims fall outside the Brussels Regulation because the Regulation does not apply to “wills and succession” within the scope of Article 1(2)(a) (“the succession issue”), or challenges to the validity of CCG’s organs within the scope of Article 22(2) (“the Article 22 issue”), and the natural and appropriate forum for determining them is Lebanon (“the forum issue”);

c) that the claims are subject to an arbitration clause (or several arbitration clauses) such that a stay is required by s. 9(4) of the Arbitration Act 1996 (“the stay issue”). Any disputes against parties not bound by the arbitration clause should be stayed as a matter of discretion.

(Point c falls outside the scope of current posting).

Logically looking at point b) first (the exclusion of ‘wills and succession’, the High Court first of all considered the proposition that exceptions to the scope of application need to be applied restrictively.

To my knowledge this has not as such been held by the ECJ. Carr J expresses sympathy with the view that the findings of the ECJ in C-292/08 German Graphics in particular (that the insolvency exception not be given an interpretation broader than is required by its objective), could be given broader application, for all exceptions. I am more convinced by defendants’ argument that one needs to be careful to extend the reasoning of German Graphics outside the insolvency context, given that its ruling is inevitably influenced by the existence of the Insolvency Regulation.

However Mrs Justice Carr suggested that whether or not restrictive interpretation ought to be followed, is not quite the determinant issue: rather, that the exceptions should be applied in similar fashion as the exclusive jurisdictional rules of Article 22 (Article 24 in the recast).  Those jurisidictional rules, which are an exception to the general rule of Article 2 (4 in the recast), Carr J notes, only apply where the action is ‘principally concerned with’ the legal issue identified in the Article. ‘Have as their object’ is the term used in the Regulation, for 3 out of 5 of the Article 22 exceptions. (For the other two, including those with respect to intellectual property, the term is ‘concerned with’. In fact in other language versions the term is ‘concerned with’ throughout – which has not helped interpretation). ‘Have as their object’ was indeed applied by the ECJ as meaning ‘whose principal subject-matter comprises’ in BVG, viz the Article 22(2) exception. (Not in fact as Carr J notes, ‘principally concerned with’ , which the ECJ only referred to because it is the language used in Article 25’s rule on examination of jurisdiction).

The stronger argument for siding with the High Court’s conclusion lies in my view not in the perceived symmetry between Article 22 (exclusive jurisdictional rules) and Article 1 (scope), but rather in the High Court’s reference in passing to the Jenard report. At C/59/10: ‘matters falling outside the scope of the Convention do so only if they constitute the principal subject-matter of the proceedings. They are thus not excluded when they come before the court as a subsidiary matter either in the main proceedings or in preliminary proceedings.’ Granted, the result is the same, however the interpretative route is neater. Like other things in life (it’s single Malt, not so much general tidiness I am referring to), I like my statutory interpretation neat.

Eventually Carr J held that Ms Sabbagh’s action is principally concerned with assets and share misappropriation, in short, with conspiracy to defraud. If successful, the action will of course impact on Ms Sabbagh’s inheritance. However that does not justify the exclusion of Brussels I to her claim.

[The court was also taken on a short comparative tour of the Succession Regulation, with a view to interpreting the succession exception in Brussels I. Interestingly, Carr J noted that indeed that Regulation may serve as a supplementary means of interpretation of the Jurisdiction Regulation, even though the UK is not bound by the Succession Regulation.]

 

Next came the potential application of Article 22(2). This issue not only raised the question of whether the action would at all fall within the Article 22(2) remit; but also, whether in that case that Article needs to be applied reflexively, given that the companies concerned are incorporated in Lebanon. Here inevitably reference was made to Ferrexpo. The High Court however held that no question of reflexive application arises, under the same reasoning as above, with respect to the succession exception: the challenge to the corporate decisions was not one of ultra vires or other ‘corporate’ validity: rather, one of their proper characterisation or correctness. They are not therefore substantially concerned with the Article 22(2) exceptions.

 

The High Court preceded its application of Article 6(1) (joinders /use of an anchor defendant: first defendant is domiciled in London) with a very thorough review of the merits of each of the cases. (At 5, the Court notes that the other defendants live ‘abroad’, most of them seemingly in Greece. However the relevant companies at least seem to be domiciled in Lebanon. Article 6 can only be used against defendants already domiciled in another Member State. For those outside, national conflicts law decides the possibility of joinder).

Article 6 requires that “the 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.”  ECJ Case-law (in particular Roche Nederland, C-539/03) has it that it is not sufficient that there be a divergence in the outcome of the dispute: that divergence must also arise in the context of the same situation of law and fact (Case C‑539/03 Roche Nederland and Others [2006] ECR I‑6535, paragraph 26). In Freeport, Case C-98/09, the ECJ added that It is for the national court to assess whether there is a connection between the different claims brought before it, that is to say, a risk of irreconcilable judgments if those claims were determined separately and, in that regard, to take account of all the necessary factors in the case-file, which may, if appropriate yet without its being necessary for the assessment, lead it to take into consideration the legal bases of the actions brought before that court. (at 41). It added that where claims brought against different defendants are connected when the proceedings are instituted, (which implies that it is expedient to hear and determine them together to avoid the risk of irreconcilable judgments resulting from separate proceedings), there is no further need to establish separately that the claims were not brought with the sole object of ousting the jurisdiction of the courts of the Member State where one of the defendants is domiciled (Freeport, at 54).

Whether the likelihood of success of an action against a party before the courts of the State where he is domiciled is relevant in the determination of whether there is a risk of irreconcilable judgments for the purposes of Article 6(1), was raised in Freeport but not answered by the ECJ for such answer was eventually not necessary for the preliminary review at issue. In Sabbagh, with reference to precedent in the English courts, the High Court does carry out a rather thorough merits review, effectively to review whether the claim against Wael might not be abusive: ie invented simply to allow him to be used as anchor defendant. Carr J’s extensive merits review hinges on ‘to take account of all the necessary factors in the case-file‘ per Freeport. Whether such detailed review might exceed what is required under Article 6(1) is simply not easily ascertained. (The High Court eventually did decide that Article 6(1) applied on account of one of the pursued claims).

Did I say ‘half an hour’ in the opening line of this posting? An exam using this judgment might take a bit longer…

Geert.

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