The Chancellor:
Introduction
1.On 5th June 2007 a Leopard 23m sport yacht called the Bull ("the
Bull") was registered in the Cayman Islands in the register of British
shipping in the name of the first respondent Yacht Bull Corporation
("YBC") under number 740064. YBC is a company incorporated in the
Cayman Islands formerly owned or controlled by Mrs Ruth Madoff, the
wife of Mr Bernard Madoff. The Bull had been acquired with money,
some $7m, emanating from Madoff Securities International Ltd ("MSIL"),
a company incorporated in England then owned and controlled by Mr
Bernard Madoff ("BM"). BM also owned and controlled Bernard Madoff
Investment Securities LLC ("BMIS"), a company incorporated in New
York. On 11th December 2008 BM admitted to having carried on a 'Ponzi'
scheme, primarily through BMIS, whereunder some 5,000 investors
were defrauded of $65bn. On 12th December 2008 the US Securities
and Exchange Commission ("SEC") obtained a temporary restraining
order from the US District Court for the Southern District of New York
against BM and BMIS of which it gave notice to the banks with which MSIL
dealt. On 15th December 2008 the UK Financial Services Authority served
notice on MSIL restricting the use to which it could put its assets. On 16th
December BM and his sons resigned as directors of MSIL.
2.On 19th December 2008 the remaining directors of MSIL presented a
petition to the High Court in England seeking an order to wind up MSIL on
the ground that it was just and equitable to do so. On the same day they
applied for and obtained an order for the appointment of the applicants
Messrs Byers, Hosking and Akers as joint provisional liquidators of MSIL.
The petition was amended on 8th December 2009 to seek a winding up
order on the additional ground that MSIL was insolvent. An order for
the compulsory winding up of MSIL was made on 15th December 2009
and the joint provisional liquidators were appointed joint liquidators
("the JLs"). In the liquidation of MSIL there is a deficiency with regard
to creditors of some £185m. The largest creditor is BMIS in the sum
of £201m alleged to be due under the preference provisions of the US
Bankruptcy Code.
3.The second respondent, Financière Meerschaert SA ("FM"), is company
incorporated and domiciled in France. By 31st October 2008 it had
subscribed on behalf of its clients some €10m for shares in a mutual fund
in Luxembourg run by UBS called SICAV Luxalpha. The fund invested
substantial sums with BMIS. When the existence of the Ponzi scheme run
by BM came to light FM compensated its clients for their losses and took
over their shares in SICAV Luxalpha. On 30th April 2009 FM instituted
proceedings in the Commercial Court in Antibes against YBC and Mrs
Madoff for compensation for the harm caused to FM through Luxalpha by
their participation in the Ponzi scheme.
4.At all material times the Bull has been moored at Antibes. On 3rd April
2009 FM procured an order from the Commercial Court in Antibes for
the arrest of the Bull in support of its alleged claim. That arrest was set
aside by the Aix en Provence Court of Appeal on 10th December 2009.
Five hours after the arrest by FM the JLs procured an order from the
Commercial Court in Antibes for the arrest of the Bull so as to preserve it
for the benefit of all unsecured creditors of MSIL. On 18th January 2010
FM applied to the Commercial Court in Antibes to set aside the latter
order. That application has not yet been determined.
5.On 28th April 2009 MSIL, through the JLs, instituted proceedings in the
Grand Court of the Cayman Islands against YBC for a declaration that
it was the sole beneficial owner of the Bull and entitled to be registered
as the legal owner of the same. They remain undetermined. On 28th
May 2009 FM intervened in the proceedings pending in the Cayman
Islands and sought an order to stay them on the ground that the Court
should decline jurisdiction so that the question of beneficial ownership
might be determined in France. On 5th October 2009 the Grand Court
of the Cayman Islands adjourned the proceedings commenced by MSIL
generally.
6.On 3rd July 2009 MSIL, through the JLs, applied to the Commercial
Court in Antibes for an order lifting the arrest of the Bull procured by FM
on 3rd April 2009 on the ground that MSIL was the beneficial owner of the
Bull and that the Bull formed part of the insolvent estate of MSIL.
7.On 8th July 2009 the JLs applied to the Companies Court in England
under ss.112 and 234 Insolvency Act 1986 for a declaration that
MSIL is the sole beneficial owner of the Bull, an order that YBC do co-
operate with the applicants and a declaration that FM was precluded by
s.130(2) Insolvency Act 1986 and Articles 4, 16 and 17 of EC Regulation
1346/2000 ("the Insolvency Regulation") from commencing or continuing
proceedings against it. The respondents were and are YBC and FM. On the
same day Registrar Baister gave permission, pursuant to Insolvency Rule
12.12, to serve the application ("the Ownership Application") on FM out of
the jurisdiction.
8.On 31st July 2009 FM issued the application now before me ("the
Jurisdiction Application") seeking a declaration that this court has no
jurisdiction over FM or an order declining such jurisdiction as it might
have and an order setting aside the purported service of the Ownership
application. The Jurisdiction Application as subsequently amended relies
on 9 grounds to which I shall refer in due course. Before I do so I should
refer to some further aspects of the subsequent course of the various
proceedings I have mentioned.
9.The application of MSIL to the Commercial Court in Antibes issued on
3rd July 2009 ("MSIL's French Claim") to set aside the arrest of the Bull
made on the application of FM on 3rd April 2009 was dismissed by the
Commercial Court of Antibes on 7th September 2009 on the ground that
as MSIL had not established its ownership of the Bull it had no standing
to make its application. This order was set aside by the Court of Appeal
in Aix en Provence on 10th December 2009 on the grounds that the claim
of FM was not a maritime claim and that MSIL had standing to challenge
the arrest as a person interested. On 16th December 2009 FM procured
a further order for the arrest of the Bull from the Commercial Court in
Antibes. The JLs applied to set aside that order. On 18th January 2010
the Commercial Court in Antibes heard but reserved judgment on that
application.
10.I summarise the chronology of the relevant events as at the time of
the commencement of the hearing before me as follows:
(1) 19th December 2008 petition for winding up of MSIL presented to the
court in England and joint provisional liquidators appointed.
(2) 3rd April 2009 JLs arrested the Bull in Antibes.
(3) 28th April 2009 MSIL commenced proceedings in the Cayman Islands
to establish its ownership of the Bull.
(4) 30th April 2009 FM issued proceedings in France against YBC and Mrs
Madoff for damages.
(5) 3rd July 2009 MSIL applied to the Commercial Court in Antibes
seeking to establish its beneficial ownership of the Bull.
(6) 8th July 2009 JLs Ownership Application issued in England.
(7) 31st July 2009 FM's Jurisdiction Application issued in England.
(8) 8th December 2009 amendment to the petition to wind up MSIL.
(9) 15th December 2009 order of the Companies Court in England for the
compulsory winding up of MSIL
(10) 16th December 2009 arrest of the Bull in Antibes by FM.
11.At the commencement of the hearing the JLs applied for permission to
amend their Ownership Application so as to allege alternative causes of
action under ss.238 and 423 Insolvency Act 1986 to the effect that if the
Bull is not beneficially owned by MSIL then the payments made by MSIL
to or for the benefit of YBC in respect of its purchase were transactions at
an undervalue for which the appropriate remedy is an order that YBC do
transfer the Bull to MSIL. The application was not opposed by counsel for
FM on the basis that they could not immediately deal with the merits of
such alternative claims or any jurisdictional challenge which might arise in
relation to them. On that basis I gave permission to amend on the usual
terms as to costs.
Grounds relied on in the Jurisdiction Application
12.As I have indicated the amended jurisdiction application specifies 9
grounds on which FM contends that it is entitled to either a declaration
that the court has no jurisdiction over FM or should decline any such
jurisdiction as it may have or the purported service of the Ownership
Application should be set aside. The first three depend on the application
of the Judgments Regulation EC 44/2001. The seventh depends on the
application of the Service Regulation EC 1393/2007. The remainder
appear to me to depend to a greater or lesser extent on the application
and terms of either or both the Insolvency Regulation and the Judgments
Regulation. I have not heard full argument on the application of the
Service Regulation and will expect further argument on that issue if and
to the extent that it is still material in the light of my conclusions on the
Judgments Regulation and the Insolvency Regulation. I will deal with the
Judgments Regulation first.
The Judgments Regulation
13.The Judgments Regulation was promulgated on 22nd December
2000 and came into force on 1st March 2002. It has direct effect and is
incorporated into the law of England and Wales by the Civil Jurisdiction
and Judgments Act 1982 as amended. With respect to member states of
the European Union it supersedes the Brussels Convention 1968. Article 1
is, so far as relevant, in the following terms:
"1. This Regulation shall apply in civil and commercial matters whatever
the nature of the court or tribunal. It shall not extend, in particular, to
revenue, customs or administrative matters.
2. The Regulation shall not apply to:
[(a)..];
(b) bankruptcy, proceedings relating to the winding-up of insolvent
companies or other legal persons, judicial arrangements, compositions
and analogous proceedings;
[(c)...;
(d)..
3...]
14.If the Judgments Regulation applies, then by Article 2 persons
domiciled in a member state must be sued in the courts of that member
state. By Article 27 if proceedings involving the same cause of action
between the same parties are brought in the courts of different member
states then any court other than the court first seised must stay its
proceedings until the jurisdiction of the court first seised is established
and, when it is, decline its jurisdiction in favour of that court.
15.Counsel for FM contends that the Judgments Regulation does apply
with the consequence that proceedings against it must be brought
in France as provided by Article 2. In addition she submits that the
Commercial Court in Antibes was first seised of the issue of the ownership
of the Bull when MSIL made its application on 3rd July 2009 so that this
court is obliged by Article 27 to decline jurisdiction. I did not understand
counsel for the JLs to dispute either consequence if the Judgments
Regulation applies. He submitted that it did not because of the exclusion
of "proceedings relating to the winding-up of insolvent companies"
prescribed by Article 1(2)(b).
16.The scope of that exception has been the subject matter of a number
of decided cases both in the European Court of Justice and in England.
Those in the European Court of Justice to which I was referred are
Gourdain v Nadler [1979] 3 CMLR 180; Seagon v Deko Marty Belgium
NV [2009] 1 WLR 2168 and German Graphics Graphische Maschinen
GmbH v Alice van der Schee (as the liquidator of Holland Binding BV)
Case C-292/08 10th September 2009 (BAILII: [2009] EUECJ C-292/08).
The cases in England on which one or other of the parties relied are
Re Hayward [1997] Ch 45 and Pollard v Ashurst [2001] Ch 595. It is
convenient to consider those five cases in chronological order. I did not
understand there to be any substantial difference between counsel as to
the principles to be derived therefrom, only their proper application.
17.Gourdain v Nadler [1979] 3 CMLR 180 concerned the identical
provisions in the Brussels Convention. In that case a court in France
had made an order under its domestic bankruptcy legislation requiring
the German manager, Herr Nadler, of an insolvent French subsidiary
of a German company to contribute to its assets for distribution to the
company's creditors. M.Gourdain, the liquidator of the French subsidiary
sought to enforce that order in Germany under the Brussels Convention.
Herr Nadler contended that the liquidator was not entitled to do so
because the claim fell within the exception for "proceedings for the
winding-up of insolvent companies". That submission was upheld. In
paragraph 4 of its judgment the European Court of Justice stated:
"..It is necessary, if decisions relating to bankruptcy and winding-up are
to be excluded from the scope of the Convention, that they must derive
directly from the bankruptcy or winding-up and be closely connected with
the proceedings for 'the liquidation des biens' or the 'reglement judiciaire'.
In order to answer the question referred to the court by the national
court it is therefore necessary to ascertain whether the legal foundation
of an application such as that provided for in Article 99 of the French law
relating to bankruptcy and winding-up as interpreted for the purposes of
the Convention."
Having done so the court concluded in paragraph 6 that:
"It is quite apparent from all these findings that the legal foundation
of Article 99 [of the Bankruptcy law of France], the object of which, in
the event of the winding-up of a commercial company, is to go beyond
the legal person and proceed against its managers and their property is
based solely on the provisions of the law of bankruptcy and winding-up as
interpreted for the purposes of the Convention. A decision...ordering the
de facto manager of a legal person to pay a certain sum into the assets
of a company must be considered as given in the context..proceedings
relating to the winding-up of insolvent companies...within the meaning of
Article 1(2)(ii) of the Convention."
18.In Re Hayward [1997] Ch 45 the court in England was concerned
with the purchase in joint names of a villa in Minorca. One of the joint
purchasers was made bankrupt and then died intestate. His widow,
claiming to be entitled to his estate, transferred his half share in the
villa to his co-owner in satisfaction of a debt due by her to the co-owner.
The trustee in bankruptcy commenced proceedings in England against
the co-owner, who had by then become the sole registered proprietor of
the villa in Portugal, for an order entitling him to the deceased bankrupt
co-owner's share in the villa and a declaration that it formed part of his
bankruptcy estate. The claim was struck out on the ground that the court
in England had no jurisdiction in relation to disputes as to the ownership
of land in Spain. The trustee's appeal was dismissed by Rattee J. He held
[p.54]:
"Unlike the situation in Gourdain v Nadler, the relief sought by the trustee
in the present case..cannot be said...to be relief available to the trustee
only in the bankruptcy jurisdiction and in accordance with bankruptcy law.
The issue between the parties...is no aspect of bankruptcy law but is the
effect under Spanish law, as the lex situs of the villa, of the fact that..the
first respondent...is at present the sole registered proprietor of the whole
of the villa."
Rattee J also rejected a submission to the effect that s.367 Insolvency Act
1986, the bankruptcy equivalent of s.234(2) Insolvency Act applicable to
company winding-up, made any difference. He said:
"It matters not whether such orders could be made under that section.
For it is plain that the relief sought is not (as was the relief in Gourdain v
Nadler) relief of a type which can only be obtained from the court under
the provisions of some law relating to bankruptcy or insolvency. The
trustee, if he has a good claim...could clearly pursue that claim...quite
outside the bankruptcy jurisdiction."
19.Ashurst v Pollard [2001] Ch 595 was a similar case. A husband
and wife domiciled in England were joint owners of a villa in Portugal
registered in their joint names. The husband went bankrupt and his
trustee in bankruptcy obtained an order from the county court in England
for the sale of the villa. On appeal the judge of the High Court, following
Gourdain v Nadler, concluded that the proceedings were not bankruptcy
proceedings with the consequence that the Brussels Convention applied to
the claim. The Court of Appeal agreed. At paragraph [30] Jonathan Parker
LJ, with whom Kennedy and Potter LJJ agreed, said:
"In my judgment, Rattee J applied the correct test for determining
whether proceedings fall within the "bankruptcy" exception, viz: "Is
bankruptcy the principal subject matter of the proceedings?" The mere
fact that the claimant happens to be a trustee in bankruptcy cannot be
sufficient, in my judgment, to bring the proceedings within the exception
[contained in Article 1(2)(b) of the Brussels Convention]."
20.Seagon v Deko Marty Belgium NV [2009] 1 WLR 2168 was concerned
not with the proper interpretation of Article 1(2)(b) of the Judgments
Regulation but with the scope and application of Articles 1 and 3 of the
Insolvency Regulation. So far as relevant those articles provide:
"1. This Regulation shall apply to collective insolvency proceedings which
entail the partial or total divestment of a debtor and the appointment of a
liquidator."
"Article 3
International jurisdiction
1. The courts of the Member State within the territory of which the centre
of a debtor's main interests is situated shall have jurisdiction to open
insolvency proceedings. In the case of a company or legal person, the
place of the registered office shall be presumed to be the centre of its
main interests in the absence of proof to the contrary."
The definition of "insolvency proceedings" in Article 2 refers to the
proceedings listed in Annex A. In the case of the United Kingdom the
listed proceedings are:
"Winding up by or subject to the supervision of the court
Creditors' voluntary winding up (with confirmation by the court)
Administration
Voluntary arrangements under insolvency legislation
Bankruptcy or sequestration."
21.In Seagon a company established in Germany paid money into a bank
account in the name of a company established in Belgium. The German
company was then wound up and its liquidator sought to recover from the
Belgian company the amount of the payment. He brought proceedings
for that purpose in Germany in reliance on the terms of Article 3 of the
Insolvency Regulation. The Belgian company contended that the German
court had no jurisdiction in the matter. The matter was referred to the
European Court of Justice. In paragraphs 16 and 17 of its judgment the
Court noted that:
"16 It is clear from the order for reference that the action to set a
transaction aside is governed in German law by Paragraph 129 et seq. of
the Insolvency Code (Insolvenzordnung) of 5 October 1994 (BGB1. 1994
I, p. 2866). Only the liquidator may bring such an action in the event of
insolvency with the sole purpose of protecting the interests of the general
body of creditors. Under the provisions of Paragraphs 130 to 146 of that
code, the liquidator may challenge acts undertaken before the insolvency
proceedings were opened which are detrimental to the creditors.
17 The action to set a transaction aside at issue in the main proceedings
is therefore intended to increase the assets of the undertaking which is
the subject of insolvency proceedings."
The European Court of Justice referred to paragraph 4 of its decision
in Gourdain v Nadler, noted that recital 6 of the Insolvency Regulation
adopted the same criterion and continued [21]:
"Thus, according to that recital, the regulation should be confined to
provisions governing jurisdiction for opening insolvency proceedings and
judgments which are delivered directly on the basis of the insolvency
proceedings and are closely connected with such proceedings."
The Court concluded in paragraph 28 that the German Court had
jurisdiction to hear and determine the claim made by the liquidator of the
German company.
22.In German Graphics Graphische Maschinen GmbH v Alice van der
Schee (as the liquidator of Holland Binding BV) Case C-292/08 10th
September 2009 the European Court of Justice was concerned with
both the Judgments Regulation and the Insolvency Regulation. In that
case a German company had supplied machinery to a Dutch company
subject to a reservation of title clause in its favour. The Dutch company
went into compulsory liquidation. A month later a German court granted
protective measures to the German company based on the reservation of
title clause. The issue was whether those measures were enforceable in
Holland. The Court concluded that the principles established in Gourdain
in relation to the Brussels Convention were equally applicable to the
Judgments Regulation and continued:
"29 In the light of the above it is therefore the closeness of the link, in
the sense of the case-law resulting from Gourdain, between a court action
such as the one at issue in the main proceedings and the insolvency
proceedings that is decisive for the purposes of deciding whether the
exclusion in Article 1(2)(b) of [the Judgments Regulation] is applicable.
30 It should be noted that, in a case such as the one at issue in the main
proceedings, that link is neither sufficiently direct nor sufficiently close to
exclude the application of [the Judgments Regulation].
31 It appears from the order for reference that German Graphics, the
applicant in the proceedings before the Landgericht Braunschweig, has
requested the recovery of assets owned by it and that the only question
before the court relates to the ownership of certain machines situated
on the premises of Holland Binding in the Netherlands. The answer
to that question of law is independent of the opening of insolvency
proceedings. The action brought by German Graphics sought only to
ensure the application of the reservation of title clause in its own favour.
32 In other words, the action concerning that reservation of title clause
constitutes an independent claim, as it is not based on the law of
the insolvency proceedings and requires neither the opening of such
proceedings nor the involvement of a liquidator.
33 In those circumstances, the mere fact that the liquidator is a party to
the proceedings is not sufficient to classify the proceedings brought before
the Landgericht Braunschweig as proceedings deriving directly from the
insolvency and being closely linked to proceedings for realising assets.
34 It must, therefore, be held that a claim such as that brought by
German Graphics before the Landgericht Braunschweig does not fall
outside the scope of application of [the Judgments Regulation]."
23.At the time the Ownership Application was issued on 8th July 2009
the relief sought was that summarised in paragraph 7 above. On 19th
January 2010 I gave permission to add the two causes of action I have
summarised in paragraph 11 above. I do not doubt that the cause of
action under s.238 falls within the exception for "proceedings relating to
the winding-up of insolvent companies" contained in Article 1(2)(b) of
the Judgments Regulation. (I express no view with regard to that arising
under s.423.) It is not available to MSIL before winding up but can only
be pursued by a liquidator or other comparable office-holder. The cause
of action is purely statutory in that the conditions for liability are laid
down in the relevant provisions of the Insolvency Act 1986. That statute
deals generally with insolvency whether personal or corporate. Further the
fruits of success enure for the benefit of the company's creditors, not the
company itself. But, as the form of amendment shows, both claims are
alternative to the original ownership claim and cannot arise unless and
until the ownership claim has been determined in favour of FM. If they do
arise neither of them can confer any beneficial interest in the Bull before
judgment on those claims and the grant of relief to the JLs in the form
they seek.
24.Counsel for the JLs contends that the original ownership claim is
within the exception from the Judgments Regulation for "proceedings
relating to the winding-up of insolvent companies". He submits that the
issue as to the beneficial ownership of the Bull lies between the JLs and
YBC alone and that although the JLs will have to prove their case the
claim will not be opposed by YBC. He accepts that FM is a necessary
party because it has obtained an order for the arrest of the Bull and
is a proper respondent to what he described as the JLs principal claim
namely that the various attempts of FM to obtain a right over or in
respect of the Bull are precluded by s.130(2) Insolvency Act 1986. He
contends that the claim in paragraph 1 of the ownership application for
a declaration as to the beneficial ownership of the Bull is properly to be
regarded as incidental to the claim for an order or declaration that the
provisions of s.130(2) preclude the arrests obtained by FM. He invited me
to have regard to the application as a whole, including, by inference, the
additional claims arising from the amendment.
25.I do not accept these submissions. First, I do not accept that the
application must be considered as a whole in the sense that dependent
or alternative claims falling within the exception can change the nature
of the claim on or to which they are dependent or alternative. In my view
the submission of counsel for the JLs is contrary to the true analysis of
the amended claim in this case. The principal claim is the declaration as
to beneficial ownership, the other claims are either dependent, namely
the application of s.130(2) to actions or proceedings against MSIL "or
its property", or alternative, namely the application of ss.238 and 423
Insolvency Act if the declaration of ownership is not made. It is necessary
to consider whether the principal claim is within the exception, cf Re
Hayward at p.54C.
26.Accordingly the relevant question is whether the claim for ownership is
within the exception. In my judgment it is not. The claim is made by the
JLs but the claim to ownership arises under the general law and, if well
made, had accrued to MSIL before it was wound up. The link with either
the Insolvency Act or the winding up of MSIL is neither direct nor close.
I see no sensible distinction between this case and Re Hayward, Ashurst
v Pollard or German Graphics. In my judgment, the exception contained
in Article 1(2)(b) does not apply so as to exclude the application of the
Judgments Regulation as a whole.
27.Accordingly, Article 2 applies to that claim. It is necessarily made
against both YBC and FM. YBC is not domiciled in another Member
State but FM is domiciled in France and is entitled to be sued there in
accordance with Article 2. In those circumstances I consider that I should,
as asked by counsel for FM, declare that this court has no jurisdiction over
FM in relation to the claim made in paragraphs 1 and 2 of the Ownership
Application. This conclusion renders further consideration of grounds (c)
to (f) set out in the amended Jurisdiction Application unnecessary. But
what orders I should make in relation to paragraphs 3 to 5 may depend
on whether the Insolvency Regulation applies to them. Accordingly I will
defer my decision on what order to make in relation to those paragraphs
until I have considered the issues raised by counsel for FM in relation to
the application of that regulation.
The Insolvency Regulation
28.Although I have set out some provisions of this Regulation in
paragraph 20 above it is convenient now to set out all those relevant to
the arguments on this part of the case. They are the following:
"Whereas
[(1)-(8)]
(9) This Regulation should apply to insolvency proceedings, whether the
debtor is a natural person or a legal person, a trader or an individual.
The insolvency proceedings to which this Regulation applies are listed in
the Annexes. Insolvency proceedings concerning insurance undertakings,
credit institutions, investment undertakings holding funds or securities for
third parties and collective investment undertakings should be excluded
from the scope of this Regulation. Such undertakings should not be
covered by this Regulation since they are subject to special arrangements
and, to some extent, the national supervisory authorities have extremely
wide-ranging powers of intervention.
[(10) – (33)]
.....
Article 1
Scope
1. This Regulation shall apply to collective insolvency proceedings which
entail the partial or total divestment of a debtor and the appointment of a
liquidator.
2. This Regulation shall not apply to insolvency proceedings concerning
insurance undertakings, credit institutions, investment undertakings
which provide services involving the holding of funds or securities for third
parties, or to collective investment undertakings.
Article 3
International jurisdiction
1. The courts of the Member State within the territory of which the centre
of a debtor's main interests is situated shall have jurisdiction to open
insolvency proceedings. In the case of a company or legal person, the
place of the registered office shall be presumed to be the centre of its
main interests in the absence of proof to the contrary.
Article 4
Law applicable
1. Save as otherwise provided in this Regulation, the law applicable to
insolvency proceedings and their effects shall be that of the Member
State within the territory of which such proceedings are opened, hereafter
referred to as the "State of the opening of proceedings".
2. The law of the State of the opening of proceedings shall determine the
conditions for the opening of those proceedings, their conduct and their
closure. It shall determine in particular:
[(a)...]
(b) the assets which form part of the estate and the treatment of assets
acquired by or devolving on the debtor after the opening of the insolvency
proceedings;
[(c) to (m)]"
29.The issue in relation to the application of the Insolvency Regulation
is whether MSIL comes within that part of Article 1(2) as excludes
"investment undertakings which provide services involving the holding of
funds or securities for third parties". Counsel for FM contends that it does
and submits that in the absence of substantial disclosure I am not entitled
to conclude that it does not.
30.Counsel for FM submits that MSIL was an investment firm within the
meaning of the Markets in Financial Instruments Directive 2004/39/
EC ("MiFID") and is therefore an investment undertaking within the
exception if it provides investment services to third parties. She goes on
to submit, by reference to MiFID, that third parties include in relation to
the undertaking its directors and shareholders. She points to passages
in various documents which indicate that MSIL may well have traded
for BM, members of his family and his lawyer and co-shareholder, Mr
Koenigsberg. She seeks disclosure from the JLs under the following
heads (1) customer statements, records of trade and other documents
identifying clients; (2) information concerning the facts, source and
purpose of funds paid to MSIL and (3) information concerning payments
to third parties.
31.The requests for disclosure were first made in a letter from the
solicitors for FM dated 3rd December 2009 which set out in detail and
at length what FM sought. In their response dated 10th December 2009
the solicitors for the JLs indicated that they considered the documents
requested to be irrelevant, that as FM was not a creditor it was not
entitled to examine them and that under Insolvency Rule 12.13(1) the
JLs were entitled to withhold production. Nevertheless they responded to
the individual requests and supplied certain documents notwithstanding
their general objections. On 22nd December 2009 the solicitors for FM
wrote again inviting the solicitors for the JLs to reconsider their decision
to refuse production of further documents. On 23rd December 2009
the solicitors for the JLs refused to do so. On 30th December 2009 the
solicitors for FM tried again and were met on 4th January 2010 with a
further refusal. There, so far as disclosure is concerned, matters rested
until the hearing before me. No formal application for disclosure was
issued before the commencement of the hearing because, as counsel
for FM candidly admitted, FM was not prepared to do so lest it thereby
submitted to the jurisdiction of the court. Instead of that she produced at
the hearing a draft of the disclosure order she sought.
32.Whilst, counsel for the JLs does not admit the validity of the various
stages in the argument of counsel for FM, the principal point made by
the JLs is that the exception is not in relation to investment undertakings
as a whole, nor even to investment undertakings providing services to
third parties but only to investment undertakings providing "services
involving the holding of funds or securities for third parties" at the time of
the opening of the insolvency proceedings. They rely on the first witness
statement of Mr Slater and the fifth witness statement of Mr Verrill, both
made on 12th January 2010, as conclusively demonstrating that MSIL
did not provide such services at the time of the opening of the insolvency
proceedings.
33.Mr Slater is an associate director of Grant Thornton UK LLP, the firm
from which the JLs come, with particular responsibility for the Forensic
and Investigations Services Department. In paragraphs 7 to 12 he
describes his role in the JLs investigation into the affairs of MSIL such
that he has examined in detail the vast store of information obtained by
the JLs, including the books and records of MSIL, and interviews with,
amongst others, seven traders formerly employed by MSIL. In paragraphs
13 to 26 he considers in detail the nature of the business of MSIL at the
time the JLs were appointed as joint provisional liquidators, namely 19th
December 2008. He concludes in paragraph 26 that:
"My investigations have demonstrated that at the time of MSIL's
provisional liquidation:
(a) MSIL did not provide any investment services or activities other than
dealing on its own account,
(b) MSIL was not a market maker,
(c) MSIL principally dealt on the regulated market and did not deal off
market on an organised, frequent and systematic basis."
34.In paragraphs 27 to 31 Mr Slater considered whether at the time of
the appointment of the joint provisional liquidators MSIL provided services
involving the holding of funds or securities for third parties. He concluded,
having considered both the source of the funds used by MSIL to trade and
the payments made by MSIL to others, that they did not. He averred in
paragraph 36 that:
"My extensive investigations of the company's books and records, my
interviews with traders and compliance and accounting personnel of the
company and its directors have led me to the conclusion that at the time
at which MSIL was placed into provisional liquidation:
(a) MSIL did not provide any investment services or activities other than
dealing on its own account,
(b) MSIL was not a market maker,
(c) MSIL principally dealt on the regulated market and did not deal off
market on an organised, frequent and systematic basis."
In paragraph 37 he added:
"MSIL did not hold funds and securities for any other parties in the
manner in which Mr Rooney [the deponent in that respect for FM]
suggests that it may have done."
35.In his fifth witness statement Mr Verrill, a partner in the firm of
solicitors acting for the JLs, dealt with a number of matters. In paragraph
42 he referred to the second witness statement of Mr Rooney in
paragraphs 42 and 43 of which he challenged Mr Verrill's statements in
his first witness statement to the effect that MSIL traded only on its own
account and did not hold any third party funds. In paragraph 44 Mr Verrill
affirmed that:
"...the JLs investigations have conclusively demonstrated that by the time
of the provisional liquidation of MSIL, it was not (and never had been)
providing any services to any parties (whether BMIS, Mr Madoff or anyone
else) that involved the holding of funds or securities for third parties."
He then dealt with certain specific allegations made by Mr Rooney and
concluded in paragraph 45:
"Nevertheless, for the avoidance of doubt I confirm again that MSIL did
not hold funds or securities for third parties."
In paragraph 46 he referred to the witness statement of Mr Slater.
36.Counsel for FM did not ask for any order for the cross-examination of
either Mr Slater or of Mr Verrill. In response to the observations of counsel
for the JLs in that respect she admitted that FM's principal concern was
not to run any risk of a submission to the jurisdiction of this court. In
addition she suggested that in the absence of the disclosure sought
there would be little point in seeking such an order as she would have
no material on which to cross-examine either Mr Slater or Mr Verrill.
This admission recognises, as in my view is the case, that none of the
documentary material to which she had referred me indicates that MSIL
had provided services of the relevant description, namely, "services
involving the holding of funds or securities for third parties".
37.In these circumstances I draw the following conclusions. First, the
exception in Article 1(2) does not relate to investment undertakings
generally, nor to investment undertakings providing any services to third
parties but only to those investment undertakings which provide services
to third parties of the relevant description, namely "services involving
the holding of funds or securities for third parties". Any other conclusion
would ignore the express words of the Article. Second, the disclosure
requested should be refused on the ground that the material sought is
irrelevant to the real issue and, having regard to the evidence of Mr Slater
and Mr Verrill, would be disproportionate and give rise to unreasonable
expense. Third, there is no material which would entitle me to reject the
clear evidence of Mr Verrill and Mr Slater.
38.In these circumstances, I conclude, as did Sir John Lindsay when
appointing the joint provisional liquidators on 19th December 2008 and
Sales J when making the winding up order on 15th December 2009, that
the Insolvency Regulation applies to the proceedings opened by each
of those orders. It follows from this conclusion that, depending on the
decision of the French court on the issue of the beneficial ownership of
the Bull, the claims made by the JLs against FM in relation to ss.130(2),
238 and 423 may have been properly brought in this jurisdiction under
those provisions of the Insolvency Act 1986, see Articles 3 and 4(2).
Accordingly, the appropriate order in relation to paragraphs 3 to 5 of the
Ownership Application is to stay all further proceedings in respect of them
until such time as the issues raised in paragraphs 1 and 2 have been
finally decided by the courts in France, compromised or abandoned.
The Remaining Issues
39.Two issues remain. The first relates to the contention of FM to the
effect that its interest in the Bull arising from the order for its arrest that
it obtained on 16th December 2009 constitutes a right in rem within
the meaning of that expression as used in Article 5 of the Insolvency
Regulation. Article 5(1) provides:
"Third parties' rights in rem
1. The opening of insolvency proceedings shall not affect the rights in rem
of creditors or third parties in respect of tangible or intangible, moveable
or immoveable assets – both specific assets and collections of indefinite
assets as a whole which change from time to time – belonging to the
debtor which are situated within the territory of another Member State at
the time of the opening of proceedings."
Article 5(2) describes particular rights which are included in the general
reference to rights in rem.
40.I express no view as to whether the right of FM under the arrest it
obtained on 16th December 2009 is such a right. Prima facie it came
too late anyway as the winding up order had been made by Sales J
the day before. Further the issue does not arise unless and until the
issue as to ownership of the Bull has been agreed or determined by the
courts in France in favour of the JLs. In the meantime, the application of
the JLs to the court in France to set aside the order of the Commercial
Court in Antibes granting that arrest has not been heard. Unless and
until those two matters have been finally determined the issue as to
the application or effect of Article 5 of the Insolvency Regulation is of
academic interest only. As no relief is sought in respect of the Article 5
claim it is unnecessary to stay anything. Accordingly I need say no more
about it.
41.The remaining issue is that relating to the Service Regulation. As
counsel for the JLs observed one could spend all day arguing about its
meaning and effect. I declined to do so unless it was clear from my
findings on the remaining issues that it was necessary to do so. In my
view it is not. I have concluded that paragraphs 1 and 2 of the Ownership
Application are not within the jurisdiction of this court. I have decided that
in all the circumstances I should stay all further proceedings in relation
to paragraphs 3 to 5. At the conclusion of the hearing counsel for the JLs
indicated that his clients were considering re-service of the Ownership
Application so as to avoid the issues. I do not know whether they have
done so. As far as I can see the issues as to service can only arise as
and when the issue of ownership of the Bull has been determined by the
French court in the JLs favour and they seek an order lifting the stay
on further proceedings in relation to the relief sought under paragraphs
3 to 5. Accordingly the issues do not arise now and will only ever arise
if the JLs fail properly to re-serve the Ownership Application. In those
circumstances it is unnecessary for me to say any more on the points
relating to the Service Regulation.
Summary of conclusions
42.For all these reasons I will:
(a) declare that this court has no jurisdiction to hear or determine the
claims advanced by paragraphs 1 and 2 of the Ownership Application;
(b) stay all further proceedings in respect of paragraphs 3 to 5 of the
Ownership Application until such time as the issues raised in paragraphs 1
and 2 have been finally determined by the Courts in France or otherwise
disposed of by compromise or abandonment.
I will hear further argument on the form of my order and on questions of
costs.