„(…) Mr. Justice HIRST:
Introduction
The present litigation comprises two actions 1992 folios 420 and 421, and
arises out of the award of the Technical Appeal Committee of the Liverpool
Cotton Association dated Feb. 12, 1992 in favour of the defendants, G.
S. Co. Ltd. against the plaintiffs, A. Ltd. (an English company) and L'A.
SA (a Swiss company). As previously, I shall wherever possible refer to
the plaintiffs respectively as 'Ltd.' and 'SA' The two cases originally came
before Mr. Justice Gatehouse at an interlocutory hearing May 1, 1992, at
which he granted applications against both the defendants for worldwide
Mareva injunctions, including an order for the disclosure of worldwide
assets. The sole substantive claim at that stage against SA, on which the
injunction against them was based, was the defendants' counterclaim
for an order under s. 26 of the Arbitration Act, 1950 granting leave to
the defendants to enforce the award against SA in the same manner as
the judgment or order, and to enter judgment against SA in terms of the
award.
The previous application before me was by SA only to set aside the
Mareva and disclosure orders as against them. The dispute, to which
the arbitration referred, had arisen under a contract of sale dated Dec.
8, 1981 of the 3000 tonnes of Benin raw cotton, in which the sellers
were described as Ltd., and which was signed by authorised signatories
on behalf of respectively Ltd. and the defendants. I gave judgment on
June 10, and, for reasons which were set out fully therein, I concluded
that the defendants had no good arguable case either in law or in fact to
support their case for an order under s. 26, and I made it clear that, on
that footing, I was prepared to discharge the Mareva and ancillary order
against SA. One of the grounds upon which my conclusion was based
was that the evidence then before the Court failed to substantiate a good
arguable case that SA were parties to the contract of sale on which the
arbitrators' jurisdiction was founded.
The hearing of the application to discharge was just before the beginning
of the short vacation at the end of May, and I originally intended to deliver
the judgment immediately after the end of the vacation at the beginning
of June. However, I agreed to postpone the delivery of the judgment when
I was notified that, if I was against them in my judgment, the defendants
intended to apply to extend the Mareva and ancillary order on entirely
fresh grounds. The defendants rely on three matters in support of which
they now seek the continuation of the Mareva injunction, viz.
(i) A claim against SA under s. 423 of the Insolvency Act, 1986, first put
forward in an amendment to the counterclaim dated June 1.
(ii) A possible claim under s. 238 of the 1986 Act by liquidators of Ltd.
(iii) Prospective new arbitration proceedings against SA (not yet launched)
asserting that they were parties to the contract of sale.
I shall shortly summarize the factual and legal basis of these three
contentions, but it is convenient first to set the scene more broadly.
After Mr. Falconer had completed his opening, Mr. Colman at the outset
of his submissions made it clear that he is not able presently (though
without prejudice to any future position he might adopt) to dispute Mr.
Falconer's contention that he has a good arguable case on the merits on
the first two of these contentions.
Mr. Colman, however, has mounted a counter application to strike out the
amendment:
(i) Under O. 18, r. 19 on the footing that it is an abuse of the process of
the Court.
(ii) Under O. 28, r. 7(3), on the ground the subject matter of the
counterclaim ought to be disposed of by a separate action.
(iii) On the ground that, having regard to the provisions of the Lugano
Convention, the proceedings against SA on the Counterclaim as amended
should be brought in the Swiss Courts as the forum conveniens for the
disposal of those issues. When I come to consider this part of the case,
it will be necessary for me to set out in more detail the history of this
litigation in order to explain the rival contentions on these points.
If Mr. Colman's application to strike out fails he submits that in the
exercise of my discretion I should refuse to grant any extension of the
Mareva injunction and the associated order.
I am giving this judgment in open Court at the request of both parties.
THE DEFENDANTS' THREE CONTENTIONS
Section 423
Sections 423 and 425 of the Insolvency Act, 1986 provide so far as
relevant as follows:
423. (1) This section relates to transactions entered into at an
undervalue; and a person enters into such a transaction with another
person if . . .
(c) he enters into a transaction with the other for a consideration the
value of which, in money or money's worth, is significantly less than
the value, in money or money's worth, of the consideration provided by
himself.
(2) Where a person has entered into such a transaction, the court may, if
satisfied under the next subsection, make such order as it thinks fit for -
(a) restoring the position to what it would have been if the transaction
had not been entered into, and
(b) protecting the interests of persons who are victims of the transaction.
(3) In the case of a person entering into such a transaction, an order shall
only be made if the court is satisfied that it was entered into by him for
the purpose -
(a) of making assets beyond the reach of a person who is making, or may
at some time make, a claim against him, or
(b) of otherwise prejudicing the interests of such a person in relation to
the claim which he is making or may make . . .
(5) In relation to a transaction at an undervalue, references here and
below to a victim of the transaction are to a person who is, or is capable
of being, prejudiced by it; and in the following two sections the person
entering into the transaction is referred to as 'the debtor'.
425. (1) Without prejudice to the generality of section 423, an order
made under that section with respect to a transaction may (subject as
follows) -
(a) require any property transferred as part of the transaction to be
vested in any person, either absolutely or for the benefit of all the persons
on whose behalf the application for the order is treated as made;
(b) require any property to be so vested if it represents, in any person's
hands, the application either of the proceeds of sale of property so
transferred or of money so transferred;
(c) release or discharge (in whole or in part) any security given by the
debtor;
(d) require any person to pay to any other person in respect of benefits
received from the debtor such sums as the court may direct.
The defendants' case under this section is conveniently and succinctly
summarized in the seventh affidavit of Mr. Patrick Hann, who is a solicitor
of the Supreme Court employed by Messrs. Middleton Potts, and who
has the conduct of the case on behalf of the defendants. The material
on which this is based is derived entirely from evidence sworn on behalf
of the plaintiffs and in particular the affidavits of Mr. K. (who is the
executive officer of both Ltd. and SA) and Mr. Paul W., who is a chartered
accountant and auditor of Ltd. Their evidence was directed to showing
that, as part of an allegedly legitimate tax avoidance scheme following a
change in the law affecting off-shore companies, Ltd. had stripped itself
of its assets, partly by transfers to an Irish company of the same name
(hereinafter called 'Dublin'), and partly by payments of management fees
and commission to SA.
Mr. Hann's analysis of this evidence is as follows (B 172FF):
(i) During or about June of 1986 a Management agreement was made
between SA and Limited whereby, inter alia, SA was to manage Limited's
business and was to receive in return management fees and a commission
- see paragraph 6 of Mr. K.'s Affidavit re-sworn 25th May 1992, and
Exhibit 'CK1' thereto.
(ii) It was provided in that Management Agreement (at Articles IV and
VIII) that the management fees and commission payable by Limited
were to be fixed 'at the beginning of each calendar year, with or without
reservations'. I take that phrasing to indicate that the amount of such
fees and commissions was to be open to later adjustment. It would there
appear that the commissions and fees paid have been calculated not
by reference to the value of any work which had been carried out for
Limited by SA but simply by reference to the funds which were available
to Limited.
(iii) In this connection it will be observed from the copy accounts of
Limited for the years 1986 to 1990 which formed exhibit 'PH5' to my
Affidavit of 28th April 1992:
(a) That no specific entries appeared which showed the amounts of
any commission or fees payable to SA pursuant to the Management
Agreement but
(b) That although those accounts recorded that Limited's turnover ranged
between about 55 Million Swiss Francs and 145 Million Swiss Francs, the
annual profit/losses of Limited ranged between loss of 3,760 Swiss Francs
(in 1990) and a profit of only about 177,000 Swiss Francs (in 1989).
In the circumstances (and bearing in mind that no dividends were
apparently paid in respect of the years 1986 to 1989) it seems to me at
least possible that the principal aim of SA and Limited in calculating the
commission and fees which were paid during those years was to produce
a situation whereby Limited's annual profits were always relatively
modest.
(iv) The anlaysis set out at paragraph 8 (iii) above was and is borne out
by the evidence which has been served on behalf of Limited and SA. In
particular:
(a) At paragraph 19 of his Affidavit Mr. K. makes clear that, before 1990:
'substantial profits had been taken out [of Limited] as a result of
management charges paid to [SA]';
(b) At paragraph 11 of Mr. W.'s Affidavit of 15th May, 1992 it was pointed
out that in 1986 to 1989:
'substantial profits had been taken out [of Limited] consistently via
management charges paid to A. SA as consideration for the provision of
administrative, management and agency services. These charges were
paid each year and consequently taken out of A. Limited's accounts'
(v) The effect of these transfers out has been that the net asset value
of Limited has always been left at a very modest level (866,508 Swiss
Francs for 1989 - about £300,000: 422,748 Swiss Francs for 1990 - about
£150,000).
(vi) It seems clear that a similar approach to commission and fees was
taken by SA and Limited in respect of the 1990 accounting year: it is
certainly the case that the net loss for that year was 3,760 Swiss Francs.
In addition, of course, what seems to have been the first ever dividend
was paid in respect of that year, that dividend amounting to 440,000
Swiss Francs whereas the retained profits which had been carried forward
amounted to 446,508 Swiss Francs (se page 52 of Defendant's Bundle).
(vii) In his Affidavit (at paragraph 19) Mr. K. refers to the trading loss
for the year ended 31st December, 1990 as being 'simply as a result of
our accountant's advice that there should, as far as possible, be a shell
prior to the start up of the Irish company's trading activities'. The giving
of this advice is confirmed at paragraph 11 of Mr. W.'s Affidavit but no
explanation is given (either by him or by Mr. K.) as to why such 'stripping'
was carried out a full year before the commencement of the trading
activities of the Irish company and a full 2 years before on any view those
activities had to commence.
It appears then to be quite clear that from 1986 onwards the payment of
commission and fees to SA by Limited was used by Limited as a device
whereby its annual profits/losses could be reduced to very modest figures
and as a result its net assets kept low and that in 1990 the payment
of such charges and fees reflected a conscious decision to strip Limited
of its assets and to leave it 'a shell'. For Limited to transfer money and
assets to SA and the Irish company completely ignoring the arbitral award
made in April 1990 indicates that its purpose can only in part have been
to avoid incurring liability to tax. The transfers to SA were effected at
an under value since they were not based on the value of the services
provided. I verily believe that G. S. has been a victim of these transfers to
SA and has a good arguable case to set these transfers aside under S.423
of the Insolvency Act 1986.
(i) It will be recalled that the original award against Limited in this
case was made on 18th April 1990 (see Plaintiffs' first bundle at pages
140-153). That award was in the sum of 11,635,243.15 French Francs. As
from that date there was, therefore, at the very least a strong possibility
that Limited was or would be subject to a liability to G. S. in that amount.
(ii) This must of course have been known to Mr. K. who was a director
(and, in effect, the owner of both Limited and SA). Indeed it will be
recalled that in Limited's 1990 accounts (which were signed on a date
between 1st January and May 1991) it was noted:
'the company is involved in arbitration with one of its customers over the
supply of goods. At the present, the director is unable to form an opinion
as to outcome of its claim. He is of the opinion that the amount involved
is not material to these accounts and no provision has been made for this
contingent liability.'
Although I referred to that note at paragraph 8 of my Affidavit of 28th
April, 1992 it is striking that no mention of it, nor any attempt to explain
it, is made in the Affidavits which have been served on behalf of Limited
and SA.
(iii) There are, of course, numerous questions which arise in relation to
that note. In particular it is difficult to understand:
(a) Why it refers to the arbitration but not to the fact that an award
against Limited had already been made,
(b) How Mr. K. could have concluded that the amount concerned was 'not
material to these accounts',
(c) Why it was felt appropriate to make no provision for that 'contingent
liability' in the 1990 accounts.
These are, of course, matters which G. S. will wish to investigate with Mr.
K. and Mr. W. when they come to be cross-examined on their Affidavits.
(iv) Whatever the explanation for that note it was, I submit, clearly
improper after 18th April, 1990 for Limited to pay - or for SA to accept -
monies in respect of management fees or commissions which exceeded
the true value of any services which had actually been rendered by SA.
Whether or not such payments would have been objectionable at a time
when there was no reason to believe that Limited would be unable to
discharge its liabilities, they were, in my respectful submission, clearly
objectionable at a time when to the knowledge of Limited and SA such
monies were likely to be required to discharge Limited's liabilities to G. S..
(v) It is, moreover, my submission that G. S. has a good arguable case
for recovering some or all of those 'unearned' monies from SA pursuant
to S.423 of the Insolvency Act 1986 since the obvious purpose and effect
of such payments was to put monies in question beyond the reach of G.
S.. Such would have been my contention in any event but it gains further
support from the matters referred to at paragraph 7 (and exhibit 'PH4') of
my Affidavit of 28th April, 1992 and paragraph 3 (and exhibit 'PH11') of
my Affidavit of 18th May, 1992. In that connection it will be recalled:
(a) That Mr. Lane of G. S. deposed to the fact that Mr. B. of SA told him
on 30th April, 1990 (i.e. 12 days after the original award was made
against Limited) that G. S. would not obtain any money out of Limited
when they tried to enforce any appeal award and the necessary steps had
been taken 'to have the drawer empty'.
(b) That Mr. B. denied this in his Affidavit (which has yet to be resworn
in English form) and that Mr. K. deposed to his belief that it was 'pure
fabrication" - see page 64 of the Plaintiffs' second bundle, paragraph 22.
(c) That I have since then produced a transcript - and possess a tape
recording - of that conservation: see pages 146-160 of the Defendant's
bundle.
Mr. Falconer submits that this evidence demonstrates a strong case
showing that Ltd. entered into a transaction with SA offending against s.
423, on the basis that:
(i) Assets were put out of the reach of the defendants apparently at an
undervalue, by inter alia transfers to SA at a time when the arbitration
award had already been made.
(ii) There is a failure by Mr. W. to explain the reasons for the very odd
note in the accounts.
(iii) There is a failure to explain why Ltd. was stripped of its assets in
1990, when the Irish company was not starting business until January,
1992.
(vi) The conversation, as contained in the tapes which are in evidence
before the Court, is indicative of wrongdoing.
(v) In consequence, there is a strong prima facie case to support a direct
cause of action against SA under s. 425(1)(d).
In the upshot, Mr. Falconer submits that, leaving aside for the moment
the discretionary aspects, this ground alone, which he puts at the
forefront of his case, substantiates the continuation of the Mareva and
the associated order both on general principles and having regard to the
terms of s. 423(2)(b), there being presently no contest from SA to the
defendants' case on the risk of dissipation of assets, which, Mr. Falconer
submits, is self-evident in the light of Mr. Hann's analysis quoted above.
I accept Mr. Falconer's submissions thus far, it being noteworthy that,
even if the plaintiff's explanation of the asset-stripping exercise is sound,
it by no means follows that the purpose of the transaction was not the
s. 423 purpose (Arbuthnot Leasing Ltd. v. Havelet Leasing Ltd. (No. 2),
[1990] B.C.C.636 at p. 644C per Mr. Justice Scott (as he then was)).
Section 238
Section 238 of the 1986 Act provides:
(1) This section applies in the case of a company where -
(a) an administration order is made in relation to the company, or
(b) the company goes into liquidation;
and 'the office-holder' means the administrator or the liquidator, as
the case may be.
(2) Where the company has at a relevant time (defined in section 240)
entered into a transaction with any person at an undervalue, the office-
holder may apply to the court for an order under this section.
(3) Subject as follows, the court shall, on such an application, make such
order as it thinks fit for restoring the position to what it would have been
if the company had not entered into that transaction.
(4) For the purposes of this section and section 241, a company enters
into a transaction with a person at an undervalue if -
(a) the company makes a gift to that person or otherwise enters into a
transaction with that person on terms that provide for the company to
receive no consideration, or
(b) the company enters into a transaction with that person for a
consideration the value of which, in money or money's worth, is
significantly less than the value, in money or money's worth, of the
consideration provided by the company.
(a) that the company which entered into the transaction did so in good
faith and for the purpose of carrying on its business, and
(b) that at the time it did so there were reasonable grounds for believing
that the transaction would benefit the company.
Mr. Falconer submits that, since it is not disputed that Ltd. is now a shell
company, Ltd. will be insolvent if the defendants are entitled to enforce
their award against them. As a result, under s. 238 an administrator or
liquidator could apply for an order restoring the position in respect of
transactions at an undervalue which are likely to be set aside.
No such order could be made if the Court was satisfied:
(i) That Ltd. had entered into the transaction in good faith and for the
purpose of carrying on its business; and
(ii) That at the time it did so there were reasonable grounds for believing
that the transaction would benefit Ltd. However, Ltd. could never establish
either of these criteria laid down by s. 238(5), having regard to the
evidence summarized above.
Mr. Falconer stressed that, unlike the position under s. 423, s. 238 gives
the defendants no direct claim against SA. However, he submitted that
the Court has jurisdiction to grant a Mareva injunction against a third
party such as SA as ancillary to the relief sought against Ltd. under s. 238
(TSB Private Bank International S.A. v. Chabra, [1992] 1 W.L.R. 231 at
p. 242 where Mr. Justice Mummery held that there was such jurisdiction,
albeit in a different factual context, even though there was no cause of
action against the third party). I accept that here also Mr. Falconer has
established a good arguable case having regard to the TSB case, on the
footing that there is credible evidence that the assets of SA may in part
be the assets of Ltd., who have as a result of the asset-stripping operation
clearly put it out of their own power to meet the arbitration award, with
the result that an injunction against Ltd. alone is likely to be inadequate
to protect the defendants from the risk that they will be unable to enforce
the arbitration award directly. New arbitration proceedings
Mr. Falconer does not seek to reopen my conclusion in my previous
judgment that, on the evidence then before me, there was no good
arguable case on the facts that SA was a party to the relevant contract
on what the arbitration was based. However, he submits that the position
is radically changed as a result of evidence recently obtained by the
defendants as to Ltd.'s conduct of their case in the Commercial Court
of Bremen in mounting an objection to an arrest order obtained by the
defendants in Germany.
The submission of their German lawyers described the sales contract
on which the award of the Liverpool Cotton Exchange was based,
summarized the arbitration award against 'A. Ltd. London and L'A. SA
Geneva' and then proceeded as follows (B 219) in a passage, translated
from the German: -
According to the agreement of 8 December 1955, which the Applicant
has already submitted for the record, the parties to the agreement are
A. Ltd., 45 A Route des Acasias in Geneva, and the G. S. Co. Ltd. The
parties to the agreement include neither A. Ltd. London nor L'A. S.A.
in Geneva, against whom [one or both; the German is ambiguous] the
arbitration Award is however directed. The [superior] Court of Arbitration
has thus settled the dispute between parties not bound by the arbitration
agreement and has thus exceeded its powers.
It goes without saying that this submission in Bremen is wholly at
variance with the position taken up throughout by the plaintiffs in
England, which is that Ltd. were the sole parties to the contract and the
sole proper parties to the arbitration.
Mr. Falconer submits that this evidence demonstrates that the plaintiffs
are playing Box and Cox, and deceiving either the English or the German
Courts in order to evade their responsibilities; and that as a result the
Court can have no faith in their evidence, and in particular cannot rely
on the denials of Mr. K. (who is the moving spirit of both Ltd. and SA)
that Ltd. were not acting as agents for SA in entering the contract of
sale. Consequently, he submits he has good grounds for launching new
arbitration proceedings against SA, which he submits will supply a yet
further basis for the maintenance of the Mareva against SA.
In answer to these allegations, the plaintiffs contacted Ltd.'s German
lawyer, Dr. Hohrmann of Blaum Dettmers Rabstin of Bremen, and
incorporated his explanation in an affidavit sworn by Mr. I. R. Evans, the
partner in Weightman Rutherfords who has the conduct of this action on
behalf of the plaintiffs, as follows: -
I am instructed by Dr. Hohrmann that although the written submissions
filed on behalf of A. Limited did refer to the contracting Company as A.
Limited Geneva this was an error on his part. Although he was aware that
there was reference to a company with an address in England with the
same name he simply assumed that the contracting party was A. Limited
of Geneva because the contract for sale of the cotton to G. S. showed
its address to be in Switzerland and this was repeated in the Award. He
confirms to me that hurried instructions had been received by telephone
from Mr. Gisler and that he has not yet been told by A. Limited or L'A.
S.A. to submit that A. Limited, the English registered Company, was not
a party to the contract. He was unaware that A. Limited was, in fact, an
English registered Company.
On the basis of this evidence, Mr. Colman submits that it is plain that
the German lawyers went off on a frolic of their own, and committed an
unfortunate error which had nothing to do with the plaintiffs themselves,
so that the new evidence is, in his words, a non-event.
In his final reply, Mr. Dunning submitted that, even if the Court did not
accept this interpretation, there was no contention in Germany that SA
were parties to the contract, which was the critical aspect for the purpose
of the proposed new arbitration.
Dealing first with the facts, I am unable to accept Mr. Colman's
interpretation of the evidence as it at present stands, since Dr.
Hohrmann's assertion that he was unaware that Ltd. was an English
registered company is hard to square with his repeated references
in his written submission in Bremen to A. Ltd., London, which he
specifically contrasts with A. Ltd., Geneva; it is also hard to accept that
an experienced German lawyer could treat a company with the suffix
'Limited' as being Swiss-registered.
This, for the reasons given by Mr. Falconer, casts a serious shadow
over the credibility of the plaintiffs' witnesses and the propriety of their
conduct, and is a material factor in the exercise of my discretion as
explained below.
However, this evidence is not sufficient to lead me to alter my previous
view that there is at present no good arguable case that SA were actually
parties to the sales contract in 1988, since, as Mr. Dunning rightly pointed
out, there is no suggestion in the German submissions that SA were
such parties; so the crucial gap in the evidence still remains, and cannot
be filled solely on the basis that the plaintiffs' evidence is prima facie
unreliable, and that their conduct may have been unscrupulous.
It follows that I would not consider this third ground as a sound basis for
continuing the Mareva injunction, but this result is academic in view of my
conclusion in Mr. Falconer's favour under the first two headings, which in
my judgment provide a firm basis for continuing the Mareva, subject of
course to the Court's overriding discretion, and also, most importantly, to
the striking out application to which I now turn.
THE PLAINTIFFS' APPLICATION TO STRIKE OUT
The history of the proceedings in more detail
Following upon Mr. Justice Gatehouse's order on May 1, the defendants
served their points of defence and counterclaim, in which Dublin and Mr.
K. were added as defendants to counterclaim.
At that juncture the sole order sought against SA was, as already noted,
an order under s. 26 of the 1950 Act granting leave to the defendants
to enforce the award. However, against Ltd., Dublin, and Mr. K., the
defendants by way of counterclaim asserted that Ltd.'s transfer of all
its assets to Dublin with effect from Jan. 1, 1992 was effected at the
instigation of Mr. K. with the intention on the part of Ltd. and Dublin, and
also on the part of Mr. K. and another officer of the A. group, of enabling
Ltd. to avoid its liability to honour the arbitration award, and to put the
assets of Ltd. beyond the reach of the defendants; and it was alleged
that the purported transfer of assets to Dublin was for no consideration,
alternatively for a consideration the value of which was significantly less
than that of the assets purportedly transferred.
In the result, the defendants claimed relief under a number of headings
against the defendants to counterclaim, including a claim under s. 423 of
the 1986 Act.
At this juncture the defendants had of course not received the plaintiffs'
evidence, upon which the amendment to the points of defence and
counterclaim is based, this evidence only becoming available a week later
on May 15 in support of SA's application to discharge the Mareva.
There were two hearings in May; at the first, Mr. Milligan unsuccessfully
sought to debar the plaintiffs from pursuing their application to discharge
on the grounds that they were in contempt of Mr. Justice Gatehouse's
order; the second, which concluded on Friday, May 22, was the
substantive hearing of the application to discharge, at the end of which I
reserved judgment.
The amended points of defence and counterclaim were served on June 1,
accompanied by Mr. Hann's affidavit sworn on the same day in support of
the continuation of the Mareva, and quoted from above.
Alleged abuse of the process of the Court
This part of Mr. Colman's case is based on the history of the case so far,
which Mr. Colman analyses as follows: -
(i) SA were the initiators of the proceedings, attacking the award as
having been made without jurisdiction against SA.
(ii) This was met by one plea and one plea only, namely the claim for
enforcement under s. 26.
(iii) SA's attack on the award against them was successful, and the
defendant's mirror-image application under s. 26 consequently failed,
judgment being entered into in SA's favour under both headings.
(iv) Between the time of the argument in May and the time of the
judgment SA suddenly found itself confronted with the amendment, which
fundamentally altered the position to the unfair detriment of SA, since
it had no relationship at all to SA's claim, now upheld, and in no way
depending on the answer to that claim.
(v) This was a highly unsatisfactory state of affairs, and the defendants
should not be allowed to use SA's original proceeding (which is now
disposed of) in order to tack on all manner of unconnected claims against
them.
In my judgment the basic flaw in this argument is that it ignores the
case against Ltd., Mr. K. and Dublin, which was mounted in the original
points of defence and counterclaim served on May 8. This included a
claim under s. 423, and in my judgment Mr. Falconer is right when he
submits that, irrespective of the failure of the original s. 26 application,
and even if SA had never previously been parties to any of the English
litigation, the defendants would have had a cast-iron case for joining SA
as an additional defendant under O. 11, r. 1(1)(c), on the ground that the
claim has been brought against Ltd., who have been duly served within
the jurisdiction, and that SA, as a corporate person out of the jurisdiction,
are a necessary and proper party thereto. In the exercise of its discretion,
the Court would inevitably have regard to the fact that the s. 423 claims
against Ltd. and SA respectively were inextricably interlinked, and that in
consequence, in the interests of justice they should be heard together, so
as to save costs and avoid inconsistent results.
Quite apart from this decisive consideration, Mr. Colman's analysis
overstates the case in his favour, since, for reasons given below, I
consider there is a connection between SA's original claim and the
amendment.
As a result I am unable to accept that the amendment in any way involves
an abuse of the process of the Court. Order 28, r. 7
This order provides as follows:-
Counterclaim by defendant
7. (1) A defendant to an action begun by originating summons who has
acknowledged service of the summons and who alleges that he has any
claim or is entitled to any relief or remedy against the plaintiff in respect
of any matter (whenever and however arising) may make a counterclaim
in the action in respect of that matter instead of bringing a separate
action.
(2) A defendant who wishes to make a counterclaim under this rule
must at the first or any resumed hearing of the originating summons
by the Court but, in any case, at as early a stage in the proceedings as
is practicable, inform the Court of the nature of his claim and, without
prejudice to the powers of the Court under paragraph (3) the claim shall
be made in such manner as the Court may direct under rule 4 or rule 8.
(3) If it appears on the application of a plaintiff against whom a
counterclaim is made under this rule that the subject-matter of the
counterclaim ought for any reason to be disposed of by a separate action,
the Court may order the counterclaim to be struck out or may order it to
be tried separately or make such other order as may be expedient.
Mr. Colman submits that the Court should exercise its powers under sub-
r. (3), and in support of this submission he relied on a passage in the
speech of Lord Bridge of Harwich (with whom Lord Mackay of Clashfern,
L.C. agreed) in Metal Scrap Trade Corporation Ltd. v. Kate Shipping Ltd.,
[1990] 1 Lloyd's Rep. 297 at p. 299, col. 1; [1990] 1 W.L.R. 115 at p. 117
as follows: -
The two primary issues in dispute are whether the parties concluded any
binding contract at all and, if so, whether the contract incorporated an
arbitration agreement. The respondents' originating summons seeks only
a declaration that there was no arbitration agreement. The appellants,
while resisting that declaration, seek by counterclaim a declaration
that there was in any event a binding contract. These two issues are so
closely interrelated that it would seem to me absurd that they should
be determined by different tribunals. A party against whom English
arbitration proceedings have been commenced and who invokes the
jurisdiction of the English Court by seeking a declaration that he was not
a party to the alleged arbitration agreement cannot claim any special
immunity from liability to a counterclaim. If the subject matter of the
counterclaim is wholly unrelated to the subject matter of the claim, that
may well be a ground for striking out the counterclaim under R.S.C.,
O. 28, r. 7(3). But where, as here, the subject matter of the claim and
counterclaim are inseparably interconnected, the proposition that they
ought to be disposed of in separate proceedings flies in the teeth of the
common sense and common justice of the case.
Mr. Colman submitted that the penultimate sentence is applicable to the
present case, since the amendment, he submits, is wholly unrelated to
the original successful claim by SA in the action.
I do not accept the factual premise, since it seems to me that there is a
significant connection between the amendment and the original claim by
SA, seeing that the subsequent efforts by the defendants to enforce the
award are directly connected with the arbitration itself. But quite apart
from this consideration, it would, for the reasons set out at the end of
the previous section of this judgment, be impossible to conclude that the
amendment to the counterclaim ought to be disposed of by a separate
action. I am therefore not prepared to apply sub-r. (3) of O. 28 in the
present case.
Mr. Falconer addressed an additional argument based on the speech of
Lord Brandon of Oakbrook in the Metal Trade case at p. 307, col. 1; p.
129H as follows: -
The first way in which I consider that the majority in the Court of Appeal
erred in principles was in taking the view that a counterclaim made
under O. 28, r. 7(1), ought not to be allowed to proceed in a case where,
if the defendants had brought a separate action instead of making a
counterclaim, they would not have been able to obtain leave to serve
process out of the jurisdiction under O. 11. In my opinion the terms of
O. 28, r. 7(1) and (3), are inconsistent with this view in two ways. First,
the words in brackets in r. 7(1), namely, 'whenever and however arising'
are so wide as to show clearly that the rule is intended to extend to cases
in which, if a separate action were to be brought, leave to serve process
out of the jurisdiction under O. 11 might not be obtainable. Secondly,
r. 7(3) deals with cases where the subject matter of a counterclaim is
such that it ought, for one reason or another, to be disposed of by a
separate action. That must mean, in my view, a separate action in the
High Court (or possibly in a County Court) in which the subject matter
of the counterclaim can be disposed of effectively. It cannot mean a
separate action in which, by reason of the inability of the plaintiffs to
obtain leave to serve process out of the jurisdiction, the subject matter of
the counterclaim cannot be disposed of effectively.
Mr. Falconer submitted that, since any separate action against SA would
be subject the need to obtain leave to serve out of the jurisdiction under
O. 11, sub-r. (3) of O. 28 did not apply to the present case.
Mr. Dunning submitted that Lord Brandon cannot have had in mind cases
where there is no need to invoke O. 11 because service is permissible,
under the Brussels or Lugano Conventions, on a defendant domiciled in
a country which is party to one or other of those Conventions. I accept
this submission and, had this section of the case turned on that point,
I should not have accepted that part of Mr. Falconer's argument, since
in my judgment, for the reasons given in the ensuing section, it would
be open to the defendants to serve SA under art. 6.1 of the Lugano
Convention as of right, and without the need to have recourse to the
discretionary provisions of O. 11, so as to ensure that the subject matter
of the counterclaim could be disposed of effectively in an action in this
Court.
The Lugano Convention
The Civil Jurisdiction and Judgments Act, 1991 implements the Lugano
Convention ('the Convention'), which was opened for signature at Lugano
on Sept. 16, 1988, and signed by the United Kingdom on Sept. 18, 1989.
Switzerland is also a Contracting State. The 1991 Act came into force with
effect from May 1, 1991 (SI 1992 No. 745).
Apart from some minor changes, none of which is material in the present
case, the Lugano Convention reproduces the 1982 Brussels Convention.
In Title I (headed 'Scope'), art. 1 provides that the Convention shall
apply in civil and commercial matters whatever the nature of the court
or tribunal, subject to four exceptions, one of which is 'Bankruptcy and
proceedings relating to the winding up of insolvent companies .....' In
Title II (headed 'Jurisdiction'), s. 1 (headed 'General Provisions'), art. 2
provides as follows:
Subject to the provisions of this Convention, persons domiciled in a
Contracting State shall, whatever their nationality, be sued in the courts
of that State.
In s. 2, headed 'Special Jurisdiction', art. 5.3 and 6.1 provide respectively
as follows:
Article 5
A person domiciled in a Contracting State may, in another Contracting
State, be sued: . . .
3. in matter relating to tort, delict or quasi-delict, in the courts for the
place where the harmful event occurred;
Article 6
A person domiciled in a Contracting State may also be sued:
1. where he is one of a number of defendants, in the courts for the place
where any of them is domiciled . . .
In Title VI, headed 'Transitional Provisions', art. 54 provides as follows:
The provisions of this Convention shall apply only to legal proceedings
instituted and to documents formally drawn up or registered as authentic
instruments after its entry into force in the State or origin and, where
recognition or enforcement of a judgment or authentic instrument is
sought, in the State addressed.
Section 49 of the Civil jurisdiction and Judgment Act 1982 (which is
incorporated into the 1991 Act and made applicable to the Lugano
Convention by s. 3 and par. 24 of Schedule 2) provides as follows: -
49. Saving for powers to stay, sist, strike out or dismiss proceedings
Nothing in this Act shall prevent any court in the United Kingdom from
staying, sisting, striking out or dismissing any proceedings before it, on
the ground of forum non conveniens or otherwise, where to do so is not
inconsistent with the 1968 Convention.
Mr. Colman submitted that, whereas art. 2 is mandatory, art. 6(1) is no
more than permissive, and subject (in the discretion of the Court under s.
49) to displacement on the ground of forum non conveniens.
In the latter context he submitted that, SA being a Swiss company,
Geneva is the natural and appropriate forum and the centre of gravity for
the prosecution of the amendment against SA on the following grounds:
(a) the counterclaims are unrelated to the claim and have been advanced
only by tacking them on to a counterclaim which has not been dismissed
against SA;
(b) with one exception (Mr. W.) all the witnesses to be called by SA are in
Geneva;
(c) SA has no connection with London and is domiciled and carries on
business in Geneva;
(d) Ltd.'s business is conducted from Geneva;
(e) the claims against SA can be prosecuted in Geneva (assuming
evidence foreshadowed on Swiss law is forthcoming);
(f) Geneva is the forum with which the claims have their closest and most
real connection.
Mr. Falconer drew attention to art. 54, and pointed out the date of
inception of the present action was prior to May 1. However, he did not
very strongly press the point, and I am satisfied that, seeing that the date
of both the original counterclaim and the amendment were after 1st May,
the provisions of the Convention to apply to those proceedings.
The main thrust of Mr. Falconer's submission was that art. 6.1 entitled
the defendants as of right to sue SA in England, seeing that their co-
defendants, Ltd., are domiciled here; and that in consequence s. 49 is
inapplicable, since a stay on the grounds of forum non conveniens would
be inconsistent with the Convention.
I accept Mr. Falconer's construction of art. 6.1, which seems to me to
accord with the language of art. 6 itself, and also with the title of s. 2
('Special jurisdiction'). That art. 6.1 gives the plaintiff an unfettered right
of choice is fully in line with the views expressed in Professor Schlosser's
report, 1979 OJC No. C59 at par. 78 as follows: -
Article 21 expressly prohibits a court from disregarding the fact that
proceedings are already pending abroad. For the rest the view was
expressed that under the 1968 Convention the Contracting States are
not only entitled to exercise jurisdiction in accordance with the provisions
laid down is Title 2; they are also obliged to do so. A plaintiff must be
sure which court has jurisdiction. He should not have to waste his time
and money risking that the court concerned may consider itself less
competent than another. In particular, in accordance with the general
spirit of the 1968 Convention, the fact that foreign law has to be applied,
either generally or in a particular case, should not constitute a sufficient
reason for a court to decline jurisdiction. Where the courts of several
States have jurisdiction, the plaintiff has deliberately been given a right
of choice, which should not be weakened by application of the doctrine
of forum conveniens. The plaintiff may have chosen another apparently
'inappropriate' court from among the competent courts in order to
obtain a judgment in the State in which he also wishes to enforce it.
Furthermore, the risk of a negative conflict of jurisdiction should not be
disregarded: despite the United Kingdom court's decision, the judge on
the Continent could likewise decline jurisdiction. The practical reasons
in favour of the doctrine of forum conveniens will lose considerably in
significance, as soon as the 1968 Convention becomes applicable in the
United Kingdom and Ireland. The implementing legislation will necessitate
not inconsiderable changes in the laws of those States, both in respect
of the definition of the concept of domicile (see paragraph 73) and on
account of the abolition of jurisdictional competence based merely on
service of a writ within the area of the court (see paragraph 86). To
correct rules of jurisdiction in a particular case by means of the concept
of forum conveniens will then be largely unnecessary. After considering
these arguments the United Kingdom and Irish delegations did not press
for a formal adjustment of the 1968 Convention on this point.
The Jenard Report 1979 OJC No. C59 at p. 15 is to the same effect as
follows:-
Moreover, the purpose of the Convention is also, by establishing common
rules of jurisdiction, to achieve in relations between the Six and in the
field which it was required to cover, a genuine legal systematization which
will ensure the greatest possible degree of legal certainty. To this end, the
rules of jurisdiction codified in Title II determine which State's courts are
most appropriate to assume jurisdiction, taking into account all relevant
matters; the approach here adopted means that the nationality of the
parties is no longer of importance.
This view also, in my judgment, accords with the approach of the Court
of Appeal in Re Harrods (Buenos Aires) Ltd., [1991] 3 W.L.R. 397 (a case
which has now, I have been informed, been referred to the European
Court by the House of Lords). The point at issue was whether the Brussels
Convention regulated a case where the competing jurisdiction was in a
non-Convention country, and the Court of Appeal held that it did not, on
the grounds that the purpose of the Convention was, in the words of Lord
Justice Dillon at p. 416G, to establish 'an expeditious harmonious and . . .
certain procedure' and, in the words of Lord Justice Bingham at p. 420G,
to provide a 'mandatory and comprehensive code', as between the Courts
of contracting states.
It follows that, in my judgment, it is not open to Mr. Colman to invoke the
forum non conveniens doctrine in this case.
Even if I had reached a contrary conclusion on principle, I should not have
accepted Mr. Colman's submission as to the appropriate forum, for the
following reasons.
So far as the s. 423 claim is concerned, it seems to me that the centre
of gravity is plainly in England, seeing that the remedy sought is under
an English Statute, and the starting point is the claim against an English
company (Ltd.) under that section, with which the claim against SA is
closely connected. It is no answer, as Mr. Dunning suggested, to say
that Ltd. are prepared to submit to Swiss jurisdiction, seeing that the
defendants have exercised their undoubted right to sue Ltd.in Ltd.'s Court
of domicile in England.
So far as the s. 238 is concerned, I very much doubt whether this part
of Mr. Falconer's case falls within the Convention at all, seeing that
there is no direct claim at all against SA under that section, but rather
an application for a Mareva injunction ancillary to the relief potentially
claimed against Ltd. If, however, the Convention does apply to this part
of the case also, it would seem to fall within the bankruptcy/liquidation
exception to art. 1, and in any event its centre of gravity, namely the
potential liquidation of Ltd. under English company law, is manifestly in
England.
For completeness I should record that Mr. Falconer submitted that his s.
423 claim against SA also fell within art. 5.3, on the ground that it was
in a matter relating to quasi-delict, and I think that may well be correct,
though it is not necessary in the circumstances for me to decide the point.
For all the above reasons I am satisfied that Mr. Colman's submissions
under the Convention must also fail. There are thus no grounds under
any of Mr. Colman's three headings for striking out the amendment to the
counter-claim.
DISCRETION
Mr. Colman drew my attention to the ambit of Mr. Justice Gatehouse's
worldwide Mareva injunction against SA, which he characterised as
draconian.
In my judgment, however, such a wide order is fully justified in the
present case.
The arbitration award entered against Ltd. is not challenged on
jurisdictional grounds, the sole point on which leave to appeal is sought
being that the arbitrators erred in their conclusions on the force majeure
issue. Not surprisingly, Ltd. have not challenged the worldwide scope
of the Mareva against them, the whole basis of both the s. 423 claim
and (potentially) the s. 238 claim against them being that they have
denuded themselves of their English assets. Part of the asset-stripping
operation, on which I have already held that the defendants have a
good arguable case against SA, is the allegedly improper payment of
excessive management fees and commission to SA in Geneva, where SA
are domiciled and based, and where, jointly with Ltd., they are under
the management of Mr. K.. It follows that, even without recourse to the
German evidence, the case for a worldwide Mareva against SA is every bit
as strong as that against Ltd.
When the German evidence is also taken into account, showing, for
the reasons I have already given, a good arguable case that the joint
management in Geneva are playing Box and Cox in order to defeat the
arbitration award against Ltd. in the defendants' favour, the case for a
worldwide Mareva against SA becomes, in my judgment, overwhelming.
It follows in the exercise of my discretion I shall continue the worldwide
Mareva injunction against SA, together with the associated order, and I
will hear Counsel on the detailed terms of the order, including the fixing of
a new date for compliance by SA with the order for disclosure of assets.
(…)“