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.

All change for financier assignees — second time lucky with anti-anti-assignment provisions?

The good times seem likely to end finally on 31 December this year for anti-assignment clauses. The Government has published the draft Business Contract Terms (Assignment of Receivables) Regulations 2018, which for SMEs essentially invalidate anti-assignment clauses affecting receivables — i.e. sums payable for goods or services supplied. A few pointers:

1. The prohibition is not limited to assignment to financiers: assignment to debt-collectors, etc, also seems to be protected.

2.  There are anti-avoidance provisions. Any attempt to put conditions on the assignability of receivables is outlawed. The blurb states that a set-off clause is not such a condition: this may be important where, for example, a contract allows set-offs that would not otherwise be pleadable against an assignee. On the other hand, there is some doubt about this: the Regulations do not contain any such provision, and the blurb, of course, is not part of them.

3. There are exceptions. These include financial services, swaps, energy futures, petroleum licences, public-private partnership projects and contracts with national security implications. Importantly there are also two other carve-outs. One is contracts where one or more parties is not acting in the course of a business. This means consumers can, if there is a suitable term, continue to refuse to deal with an assignee. Another is contracts which neither party entered into in the course of a business here: so genuine international contracts remain subject to the old freedom of contract rules. Perhaps suprisingly, rental contracts are also excluded, except when connected with certain forms of financial services.

All in all, these seem an improvement on last year’s regulations (not difficult). As to their effect we’ll have to wait and see.

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.

Of sales, bills of exchange and arbitration

Picken J today revisited an old chestnut in arbitration law. Suppose you sell goods or services and draw on the buyer for the price (yes, some people still do this), and have a standard arbitration clause referring to “all disputes arising out of or in connection with this Contract”. Does the arbitration clause cover a claim on the bill of exchange, as against one on the underlying contract of sale? Just this happened in Uttam Galva Steels Ltd v Gunvor Singapore Pte Ltd [2018] EWHC 1098 (Comm), where the buyer made a s.67 application challenging an LME arbitration tribunal that had said yes and had then given judgment against it on the bill. In fact the buyer had introduced the point out of time, so the point was a non-starter.  But even without that it would, said Picken J, have failed. On the basis of modern arbitration practice as evidenced in Fiona Trust v Privalov [2007] UKHL 40; [2007] 4 All E.R. 951 parties should not lightly be taken to have agreed to bifurcated dispute resolution according to whether the action was being brought on the bill or on the contract. Dicta in Nova (Jersey) Knit Ltd v Kammgarn Spinnerei GmbH [1977] 1 WLR 713, 731 and the Singapore decision in Rals International Pte Ltd v Cassa di Risparmio di Parma e Piacenza SpA [2016] SGCA 53 failed to convince him otherwise.

On balance it is suggested that his Lordship was right. It is true (as he admitted) that the result is that those who sell under bills of exchange may inadvertently give up the right they would otherwise have to summary judgment on the bill with few if any questions asked under the ‘pay now, sue later’ principle. But summary judgment is equally available under the underlying contract, and the fact that this may be precluded by an arbitration clause never seems to have unduly worried anyone.

If the claim is brought on the bill by an indorsee who is a holder in due course, then presumably the result will be different: the holder here can hardly be bound by any arbitration clause — as indeed was held in Rals International Pte Ltd v Cassa di Risparmio di Parma e Piacenza SpA [2016] SGCA 53, where the claimant was the indorsee of a promissory note. But this need not detain us.

Meanwhile, the sensible reaction for a commercial lawyer is a simple one: say what you want. Where payment is or may be made by a bill of exchange, it is hardly rocket science to draft the arbitration clause to as to embrace “all disputes arising out of or in connection with this Contract, including cases where the claim is brought under a bill of exchange or promissory note”, or (if you prefer) “all disputes arising out of or in connection with this Contract, save for cases where the claim is brought under a bill of exchange, promissory note or similar instrument”. You may do students of commercial law out of a bit of technical learning, but you sure will save your clients a good deal of heartache and very possibly money.

Valuers’ negligence: no claim for more than lender loses

Not often do you find a Supreme Court decision in only 15 paragraphs that is clear, sensible and palpably right. Today we got just that in the valuers’ negligence decision of Tiuta International Ltd (in liquidation) v De Villiers Surveyors Ltd [2017] UKSC 77. Although a land case, this is of equal, and large, significance to ship and other finance.

In 2011 Tiuta lent £2.475 million for a bijou Home Counties development against a valuation by De Villiers of £2.3 million undeveloped / £4.5 million complete, of which no complaint was made. After some months the developers ran into difficulties. In 2012 Tiuta made a new loan of £3.088 million against the same development, of which £2.799 million went to discharge the old loan plus accrued interest, and the balance of £289,000 was new money. This latter advance was made against a new valuation by De Villiers in the sum of £3.5 million undeveloped / £4.9 million complete. Shortly after all this, the developers went bust and Tiuta lost big money.

Tiuta sued De Villiers for their loss, alleging negligence in the second valuation. De Villiers riposted that they could not possibly be answerable for more than £289,000, since even if they had not been negligent Tiuta would still have been exposed to the original, largely irrecoverable, balance of £2.799 million. To everyone’s surprise, a majority in the Court of Appeal disagreed. The 2011 loan had been paid off and was now out of the reckoning: the 2012 loan in the figure of £3.088 million counted as an entirely new advance made against the suspect valuation, and on principle any loss on it was recoverable. McCombe LJ, the dissentient, was left gasping and stretching his eyes (remember Hilaire Belloc’s Matilda?) at the idea that new money injection of a mere £289,000 could give Tiuta, free gratis and for nothing, a claim of up to £3 million that had not been there before.

The Supreme Court swiftly restored orthodoxy. Whether the lenders provided new money of £289,000 and left the existing loan of £2.799 million untouched, or provided a new loan of £3 million-plus which was partly used to pay off the original loan, the result was the same: the only net increase in exposure was £289,000 and that was all that was recoverable. Nor could Tiuta get home by saying that the repayment of the original loan was somehow a collateral benefit to Tiuta: as Lord Sumption observed with merciless logic, it was in fact neither collateral nor a benefit.

Advantage PI insurers, to be sure. On the other hand, this still leaves some questions unanswered. If the first lender had been someone other than Tiuta, the result would presumably have been different. Does this mean that if a lender wants to avoid the result in Tiuta, all it has to do is to make sure that when it lends several times to the same project, each loan is made by a separate subsidiary special purpose vehicle (quite easy to arrange)? One suspects lawyers are already busy dealing with questions like this and advising accordingly.

Good news for English judgment creditors — oh, and the beneficiary of a credit is who the credit says it is.

In Taurus Petroleum Ltd v State Oil Marketing Company of the Ministry of Oil, Republic of Iraq [2017] UKSC 64 Shell bought two parcels of Iraqi oil in 2013 from the state Iraqi oil company SOMO. Its bank, Credit Agricole in London, issued letters of credit governed by English law naming SOMO as beneficiary, but containing a clause as follows (essentially to comply with the Iraqi sanctions regime):

“[A] Provided all terms and conditions of this letter of credit are complied with, proceeds of this letter of credit will be irrevocably paid in to your account with Federal Reserve Bank New York, with reference to ‘Iraq Oil Proceeds Account’.These instructions will be followed irrespective of any conflicting instructions contained in the seller’s commercial invoice or any transmitted letter.
[B] We hereby engage with the beneficiary and Central Bank of Iraq that documents drawn under and in compliance with the terms of this credit will be duly honoured upon
presentation as specified to credit CBI A/c with Federal Reserve Bank New York.”
Taurus subsequently got an arbitration award against SOMO of something like $9 million, which it wanted to enforce against the benefit of the letter of credit under a TPDO (garnishee in old-fashioned English). Three questions: (1) who was the creditor under the LCs,  SOMO or the Central Bank? (2) where was the debt situated? (3) should a receiver be appointed?
On the situation of the debt, the whole court agreed, reversing the CA, that it was London, where the debtor, the London branch of Credit Agricole, was situated. It followed that the English court had jurisdiction to make a TPDO. There was no reason to treat a LC debt as any different from any other debt: Power Curber International Ltd v National Bank of Kuwait S.A.K. [1981] 1 W.L.R. 1233, regarding such debts as situated in the place of payment, was wrong.
All their Lordships felt that a receivership order was appropriate.
On the identity of the creditor, the decision was by a majority. The majority said, reversing the CA, that it was SOMO. They were named as beneficiaries. The agreement to pay the Oil Proceeds Account in New York made no difference in this respect: it was merely a collateral agreement. (Presumably Taurus had some arrangement with the Central Bank to collect from them: we are not told).
On balance, a good decision for creditors chasing funds through TPDOs. Its effect is essentially that any LC issued by a London bank, even a branch of a foreign institution, now seems fair game, even if payable in Mannhein, Manila or Madagascar. Forget Brexit: London is likely to remain the place to be.

Lending $150 million to an oil company? Don’t worry too much about UCTA.

The decision in African Export-Import Bank & Ors v Shebah Exploration & Production Co Ltd & Ors [2017] EWCA Civ 845 , dismissing an appeal from Phillips J (noted here in this blog), contains few surprises and much relief. A syndicate of three banks, one Egyptian and two Nigerian, lent $150 million or so to a speculative Nigerian oil exploration company which — surprise, surprise — failed to pay most of it back. The lenders did the obvious thing, accelerated the loan and filled in the form asking for summary judgment. Hoping to stave off the evil day, the company and its two guarantors raised what looked like a fairly speculative set-off of a cool $1 billion, essentially suggesting that one bank had wrongfully dragged its feet over making the loan, and that another had broken the terms of a different, earlier, facility. The lenders sought to shut out this effort to muddy the waters by invoking an explicit anti-set-off clause. The borrower for its part argued that it had dealt on the lenders’ written standard terms of business and that the clause was clearly unreasonable under s.3 of the Unfair Contract Terms Act 1977(!). Phillips J disagreed and gave judgment in short order, pointing out that the terms, standard ones drafted by the Loan Market Association, had been extensively negotiated, and that it would be rare indeed for a party to be able to argue that a standard set of conditions like this was used so inflexibly as to attract the operation of s.3.

The Court of Appeal agreed wholeheartedly. They pointed out that the borrowers, who had to prove the use of written standard terms of business, had not even called any evidence to that effect. This would not do: as Longmore LJ drily put it at [33],

“A party who wishes to contend that it is arguable that a deal is on standard business terms must, in my view, produce some evidence that it is likely to have been so done. … It cannot be right that any defaulting borrower can just assert that business is being done on standard terms and that the lender then has to disclose the terms of other (how many other?) transactions he has entered into before he is entitled to summary judgment.”

Although he accepted that inflexible use of a third party’s standard terms might theoretically trigger s.33, he also pointed out that any substantial degree of negotiation would negative this, and also that the negotiation need not necessarily relate to the terms potentially caught by the 1977 Act.

As I said, a result which will be welcomed in the Square Mile. It will rightly reassure lenders that they can make their loans subject to English law safe in the knowledge that the courts here will give short shrift to snivelling arguments based on an Act which was never intended, one suspects, to protect highly commercial borrowers like this.

Of course, to make assurance doubly certain, there might be something to be said for strengthening the blanket exception to the 1977 Act in s.26 so as to encompass not only international supply contracts but contracts for loans or financial services between corporations with places in different jurisdictions. With the Queen’s Speech reduced this Parliament to about the length of a fireside chat, an under-occupied Government might even find Parliamentary time for the necessary change.

Investors — beware how you handle corporate structures

Most serious investors in everything from ships to real estate to businesses act through the medium of ‘tame’ companies. They do this for very good reasons. However, the Supreme Court gave a salutary warning this morning that even the simplest structures of this kind can provide pitfalls for the unwary.

Slightly simplified, in Lowick Rose LLP (in liquidation) v Swynson Ltd [2017] UKSC 32 what happened was this. A wealthy investor H used a wholly-owned special purpose vehicle S Ltd to make a loan of £15 million to EMS Ltd to enable EMS to buy MIA Inc. Due diligence, or rather a lack of it, was provided by accountants HMT, who failed to notice glaring problems with MIA. The trouble quickly surfaced. As a damage limitation exercise H caused S to lend a further £1.75m to EMSL in 2007 and £3m in 2008, H at the same time obtaining a large holding in EMS. Things went from bad to worse, and in 2008 more refinancing was necessary. H personally lent EMS some £19 million, most of which went to pay off EMS’s borrowings from S, with the rest being new money. To no avail: MIA collapsed, and with it the whole house of cards.

H and S sued HMT for losses of some £16 million. At this point an awkwardness arose. HMT was held on the facts to have owed no duty to H. As regards S it admitted negligence, but argued that in so far as S’s loans to EMS had been paid off (by H) the loss was H’s and not S’s. Reversing the Court of Appeal, the Supreme Court decided for HMT. S had indeed suffered no loss. The loan by H to EMS to pay off S was not an unconnected benefit, so as to be regarded as res inter alios acta. Nor could S invoke transferred loss and the rule in Dunlop v Lambert (1839) 2 Cl & F 626; nor yet could H use the doctrine of subrogation to keep the loan from S to EMS alive and claim in the name of S.

A nice windfall for HMT’s professional indemnity insurers, and an unnecessary one. Had H lent the money to S for S to use to refinance EMS, there would have been no problem; H, through S, would have been £16 million to the good. But he hadn’t done that, and that was an end of the matter. As we said above, when using corporate structures any failure to take care to guard your back can be very costly.

Solicitors also note: you are now on notice. Since this decision, unless you take great care in advising on refinancing deals, the SIF is likely to have some less-than-kind words for you too.

Message from the Supreme Court: do your due diligence

Yesterday’s Supreme Court decision in BPE Solicitors v Hughes-Holland [2017] UKSC 21 looks like a dry-as-dust decision on the measure of damages in professional negligence cases. It is more important than that, however.

A financier, G, was negligently misinformed by his solicitor about a project he was thinking of financing. To cut a long story short, G was led to believe he was bankrolling the carrying out of a property development, while in fact he was merely refinancing the property owner’s own crippling indebtedness, leaving no assets left over to actually do the work. Having taken the loan the borrower went bust; the property was sold for a song, and G lost his hard-earned cash.

Pretty obviously, had G not been misled he would have run a mile and invested his funds elsewhere, where they would still have been available to him. There was however a complication: quite apart from any misinformation by his lawyers, the project he invested in was a complete dud from beginning to end. In other words, even if what his solicitors told him had been entirely true and he had been financing the actual works, he would still have been pouring his money down the drain, and he would still have lost out.

Upholding the Court of Appeal, Lord Sumption (speaking for the court) decided that G recovered nothing. Even though he would not have made the disastrous investment he did but for his solicitors’ blunder, his solicitors’ duty did not extend to protecting him from garden variety commercial misfortune. It followed that (contrary to a number of earlier authorities) the so-called SAAMCO cap (see South Australia Asset Management Corpn v York Montague Ltd [1997] AC 191) applied to reduce recovery to nil.

The significance of this decision to businesses generally, from lenders of money to buyers of ships or businesses, is that it removes what was once quite a comforting safety-net. Prior to BPE, if professional advisers negligently failed to tell a client facts indicating that some investment he was seeking to make was entirely unacceptable or unviable, the client could recover his entire (foreseeable) loss, even if other commercial conditions indicated that the deal was a disaster and he would have lost out anyway regardless of the facts he was not told about. Quite rightly, the Supreme Court has now closed off this means of palming off one’s own financial misjudgment on somebody else’s professional indemnity insurers. As the title says: do your due diligence. If you don’t, from now on you’re on your own.

Trustees, beneficiaries and purchasers — good news all round

Good news from the Supreme Court last week for commerce: in particular, those purchasing assets from trustees. In Akers v Samba Financial Group [2017] UKSC 6 ASa Saudi businessman, held shares on trust for a company, SICLA: he disposed of the shares to Samba in satisfaction of a debt. Assuming Samba were in good faith, you might have thought there was no problem: they would take free of the trust. But SICLA was insolvent: and the liquidator sought an end-run round the rule of equity’s darling by invoking s.127 of the Insolvency Act 1986. This prohibits disposition of the assets of an insolvent company (including beneficial interests in trust property), and allows their claw-back, with only a judicial discretion to protect the alienee and no general good-faith purchaser protection. The Supremes refused to allow this attempted circumvention. Dispositions within s.127 implied dispositions by the company, not dispositions of the company’s (equitable) property by a trustee purporting to vest it in a third party. Result: purchasers, provided they are in good faith and without notice, can happily thumb their noses at alleged trust beneficiaries, even insolvent ones. Quite right too.

But there was also good news for beneficiaries. In the present case the trust was a Cayman trust; however, the shares, being shares in Saudi companies registered in Saudi Arabia, were situated in Saudi Arabia. Now, Saudi law doesn’t accept the existence of trusts. Nevertheless their Lordships made it clear that under the Hague Convention embodied in the Recognition of Trusts Act 1987, the English courts would recognise the trust (although under Art.11(d) of the Convention the question whether a purchaser of the shares took free of it would fall to be decided by the lex situs, Saudi law). We all thought that was probably the case anyway; but it’s nice to have confirmation of one’s prejudices, especially if (as here) they are sensible ones.