International insolvency — English law rights confirmed protected

Shortly after New Year 2018, Hildyard J decided that when an Azeri bank went bust and was put into reconstruction in Baku, the Azeri administrator could not use the Cross-Border Insolvency Regulation to freeze out a couple of creditors in England and Russia whose bond debts were governed by English law. They had refused to have anything to do with the reconstruction, smugly sat back and waited for the reconstruction to finish, knowing that the bank still had English assets that could potentially be seized. (See our blogpost here).

The Court of Appeal has now agreed, in Bakhshiyeva (Foreign Representative of the Ojsc International Bank of Azerbaijan) v Sberbank of Russia & Ors [2018] EWCA Civ 2802 (18 December 2018) . It might or might not be a good idea for England to adopt modified universalism in insolvency and accept, in essence, that the law of a corporation’s home jurisdiction should be controlling in all questions of the enforceability of obligations against it, wherever situated and whatever the law governing them. Indeed, it does just this in EU insolvencies, courtesy of the EUInsolvency Regulation 2015. But established common law authority said that an English court would ignore laws cancelling debts that did not emanate from the state whose law governed them. Further, the CBIR was best read as legislation with procedural, not substantive, aims. It would suspend enforcement of obligations while the reconstruction was going ahead, but would not actually destroy them. Any attempt to use a foreign reconstruction for anything more than that would not be countenanced.

Whether this is the last word we will see. There may be an appeal to the Supremes: the two creditors clearly have the money, and quite a lot rides on the result. However, the view of this blog, for what it is worth, is that this is a delicate matter best left to careful legislative reform, if indeed reform is needed at all. And that’s a bigger if than it looks. Money-men aren’t popular these days, but there is something to be said for the position of the two creditors. No-one has to issue English-law bonds, nor to leave assets in England that can be seized to support the obligations contained in them. And, one strongly suspects, the interest rate on the English-law debt was lower than on Azeri-law debt precisely because of the perceived lower solvency risk. The ability to take the benefit of this and then tell foreign creditors to go fish isn’t, perhaps, something we should be promoting.

Relective loss and the unsecured creditor.

 

Garcia v Marex Financial Ltd [2018] EWCA Civ 1468 is a cautionary tale of a creditor with a judgment against two companies being thwarted by their beneficial owner removing their assets from the jurisdiction before the judgments could be enforced. The creditor decided to sue the wrongdoer for the torts of knowingly inducing and procuring the two companies to act in wrongful violation of your and causing loss to you by unlawful means. But not so fast, what about the rule against recovery of ‘reflective loss’ established by the House of Lords in Johnson v Gore Wood [2002] 2 AC 1? The rule states that where a company suffers loss caused by a breach of duty owed to it, only the company may sue in respect of that loss. A claim is barred if the loss suffered by the claimant would have been made good by restoration of the company’s assets. The rule is subject to an exception in Giles v Rhind [2003] Ch 618, where as a consequence of the actions of the wrongdoer, the company no longer has a cause of action and it is impossible for it to bring a claim or for a claim to be brought in its name by a third party. Here, there was a clear breach of duty owed to the company by the beneficial owner who had  asset stripped them.

But does the rule also apply to unsecured creditors of the company who are not its shareholders? Until now this question was undecided, but not any longer. In Garcia v Marex Financial Ltd [2018] EWCA Civ 1468, the Court of Appeal have decided that the rule does apply to unsecured creditors of the company who are not its shareholders. On the facts the rule barred the action against the tortfeasor and the Giles v Rhind exception did not apply as the wrongdoing had not made it impossible for the companies to pursue a claim against the wrongdoer.

 

No direct liability in tort for UK parent company. Third ‘anchor defendant’ decision in the Court of Appeal.

 

AAA v Unilever [2018] EWCA Civ 1532 is the third Court of Appeal decision in the trio of anchor defendant cases (the others being Lungowe v Vedanta and Okpabi v Royal Dutch Shell) that came before the courts last year raising the issue of when a parent company owes a duty of care to persons affected by the activities of its overseas subsidiary. The claimants were workers on a tea plantation in Kenyan who had suffered from criminal acts following the violence that followed the 2007 elections, which was on tribal lines. The issue was whether the parent company and the subsidiary owed a duty of care to people on the estate to protect them from unlawful violence. The claimants conceded that Kenyan law applied but it was accepted that English law was very persuasive in Kenya and Kenyan law would follow English law on the imposition of a duty of care on the parent company. Elizabeth Laing J admitted the possibility of a duty of care being owed by the parent company but the claim foundered on the issue of foreseeability of the type of harm suffered by the claimants.

Last week the Court of Appeal dismissed the claimant’s appeal on the grounds that there was no arguable case that the parent company owed a duty of care to the claimants. Sales LJ, giving the judgment of the Court, held that a parent company could owe a direct duty of care to those affected by the activities of its subsidiary in two situations: (i) where the parent has in substance taken over the management of the relevant activity of the subsidiary in place of, or jointly with, the subsidiary’s own management; or (ii) where the parent has given relevant advice to the subsidiary about how it should manage a particular risk.

The appellants accepted that they could not say that their claim was within the first category as the management of the affairs of Unilever’s Kenyan subsidiary, UTKL, was conducted by the management of UTKL. Instead, they sought to bring their claim within the second category, relying upon advice which they say was given by Unilever to UTKL in relation to the management of risk in respect of political unrest and violence in Kenya.  However, the witness evidence and the documentary evidence, showed that UTKL did not receive relevant advice from Unilever in relation to such matters, and that UTKL understood that it was responsible itself for devising its own risk management policy and for handling the severe crisis which arose in late 2007, and that it did so.

So far, the three anchor defendant cases on whether a parent company owes a duty of care in respect of the activities of its subsidiary company have seen two decisions against the claimants, and one Vedanta v Lungowe in their favour. In Vedanta  permission to appeal to the Supreme Court was granted on 23 March 2018, and in Okpabi the claimants have stated their intent to apply for permission to appeal to the Supreme Court. We are likely to see a lot more on this question in the coming months.

 

 

Midsummer blues (if you’re a judgment creditor)

Imagine your clients have just got judgment for zillions against a company. You then find that the man behind it, or one of his pals, has quietly siphoned off the company’s assets to some entity in the back of beyond to make sure your clients never see their money. What can you do? Unfortunately one remedy, a suit against the person responsible for diverting the assets, now seems largely closed off. At least that seems to be the result of an important Court of Appeal decision today, Garcia v Marex Financial Ltd [2018] EWCA Civ 1468.

Foreign exchange brokers Marex had a judgment for a cool $5 million, give or take a few thousand, against a couple of BVI companies owned by one S. Hey presto, when it came to enforcement the cupboard was bare, save for a measly $4,392.48, having (on Marex’s case) been deep-cleaned by S. Marex sued S for dishonestly asset-stripping the BVI companies of something over $9 million, alleging correctly that this amounted to the tort of causing loss by unlawful means.

At this point they were met with a plea that their action was barred by the principle of reflective loss stated in Johnson v Gore Wood [2002] 2 AC 1. Marex’s claim was based on the companies’ loss through the defendants’ wrong of the assets that would have been used to pay  their debt: it was thus the companies’ claim and no-one else could be allowed to piggy-back on it. The defence did not convince Knowles J (see [2017] EWHC 918 (Comm) , noted here in this blog); but it did impress the Court of Appeal. The bar on reflective loss extended to any claim based on a wrong causing loss to the company that had a knock-on effect of causing loss to a third party: it did not matter whether the claimant was a shareholder, a stockholder, a  creditor or anyone else. Nor could the rule be sidelined where (as here) it was practically impossible for the company to sue the wrongdoer: the exception in Giles v Rhind [2003] Ch 618 applied only in rare cases where it was not only factually but legally impossible for the company to sue.

How far this decision generally eviscerates the tort of causing loss by unlawful means where the immediate victim is a company remains to be explored. The fact remains, however, that since today an English judgment against a corporate, as against an individual, defendant has become that less valuable as the ability of third parties to frustrate it with relative impunity has grown. Moral: get that freezing relief as soon as possible. It may be all you have to rely on at the end of the day.

Ultra vires or ineffective: a no-nonsense approach to contractual effectiveness

A short technical point of interest especially to those dealing with foreign state or semi-state entities arises out of a decision of Andrew Baker J a week ago in Exportadora De Sal SA De CV v Corretaje Maritimo Sud-Americano Inc [2018] EWHC 224 (Comm).

The power of a Ruritanian state corporate entity  to conclude a contract is governed by the law of the place of incorporation, i.e. Ruritania. The validity of the contract, and whether anything has happened which has the effect of preventing the parties being liable, or discharging an existing duty, is controlled by the governing law of the contract: if there’s an English law and jurisdiction clause, this means English law, to the exclusion of Ruritanian. But where is the boundary between the two?

A Mexican 51/49 state/private entity contracted for the building of a self-unloading salt barge (don’t say you don’t learn about interesting gadgets on Maricom) for about $27 million. The contract specified English law and London arbitration. The Mexican entity broke its contract, and following arbitration went down for about $7 million.  However the builders, when they tried to enforce the award, encountered a plea that the Mexican entity concerned had had no power under Mexican law to contract for the barge except through a specified tender process; that this hadn’t happened, that there had indeed been a Mexican administrative decision to cancel the contract on that basis, and that this nullified not only the contract but any submission to the arbitral process contained within it.

Andrew Baker J gave the buyers short shrift for a number of reasons we need not go into here. As regards the no-power argument, however, he made the important point that it was a non-starter. Although possibly dressed up as an ultra vires point, it was really nothing of the sort: viewed as a matter of substance it was a question of substantive validity. Substantive validity being governed by English law, the fact that under Mexican law the contract had been declared entirely ineffective was simply beside the point. As his Lordship observed, this decision was merely a mirror-image of the earlier Haugesund Kommune et al. v Depfa ACS Bank [2012] QB 549, where an ostensibly validity-orirnted rule had been held on a proper construction actually to go to the vires of a contracting party. But  the Exportadora de Sal case is none the less a useful weapon in the armoury of an English international commercial lawyer faced with an impressive-sounding plea that an apparently English contract was ultra vires under the laws of Backofbeyondia.

 

 

Parent company liability for subsidiary operations abroad.  

 

An interesting new Court of Appeal decision on transnational litigation in the  English courts concerning alleged torts committed overseas. Lungowe v Vedanta and Konkola Copper Mines [2017] EWCA Civ 1528 involved claims by Zambian citizens against the defendants alleging personal injury, damage to property and loss of income, amenity and enjoyment of land, due to alleged pollution and environmental damage caused by discharges from the Nchanga copper mine since 2005. Konkola Copper Mines (‘KCM’), a Zambian company, owned and operated the mine. Vedanta, a UK company, is a holding company for various metal and mining companies, of which KCM is one.

The claim was served on Vedanta by virtue of its domicile in the UK and permission was granted for the claim form and particulars of claim to be served out of the jurisdiction on KCM. Vedanta and KCM both applied for declarations that the High Court had no jurisdiction to hear the claims. In June 2016 Coulson J dismissed the challenges. The Court of Appeal has now upheld the dismissal.

  1. Vedanta’s position.

Under art. 4 of the Recast Brussels Judgments Regulation 2012 the claimants were entitled to sue Vedanta in the UK by virtue of its domicile. The Court of Appeal held that following the ECJ’s decision in Owusu v Jackson [2005] QB 801, it was clear that there was no scope for staying proceedings on the grounds of forum non conveniens where jurisdiction was established on the grounds of the defendant’s domicile under art. 4. Although in principle it might be possible to argue that invoking the rules in the Recast Regulation amounted to an abuse of EU law, there would have to be sufficient evidence to show that the claimant had conducted itself so as to distort the purpose of that rule of jurisdiction. The present case did not meet the high threshold for an abuse argument to succeed.

  1. KCM’s position

The application to serve KCM out of the jurisdiction in Zambia was based on para 3.1 of Practice Direction 6B on the ground that there was between the claimant and Vedanta a real issue which it was reasonable for the court to try and the claimant wished to serve KCM as a necessary or proper party to that claim. If the claimants could satisfy these conditions, the court still retained a discretion and CPR 6.37(3) provide that: “The court will not give permission unless satisfied that England and Wales is the proper place in which to bring the claim.”

An important issue in this analysis was whether there was a real issue between the claimants and Vedanta. This raised the question of whether a parent company could owe a duty of care to those affected by the operations of a subsidiary. Following the Court of Appeal’s decision in Chandler v Cape such a duty towards the employee of a subsidiary could arise where the parent company (a) has taken direct responsibility for devising a material health and safety policy the adequacy of which is the subject of the claim, or (b) controls the operations which give rise to the claim. The parent must be well placed, because of its knowledge and expertise to protect the employees of the subsidiary. If both parent and subsidiary have similar knowledge and expertise and they jointly take decisions about mine safety, which the subsidiary implements, both companies may (depending on the circumstances) owe a duty of care to those affected by those decisions. This type of duty may also be owed in analogous situations, not only to employees of the subsidiary but to those affected by the operations of the subsidiary. The Judge had decided on the basis of the pleaded case that it was arguable that such Vedanta did owe such a duty of care to those affected by KCM’s operations. The Court of Appeal concluded that the Judge had been entitled to reach that conclusion. There was a serious question to be tried which could not be disposed of summarily, notwithstanding that it went to the Court’s jurisdiction.

The Court of Appeal also upheld the finding that it was reasonable to try the issue between Vedanta and the claimants. Vedanta was sued within the jurisdiction pursuant to a mandatory jurisdictional rule and the claimants had an interest in suing Vedanta other than for enabling them to bring KCM within the jurisdiction. The claimants were suing Vedanta as a company with sufficient funds to meet any judgment of the English court, whereas they had grounds to believe, and evidence to show, that KCM might be unable or unwilling to meet such a judgment. KCM was a necessary and proper party to the Vedanta claim because the claims against the two defendants were based on the same facts and relied on similar legal principles and the Judge was entitled to conclude that Vedanta and KCM could be regarded as broadly equivalent defendants.

As to whether England and Wales was the proper place in which to bring the claim, the Court of Appeal again upheld the Judge’s finding that it was. Although, absent the claim against Vedanta, it would be clear that England would not be the appropriate forum for the claims – that would be Zambia, the position change once the claim against Vedanta was taken into account. It would be inappropriate for the litigation to be conducted in parallel proceedings involving identical or virtually identical facts, witnesses and documents, in circumstances where the claim against Vedanta would in any event continue in England.

The case can be contrasted with the earlier decision of Fraser J in Okpabi and others v. Royal Dutch Shell Plc and Shell Petroleum Development Company of Nigeria Ltd [2017] EWHC 89 (TCC), noted in this blog on 2 February 2017.  Fraser J found that there was no arguable duty of care owed by the parent company Royal Dutch Shell Plc to those affected by the operations of its subsidiary in Nigeria. He declined to follow Coulson J’s decision in the instant case, identifying facts that distinguished the two cases. The decision is under appeal.

Parents and subsidiaries. No liability in tort for Nigerian pipeline pollution.

When will a parent company be liable in tort in respect of acts of one of its subsidiary companies? Fraser J has provided some answers to this question in Okpabi v Royal Dutch Shell and Shell Petroleum Development Company of Nigeria Ltd,  [2017] EWHC 89 (TCC). The case involved pollution claims arising from oil leaks from Nigerian land pipelines due to the illegal process of bunkering by which oil is stolen by tapping into the pipelines. The principal target was Shells’ Nigerian subsidiary SPDC who operated the pipelines but the claimants wanted the case to be heard in the English courts rather than in Nigeria. To do this they brought proceedings against the English holding company, Royal Dutch Shell, which would serve as an “anchor defendant” to allow claims against SPDC to be joined to those proceedings. In a jurisdictional challenge by the two defendants the issue arose as to whether there was an arguable duty of care on the part of RDS to the claimants under Nigerian law which for these purposes was the same as English common. If not, there would be no ‘anchor defendant’ and SPDC’s applications challenging jurisdiction would succeed, due to the lack of connection of the claims against SPDC with this jurisdiction.

The claimants argued that Royal Dutch Shell owed a direct duty of care to them, relying heavily on the Court of Appeal’s decision in Chandler v Cape [2012] 1 WLR 3111, in which a parent company was found to owe such a duty to employees of its subsidiary company. They alleged that RDS had failed to ensure that repeated oil leaks from SPDC’s infrastructure were expeditiously and effectively cleaned up so as to minimise the risk to the claimants’ health, land and livelihoods and, further, had failed to take appropriate measures to address the well-known systemic problems of its operations in Nigeria which led to repeated oil spills.

Fraser J applied the threefold Caparo test to finding the existence of a duty of care.

1. The damage should be foreseeable; 2. There should exist between the party owing the duty and the party to whom it is owed a relationship of proximity or neighbourhood; 3. The situation should be one in which it is “fair, just and reasonable” to impose a duty of a given scope upon the one party for the benefit of the other.

The second and third of these limbs were problematic for the claimants. The evidence from those at SPDC’s evidence was to the effect that it, rather than RDS, took all operational decisions in Nigeria, and RDS performed nothing by way of supervisory direction, specialist activities or knowledge, that would put RDS in any different position than would be expected of an ultimate parent company. It was SPDC that had the specialist knowledge and experience – as well as the necessary licence from the Nigerian authorities – to perform the relevant activities in Nigeria that formed the subject matter of the claim.

Nor could a duty of care be said to arise from public statements by made both by the Shell Group and by RDS about the Group’s commitment to environmental issues, and the organisation of the Shell Group, such statements being a function of the listing regulations of the London Stock Exchange.  First these statements were qualified by the following wording “Royal Dutch Shell plc and the companies in which it directly and indirectly owns investments are separate and distinct entities. But in this publication, the collective expressions “Shell” and “Shell Group” may be used for convenience where reference is made in general to those companies. Likewise, the words ‘we’, ‘us’, ‘our’ and ‘ourselves’ are used in some places to refer to the companies of the Shell Group in general. These expressions are also used where no useful purpose is served by identifying any particular company or companies.” Second, it was highly unlikely that compliance with such disclosure standards mandated for listing on the London Stock Exchange could of itself be characterised as an assumption of a duty of care by a parent company over the subsidiary companies referred to in those statements.

As regards Chandler v Cape, the claimant there was a former employee, which, by definition, involved a closer relationship than parties affected by operational activities. A duty of care was more likely to be found in respect of employees, a defined class of persons, rather than others not employed who are affected by the acts or omissions of the subsidiary.  None of the four factors identified by Arden LJ in Chandler as leading to a duty of care on the parent company was present here. 1. RDS was not operating the same business as SPDC. 2. RDS did not have superior or specialist knowledge compared to the subsidiary SPDC. 3. RDS could have only a superficial knowledge or overview of the systems of work of SPDC.  4. RDS could not be said to know that SPDC was relying upon it to protect the claimants.

Accordingly, there was no arguable duty of care on the part of RDS and with the disappearance of the anchor defendant the claims against SPDC could not proceed in England. The claimants’ solicitors, Leigh Day, have stated that they will appeal.

 

Freezing injunctions and contribution claims

A nice point about freezing injunctions in the High Court today, in which Leggatt J provided some joy for honest but hard-pressed litigants. Kazakhstan Kagazy (KK), a British company with big interests in paper & recycling in Kazakhstan, sued a number of its subsidiaries’ employees, including A and Z, for dishonestly siphoning off something over $100 million to themselves and their chums in Central Asia (the serious litigation is booked for next year). KK settled with Z for what one suspects was a tidy sum plus an agreement to co-operate in chasing the other defendants. Proceedings against Z were duly stayed.

A issued a Pt 20 notice claiming contribution from Z in the event that he was held liable to KK. As an adjunct he also sought a freezing injunction against Z. In fact the contribution notice was bad for other reasons, but Z also raised an interesting argument on the freezing injunction. According to The Veracruz [1992] 1 Lloyd’s Rep 353, there can be no freezing injunction until you have a right against the defendant: it won’t do to say, however convincingly, that you almost certainly will have a right next week and that there won’t then be a cat in hell’s chance of making it good if the defendant can hide his assets. Well then, said Z: this must protect me. Any right A may have against me for contribution will arise only when A has been sued by, or settled with, KK; until then there is no right but merely the prospect of one.

Apparently logical: but if correct, this would effectively mean that freezing injunctions would be a dead letter in contribution claims. Leggatt J was having none of it. To get freezing relief, he said, all you needed was to have the ability to bring proceedings which wouldn’t automatically be struck out. Since you can Part 20 a third party as soon as you are sued, and indeed A had done just that, it followed that had the  contribution notice been good, there could have been an asset-freeze. As I say, much relief for hard-pressed litigants.

See Kazakhstan Kagazy Plc v Zhunus & Ors [2016] EWHC 1048 (Comm), available on BAILII.

Andrew Tettenborn

 

Oil and Nigeria. Two new cases.

  1. In Federal Republic of Nigeria v MT Asteris (Charge FHC/L/239c/2015) the Federal High Court convicted a vessel and its crew of charges that included conspiracy to deal, dealing with, attempting to export and storing crude oil without lawful authority or a licence. The vessel had been arrested while drifting in Nigeria’s exclusive economic zone and Lloyds List data showed that the vessel had been trading in Nigeria. The vessel had 3,423.097 metric tons of petroleum products on board but no documents confirming their origin.
  2. Following Shell’s £55m settlement of an oil spill claim in the Bodo community in Nigeria, two new claims have been filed against Shell in the High Court by London solicitors, Leigh Day, in respect of spills in the Ogale and Bille communities.In the Ogale action, it is alleged that leaks are due to pipelines and infrastructure being several decades old and in a poor state of repair. In 2011 the United Nations Environmental Programme (UNEP) published an Environmental Assessment of Ogoniland which included extensive testing of the Ogale Community. UNEP’s recommended: (i) Emergency measures to provide adequate sources of drinking water to impacted households; (ii) Immediate steps to prevent existing contaminated sites from causing further pollution and; (iii) A substantial programme of clean up and decontamination of impacted sites. It is alleged that Shell has failed to comply with the recommendations of the UNEP Report and to clean up the sites polluted by their oil.In the Bille action it is alleged that creeks, mangroves and island communities have been devastated by oil leaks since the replacement of the Bille Section of the pipeline in 2010. The key issue in the claim will be whether Shell can be liable for failing to protect their pipelines from damage caused by third parties.On 2 March 2016 at the Technology and Construction Court, His Honour Judge Raeside QC, ruled that formal legal proceedings against Shell can now be served on Shell Nigeria (the Shell Petroleum Development Company of Nigeria Ltd) who will be joined to the English proceedings alongside Royal Dutch Shell plc.