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188

CASE DIGESTS

Banking & Finance p27Civil Procedure p30Commercial Cases p32Company Law p35Corporate Insolvency p37Personal Insolvency p39Property & Trusts p41Sport p42

Richard Adkins QCWe mark the passing of Richard Adkins QC. p7

FEATURE ARTICLES

Declaring dividends in the face ofcontingent liabilitiesFollowing the recent High Court decision in BTI2014 LLC v Sequana Richard Fisher considerswhat guidance it offers to directors wishing to payshareholder dividends, notwithstanding theexistence of contingent liabilities. p8

Lehman ‘Waterfall IIC’ judgmenthanded down - meaning of defaultrate in ISDA Master AgreementsDavid Allison QC and Adam Al-Attar reviewthe latest judgment to be handed down in theLehman ‘Waterfall’ litigation, which adjudicatesthe rate of interest payable to creditors under theISDA Master Agreement. p14

FOCUS - GIBRALTAR

The effect of Brexit on GibraltarFundsJoey Garcia of ISOLAS, Gibraltar, reflects uponrecent developments in Gibraltar as a result ofBrexit. p18

The consequences of responsibilitiesJonathan Garcia, of ISOLAS looks at the Fund Judgment that brought Gibraltar Directors’ Duties into focus. p21

FOCUS - CAYMAN ISLANDS

Waterfalls in Cayman and EnglishInsolvenciesTom Smith QC, Rocco Cecere and ChristopherLevers of Mourant Ozannes discuss how thepriority of redemption claims in Cayman

REGULARS

From the Editor p4EEC/EEA Update p78News in Brief p82South Square Challenge p88Diary Dates p90

Gibraltar Update

Conference round-up

Indian summer

Waterfalls in Cayman

LitigationForum report

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liquidations has been clarified in the light of the recent Cayman Islands Court of Appealdecision in In re Herald Fund SPC. p44

Mourant Ozannes and South SquareLitigation Forum 2016Key developments in financial litigation andinsolvency and restructuring as reported by Pierre Ali-Noor, Mourant Ozannes andMadeleine Jones, South Square p50

FOCUS - INDIA

Key developments in the Indianlegal arenaMatthew Abraham outlines the new Insolvencyand Bankruptcy Code and reports on and theopening of the Mumbai Centre for International Arbitration. p56

Nortel Group settlementSeven years on, Alexander Riddifordlooks at the Nortel Group settlement. p58

Planning for a rainy dayUnderstanding weather derivativesJoanna Perkins looks at the development of weather derivatives and their role in managing risk. p64

56

COVER STORY

Jersey CreamGlen Davis QC reviews the 5th edition of JerseyInsolvency and Asset Tracing by Anthony Dessainand Michael Wilkins. p68

CONFERENCE ROUND UP

3rd Regional Conference Singapore Matthew Abraham reports from the recent 3rdRegional conference in Singapore. p72

INSOL 2017 -10th World CongressWe preview the INSOL 2007 world Congress inSydney next January. p74

New tenants for South SquareProfile of new tenants, Riz Mokal, Madeleine Jonesand Edoardo Lupi. p76

4

FROM THE EDITORMARK ARNOLD QC

‘The golden met-wand and measureto try the causes of the subjects’

As many of you will know, we have recentlylost our friend and colleague, Richard AdkinsQC. Immediately after this editorial, DavidAlexander QC pays tribute to thisextraordinarily brave, gifted and generousman, who was an example to us all. Richardwill be sorely missed.

On Monday 27 January 1606, when Brexitwas still some way off, the Attorney General,Sir Edward Coke, led the prosecution of oneGuido Fawkes and others, apprehended intheir attempt to blow up the King inParliament the previous November. James I(“the greatest King that ever was of England”,according to the Attorney General) survived;the plotters did not. James I attempted to ruleby proclamation (as well as divine right). Thisled first to the Case of Prohibitions (1607).James I asserted that “the Judges are but thedelegates of the King,” who may hear suchcases as he pleased and decide them himself.The Chief Justice of the Common Pleas, SirEdward Coke, disagreed. He said that the lawwas “the golden met-wand and measure totry the causes of the subjects; and whichprotected His Majesty in safety and peace”.The King was greatly offended, apparently,for this would mean that he was under thelaw. Quite so, said Coke. The Case ofProclamations followed in 1610. Coke opinedthat the King could not by his proclamationchange any part of the law of the realm, and

that he had no Prerogative save that whichthe law of the land allowed him.

James’ successor, who was nine at the time,was not paying attention. Charles I quicklytired of Parliament. He wanted money andwas not above forcing his subjects to advanceloans to him. Coke’s next lecture became thePetition of Right, which sought to enshrinethe subject’s rights against the Prerogative,including against being forced to lend theKing a fiver without the consent ofParliament. Charles I signed it, then ignoredit, and attempted instead to rule withoutParliament for a decade or so, makingplentiful use of his Prerogative in the process.Parliament remonstrated, grandly. Civil Warensued; the King lost his head. After theintermission, the monarchy was restored. Onthe whole, Charles II ruled wisely; hisbrother, James II, less so. He abdicated andwas replaced by William III, “the gloriousinstrument of Delivering this Kingdome from… Arbitrary Power”, who ruled with his wife,Mary II.

In 1689, they signed the Bill of Rights. Itrecorded that James II “did endeavour tosubvert and extirpate … the Lawes andLiberties of this Kingdome” by “Assumeingand Exercising a Power of Dispensing withand Suspending of Lawes and the Executionof Lawes without Consent of Parlyament”,amongst other unpleasant things. The

5

NOVEMBER 2016 SOUTH SQUARE DIGEST

SOUTH SQUARE DIGEST IS PUBLISHED BY SOUTH SQUARE BARRISTERS, AT 3-4 SOUTH SQUARE GRAY,S INN, LONDON WC1R 5HP. TEL 020 7696 9900. PUBLICATION, PRINT AND PRODUCTION BY WENDOVER PUBLISHING LTD. TEL 01428 658697.

exercise of such “pretended powers” wasdeclared illegal. Thereafter the King ruledwith Parliament, and the Crown inParliament became – and remains –sovereign. By the Act of Settlement 1701,Parliament also safeguarded theindependence of the judiciary, who could beremoved only by Act of Parliament.

What of the Royal Prerogative? It survivesas a necessary part of the machinery bywhich executive power is exercised. Inparticular, the conduct of internationalrelations and the making and unmaking oftreaties on behalf of the UK are regarded asmatters for the Crown in the exercise of itsprerogative powers. But there are limits. It isa fundamental principle of Parliamentarysovereignty that primary legislation is notsubject to displacement by the Crown (ie theexecutive government) through the exerciseof its prerogative powers: legislation enactedby the Crown with the consent of both Housesof Parliament is supreme. The Crown onlyhas and may exercise prerogative powerswithin limits recognised by the law, as Cokehad said. Thus executive government is madesubject to the rule of law in the UK.

The Divisional Court has recently ruled thatHM Government cannot, by exercising theRoyal Prerogative, trigger Article 50 withoutfirst consulting Parliament. Why not? By theEuropean Communities Act 1972, EU lawconfers certain rights on the people of thiscountry. Those rights cannot be removed bythe exercise of prerogative powers unlessParliament has said so. According to theDivisional Court, Parliament has not said so.

Whether or not that is correct will be amatter for the Supreme Court hearing theappeal shortly. For now, it is instructive toconsider the response. The judges have beenbranded “Enemies of the People”. Really?Judges have applied what they judge to be thelaw of this land so as to require theGovernment to consult Parliament, elected bythe British people to represent their interests,before modifying or removing rights vestedby Parliament in those same people. Theyhave reaffirmed the sovereignty ofParliament and the rule of law. For thoseconcerned about the erosion of Britishsovereignty, what’s not to like? It is the Lord

Chancellor’s constitutional responsibility touphold the independence of the judiciary andthe rule of law. A little more than forty-eighthours after judgment was delivered, sherallied to their defence (sort of), saying: “Theindependence of the judiciary is thefoundation upon which our rule of law isbuilt and our judiciary is rightly respected theworld over for its independence andimpartiality.” But not in England, it seems.

The Prime Minister has assured herEuropean counterparts that she still intendsto trigger Art 50 by March 2017. Oncetriggered, will it be irrevocable? Yes, says theGovernment. No, says Lord Kerr, author ofArticle 50. “Brexit means Brexit”, we are told.Of course it does. But will that be hard orsoft? Sunny side up, over easy, or scrambled?The Foreign Secretary remains optimistic:“Brexit means Brexit and we are going tomake a Titanic success of it …”

The Government has also announced theGreat Repeal Bill, the object of which will be

THE MOTHER OF PARLIAMENTS

6

to repeal the ECA 1972 in due course whilealso converting existing EU law into purelydomestic law. Parliament will then decidewhat should be kept, changed or dispensedwith. That may work in the domestic context.In the restructuring and insolvency world, asin many others, however, that would notaddress one of our principal concerns:namely, the question whether what is donehere will be recognised and enforcedelsewhere in the EU. That must be a matterfor negotiation and agreement, when Article50 is triggered.

Lest it be thought that the United Kingdomis alone in its constitutional travails in thisseason of mists and mellow fruitfulness, aswe go to print the people of the United Stateshave voted Donald Trump into office as their45th President. In Mr Trump’s words, this is“Brexit Plus Plus Plus”. After an electionnotable for its animosity, claims that it wouldbe rigged (as Republican hopes appeared towane) or perhaps not (as they waxed), andthe late interventions of the Director of theFBI, and much more, President Trump hasmuch to do to calm troubled waters, bothdomestically and internationally.

This issue of the Digest is trulyinternational. Joey Garcia and JonathanGarcia of ISOLAS look at the effect of Brexiton Gibraltar Funds and a recent appellatedecision concerning directors’ duties. TomSmith QC discusses with Rocco Cecere andChristopher Levers of Mourant Ozannesappellate clarification in In Re Hedge FundSPC of the priority accorded to redemptionclaims in Cayman liquidations. MatthewAbraham outlines the new insolvency andbankruptcy code in India, and reports onboth the opening of the Mumbai Centre forInternational Arbitration and also the 3rd

Regional Conference held in Singapore, whichhe attended with Antony Zacaroli QC inSeptember.

Closer to home, we re-introduce you to RizMokal, who rejoins us as a tenant following adistinguished academic career, and toMadeleine Jones and Edoardo Lupi, whobecame tenants on 1 October 2016 onsuccessful completion of their pupillages.Glen Davis QC reviews the latest edition ofJersey Insolvency and Asset Tracing, byAnthony Dessain and Michael Wilkins. DavidAllison QC and Adam Al-Attar discuss thelatest judgment handed down in the LehmanWaterfall litigation, Waterfall IIC, concerningthe rate of interest payable to creditors underthe ISDA Master Agreement. Richard Fisherconsiders the implications of BTI 2014 LLC vSequana, an important recent decisionconcerning the directors’ duty to take intoaccount the interests of creditors. AlexanderRiddiford looks at the Nortel Group settlementjust sanctioned by Snowden J. And, forsomething completely different but no lessengaging, Joanna Perkins takes a look atweather derivatives.

In addition to all this, Pierre Ali-Noor ofMourant Ozannes and our own MadeleineJones report on the Litigation Forum 2016,which South Square hosted jointly withMourant Ozannes. And, of course, we havethe usual case digests, edited by LloydTamlyn, as well as news in brief, diary datesand the South Square Challenge.

All at South Square hope that you enjoy thisedition of the Digest. If you would like to beadded to the circulation list (or your contactdetails have changed) please contactkirstendent@southsquare.com.

TRUMP: BREXIT, BREXIT PLUS

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NOVEMBER 2016 SOUTH SQUARE DIGEST

Richard Adkins QC

With the death of Richard Adkins QC on 4August 2016, Chambers lost a fine lawyer anda good and loyal colleague and friend.

Having been to Oxford University, Richardinitially went down the route of becoming asolicitor with Lovell White & King. However,he swiftly determined that this side of thelegal profession was not for him and, despitethe risks that becoming a barrister entailed,decided that he would give up the safety andsecurity of working in a big firm for thevagaries of practice at the independent barwhere life is either all roses and no bed or allbed and no roses. So Richard was called tothe Bar in 1982 and subsequently became amember of chambers at 3 Paper Buildings inthe Inner Temple which is where Chamberswas housed before we moved up to SouthSquare in the early 1990s.

Richard then went on to develop a highlysuccessful career at the Bar taking silk in1995. Like many in Chambers he specialisedin business and financial law both

domestically and internationally, but wasone of the first to recognise the importance ofrestructuring, an area of work at which heexcelled. He was also regularly instructed intakeover litigation and professionalnegligence cases and developed a thrivingbanking practice, with a particularspecialism in securities, debt discounting andfactoring, chattel leasing and securitisations.Richard was a very clever man; he was agenuinely fine lawyer who had an amazingbrain for unscrambling the most complex ofproblems. He was also generous with histime in explaining the finer details ofimpenetrable financing transactions topeople who were less intellectually agile thanhe was. He was highly regarded for hisinvestigative approach and ability to solveproblems which defied the efforts of others.He approached his cases with greatenthusiasm and was very good at identifyingthe points that mattered – and doing so veryquickly.

Richard also had another side. He caredenormously for others and gave up much ofhis time to help them. He served for manyyears as part of the Chambers ExecutiveCommittee on which he was a core member.He was always available to provide his wisecounsel to all whether you were a pupil, ajunior tenant or even a senior member ofChambers. He tried to look after everyone ina very fair and measured way. He was alsototally loyal to Chambers.

Family was immensely important toRichard. The support which he receivedfrom his wife Jane and his children, Edward,Rachel and Thomas, was crucial to thesuccess which he achieved at the Bar.

Richard David Adkins QC had what allreally good barristers should have. He wassupremely clever. He had total and utterintegrity. And he loved his fellow man. Hetruly was one of the good guys. All inChambers owe a debt of gratitude to Richardfor enriching our lives. All in Chambers willmiss him and his wise counsel very greatly.

RICHARD ADKINS QC

8

The existence of long-tail contingent liabilitiesis an unfortunately common feature ofmodern corporate groups. Actual andcontingent asbestos liabilities drove the T&Ngroup into insolvency. Other entities faceliabilities for historical acts that theycommitted themselves, or as a consequence ofsuccessor liability which, despite thepurchase of insurance, continue to growbeyond existing cover, and require ever moredemanding provisions in their accounts.

If the current business is being conductedprofitably, and the accounts demonstratesufficient distributable profits, is it open todirectors of a company to pay dividends toshareholders if they have made a reasonableestimate of the potential liabilities faced bythe relevant entity? Or is something morerequired? Should prudence prevail, and themonies be retained in order to cater for thepossibility that the contingencies will vest andliabilities exceed those estimates?

Issues of this type arose for considerationby the High Court in the recent case of BTI2014 LLC v Sequana SA [2016] EWHC 1686(Ch).

Consider a scenario in which Company Afaces potentially huge liabilities to indemnifya third party, B, for liabilities arising underthe United States ComprehensiveEnvironmental Response, Compensation andLiability Act 1980 (“CERCLA”). Based onmatters of judgment by its directors, A’s

accounts make a provision for thesecontingent liabilities in the amount of circa£50 million. But the extent, if any, of thoseliabilities is very uncertain.

The provision is at a level that enables A’sdirectors to form the view that A is solvent,such that it is able to effect a reduction ofcapital and has sufficient distributablereserves in its accounts so as to enable it todeclare dividends in two successive years toits parent company, C. C, shortly after receiptof the second dividend, sells A on termswhich seek to ensure that it can have nopossible liability for any CERCLA indemnity.However, in due course, the creditors of Aallege that the provision in A’s accounts forthe indemnity liability was manifestlyinadequate.

What remedies, if any, are open to thecreditors of Company A to challenge thepayment of the dividends to C?

In BTI, Mrs Justice Rose considered anattack on the payment of dividends incircumstances broadly similar to the aboveon the three-fold basis that (i) their paymentcontravened the requirements of Part 23 ofthe Companies Act 2006 (the “2006 Act”)(because the accounts on which the directorsrelied were incorrect and did not give a trueand fair picture of the state of the company’sfinances); (ii) the decision to pay bothdividends was in any event a breach by thedirectors of their fiduciary duties; and (iii) the

Declaring dividends in theface of contingent liabilities

Following the recent High Court decision in BTI 2014 LLC vSequana Richard Fisher considers what guidance it offers todirectors wishing to pay shareholder dividends.

CONTINGENT LIABILITIES

9

declaration and payment of dividendsconstituted transactions defrauding creditorsfor the purpose of Section 423 of theInsolvency Act 1986 (the “1986 Act”).Ultimately, the claims failed other than inrespect of the final dividend declared, whichMrs Justice Rose held (on the very specificfacts of the case) contravened Section 423 ofthe 1986 Act. But the decision contains anumber of useful findings as to the currentstate of the law that should provide guidancegoing forwards.

At the heart of the attack on the dividendswas the manner in which directors shouldapproach the question of assessing thesolvency of a company where it facescontingent liabilities. A company can onlymake a distribution out of profits availablefor that purpose, and by reference to properlyprepared annual or interim accounts thatenable a reasonable judgment to be made asto the amounts of the items on which the

justification of the dividends depends (Ss 830,836 and 837 of the 2006 Act). In this instance,although the accounts purported to supportthe payment of dividends, they werepredicated on the reduction of capital havingbeen effective and the provision for thecontingent liabilities having beenappropriate.

Where a reduction of capital takes place outof court in accordance with Chapter 10 of the2006 Act, the reduction must be supported bya solvency statement (Ss 641 and 642). Thisrequires (see judgment at [312]) a statementthat each of the directors of the company hasformed the opinion that (i) “there is noground on which the company could then befound to be unable to pay (or otherwisedischarge) its debts”; and (ii) that thecompany will be able to pay (or otherwisedischarge) its debts as they fall due during theyear following the date of the statement.

This language (which is in substance

NOVEMBER 2016 SOUTH SQUARE DIGEST

BTI V PAPER GIANT SEQUANA

10

CONTINGENT LIABILITIES

whether the court would have jurisdiction towind up the company under Section 123 of theInsolvency Act 1986 on a petition issued on theday the solvency statement was signed. Thetest is not a technical one but astraightforward one applying the words of thesection. The directors must look at thesituation of the company at the date of thestatement and, taking into account contingentor prospective liabilities, form an opinion as towhether the company is able to pay its debts.”

■ The phrase “taking into accountcontingent and prospective liabilities” carriesthe same meaning as used in Section 123(2) ofthe 1986 Act, and is to be construed in thesame way as described in Re Eurosail (see[337]-[339]) i.e. not in a technical sense, butwhether considering the nature of thecontingent and prospective liabilities, assetswould be available to meet them, and whatprovision has to be made for that purpose([329] and [330]).

■ It is not necessary for the directors tohave reasonable grounds for the opinion thatthey form (albeit it will be a criminal offenceunder Section 643(c) of the 2006 Act if they donot have reasonable grounds for the opinionthat they hold). The effect of this will be thateven if an offence occurs, the reduction ofcapital will still be valid ([331]-[333]).

Applying the long standing decision of DeCourcey v Clement [1970] 1 Ch 693, the Courtfurther held that errors in the solvencystatement (or statement of assets andliabilities on which the statement was based)would not invalidate the reduction of capitalprovided that the statement can bereasonably and fairly described as astatement of the company’s assets andliabilities ([318] and [343]).

The reduction of capital was not, however,the only basis on which the dividends wereattacked. The Claimants further asserted thatthe declaration of dividends were in anyevent invalid because the accounts did notgive a true and fair view of the state of affairsof the company in light of the contingentliabilities that the company faced. In makinga provision in the accounts, the claimantsasserted that, even if a best estimate (inadmittedly very complicated circumstances:[109]), the directors should have taken moreaccount of the possibility that that estimate

mirrored in the context of solvencydeclarations given by the directors for thepurpose of a members’ voluntary liquidationunder the 1986 Act), and how stringently itwill be interpreted, had not been the subjectof any decision since the Supreme Courtopined on the meaning of insolvency inSection 123 of the 1986 Act in Re Eurosail[2013] UKSC 28. In BTI, the issue concernedthe first limb of the above test i.e. what wasrequired for the directors’ statement ofopinion that there was no ground on whichthe company could then be found to beunable to pay (or otherwise discharge) itsdebts?

The conclusion reached is likely to givecomfort to directors both in this context andwhen considering solvency statements in thecontext of voluntary liquidations. Upholdingthe validity of the reduction of capitalnotwithstanding the existence of the largecontingent liabilities (which could ultimatelygreatly exceed the provisions made), theCourt held that:

■ The directors must in fact have formedthe opinions required by Section 642 of the2006 Act and applied the correct test incoming to those opinions (i.e. it is not enoughthat the directors acted honestly) [322]

■ However, the requirement that there be“no ground” on which the company could befound at the date of the statement to beunable to pay its debts did not mean “on theworse case scenario”. As Mrs Justice Rose putit at [327]:

“I hold that the opinion that the directorsmust form is not whether, if calamity were tostrike on some or all fronts, the companymight be unable to pay its debts nor is it

Mrs Justice Rose found that the ‘noground’ requirement did not mean ‘on theworst case scenario’

The Court held that errors in the solvencystatement would not invalidate the reduction of capital...

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could turn out to be wrong “by a long way”([6]). The estimated liabilities had covered alarge range with (at certain times) a potentialdifference of more than $250 million betweenthe low and high estimates in a worst casescenario (see, for example, [122] and [131]).

This argument was also rejected. The Courtnoted (with implicit approval) the conclusionreached by various eminent Chancery silksover the last 3 decades that:

“The requirement to prepare accounts whichshow a true and fair view is a legalrequirement, the satisfaction of which is aquestion of law for the courts to determine. Indetermining that question, the Courts will relyvery heavily upon the ordinary practices ofprofessional accountants in determiningwhether accounts show a true and fair view.That is because those practices reflect theaccumulation of experience and good practiceand mould the expectations of the users ofaccounts as to the sufficiency and utility of theinformation in terms of quantity and quality”(see [372]).

The Court also noted the definition in FRS12 that a provision for a contingent liabilityshould only be recognised when an entity hasa present obligation (legal or constructive) asa result of a past event, it is probable that atransfer of economic benefit will be requiredto settle the obligation, and a reliable estimatecan be made of the amount of the obligation.Unless those conditions are met, no provisionshould be recognized ([374] –[378]).

Mrs Justice Rose therefore concluded that,provided a provision was reasonablyincluded as reflecting the best estimate ofthose involved, the accounts would beregarded as giving a true and fair view of thecompany’s financial position even if it waspossible that a much higher provision could(or, with hindsight, would) be justified (at, forexample, [400] and [431]).

Is it possible to argue that, even if thepayment of dividends was valid for thepurpose of Part 23 of the 2006 Act, thedeclarations amounted to a breach offiduciary duties in circumstances where thedirectors were aware that the estimates usedfor provisions were surrounded by greatuncertainty and there was a risk that theliability would be much greater than theestimate?

The answer to this question appears to be atenuous yes, albeit the circumstances inwhich such a claim could arise seem likely tobe rather extreme. Of potentially widerinterest was the consideration given by theCourt to the question of when a duty to takeinto account the interests of creditors mayarise.

Reliance was placed on the duty reflected inSection 172 of the 2006 Act to act in the waythat a director, in good faith, considers wouldmost likely promote the success of thecompany, and to take account of the interestsof creditors (see in particular Section 172(3)).A number of aspects of the law in this regardwere common ground and accepted by theCourt as correct (see [460]-[463]) includingthat (i) the content of the duty does not vary

RICHARD FISHER

12

according to the degree of risk of insolvencythat has arisen, and (ii) that, if the courtdecides that the duty to take into accountcreditors’ interests has arisen but thedirectors did not in fact take the interests ofcreditors into account, that is not of itself abreach of fiduciary duty invalidatingeverything done automatically (applyingColin Gwyer v London Wharf (Limehouse) Ltd[2002] EWHC 2748 (Ch)).

In determining when the duty to creditorsmay arise, the Claimants argued that itsufficed if there was a real as opposed toremote risk of insolvency. The Defendantsargued that the company had to be “very closeto insolvency”.

Rose J conducted an extensive review of theauthorities in this area (see [466]-[476]) and,agreeing with the judgment of John RandallQC in Re HLC Environmental Projects Ltd (inliq) [2013] EWHC 2876 (Ch), held that thelanguage of a real risk of insolvency was, onanalysis, in all cases treated as beinganalogous with notions of being “on the vergeof insolvency” or “of doubtful or marginalsolvency”. She stated at [478]:

“The essence of the test is that the directorsought in their conduct of the company’sbusiness to be anticipating the insolvency ofthe company because when that occurs thecreditors have a greater claim to the assets ofthe company than the shareholders.”

Having expressed the applicable testbroadly, she therefore concluded that, incircumstances where there was a realpossibility that the company would neverbecome insolvent or even close to insolvent,the company could not be described as beingon the verge of insolvency or of doubtfulinsolvency or in a precarious or parlousfinancial state. Therefore, the directors couldnot be said to be required to run the companyin the interests of the creditors rather than theshareholders of the company (see [483]).

Whilst not impossible, it seems unlikely thata Part 23 compliant declaration of a dividendwill in many cases be capable of beingchallenged as being in breach of the director’sfiduciary duties to take into account theinterests of creditors.

It is therefore a little surprising that, havingreached this conclusion, the challenge to one(but not both) of the dividends declaredsucceeded as being a transaction defrauding

MRS JUSTICE ROSE

CONTINGENT LIABILITIES

It seems unlikely that a Part 23 compliant declaration ofa dividend will be capable of being challenged as beingin breach of the director’s fiduciary duties to take into account the interests of creditors

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creditors within the meaning of section 423of the 1986 Act.

Section 423 requires inter alia that thedirectors had the subjective purpose ofputting assets beyond the reach of creditors,and that this was a real or substantialpurpose of entering into the transaction(IRC v Hashmi [2002] EWCA Civ 981 and HillSpread Trustee [2006] EWCA Civ 542). TheCourt rejected the argument that a paymentof a dividend could not fall within the scopeof Section 423 (on the basis that it was adiscretionary decision to pay assets tomembers which moved them from thedebtor to a third party, irrespective of thesource of their entitlement i.e. the originalarticles): [500]. However, it went on to holdthat, although there was no evidence of therelevant purpose at the time that the firstdividend was declared, the second wasdeclared at a time when sale of A by C wasin contemplation. The fact that it wasdeclared in order to facilitate that sale(which sale would remove a potentialresponsibility for environmental liabilitiesfrom the group balance sheets), did satisfythe purpose requirement of Section 423.

This appears to be a somewhat surprisingconclusion and, with respect, thesubmission made by the Defendants inresponse to this argument appears to haveforce (see [512]): that the purpose of the salemay have been to remove the liability fromC’s group, but the transaction which wasbeing challenged was the declaration of thedividend. The Judge rejected this argumenton the basis that linked transactions may beattacked under Section 423, and that it wasnot possible to distinguish the purpose ofpaying the dividend and the purpose ofselling the company. However, thetransaction that deprives the company ofvalue in this instance was the payment ofthe dividend. It was not a necessary part ofthe declaration of the dividend that therewas also a sale of A by C’s corporate group:

there were two self-standing transactions.The purpose of the company in paying thedividend does not appear to have been todeprive the creditors of recourse to thatasset: on the contrary, on the evidence itappears to have been clear that leavingassets in A that could otherwise be used fordividends might increase the likelihood ofclaims being made. The purpose of the salemay have been to ensure that C’s corporategroup no longer had a member within itthat was potentially subject to the risk ofclaims arising under or as a consequence ofCERCLA, but that is a purpose relating solelyto the sale. The transaction that the claimantreally wanted to challenge was the sale (asthe passage at [516] of the judgmentsuggests):

“Here there is no doubt that the substantiveintention of the directors at the time of theMay Dividend and the sale was to preventAWA having any legal or moral call upon itsparent company to meet its creditors’ claims”

The transaction that eliminated any legalor moral ability of A to call upon C was thesale, not the declaration of dividend. But thesale was not a transaction entered into by Acausing prejudice to its creditors by puttingassets beyond their reach. The fact that thedeclaration of the dividend was a pre-cursorto the sale ought not to mean that it is atransaction susceptible to challenge underSection 423, or that the purpose of the salewas also a substantial purpose of thedeclaration of dividend.

This issue will be revisited on appeal andmay also be relevant to the point that theCourt did not determine at the first trial,namely the remedy (if any) that would beordered (see [525]).

Assuming the decision to be upheld onappeal in all other respects, it provideshelpful guidance for directors whoseshareholders want dividends to be paidnotwithstanding the existence of materialcontingent liabilities.

The fact that the declaration of the dividend was a pre-cursor to the sale ought not to mean that it is atransaction susceptible to challenge under Section 423

14

Lehman ‘Waterfall IIC’ judgmenthanded down - meaning of defaultrate in ISDA Master Agreements

IntroductionOn 5 October 2016, Mr Justice Hildyardhanded down judgment in the latestinstalment of the Lehman “Waterfall”litigation arising out of the collapse ofLehman Brothers International(Europe) (LBIE). The judgmentaddresses the interpretation of keyprovisions in the 1992 and 2002 ISDAMaster Agreements concerninginterest on sums due following theclose-out of transactions upon earlytermination. It also addresses similarissues arising under a German lawgoverned form of master agreement.

The need for the court to adjudicateon the matter arose in the context ofthe substantial surplus that remains inLBIE’s administration after paying orproviding for the provable debts owedby LBIE in full. The situation isunusual, with the surplus estimated tobe in the region of £7 billion.

Given the widespread use of theISDA Master Agreement throughoutthe world (at the end of December2014 the total notional amount of overthe counter derivatives in existencewas US$630 trillion), the issues are ofconsiderable importance to the wholederivatives market. However, the rarefact of the surplus in LBIE’sadministration means that the issuesin the case are unlikely to arise again.For the parties involved in the case,some £4.4 billion of LBIE’s admitted

claims arise under ISDA MasterAgreements, and the debts have beenoutstanding for more than five years.Even a small change in the percentageof interest owed would therefore bemagnified dramatically.

Given the large surplus and the factthat such a small difference in interestcould have such a large impact, it isunsurprising that creditors took such akeen interest in the case. For creditorslower down the insolvency paymentswaterfall, such as subordinatedcreditors and shareholders, there wasan incentive to argue that the interestpayable under the ISDA MasterAgreement does not exceed the eightpercent simple interest granted by theJudgments Act. For those creditorswith payments due to them under theISDA Master Agreement and withoutan interest in the subordinated debt, itwas in their economic interest to arguethat their ‘cost of funding’ – which wasthe key issue in the case – could haveincluded equity funding that surpassedthat eight percent threshold, so as toclaim a rate of interest higher than theJudgments Act rate.

The IssuesRule 2.88(9) provides for statutoryinterest under Rule 2.88(7) to bepayable at the greater of: (a) the ratespecified in section 17 of theJudgments Act 1838 on the date when

the company entered administration(“the Judgments Act Rate”) (namelyeight percent simple per annum); and(b) the “rate applicable to the debt apartfrom the administration”.

In both the 1992 and 2002 ISDAMaster Agreements interest on sumspayable by the defaulting party (in thiscase LBIE) is due at the Default Rate formuch of the period since LBIE’scollapse in September 2008. TheDefault Rate is defined in bothagreements as “a rate per annum equalto the cost (without proof or evidence ofany actual cost) to the relevant payee(as certified by it) if it were to fund or offunding the relevant amount plus 1percent per annum”.

The principal question was whetherLBIE’s counterparty creditors would beentitled to claim interest at the DefaultRate, as the “rate applicable to the debtapart from the administration” withinthe meaning of Rule 2.88(9), whichexceeds the Judgments Act Rate ofeight percent simple per annum.

The Judgment deals with two keyissues (and a number of sub-issues)arising from the definition of DefaultRate in the ISDA Master Agreement.First, whether the “relevant payee”(whose cost of funding is to becertified) is confined to LBIE’scontracting counterparty, or includesthose who acquired by assignment theright to payment of the close-out

LEHMAN WATERFALL LITIGATION

David Allison QC and Adam Al-Attar review the latest judgment to be handeddown in the Lehman ‘Waterfall’ litigation, which adjudicates the rate of interestpayable to creditors under the ISDA Master Agreement.

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NOVEMBER 2016 SOUTH SQUARE DIGEST

amount subsequent to LBIE’s collapse.Second, whether the phrase “cost … ifit were to fund or of funding therelevant amount” is confined to the costof borrowing the relevant amount orwhether it includes costs of andassociated with raising money by anymeans. As Hildyard J commented atparagraph 53, the sharpest divisionbetween the parties was whether thephrase was confined to cost ofborrowing or extended to the cost ofissuing equity.

The first issue was of particularimportance in the LBIE administration,because a large proportion of LBIEdebt had been purchased in thesecondary market by hedge funds andother entities whose cost of funding,generally speaking, was likely to be ofa different order to the cost of fundingof the original counterparties.

The second issue was ofconsiderable importance taking intoaccount the assumption that ifcounterparties could certify a cost of

funding that included their cost ofraising equity then it was likely thatthe rate so certified would besignificantly higher than if they wereconfined to certifying their cost ofborrowing the relevant amount. Theinterest related to funding by way of aloan, especially for large commercialentities, will often be lower than thecosts associated with raising the sameamount through equity. This wasdramatically illustrated in the case ofGoldman Sachs International (a partywhose joinder was expressly limited tothe submission of evidence and themaking of arguments not raised by theSenior Creditor Group) who “was infact able to borrow at the relevant timemany billions of dollars at rates ofinterest ranging from 0.01 percent to1.10 percent”, yet sought to contendthat it was entitled to rely upon itsequity funding costs to certify a rate inexcess of the eight percent statutoryrate. The potential commercialsignificance of this issue in connection

with the LBIE administration can beseen at paragraph 11 of the Judgment,where Hildyard J noted that statutoryinterest on all ISDA claims at theJudgments Act Rate would result in anaggregate amount of statutory interestpayable of £1.7 billion, but if interestwas payable on ISDA claims at acompound rate of eight percent, 12percent or 18 percent, then theaggregate amount of statutory interestpayable would be £2.1 billion, £3.7billion or £6.8 billion respectively.

Contractual interpretationAs with many terms used in acommercial context that are notconsidered terms of art, the termsinvolved were to be construed inaccordance with the commercialpurpose of the ISDA MasterAgreements and the need forcommercial certainty, but also theneed for flexibility in how differentparties choose to contract under theMaster Agreement.

The relevant payeeThe ISDA Master Agreement allows aparty to transfer all or any part of itsinterests in any Early TerminationAmount payable to it by a DefaultingParty (under section 7 of the 2002Agreement).

Hildyard J concluded that ‘relevantpayee’ meant the original contractingcounterparty, and thus did not includethe persons who had acquired theright to payment under Section 6 of theMaster Agreement via an assignmentunder Section 7. Putting it figuratively,“the transferee is entitled to the treeplanted by the transferor and such fruitas had grown and would grow on itwhen transferred, and not to fruit of adifferent variety or quantity whichmight have grown had the transfereeplanted the tree.” Hildyard J also foundsupport from the general principle thatan assignee cannot usually recovermore against the debtor than theassignor could have recovered.Accordingly, what has to be certified

DAVID ALLISON QC

16

ADAM AL ATTAR

therefore, the cost of raising equity.Nor does it include costs to the relevantpayee of raising money beyond thatrequired to fund the relevant amount.

Hildyard J summarised the test, atparagraph 174, as “‘cost’ is the pricewhich the relevant payee paid, or wouldhave to pay, to a counterparty to atransaction to borrow an equivalentsum, taking into account all relevantconsiderations. That leaves a broadmargin, confined by certification, butwhich is tied to a borrowing transaction(actual or hypothetical) rather than theactivities of the relevant payee as a

pursuant to the definition of theDefault Rate is the cost to the originalcounterparty of funding the relevantamount irrespective of whether thatoriginal counterparty has sold its debtin the secondary market.

Cost of fundingHildyard J concluded that the phrase inthe Default rate clause (above) “Cost …if it were to fund or of funding therelevant amount” is confined to the costto the relevant payee of borrowing therelevant amount under a loantransaction. It does not include,

whole”. In rejecting the possibility thatequity funding could form part of thecertification, he said, at paragraph 136,“Interest is payment by time for the useof money: it is an obligation imposed asthe cost of being afforded the use ofmoney over the relevant period of time.The obligation is in the nature of a debtestablished by the transaction underwhich the use of the money is provided.That obligation is plainly a cost, equal tothe rate of interest charged” and, atparagraph 137, “A share has verydifferent characteristics … A shareconfers an interest, measured by theparticipation and any voting rights, inthe issuer; any return is in right of thatinterest.”

Hildyard J also held that the cost offunding may also extend to overnightfunding, or funding for any otherduration. It may also be calculatedeither by reference to a particular dateor on a fluctuating basis, taking intoaccount relevant market conditionsand any other relevant facts orcircumstances known to the relevantpayee from time to time.

Challenging the certificateThe parties were largely agreed thatthe relevant payee’s certification wouldbe conclusive as to its cost of fundingwithin the meaning of the phrase (nowdefined by Hildyard J), save in certaincircumstances. These circumstanceswould extend to situations where thecertificate is made irrationally orotherwise than in good faith, but theparties divided on whether the test of“manifest error” would go beyond thesituations of irrationality and/or lack ofgood faith. Hildyard J held that that itwas “inconceivable” that the drafters ofthe ISDA intended to precludechallenge to a certificate when itappears founded on “manifestnumerical or mathematical error.”However, to go beyond this, withoutrestricting the nature of the error tonumerical or mathematical error, washeld to go beyond implication intorefashioning.

LEHMAN WATERFALL LITIGATION

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an entitlement to interest apart fromthe administration which reflectedthe cost to the relevant party offunding the close-out amount underthe GMA.

Hildyard J held that s.288(4) of theGerman Civil Code, which providesfor a claim for “further damage” fora default in payment, was notavailable as a basis for a claim forStatutory Interest in excess of 8percent pursuant to Rule 2.88(9) ofthe Rules. He held, first, that therequired default had not occurredas at the date of LBIE’sadministration because thetermination payment under theGMA did not become due until afterit had been calculated and, further,because LBIE had not “seriously anddefinitively” refused to perform theGMA as at the date of itsadministration (as would havetriggered a default under s.286 of theGerman Civil Code). Secondly, heheld that no default under Germanlaw could occur following thecommencement of LBIE’sadministration and, relatedly, that aproof of debt in LBIE’sadministration did not constitute a“warning notice” under s.286 of theGerman Civil Code and could nottherefore be relied upon to trigger adefaulted payment obligation.

Further, as a matter of Englishlaw, Hildyard J held that a claim for“further damage” under s.288(4) wasnot a rate “applicable to” the proveddebt apart from the administrationwithin the meaning of Rule 2.88(9) ofthe Rules. It was in the nature of adamages claim to be pleaded andproved and assessed by the court. Itwas not, therefore, “applicable to”the debt proved as at the date of

New York or England?According to the Administrators’estimate, some 543 claims arose underEnglish law; and some 310 under NewYork law. Hildyard J held thatalthough there are differencesbetween the two jurisdictions in theirrespective approaches to issues ofcontractual construction, none of theparties contended for any differentresult according to the choice ofEnglish or New York law, nor didHildyard J see any reason to departfrom that agreed position. Indeed, itseems likely that the draftsmen ofthe ISDA Master Agreementsanticipated that they would producethe same result whichever of the twolaws was adopted. Furthermore, theprinciples of New York law as to theconstruction of contracts werelargely matters of common groundbetween the experts.

German Master AgreementHildyard J also considered similarquestions arising in relation to astandardised master agreementgoverned by German law (the GMA).The amounts claimed under theGMA were significantly less thanunder the ISDA Master Agreement.The Administrators received 15claims with an aggregate value of£311 million. However, a similarissue arose in that if a creditor couldestablish that a proved debt underthe GMA has an applicable interestrate of higher than 8 percent perannum apart from theadministration, then they would beentitled to that higher rate of interestunder Rule 2.88(9) of the Rules.

However, the issues raised variedfrom the ISDA Master Agreement inthat Wentworth argued that the GMAdoes not make provision for anycontractual entitlement to interest onthe close-out amount which falls duefrom LBIE following its termination.The Senior Creditor Group on theother hand argued that section 288of the German Civil Code provided

LBIE’s administration.As to the separate issue of whether

a “further damage” claim (if it hadbeen a rate applicable under Rule2.88(9) of the Rules) could beassessed by reference to anassignee’s circumstances, rather thanthose of the assignor, Hildyard Jfound that the claim was limited tothe rights of the assignor.

Supplemental Issue 1(A)This issue concerned the questionraised in Waterfall IIA of whether arate of interest that arises out of apre-administration contract butwhich only begins actually to accrueby reason of action taken by thecreditor after the commencement ofthe administration may be “the rateapplicable to the debt apart from theadministration”.

Hildyard J answered this questionin the affirmative, and held that thewords “the rate applicable to thedebt apart from the administration”in Rule 2.88(9) include, in the case ofa provable debt that is a close-outsum under a contract, a contractualrate of interest that only begins toaccrue only after the close-out sumbecame due and payable as a resultof action taken by the creditor afterthe commencement date of LBIE’sadministration.

South SquareThe following eleven members ofSouth Square appeared in the case,representing four different parties:Robin Dicker QC, William Trower QC,Antony Zacaroli QC, David AllisonQC, Tom Smith QC, Daniel BayfieldQC, Richard Fisher, Stephen Robins,Adam Al-Attar, Henry Phillips andRobert Amey.

Some 543 claims arose under English law,some 310 under New York law, and a further 15 claims under German law

18

The effect of Brexiton Gibraltar Funds

Gibraltar Funds: The National PrivatePlacement Regime lives onIt is estimated that over 90 percent of fundsregistered in Gibraltar operate outside of thescope of the UCITS Directive and theAlternative Investment Fund ManagersDirective (AIFMD). In fact, some largeGibraltar-based funds have historically movedout of Gibraltar in order to avoid having tocomply with AIFMD since it came into effect in2013. Open-ended funds that run less than EUR100M will not be affected by Brexit and willcontinue to operate and be promoted throughthe various National Private PlacementRegimes (NPPR’s) that exist in differentEuropean territories, as they have always done.Clearly this needs to be monitored. OriginallyAIFMD envisaged the phasing out of NPPR’stowards the end of 2018, but this was onlygoing to happen on the basis that passportingunder AIFMD would be made available fornon-EU managers (so there would be no needfor NPPR, and distribution could only be on thebasis of AIFMD).

This is now unlikely. The European Securitiesand Markets Authority’s (ESMA) statement on30 July 2014 (its Opinion and Advice on theextension of the AIFMD passport) was lengthyand complex, and most commentary on thepublication focused on the positive advicerelating to the extension of the AIFMD passportto Alternative Investment Fund Managers(AIFMs) established in Guernsey, Jersey andSwitzerland. The reality is that by ESMA optingto follow a country by country assessment ofthe potential extension, the 2018 timeline has

become completely unrealistic. ESMA would berequired to adopt a delegated act terminatingthe NPPR only when it considers that there areno significant obstacles regarding investorprotection, market disruption, competition orthe monitoring of systematic risk that impedesthe application of the passport to the marketingof non-EU funds by EU AIFMs in the MemberStates and the management or marketing offunds by non-EU AIFMs in the Member Statesin line with the relevant provisions of AIFMD.

Of the six countries that ESMA initiallyconsidered, positive advice was only given inrelation to three, with the US, Hong Kong andSingapore being subject to further investigationand review. Guernsey, Jersey and (fromJanuary this year) Switzerland were the onlycountries to ‘pass’ the ESMA assessmentbecause they are the only three counties whoadopted local legislation that was substantiallythe same as AIFMD. ESMA still need to assessand form a view on Australia; Bahamas;Bermuda; Brazil; British Virgin Islands; Canada;Cayman Islands; Curacao, Isle of Man; Japan;Mexico; Mauritius; South Africa; South Korea;Thailand and US Virgin Islands. They have alsodeclined to assess countries like India andChina because there is no MoU between therespective supervisory authorities and ESMA(or because the current level of activity doesnot justify it).

As such, the significant majority of Gibraltarfunds are unlikely to see any change to theiroperations, both in terms of the way that theyare managed, and the way that they can bepromoted or distributed. The UK and the US

GIBRALTAR UPDATE

Joey Garcia of ISOLAS, Gibraltar, reflects upon recentdevelopments in Gibraltar as a result of Brexit.

A brief synopsis

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through the creation of an Exchange TradedInstrument offered by a few of the memberfirms of the Gibraltar Stock Exchange, or themore mainstream use of UCITS platforms andmanagement companies that are able todelegate portfolio management to entities inGibraltar that are authorised or registered forthe purpose of asset management and subjectto prudential supervision.

AIFMD and Passporting of investmentservices: life after BrexitAIFMs that are authorised in Gibraltar will beable to continue to rely on the imperfect AIFMDpassporting system for the near future. In theeventuality of an outright exit, unless a specialarrangement can be negotiated, then it is likelythat passporting rights to the EU would be lost.However, special arrangements to deal withthis could (theoretically) be agreed along thelines of an arrangement entered into with aMember State that grants a license in thatterritory, with operations being maintainedlargely in Gibraltar, on the basis that Gibraltaroffers a similar opportunity to that MemberState in order to allow regulated firms there togain access to the United Kingdom throughGibraltar. This is an option worth exploring.The UK is the key financial centre of the EU and

will remain the key markets for funddistribution in line with other similar but moredeveloped fund jurisdictions. The very recent‘Brexit Information Report’ released by theStates of Jersey provides an estimate of the netvalue of funds’ assets by the location of the‘ultimate investor.’ Only 17 percent of thisvalue relates to the EU while 40 percent relatesto the UK and 33% relates to the rest of theworld. If funds choose to comply withEuropean NPPRs in order to promotethemselves in the EU, then they will need tocomply on a country by country basis wherethe requirements for each Member State arenot streamlined or consistent. For example adepositary is required in Germany, Denmarkand France where this is not a requirement inSweden, Finland or the UK. Other jurisdictionssuch as Spain or Italy do not really have a localregistration process and this often detersmanagers from marketing their funds there.However, this would have been the positionpre and post-Brexit so from that perspective,there is actually little change to the Gibraltarfund landscape.

It is also possible for funds to consider otheralternative distribution arrangements that canexist outside of the NPPR framework such asthe securitisation of a fund’s performance

FRONTIER WITH SPAIN ANDTHE EU: IN THE EVENT OF AN

OUTRIGHT EXIT THE CURRENTAIFMS PASSPORTING RIGHTS

ARE LIKELY TO BE LOST

20

GIBRALTAR UPDATE

although access to the rest of Europe may beimportant, access to the UK is equally orarguably more important, and there may beopportunities for Gibraltar to position itselfhere.

Other potential arrangements will depend onthe model that is eventually adopted by the UK.The Norway model, (maintaining the UK’smembership of the EEA and EFTA) wouldprovide the least disruption to financialservices being offered. If this is not the case,Gibraltar firms will need to analyse thepatchwork of laws governing access by non-EU‘third countries’ to local markets. The recenttrend in EU regulation has been to harmonisethe position of ‘third countries’ (in particularunder AIFMD and MiFIR/MiFID II), without arequirement for the country in question toaccept free movement of people. Given thatGibraltar is (along with the UK) more thansimply ‘equivalent’ on the basis that firms are

already required to comply with EU legislation(and not simply equivalent legislation), it islikely that any extension of the third countrypassport to ‘third countries’ will include the UK,and by extension Gibraltar.

The industry in Gibraltar is alreadyconsidering a dual regime along the lines thatactually already exists in other jurisdictionswhere there is an ability to operate on an EUequivalency basis (under regime A) but also asan alternative, under a separate andalternative regime (regime B) that couldencourage new, start up, or alternativeoperations to move into the jurisdiction on thebasis of the flexibility, speed to market andpragmatic approach that is available. This hasalready (to an extent) been done within the‘small AIFM’ regime where AIFMD grants theauthority to the local regulator, the GibraltarFinancial Services Commission (FSC) todetermine the requirements for that regime,and where the FSC has been able to take a viewon the requirements that should apply to asmall investment manager, adopting a ‘MiFIDlite’ approach. That is not to say that Gibraltarwill deviate from the global direction andthinking on prudential requirements that existwithin EU directives and regulations butdivergences in drafting, interpretation andapplication are likely to develop over time thatensure that international commitments aremet, but without the requirement to strictlyconform with EU requirements.

ConclusionFor the majority of Gibraltar funds, ‘access’ hasnot changed and is unlikely to change in thenear future on the basis that most of thesefunds rely on NPPR’s, and those rules areunlikely to change anytime soon. We expectfunds to continue to focus on NPPR’s and/or toconsider other alternative options available tothem.

There are likely to be options for Gibraltarinvestment firms moving forward that willcontinue to allow, in some way shape or form,access to single market either directly or on anequivalence basis. For the time being Boardsmay want to consider contingency options butthere is no immediate need for decisions to bemade on the basis of a two year transitionfollowing Article 50 being invoked (wheneverthat may be).

ISOLAS’ JOEY GARCIA

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provided guidance as to what, in practice, isrequired of persons acting as licensed directorsof Experienced Investor Funds, as well as thesteps such directors ought to take to ensure theyare properly discharging their duties.

The Court of Appeal has upheld the judgment ofJack J in Minette Compson v The Chief ExecutiveOfficer of the Financial Services Commissionand Brian Weal v The Chief Executive Officer ofthe Financial Services Commission, which

The consequencesof responsibilitiesJonathan Garcia of ISOLAS, Gibraltar, looks at the FundJudgment that brought Gibraltar Directors’ Duties into focus.

SINCE 1740 THE GIBRALTARSECOND CHARTER OF JUSTICE

HAS DECLARED THAT THELAWS OF ENGLAND ’BE THE

MEASURE OF JUSTICE’ ON THEPENINSULA. PRIOR TO THAT(INCLUDING BETWEEN 1704

AND 1740) CIVIL MATTERS FOLLOWED SPANISH LAW

22

Background Advalorem Value Asset Fund Limited(“Advalorem”) was a collective investmentscheme registered under the FinancialServices (Collective Investment Schemes) Act2011 as an Experienced Investor Fund.Advalorem’s investment objective was toinvest in distressed assets on the terms set outin the offer document issued by Advalorem.

The Gibraltar Financial ServicesCommission (“FSC”) conducted aninvestigation into Advalorem, betweenFebruary and October 2013, following whichit petitioned the Supreme Court for an orderto protect the interest of participants andpotential participants. This protection orderwas granted on January 2014 and theSupreme Court appointed an administrator tosafeguard Advalorem’s assets.

Subsequent regulatory action by the FSC inrespect of Mrs Minette Compson (a director ofa company that was itself a director ofAdvalorem) and Mr Brian Weal (a director ofAdvalorem), was taken in the public interestto protect investors and, in particular, toaddress what the FSC considered wereserious and significant corporate governancefailings on the part of Mrs Compson and MrWeal. These principally related toinvestments made by Advalorem followinginappropriate property valuations (thevaluations made special assumptions thatwere inapplicable and unrealistic). The FSC’sdecisions were appealed by Mrs. Compsonand Mr Weal, but in a judgment of 29 April2015, the Supreme Court dismissed bothappeals against the FSC’s decisions.

The Court’s findings at first instanceThe Court found that this was a serious caseof two directors ignoring their obligations asdirectors and that their conduct fell wellbelow that which was required of them.

The judgment does not create any newdirectors’ duties but serves as a reminder thatinvestment fund directors and others arerequired to exercise care, skill and diligencein the performance of their duties.Specifically, the judgment deals with theextent to which ignorance can constitute adefence in a director’s breach of duties. TheCourt confirmed that the often citedprinciples of Jonathan Parker J in Re BaringsPlc as regards directors’ duties form part ofGibraltar law.

The Court rejected the argument putforward by the appellants that, since theywere not the directors of Advalorem withparticular expertise in property matters (theywere not the only directors of Advalorem),they lacked the relevant knowledge, eitheractual or constructive, of theinappropriateness of the valuations obtainedby Advalorem. The Court rejected thisargument on the basis that the valuationprocesses were set out in the offer documentwhich was a document that all directorsshould have been familiar with. Any directorshould have been able to identify that theoffer document was being breached,irrespective of property-related expertise.The regulatory design of the Experienced

GIBRALTAR UPDATE

ISOLAS’ JONATHAN GARCIA

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related to her fitness to be involved in thefinancial services industry, this wasindependent of that consideration. The Courtwas therefore not required to rule onwhether it would look at the ultimatedirecting mind of an investment company inassessing the question of duties, irrespectiveof whether management and control is beingexercised directly or through a bodycorporate which itself was a corporatedirector of the investment company.

The decision at first instance was appealedby Mr Weal and, initially, by Mrs Compson.

The Court of Appeal FindingsIn a judgment (in which Dudley CJ, the ChiefJustice of the Supreme Court of Gibraltargave the leading judgment, and with whomDame Janet Smith, JA and Sir Colin Rimer, JAconcurred) the Court of Appeal upheld thefindings of Jack J and dismissed the appeal ofMr Weal. Mrs Compson had also appealed thedecision of Jack J and, although shesubsequently withdrew it, joint grounds of

Investor Fund regime means that greatimportance is placed on thedeclarations/warranties made by thedirectors in the offer document, includingtruth and accuracy of the contents of the offerdocument and it is apparent that the Courtfollowed a similar approach.

The Court did accept that there were somematters, such as the commercialattractiveness of the land, that could perhapsbe the subject of reliance on the propertyexpert directors. This however would notabsolve Mrs Compson and Mr Weal ofresponsibility, that is, the duty to supervisecannot be delegated. This shows that althoughinvestment fund directors are not expected tobe experts in every field, they are required toapply their minds to the appropriate issuesand not rely solely on the explanations ofothers.

Ultimately, whether a director dischargedhis/her duty to display appropriate levels ofknowledge, skill and experience will dependon the facts of each particular case, whichassessment will necessarily include a detailedexamination of that director’s particular rolein the management of the company andhis/her own individual skills or experience.Likewise, the extent to which an individualdirector can rely on the expertise of otherdirectors is fact-sensitive. In some cases it willbe appropriate; in other cases it will not be.

Other matters of noteAlthough the following matters did not formpart of the case found by the CEO of the FSC,such matters should be considered forinformation purposes only.

Directors must satisfy themselves that theterms of contracts with the investment fundare in the best interests of the investmentfund and the directors cannot simply rely ona person who is not on the record asproviding a function in respect of theinvestment fund to negotiate its terms, notleast because such person may have a vestedinterest in the terms of the contract with theinvestment fund.

Arguments were also raised as to whether,as a director of a body corporate which itselfwas a director of Advalorem, Mrs Compsondid or did not owe duties to Advalorem. TheCourt took the view that because the case

NOW SELDOM SEEN IN THEUK, GIBRALTAR IS STILL HOME

TO THE ICONIC RED PHONEBOX

24

appeal had been filed.The only ground of appeal advanced on

behalf of Mr Weal against the judgment ofJack J concerned the standard of care, whichshould have been applied to measure MrWeal’s performance as a director ofAdvalorem. Accepting that Jack J hadcorrectly identified the test by which MrWeal’s claimed shortcomings fell to beassessed and rejecting the point put forward,that a general assessment was required as toMr Weal’s competence, character, diligence,honesty, integrity or judgment, or his currentability to perform the duties of an licensedperson, the Court of Appeal found that therewas no need for Jack J to have considered thewider matters about Mr Weal’s competenceetc. This was because, once the FSC had foundthat Mr Weal had breached the fifthstatement of principle applying to him underthe Financial Services (Conduct of FiduciaryServices Business) Regulations 2006 (“the FSCRegulations”), which provides that “a licenseeshall act with due skill, care and diligence inthe conduct of its fiduciary services business”,that was sufficient to entitle the FSC to takethe enforcement action that it took. Giventhat Jack J’s view was that the FSC’s findingsin this respect were unassailable, there wasno need for him to consider beyond this. As inhis judgement Jack J had found that there hadbeen a breach of the FSC Regulations, theCourt of Appeal was not required tospecifically consider Mr Weal’s actions in thecontext of the common law duty of skill andcare which he owed to Advalorem andwhether the common law test should besubjective or objective in nature. This wasbecause the application of that test neededto be considered in the statutory context, inthat Mr Weal was no ordinary director, butrather a licensed Experienced Investor Funddirector subject to regulation by the FSC.

Accordingly, the Court of Appeal was onlyrequired to consider the statement ofprinciple under the FSC Regulations which

required Mr Weal to act with due skill, careand diligence in the conduct of his fiduciaryservices business, in determining whether theFSC had correctly issued the sanctions that itdid. The Court of Appeal took the view, thatthe plain reading of the FSC Regulationsestablishes an objective test. Whilst this initself does still not determine whetherunfitness of directors generally (in everycontext, whether or not involving regulatedbusiness) is to be determined by an objectiveor subjective standard, as not every directorof a Gibraltar registered company would bebound by the FSC Regulations on which thisdecision turned, the fact that the duty of carestated under the statement of principle underthe FSC Regulations accurately states the dutyof care owed by any director at common lawsuggests that it could be argued that anobjective test similarly applies. Counsel forMr Weal, sought to rely on section 174(2) ofthe English Companies Act 2006 to attempt toimport a dual objective/ subjective test. TheCourt of Appeal rejected this, on the basis thatthere was no need to consider such a test.Accordingly, the question of which test shouldbe applied in cases of breach by a director ofhis common law duty of due skill, care andnegligence (and not breach of the equivalentstatement of principle under the FSCRegulations) remains unanswered.

One final point to take from this appealderives from certain matters of fact. Whilst,the decision of Jack J in the Supreme Court onany question of fact was final and Mr Wealwas bound by the findings of fact made byJack J, there was an attempt it appears, to re-argue the facts. It was advanced on behalf ofMr Weal that acceptance of the valuationreports and the approval of the purchase ofland should not have been construed as beingin the nature of a final decision of the boardbut rather as part of a continuum. It wasfurther submitted that Mr Weal had intendedto travel to Scotland to undertake furtherinquiries in respect of the land. Therefore,

The question of which test should be applied in casesof breach by a director of his common law duty ofdue skill, care and negligence remains unanswered

GIBRALTAR UPDATE

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responsibilities and thus put investors atrisk.” The important findings in the originaljudgment by Jack J will no doubt stand as afoundation for future fund governance andGibraltar courts will likely refer to these inany cases that occur in the future. FollowingJack J’s judgment, the FSC issued a paper,which sets out the FSC’s expectations of thedirectors of Experienced Investor Funds.

whilst Mr Weal may not have undertaken adetailed forensic examination of what wasbefore him at the board meeting, had therenot been supervening events he would haveundertaken his duties with skill, care anddiligence albeit adopting a differentapproach. Without descending into in anyparticular detail, the Court of Appeal took theview that Mr Weal’s shortcoming was inassenting to a resolution by Advalorem’sboard to pursue the attempted purchase ofthe two sites without, apparently, giving anyconsideration to matters which he shouldhave considered. It is clear from this thatdirectors should insist that when boardmeetings are held those meetings are fullyand accurately documented. Far from merelysigning pro forma minutes that are drafted inadvance and which simply “note” certainmatters (as appeared to be the case in thisinstance), board minutes should provide arecord of the substance of discussions amongthe directors and other meeting participants,any enquiries that are made and anyapprovals or resolutions in relation thereto,whether such approvals or resolutions arefinal or contingent on some other actionbeing taken or indeed, the dissenting opinionsor concerns of individual directors.

As pointed out by Samantha Barrass, theCEO of the FSC, “these decisions once againsend an important signal that there will bereal and meaningful consequences for thosewho disregard their corporate governance

First reference to European Courtof Justice from GibraltarIn a hearing earlier this year in theSupreme Court of Gibraltar, Chief JusticeMr Anthony Dudley decided to make apreliminary reference to the EuropeanCourt of Justice in Luxembourg. This is thefirst time that a court in Gibraltar hasmade a preliminary reference to theEuropean Court.

The case is brought by members of theGibraltar Target Shooting Association andraises the issue of the application toGibraltar of EU Directive 91/477 on

firearms. Among other things, theDirective establishes a European FirearmsPass which entitles target shooters andhunters to travel to EU Member States withtheir firearms. In the past, the EuropeanCommission had expressed the view thatthe Directive does not apply to Gibraltar.The case raises complex questions of EUlaw, and its applicability to Gibraltar, andthis has led to the Chief Justice’s decisionto refer questions on the interpretationand validity of EU law to Luxembourg.

SAMANTHA BARRASS, CEO OFTHE GIBRALTAR FSC: THIS DECISION SENDS AN IMPORTANT SIGNAL THERE WILLBE CONSEQUENCES FOR THOSEWHO DISREGARD THEIR CORPO-RATE GOVERNANCE RESPONSIBILITIES

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Case Digests

The propriety of dividend payments has been much inthe news over the last few months. Two recent casesdiscussing the remedies which are and are notpotentially available are summarised in the CompanyLaw section, below. In BTI 2014 LLC v Sequana SA,Mrs Justice Rose considered the propriety ofdistributions made on the basis of audited and interimaccounts which included provisions representing thedirectors’ best estimates of the company’s liability forclean-up costs. After concluding that the dividendswere lawfully declared in accordance with theCompanies Act provisions, so that the directors couldhave declared the dividends lawfully, the next issuewas whether the directors should not have done so,

LLOYD TAMLYN

given their duty to have regard to the interests ofcreditors in circumstances of insolvency and theinevitable uncertainty of any estimate (best orotherwise). The issue for the Judge was - how closeto insolvency does a company have to be for this dutyto arise? Dicta in the case law variously suggestedthat the duty arose when the company was on theverge of insolvency, or was of doubtful or marginalsolvency, or was near insolvent or where there was areal (as opposed to remote) risk of insolvency. Havingcommented that there seemed to be a big differencebetween a house being on the verge of burning downand there being merely a more than remote risk of itsburning down, the Judge held that the directors’ dutydid not arise merely because there was a real risk thatthe provision might turn out to have been materiallyunderstated. (Incidentally, the Court of Appeal in thesecond of the two digested cases, Burnden Holdings(UK) Ltd v Fielding, expressed the duty as arisingwhere following the distribution the company would beinsolvent, or of doubtful solvency).A further issue for the Judge was whether thedividend was a transaction at an undervalue withinsection 423(1) of the Insolvency Act 1986. She heldthat it was (rejecting the argument that the declarationand payment of a dividend is merely the satisfactionof a much earlier transaction constituted on the issueof the shares by the company).Elsewhere, the always uncertain status of the decisionof Bingham J. (as he then was) in Neste Oy [1983] 2Lloyd’s Rep 658 has been resolved, very largely, bythe Supreme Court in Angove’s Pty Ltd v Bailey(Property and Trusts, below). Neste Oy had decidedthat monies paid to an agent company at a time whenits directors knew that it could provide noconsideration by reason of its near insolvency and socould not, in good conscience, be retained by thecompany were held on constructive trust for thepaying principal. Neste Oy had been of considerableutility to those asserting a proprietary claim lackingany recognisable legal basis. The Supreme Courtdisapproved Bingham J.’s reasoning since it beggedthe question as to what good conscience requires.The Supreme Court left open the possibility that theresult in Neste Oy might be justified on the basis ofthe payor’s mistake in advancing the monies.

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BNY Mellon Corporate Trustee Services Ltd v LBG Capital No 1 plc[2016] UKSC 29 (Lord Neuberger PSC, Lord Mance, Lord Clarke, LordSumption and Lord Toulson JJSC, 16 June 2016)Enhanced capital notes – redemption – interpretation

The Supreme Court, by a majority of3:2, recently gave its decision followingan expedited appeal from the Court ofAppeal, which had itself allowed anappeal on an expedited basis againstthe decision of the Chancellor. The caseconcerned £3.3bn of contingentconvertible securities known asEnhanced Capital Notes (“ECN”) whichwere issued by the Lloyds BankingGroup (“LBG”) in 2009 as part of arecapitalisation necessary for LBG tocomply with the minimum ratio ofCore Tier 1 capital requirementsneeded to pass banking stress tests.The ECNs paid a relatively high rate ofinterest and were not redeemable untilmaturity dates between 2019 and 2013,but could be redeemed early by LBGupon the occurrence of a “capitaldisqualification event” (“CDE”) withinthe meaning of the ECN termscontained in a trust deed. UnderClause 19 of those terms, a CDEoccurred if as a result of regulatoryrequirements or changes to theinterpretation or application of thoserequirements, the ECNs ceased to betaken into account for the purposes ofany stress test. The Chancellor hadconcluded that under the terms of theECNs, no CDE had occurred, butGloster LJ, giving the judgment of theCourt of Appeal, disagreed and heldthat LBG was therefore entitled toredeem the ECNs. The question ofconstruction was further appealed tothe Supreme Court. Lord Neuberger,

with whom Lord Mance and LordToulson agreed, gave the leadjudgment. He stated that whenconstruing a trust deed or contract thatgoverned a negotiable instrument,“very considerable circumspection”was appropriate before the contents ofother documents were taken intoaccount. As Lord Collins stated in In reSigma Finance Corp [2009] UKSC 2,where a security document concerns anumber of creditors over a longperiod, it would be “quite wrong” totake into account circumstances notknown to all of them. That said, LordNeuberger concluded that the trustdeed could not be understood withoutsome appreciation of the thenregulatory policy of the FSA, andtherefore the general thrust and effectof the FSA regulatory material from2008 and 2009 could be taken intoaccount when construing the ECNterms. In that context, on the firstissue on appeal, Lord Neubergeragreed with the interpretation of theChancellor and Gloster LJ that underthe terms of the ECNs, the definition of“consolidated core tier 1” should betreated as a reference to “its thenregulatory equivalent”. In the lowerCourts, it had been held that thisinterpretation involved a strictdeparture of the literal words,although Lord Neuberger doubtedthis, commenting that if it did it wason the basis of a “rather pedanticapproach to interpretation”. The

reasons for Lord Neuberger’sconclusion included that it wasnotorious at the time of issue that theregulatory requirements for capitalwould be strengthened and changed.As to the second issue, the criticalquestion was whether theimplementation of CRD IV (a 2013 EUDirective) by the PRA through newcapital requirements entitled LBG tosay that a CDE had occurred. LordNeuberger observed that it was adifficult question to resolve, with theChancellor and the Court of Appealtaking different views and withLords Sumption and Clarkedissenting in the Supreme Court.Although he saw force in theopposing arguments of the ECNtrustee, he preferred LBG’sarguments that the regulatory capitalrequirements changed in 2013 withthe consequence that the ECNs couldno longer be taken into account inassisting LBG in passing the stresstest, because the trigger under theterms of the ECN was at a lower levelthan the minimum required by thePRA. Furthermore, in any event, thePRA did not in any way rely on theECNs when conducting its stress testson LBG in 2014.As a result, the Supreme Courtconcluded that a CDE had arisenunder the ECN terms, and thereforeLBG was entitled to redeem the ECNs.The appeal was accordingly dismissed.[Robin Dicker QC; Stephen Robins]

BANKING & FINANCE Digested by TOBY BROWN

TOBY BROWN

Universal Advance Technology Ltd v Lloyds Bank Plc [2016] EWCA Civ933 (Lord Dyson MR, Gross LJ and Christopher Clarke LJ, 20 July 2016)BACS system - mistaken payment - unjust enrichment

The Court of Appeal heard an appealconcerning a recalled payment underthe BACS system which wasmistakenly credited to the recipient.

The BACS system operates on a three-day cycle: day 1 is input day whenthe remitting bank transmits the datarelating to the intended transfer; day

2 is processing day for that data; day3 is the entry day when the remittedfunds are credited to the beneficiary.However, payments can be recalled

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CIVIL PROCEDURE Digested by ALEXANDER RIDDIFORD

Interactive Technology Corp Ltd v Ferster [2016] EWCA Civ 614, (Court ofAppeal, 28 June 2016)

Freezing injunctions – non-disclosure – search orders – preservation of property orders

R, a company which operatedgaming websites, was owned bythree brothers. One of the brothers(A1) was alleged by the others tohave established 13 other companies(A2-A14) as conduits for fundsgenerated by R and to have paidhimself substantial levels ofunauthorised remuneration. A1admitted that a board minute hadbeen fabricated so as (inter alia) totransfer R’s assets to A2. R obtainedwithout notice freezing, property

preservation and search orders. A1-14 applied to set aside the orders onthe grounds of non-disclosure,relying on a subsequent allegedadmission by one of the brothersthat they did not believe that therewas any risk of documents beingdestroyed (although that brotherasserted that the admission had onlybeen made in a specific, narrowcontext). The Judge refused to set theorders aside and A1-A14 appealed,arguing that there had been material

non-disclosure in respect of thefollowing: (a) R’s failure to reveal thebrother’s admission; (b) R’s failure tohighlight the significance of astatement by its auditor that certainincome had been put through R; and(c) a letter admitting that the brothershad no right to see records belongingto A2.The Court of Appeal dismissed theappeal. As to (a): A1-A14 had notapplied to cross-examine the brotherabout his explanation of his

ALEXANDERRIDDIFORD

subject to a cut-off of 3.30pm on theprocessing day. In the present case,the claimant (“UAT”) banked with thedefendant (“Lloyds”). UAT offered tosupply goods to one of its customers(“Victoria”) on the condition that itprepaid for them. On day 1 Victoria’sbanker, HSBC, effected a BACStransfer to Lloyds for the benefit ofUAT’s account. The next day,however, HSBC recalled thepayment, Victoria having becomeconcerned that it might not receivethe goods in time. Notwithstandingthe recall, on day 3, Lloyds creditedthe payment to UAT’s account. Laterthat day, Lloyds debited the sumfrom UAT’s account, and repaid themonies to Victoria. The net resultwas UAT did not receive the moniesbut never delivered the goods. UATissued proceedings against Lloydsseeking payment of the sum brieflycredited to its account. It complainedthat Lloyds had removed the sumfrom its account without itsauthority. At both first instance andon appeal in the County Court, thejudges regarded the claim as abreach of contract case, and heldthat whilst there had been a breachof the contract between Lloyds and

UAT, there was no evidence that anyloss had been suffered by UAT. TheCircuit Judge held in the absence ofany such evidence, UAT would beunjustly enriched if it were torecover the full price and keep thegoods.In the Court of Appeal, UATcontended that its claim was in debtand therefore no question ofdamages or their amount arose.Christopher Clarke LJ, with whomGross LJ and the Master of the Rollsagreed, held that whilst the lowercourts had proceeded on the basisthat the claim was for breach ofcontract, it was open to UAT now toput its case as a debt claim. UAT’spleading was apt to support such aclaim and it would make little senseon a second appeal to proceed on anassumption which is “simplyerroneous”, given that UAT did havea claim in debt. However,Christopher Clarke LJ held thatLloyds had a counter-claim for thesum in question, since it was paidunder mistake. Applying the keyelements of unjust enrichment perPortman v Hamlin Taylor Neck [1998]2 AC 548, the first requirement wasthat the recipient had been enriched.

Christopher Clarke LJ stated that UATwas enriched when it received thesum in error. The secondrequirement was that theenrichment was unjust: it wasbecause the payment occurred due tothe mistake of Lloyds. The thirdrequirement was that theenrichment was at the expense ofLloyds, which was also satisfiedbecause HSBC acting for Victoria hadrecalled the monies by the cut-offtime, such that Lloyds itself was leftto the pay the monies to UAT. UATdid not advance and did not have achange of position defence. Lloydswas entitled to have resort to “self-help” in debiting the mistakenpayment from UAT’s accountbecause Lloyds was entitled to anequitable set-off. The Court of Appealaccordingly dismissed the appeal.Christopher Clarke LJ commentedthat it was unfortunate that the claimshould have been pursued beforethree courts, when, as the judge putit, the man on the Clapham Omnibus“would find it an alarmingproposition” that UAT should beentitled to recover the monieswithout parting with the goods.

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WH Newson Holding Ltd v IMI Plc [2016] EWCA Civ 773 (Court ofAppeal, 27 July 2016)Contribution claims – part 20 claims – burden of proof

This appeal concerned whether theCourt had correctly applied s.1(4) ofthe Civil Liability (Contribution) Act1978 (the “1978 Act”). In this case, Cbrought a claim against IMI, allegingthat it had suffered loss and damageas a result of the actions of a cartelbetween (among others) IMI andDelta (the European Commissionhaving found that IMI and Delta hadparticipated in an unlawful price-fixing cartel). IMI raised a limitationdefence. C’s response was that thecartel had been concealed and,pursuant to s.32(1)(b) of theLimitation Act 1980 (the “1980 Act”),time ran from the time that theCommission’s decision was published.IMI issued Part 20 proceedings againstDelta, and other members of thecartel, claiming a contribution orindemnity under s.1 of the 1978 Act.Delta’s defence was that C’s claimagainst IMI was time barred pursuantto s.32(1)(b) of the 1980 Act and thatIMI was therefore never liable. C andIMI then settled the main claim. IMI

pursued the Part 20 claim againstDelta on the basis that, following thesettlement of the main claim, IMI’scontribution claim was governed bys.1(4) of the 1978 Act, arguing thatDelta’s limitation argument was not agood defence to the contributionclaim. The Judge held, on thepreliminary issue of the scope ofs.1(4) of the 1978 Act, that the burdenof succeeding on the limitation pointin the main claim would have fallenon C; and that the issue was part ofthe factual case against IMI in themain claim and could not bechallenged in the contribution claimon the basis that it was a “collateraldefence”.The Court of Appeal, dismissing theappeal, held that a “collateral defence”was one where the burden ofestablishing the facts that woulddetermine the issue fell on theDefendant. Under s.1(4) of the 1978Act: “a person who has agreed to makeany payment ... in bona fide settlement... of any claim made against him in

respect of any damage ... shall beentitled to recover contribution ...without regard to whether or not hehimself is or ever was liable ...provided ... that he would have beenliable assuming that the factual basisof the claim against him could beestablished”. Section 1(4) does notrequire or permit any inquiry into thequestion of liability. To succeed in thecontribution proceedings, all that IMIhad to show was that, on theassumption that the factual basis ofthe main claim could be made out, thisfactual basis disclosed a reasonablecause of action in law against it so as tomake it liable in respect of the damagethat C had suffered. If IMI coulddemonstrate that, it would haveshown that it “would have been liable”to C; and it would not be open to Deltato raise any other argument directedat showing that IMI would not havebeen held liable in the mainproceedings. Arab Monetary Fund vHashim (No.10) Times, June 17, 1993,overruled.

admission, and the Judge could nothave dismissed it as dishonest orinherently implausible. As to (b):

What the auditor had said was notmaterial to the alleged fraud. As to(c): The letter was one among many

in a series of correspondence and, inany event, the letter had been writtenon behalf of the brothers and not R.

National Infrastructure Development Co. Ltd. V BNP Paribas [2016] EWHC 2508 (Comm)(Mr David Foxton QC (sitting as Judge of the High Court), 26 September 2016)

Foreign judgments – injunctions – stay of execution – summary judgment

This was C’s application for summaryjudgment against D in respect ofamounts claimed under two standbyletters of credit. Demands had beenserved under the letters of credit.Payment was not made and C soughtsummary judgment on the the amountdue under the letters of credit.However, on 6th July, an injunctionwas obtained before the Braziliancourt preventing four Brazilian

companies, who were the Braziliansubsidiaries of banks which hadprovided the standby letters of credit,from making payment under thestandby letters of credit. The Courtproceeded on the basis that, as amatter of Brazilian law, it wasarguable that the Brazilian injunctionprevented D from paying out underthe letters of credit (with D beingexposed to a penalty for breach). The

issue for the Court was whether thatpoint, which the Court found to bearguable as a matter of Brazilian law,provided any arguable defence forresisting payment as a matter ofEnglish law. The Court noted that thereare limited circumstances in which theCourt will be prepared to refuse toenforce or prohibit payment under astandby letter of credit, in particularwhere there has been a non-compliant

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demand and in the so-called fraudexception cases. D argued: (a) that thiswas a case where summary judgmentshould not be granted on the basis thatthere is some other “compellingreason” for trial; (b) the Court shouldstay the application for summaryjudgment until the outcome of theBrazilian proceedings; and (c)alternatively, if summary judgment isgranted, it should be subject to a stayof execution. D did not argue that ithad a defence to the claim as a matter

of English law but relied instead on thefact that it found itself exposed toBrazilian law penalties if it breachedthe Brazilian injunction. While there isjurisdiction not to grant summaryjudgment even where there is nodefence to the claim, that is very muchan exceptional course, particularly in acommercial case, and especially on aclaim brought under a standby letterof credit (which has a status equivalentto cash). The Court followed the Courtof Appeal’s decision in Power Curber v

National Bank of Kuwait [1981] 2Lloyd’s Rep 394, in which a KuwaitiCourt had made an order preventing abank from making payment under aletter of credit. Parker J had grantedsummary judgment and a stay ofexecution thereon: but the Court ofAppeal had upheld entry of summaryjudgment but overturned the stay ofexecution. Relying on Power Curber,the Judge granted summary judgmentagainst D and refused to grant a stay ofexecution.

Gerald Metals SA v Timis [2016] EWHC 2327 (Ch) (Leggatt J, 21September 2016)

Freezing injunctions – arbitrators’ powers and duties

C sought a worldwide freezinginjunction against D and also appliedunder s.44 of the Arbitration Act 1996(the “1996 Act”) for a freezinginjunction against a trust of which Dwas a beneficiary. C had providedfunds to one of D’s companies, whichthen failed to meet its obligationsunder the relevant contract to theextent of US$77m. D’s companieswere ultimately owned by a trust, thetrustee of which had given aguarantee (containing an arbitrationclause) which guaranteed payment ofall sums due to the claimant underthe finance contract up to a maximumamount of US$75m. C applied to theLCIA for the appointment of anemergency arbitrator so as to obtainemergency relief including an orderto prevent the trustee from disposing

of the trust’s assets, which the LCIArejected in light of undertakings givenby the trustee. D had at one point alsoagreed to assign, by way of security,some $75m worth of shares to C.Leggatt J refused C’s applications. Asregards the application for aworldwide freezing injunction, it washeld that whilst the real object of theapplication was the shares, there wasno evidence from which the Courtcould infer either that D had effectivecontrol over those shares or that theywere still owned by or could berestored to the trust. As to theapplication for a freezing injunctionunder s.44 of the 1996 Act against thetrust, it was held that it was notappropriate to grant this relief.Section 44(3) of the 1996 Act, whichempowers the Court to make such

orders as may be necessary on theapplication of a party (or proposedparty) to arbitral proceedings in casesof urgency, is subject to s.44(5), whichprovides that the Court should actonly if or to the extent that thearbitral tribunal had no power or wasunable for the time being to acteffectively. It was only in cases wherethe art.9A and art.9B powers(respectively, for the expeditedformation of the arbitral tribunal, andfor the emergency appointment of asole arbitrator pending the formationof the arbitral tribunal), as well as thepowers of a tribunal constituted in theordinary way, were inadequate, orwhere there was no practical abilityto exercise those powers, that theCourt could act under s.44 of the 1996Act.

COMMERCIAL CASES Digested by CHARLOTTE COOKE & MADELEINE JONES

CHARLOTTE COOKE MADELEINE JONES

Hayward v Zurich Insurance Company plc [2016] UKSC 48 (LordNeuberger, Lady Hale, Lord Clarke, Lord Reed, Lord Toulson, 27 July 2016)

Deceit – insurance

The Respondent had been injured atwork and had reached a settlementwith his employers’ insurers, theApplicants. They had suspected he

was exaggerating his claims, but hadno proof of this, and so entered intoan agreement conceding liability andproviding for the quantum of the R’s

entitlement to be decided at trial.After the trial had been held and themoney paid over, proof of R’s fraudcame to light. A commenced

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proceedings against R for deceit and Rwas found to have fraudulentlymisrepresented his injury. The trialjudge in Cambridge County Court setaside the compromise and ordered theissue of quantum in the original actionto be retried. It was, and R wasawarded a lower amount.R then appealed the trial judge’sdecision to set aside the compromise.The Court of Appeal upheld his appealon the ground that the trial judge hadbeen wrong to say that the test forreliance in a misrepresentation claimwas that the representee had been

influenced by the representations. Infact, Briggs and Underhill LLJ ruled,the representee must have believedthem. The Supreme Court allowed A’sappeal. Lord Clarke, with whom theothers agreed, took the opportunity toclarify the law on misrepresentation.Inducement and causation, bothelements of the claim ofmisrepresentation, are questions offact. There is no separate requirementfor belief in the truth of themisrepresentation, though this isrelevant to the factual inquiry. It isnecessary to show that the claimant

was “influenced” by therepresentation. Where therepresentee settles on the basis thatthe representation will be believed bythe judge, the representation is“centrally relevant to the question ofinducement and causation” even if therepresentee does not think it true. Thefact that the representee has carriedout enquiries does not mean that hecannot have been induced. There mayeven be circumstances in which arepresentee knows for certain that therepresentation is false but nonethelessis found to have relied on it.

Khouj v Acropolis Capital Partners Ltd [2016] EWHC 2120 (Comm)(Knowles J, 19 August 2016)

Agency – fiduciary duty – duty to account

The administrator of the estate of thedeceased former assistant ForeignMinister of the Kingdom of SaudiArabia brought proceedings againsttwo English companies in relation totheir involvement in the deceased’sfinancial affairs. The administratoralleged that the companies had actedon the deceased’s behalf in dealingwith his investments and soughtdeclarations that they were agents orfiduciaries, such that he was entitled

to inspect any documents in theircontrol relating to the investments ofthe deceased. The English companies’position was that they did not carryout investment managementactivities and that they did not haveany relevant relationship with thedeceased. The Court considered that fiduciaryobligations can arise in the context ofa range of business relationshipswhere a substantial degree of control

over the property and affairs of oneperson is given to another. It washeld that the facts did give rise to therequisite relationship of trust andconfidence. The defendants owed aduty to account to the deceased inrelation to transactions conducted onhis behalf, a duty to keep andmaintain proper records of anytransaction or other businessconducted on his behalf and a dutyon request to provide such records.

Atlasnavios v Navigators Insurance (the “B Atlantic”) [2016] EWCA Civ808 (Laws LJ, Christopher Clarke LJ, Sir Timothy Lloyd, 1 August 2016)

Insurance – contractual construction

The ship the “B Atlantic” was to carry aload of coal to Italy. Before she left theVenezuelan lake in which she wasloaded, divers discovered a largepackage of cocaine attached to theoutside of her hull. She was detainedby the Venezuelan authorities and didnot deliver the coal. Her owners, whowere not suspected of wrongdoing,made an insurance claim understandard terms based on the InstituteWar and Strike Clauses 1/10/83. Thecontract covered loss caused by “any

person acting maliciously”. It wascommon ground that the attachmentof the drugs to the vessel by smugglersconstituted a malicious act. However,the contract also excluded liability for“detainment...by reason of infringementof any customs or trading regulations”.The parties disagreed over whether theexclusion applied. At first instanceFlaux J held that the exclusion did notapply where, although there mightliterally be an infringement, lack ofmalice on the part of the insured

meant that the infringement was notin the spirit of the exclusion. The Courtof Appeal overturned his decision.Giving guidance on how to approachthe contract as a matter ofconstruction (“[t]he perils andexclusions together express the ambitof the cover and they have to beconstrued together, each of them beinglooked at in the light of the other; youdo not start from the premise that onehas primacy over the other”) the Courtheld that it was necessary to identify

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the proximate or operative cause. Inthis case, the malicious act of thesmugglers was a cause of the owner’s

loss. However, the detainment of thevessel was the proximate cause of theloss. The authorities’ discovery of the

drugs was not the inevitable result oftheir being planted. The insurers’liability was excluded.

National Private Air Transport Services Co (National Air Services) Ltdv Creditrade LLP [2016] EWHC 2144 (Comm) (Blair J, 24 August 2016)Aviation – rent

D had sublet an aircraft from C in2009. The sublease expired inNovember 2012 and rent had beenpaid until then. In preparation forredelivery, D arranged to have repairwork performed on the craft. InJanuary 2013, C and D agreed that Cwould invoice D for rent fromNovember to January, but paymentwould be waived on D’s redeliveringthe aircraft. 31 January was agreed asa target date for redelivery. D soughtto redeliver in March but the repairswere not done to C’s satisfaction, andthe aircraft was in fact notredelivered until 30 April. C claimedrent from November to April. Dargued it was not liable for anyfurther rent, because C had waivedits entitlement to this, and on variousother grounds. Blair J held thatbecause 31 January had been

referred to as a “target date”, on atrue construction of the emails,waiver of rent was not conditional onredelivery by that date. Furthermore,C’s conduct after the agreement hadmade redelivery by 31 Januaryimpossible. This meant that C’ssubmission that the waiver wasconditional on redelivery by that datecould not be correct. Blair J ruled thatrent had been waived until 31January, but not thereafter. Further,C was not in breach of an obligationin the original sublease to makeavailable to D all manufacturers’warranties and therefore D was notentitled to a reduction on rent on thisground, since the defective partswere not covered by the warrantyand there was no contractual basisfor considering that specialwarranties would have been

negotiated with the manufacturer. Dalso argued that “full and literalcompliance” with the contract termswas outside the bounds of normaltrade practice and that there was animplied term that the terms ofredelivery were to be in accordancewith such practice. Blair J affirmedthe authority of the case on which Drelied, Yam Seng Pte Ltd vInternational Trade Corporation Ltd[2013] EWHC 111 (QB), but alsoconfirmed that it applies only to“relational” contracts, in which along-term relationship demanding ahigh degree of commitment on bothsides is “legislated for in the expressterms of the contract”. A sublease isnot such a contract and accordingly aterm to the effect that strictcompliance is not to be insisted oncould not be implied.

BTI 2014 LLC v Sequana SA [2016] EWHC 1686 (Ch) (Rose J, 11 July2016)Breach of fiduciary duty – dividends – transaction defrauding creditors

The directors of AWA (later renamedWinward, “D2”), resolved to pay twointerim dividends in the sum of €443million and €135 million to its parentcompany, Sequana, respectively inDecember 2008 and May 2009 (the“Dividends”). Prior to the payment ofthe Dividends, AWA effected areduction of capital by specialresolution supported by a solvencystatement in order to free updistributable reserves. The Claimantwas liable for a series of expensesreferable to the clean-up operation of

the Lower Fox River in WisconsinUSA. AWA in turn was liable toindemnify the Claimant for themonies it had paid out for thesepurposes. AWA’s accounts madeprovision for the company’s liabilityto the Claimant during the relevantperiod.The Claimant challenged thepayment of the two dividends onthree bases: (i) the Dividends weredeclared in contravention of Part 23of the Companies Act 2006; (ii) thedecision to pay the Dividends was a

breach by the directors of theirfiduciary duties to AWA, inparticular the duty to act in the bestinterest of creditors; (iii) payment ofthe Dividends contravened s. 423 ofthe IA 1986 as a transactiondefrauding creditors.As to (i), Rose J held that the properconstruction of s. 643 (1) CA 2006requires directors making a solvencystatement to look at the situation atthe date of the statement, taking intoaccount contingent or prospectiveliabilities, to form an opinion as to

COMPANY LAW Digested by HENRY PHILLIPS AND EDOARDO LUPI

EDOARDO LUPIHENRY PHILLIPS

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whether the company is able to payits debts: it is not a requirement thatthe directors should have reasonablegrounds for the opinion they form,provided the directors did in factform the opinion. Rose J found thatthe provision made by the directorsfor the company’s indemnity liabilitywas not defective as the figurerepresented the directors’ bestestimate. Accordingly, the Dividendswere not paid in contravention ofPart 23. As to (ii), Rose J noted that it cannotbe right that whenever a company

has on its balance sheet a provisionin respect of a long term liabilitywhich might turn out to be largerthan the provision made, the duty tohave regard to creditors’ interestsapplies for the whole period duringwhich there is a risk that there will beinsufficient assets to meet thatliability. That would result indirectors having to take account ofcreditors’ rather than shareholders’interests when running a businessover an extended period. AccordinglyRose J held that, at the time ofpayment of the Dividends, the duty to

take into account creditors’ interestshad not arisen.As to (iii), the payment of a dividendfalls within the scope of a‘transaction’ for the purposes of s.423 IA 1986. The requisite s. 423intention was not present in relationto the December Dividend, but AWAdid, through its directors, have thepurpose of putting the dividendmonies beyond the reach of theClaimant, or of otherwise prejudicingits interests at the time of payment ofthe May Dividend, such that the latterclaim succeeded.

Burnden Holdings (UK) Ltd v Fielding [2016] EWCA Civ 557 (DavidRichards, Tomlinson and Arden LJJ, 17 June 2016Distribution - breach of fiduciary duty – limitation – summary judgment

The issue on the appeal was whethera claim brought by the Claimant foralleged breach of duty against twodirectors was time-barred. It washeld at first instance that it was, andsummary judgment was givenagainst the Claimant.In 12 October 2007, with a view toselling a shareholding in theClaimant’s wholly-owned subsidiary,the Claimant’s directors authorisedthe distribution in specie of theshares in the subsidiary to a Newcowhich they wholly owned andcontrolled. By a number of furthertransactions, the shares weretransferred on to a further holdingcompany, and the directors’shareholding was sold to a thirdparty for £6 million.The Claimant went into liquidation in2009. Proceedings against thedirectors were issued on 15 October2013. It was alleged that thedistribution in specie of the shares inthe subsidiary was an unlawfuldistribution, amounting to a breach

of fiduciary duty on the directors’part. David Richards LJ accepted thatthe Claimant’s cause of actionaccrued on the date at which theoriginal distribution was made,namely, 12 October 2007. Section 21of the Limitation Act 1980 governedactions in respect of trust propertyand applied here. Prima facie, thelimitation period applicable to thedirectors was six years pursuant to s.21 (3), subject to the contraryprovisions of the Limitation Act. Itwas agreed that more than six yearshad elapsed from 12 October 2007 bythe time the claim form was issued.The Claimant relied on s. 21 (1)(b) ofthe Limitation Act, which providesthat no period of limitation applies toan action by a beneficiary under atrust “to recover from the trusteeproperty or the proceeds of trustproperty in the possession of thetrustee, or previously received by thetrustee and converted to his use”. Thedirectors took the point that they hadnever in fact received the shares,

given that they had been distributedto various shell companies, albeit, asthe Claimant pointed out, companiesentirely controlled by the directors.David Richards LJ held that theproper construction of s. 21 (1)(b)includes within its terms a transfer toa company directly or indirectlycontrolled by the trustee, such thatno limitation period applied to theClaimant’s claim. The literal readingof the word “received’” proposed bythe directors would make it very easyfor delinquent directors/trustees toevade the section’s effect bytransferring trust property to a shellcompany. Further, his Lordship heldthat the Claimant was entitled tosucceed on the basis of s. 32 of theLimitation Act (deliberateconcealment of a cause of action) asan alternative ground, given that itwas not possible, in the context ofsummary judgment, to determinewhen the Claimant could havediscovered the directors’ breach withreasonable diligence.

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Kevin Taylor v Van Dutch Marine Holding Limited [2016] EWHC 2201 (Ch) (Warren J, 5September 2016)Breach of disclosure order – committal for contempt – sentencing contemnor in absence – custodial sentences

The Claimant brought an applicationfor the committal of D3 and D4, whowere the directors, sole shareholdersand controlling minds of D1 and D2,two Maltese registered companies. D3and D4 were Dutch nationals residentin Monaco.Prior to entry of default judgment inrespect of the Claimant’s underlyingclaim for repayment under a securedbridging loan facility, the court hadmade orders which included aproprietary injunction in respect ofcertain vessels securing the facility,and a disclosure order against all ofthe Defendants (the “DisclosureOrder”). The Disclosure Order requiredaffidavits to be sworn containinginformation regarding both theaccounts and assets of the twodefendant companies as well as thoseof D3 and D4. Subsequently, the first

order was augmented by furtherorders granting, amongst other things,a worldwide freezing injunction. Theorders also provided that the provisionof information required by theDisclosure Order was a continuingobligation. D3 and D4 failed to providethe information required undertheDisclosure Order. In thecircumstances, Warren J held that D3and D4 had wilfully failed to complywith the orders, and were thereby alsoin contempt of court in relation to thefailures to comply of D1 and D2.Acknowledging that dealing with acontempt application in the absence ofthe alleged contemnors was anexceptional course, Warren Jnevertheless considered that theapplication should proceed, relying onthe checklist of factors set out inSanchez v Oboz [2015] EWHC 235

(Fam).Warren J considered that it wasappropriate to proceed immediately tosentence the contemnors in theirabsence, having considered that D3and D4 would have been unlikely toavail themselves of the opportunityafforded by an adjournment to complywith their legal obligations or to makeany plea in mitigation. The judgeconsidered that the principlesapplicable to the punishment forbreach of a disclosure order in relationto a freezing order applied to D3 andD4’s breaches, despite the fact that theDisclosure Order had not strictly beenin support of a conventional freezingorder. The appropriate punishment forsuch contempt is normally a prisonsentence. His Lordship went on toimpose a six month sentence on D3and D4, suspended for one month.

Re SABMiller plc [2016] EWHC 2153 (Ch) (Snowden J, 23 August 2016)

Scheme of arrangement – convening hearing – takeovers – class issues

SABMiller plc (the “Company”) soughtan order under s. 896 of theCompanies Act 2006 to summon asingle meeting of all of its ordinaryshareholders (the “PublicShareholders”), other than two majorshareholders, Altria Group Inc. andBEVCO Ltd (together, the “MajorShareholders”), for the purpose ofconsidering a scheme of arrangement.The scheme was the first stage in acomplex transaction by whichAnheuser-Busch InBev (“AB InBev”)would acquire control of theCompany. The Company took the viewthat it was appropriate to propose tothe court that the MajorityShareholders be treated as a separateclass, and therefore to allow theCompany’s Public Shareholders tovote separately. To this end, the

Company proposed that there shouldonly be one scheme meeting, and thatthe Majority Shareholders wouldappear by counsel and undertake tothe court at the sanction hearing to bebound by the scheme.One group of shareholders, “Soroban”,took a different view and disputed theCompany’s proposal. Unusually,Soroban was not a dissentientshareholder. Soroban sought to havethe Major Shareholders included inthe main scheme meeting, such thatthere would be a higher chance ofdissentient members being outvoted.The key question before the court waswhether the relevant provisions ofthe Companies Act 2006 permit thecourt to make an order summoning ameeting of only some of theshareholders to whom a scheme is

proposed, on the basis that the othersare prepared to give undertakings tothe court at sanction to be bound bythe scheme.Snowden J held that he hadjurisdiction to order a meeting of thePublic Shareholders, which did notinclude the Major Shareholders. HisLordship accepted the Company’ssubmission that a not uncommonpractice in this area is for membersor creditors voluntarily to excludethemselves from a class to which theyotherwise might be said to belong toavoid giving dissentient creditors theopportunity to attack a favourablevote at the sanction stage, on thebasis of unfairness or that themeeting was unrepresentative.Snowden J considered that there wasnothing in the statutory wording of

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ss. 895 and 896 to prevent a memberor creditor from agreeing voluntarilyto waive or forgo the right to

participate in the meeting, in thesame way as a member or creditorcan simply decide not to attend or

vote. (The scheme was subsequentlysanctioned by the same Judge at ahearing on 4 October 2016.)

Re Garden Products Italy S.p.A. [2016] EWHC 1884 (Ch)(Snowden J, 27 June 2016)Scheme of arrangement – sanction hearing

Snowden J sanctioned a scheme ofarrangement in relation to GlobalGarden Products Italy S.p.A (the“Company”) under Part 26 of theCompanies Act 2006. The Companyand its parent, Global Garden ProductsC S.a.r.l (the “Parent”) formed part of agroup that is one of Europe’s leadingmanufacturers and sellers oflawnmowers and related equipment.The Company was the borrower undera Facility Agreement with IntesaSanpaolo acting as the existing lender,which was governed by English lawand contained an English jurisdictionclause. Under a related Credit SupportAgreement, a number of internationalfinancial institutions, in effect,provided a commitment to fund aproportion of facilities made availableto the Company. The purpose of thescheme was to extend the maturity ofthe two tranches of the term facilities

from August 2016 and August 2017 tothe end of 2020. Further, it wasenvisaged that one tranche wouldbecome owed by the Parent and oneby the Company, with both being oweddirectly to the scheme creditors ratherthan through the existing lender,Intesa Sanpaolo. Snowden J wassatisfied that he had jurisdiction tosanction the scheme under Article 8 ofthe recast Judgment Regulation, on theassumption it did indeed apply, afterreceiving additional informationconcerning the identity and domicileof five scheme creditors in the UK. Therequirement of a “sufficientconnection” was satisfied by the factthat both the Facility Agreement andCredit Support Agreement weregoverned by English law andcontained English jurisdiction clauses.As to the question of the scheme’srecognition in Italy, Snowden J was

satisfied that there was a realisticprospect of recognition in Italy, wherethe Company is based, on the basis of avery clear and persuasive expertopinion. Although Snowden Jacknowledged that it is not ordinarilyappropriate for class issues to receivefresh attention at the sanction stage,his Lordship proceeded to consider arelevant class issue on the basis that ithad not previously been raised. Thejudge considered the effect ofCoordination Fee payable to thescheme’s Coordinators, which had notbeen disclosed in the explanatorystatement. Upon receiving a moredetailed explanation as to its rationale,Snowden J accepted that the fee wasnot likely to have affected theCoordinators’ decision to support thescheme, and waived the deficiency inthe explanatory statement.[Robin Dicker QC]

ROBIN DICKER QC

Re Metinvest [2016] EWHC 1868 (Ch) (Arnold J, 30 June 2016)

Scheme of arrangement - sanction

Following an earlier scheme ofarrangement to prevent enforcementof US$1.125 billion of notes issued byUkrainian mining and steel company(the first moratorium scheme), thescheme company required furthertime in which to seek to negotiate asubstantive restructuring of its debts;and therefore it proposed a furtherscheme of arrangement (the secondmoratorium scheme) to extend thefirst moratorium scheme’s prohibitionon enforcement for a further period.At the convening and sanctionhearings in respect of the firstmoratorium scheme, the court had

concluded that a single class ofscheme creditors was appropriate andthat the court had jurisdiction tosanction the scheme: see Re MetinvestBV [2016] EWHC 79 (Ch) (Proudman J)and Re Metinvest [2016] EWHC 372(Ch) (Asplin J). Furthermore, at theconvening hearing for the secondmoratorium scheme, Newey J hadconcluded that a single class ofscheme creditors was appropriate andthat the position in respect ofjurisdiction remained unchanged: seeRe Metinvest [2016] EWHC 1531 (Ch).At the meeting of scheme creditors inrespect of the second moratorium

scheme, the second moratoriumscheme had been approved by 100percent both by number and value ofthe scheme creditors voting at themeeting either in person or by proxy.Additionally, those voting representedapproximately 85 percent by value ofthose entitled to vote. At the sanctionhearing in respect of the secondmoratorium scheme, Arnold J heldthat the court had jurisdiction tosanction the second moratoriumscheme; that there had beencompliance with the statutoryrequirements and the terms of theconvening order; that the class had

STEPHEN ROBINS

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been fairly represented and had actedin a bona fide manner; and that thesecond moratorium scheme was onewhich it was appropriate for the courtto sanction. On this final point, theJudge held that the appropriatecomparator was insolvency. The

evidence before the court was to theeffect that, even on an orderlyrealisation of the assets of the schemecompany in the event of insolvencyproceedings, the scheme creditorswould be likely to recover no morethan 46 cents in the dollar. By

contrast, in the event of the successfulnegotiation of a substantiverestructuring, the scheme creditorswould be repaid in full over time. Thecourt therefore sanctioned the secondmoratorium scheme.[David Allison QC, Stephen Robins]

Digested by RYAN PERKINS AND RIZ MOKAL CORPORATE INSOLVENCYRe Lehman Brothers International (Europe) [2016] EWHC 2131 (Ch)(Lord Justice David Richards, 24 August 2016) Post-administration statutory and contracted interest - currency conversion claimsinsolvency set off

This judgment addresses severalsupplemental issues arising from theWaterfall IIA and Waterfall IIBjudgments given in 2015 by DavidRichards J (as he then was). Fourconcern issues of legal principle orstatutory construction. First, wherean event occurring between the dateof the administration and that of thefinal and full discharge of a creditor’snon-provable debt contractuallyentitles the creditor to interest, thecreditor thereafter has an accruedright to that interest. In calculating

this interest, no account may be takenof steps that a creditor might havetaken but did not in fact take. Second,under Rule 2.88 of the InsolvencyRules 1986, the contractual interestrate applies to contingent and futuredebts once, but only once, theybecome payable. Prior to this period,the statutory interest rate applies.Third, when a debt is discharged byinsolvency set-off, no currencyconversion claim arises, since set-offonce triggered is deemed to haveoccurred as at the date of the

commencement of theadministration. And fourth, where apart of a foreign currency debt hasnot been discharged as a result of thedepreciation of sterling as betweenthe commencement of administrationand the payment of dividends, thecreditor is entitled to contractualinterest on that part of the debt. [Robin Dicker QC; William Trower QC; AntonyZacaroli QC; David Allison QC; Tom SmithQC; Daniel Bayfield QC; Richard Fisher;Alexander Riddiford; Adam Al-Attar; HenryPhillips; Robert Amey]

RIZ MOKALRYAN PERKINS

Ronelp Marine Ltd v STX Offshore and Shipbuilding Co [2016] EWHC2228 (Ch) (Norris J, 7 September 2016)

Recognition of foreign proceedings – lifting of stay to continue individual actions

The five applicants were Liberiancompanies each of whom had enteredinto contracts with the Chinesesubsidiary of a Korean shipbuilderfor the delivery of five vessels. Thecontracts were governed by Englishlaw. The Korean parent hadguaranteed the performance of thecontracts, and the guarantees weresubject to English law and thejurisdiction of English courts. TheChinese subsidiary entered intoChinese insolvency proceedings andthe office-holder notified theapplicants of the rescission of thecontracts. The applicants commencedEnglish Commercial Court

proceedings to enforce theguarantees against the Koreanparent. The latter was subsequentlyplaced in Korean rehabilitationproceedings, and the Korean office-holder applied under the CrossBorder Insolvency Regulations 2006for recognition of the Koreanproceedings as foreign mainproceedings. This was granted, withthe result that the litigation pursuantto the guarantees was automaticallystayed. The applicants applied underthe Regulations for permission tocontinue their guarantee claims. TheCourt regarded as significant the fact,firstly, that the litigation involved

considering whether the contractswith the Chinese subsidiary wereunenforceable on the ground ofillegality, a question on which Englishlaw has been described as “in a stateof flux” and “in some disarray”. TheCourt was of the view that “theapplication of this body of lawthrough the medium of expertevidence…should not be visited uponthe Korean Rehabilitation Court.”Secondly, the English CommercialCourt proceedings were reasonablywell advanced and the parties hadincurred considerable costs on them.Thirdly, the English proceedingscould more speedily quantify the

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applicants’ claims, which in turnwould enfranchise them in theKorean proceedings. Fourthly, theEnglish proceedings would nothinder the Korean proceedings, since

they threatened neither the integrityof the insolvency estate nor theequality of distribution from it. Andfinally, the English proceedings mightassist the Korean Court by resolving a

genuinely difficult issue of Englishlaw. On these grounds, the Courtpermitted the English proceedings tocontinue. [Robert Amey]

Re BHS Ltd (in administration)[2016] EWHC 1965 (Ch) (Birss J)

Administration – appointment of additional administrators

The administrators of BHS applied tothe court for the appointment ofconcurrent administrators. Theapplicants and proposed concurrentadministrators had agreed the termsof a protocol to delineate theirrespective responsibilities, namelythat once the concurrentadministrators were appointed, theapplicants would remain in office soas to continue to trade the businesswith a view to concluding tradingactivities and making assetrealisations, while the concurrentadministrators commencedinvestigatory work into the company’saffairs. The application had thesupport of the creditors, the largest ofwhich was the Pension ProtectionFund. Birss J found as follows: (1) Thecourt had the jurisdiction to approvean appointment of the kind envisaged,including an order making theprotocol a formal part of theappointment. The conditions laiddown in the Insolvency Act 1986Sch.B1 para.103(1), para.103(5),para.103(6) and para.68(1)(a) were

satisfied. (2) The court would exerciseits discretion to make the order. Theappointment of concurrentadministrators was in the bestinterests of the creditors because itwould enable investigations intopossible claims they might be entitledto bring against the former andcurrent directors of BHS to take placein the most timely and efficientmanner. Real progress could be madein those investigations before thecompany entered into liquidation atwhich time the concurrentadministrators would be appointedas joint liquidators. Such anapproach would also allow a delay onthe entry of BHS into liquidation sothat the company would be able toconclude its trading in theadministration. (3) The protocol inthe instant case expressly providedthat the two sets of administratorswould have unfettered access to allthe documents generated during thecourse of the administration byeither set of administrators in theircapacity as agents for the company.

The protocol also included aprovision to allow for its terms to beamended by agreement. It made goodpractical sense that theadministrators as a whole couldagree variations to the protocol and,on the footing that they were minorin nature, there was no need toreturn to court. It could be left to thegood sense and judgment of theadministrators themselves todetermine whether the court’ssanction ought to be sought. (4) Asregards costs, the originaladministrators and the concurrentadministrators’ costs and expenseswould be an expense in theadministration. However, it was notanticipated that there would be asignificant increase in the overall costof the administrators even thoughthere were to be both the originaladministrators and the concurrentadministrators. Accordingly, theappointment would not materiallyadd to the costs already estimated inthe administration.[David Allison QC]

DAVID ALLISON QC

Re Elgin Legal Ltd [2016] EWHC 2523 (Ch) (Snowden J, 25 August2016)

Appointment of administrators – locus standi – retrospective effect

The former administrator (S) of thecompany (E) applied for a secondadministration order against E. Byan administrative oversight, S’sprevious appointment asadministrator had expired. S askedfor the new administration order totake effect retrospectively from 1

March 2016, being the date when hisprevious appointment hadaccidentally come to an end.Snowden J made an administrationorder against E, and held as follows:(1) S had locus standi to apply for anadministration order on the basisthat he was a creditor for unpaid fees

incurred during the previousadministration (Re LafayetteElectronics Europe Ltd [2007] BCC890 applied); (2) if S had not been acreditor of the company, then Swould not have had standing to applyfor an administration order, since aperson does not have any interest in

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applying for an administration ordermerely by virtue of his status as aformer administrator; (3) on the factsof the case, it was clear that the Courtshould exercise its discretion infavour of making an administrationorder, and the only remaining issuerelated to whether such an order

should have retrospective effect from1 March 2016; (4) it was debatablewhether the Court had jurisdiction tomake a retrospective administrationorder (Re G-Tech Construction Ltd[2007] BPIR 1275 considered), but thisissue did not need to be decided in thepresent case because (5) even if the

Court had such jurisdiction, it wouldnot be appropriate for the Court toexercise its discretion to make aretrospective administration order,having regard to the potentiallyprejudicial effect that such an ordermight have on the company’s othercreditors.

Re Lehman Brothers International (Europe) [2016] EWHC 2492 (Ch)(Hildyard J, 11 October 2016, )Statutory interest – income tax

The administrators of LBIE applied tothe Court for directions as to whetherstatutory interest under rule 2.88(7)of the Insolvency Rules 1986constitutes “yearly interest” withinsection 874 of the Income Tax Act2007. The economic consequences ofsuch a finding would be significant: ifstatutory interest fell to be treated asyearly interest under section 874,then the administrators would berequired to deduct income tax fromany such interest payments (at thebasic rate) and pay the same to the

Revenue. Hildyard J held thatstatutory interest did not constituteyearly interest, on the followingbasis: (1) statutory interest underrule 2.88(7) does not accrue due fromtime to time (in the manner ofnormal contractual interest), but onlybecomes payable once a surplusarises in the estate of the insolventcompany after payment in full of theprovable debts (Re LBIE [2015] EWHC2269 (Ch) applied); (2) accordingly,statutory interest lacks thedistinguishing quality of yearly

interest, namely the continuousaccrual of such interest from time totime; (3) the Revenue had causedregrettable confusion by issuingcontradictory guidance on thematter, resulting in potentialconfusion for commercial partiestrading LBIE’s debts in the secondarymarkets; and (4) in the future, theRevenue should engage a specialistteam and carry out proper internalchecks before giving formalconfirmation of its position.[Daniel Bayfield QC]

Re Bernard Matthew Ltd and others (Hildyard J, unreported, 20 September 2016)

Pre-pack administration – sale of property subject to fixed charge

The Court appointed administratorsof Bernard Matthews Limited and 6associated companies and instantly

on their appointment made furtherorders under paragraph 71 ofSchedule B1 to the Insolvency Act

1986 enabling the administrators tosell property of the companies free offixed charge security. [Lloyd Tamlyn]

Preston v Green [2016] EWHC 2522 (Ch) (Mr Registrar Briggs, 11 October 2016)Rescission of winding-up order – standing – credibility of evidence – extension of time

The applicant, who litigated inperson, was a director of a companythat had been wound up by theCourt. He applied for rescission of thewinding-up order. Such anapplication must be made by acontributory or creditor of thecompany, and the applicant claimedto be both. At the hearing, headmitted that he was not acontributory. He had, however,

submitted a witness statement andtwo invoices to support the claim thatthe company owed him money. TheCourt found several inconsistenciesbetween the statement and the termsof the invoices. It also highlighted theapplicant’s failure to explain why theinvoices had not previously beenpresented to the Official Receiver orthe company’s liquidator. Takentogether, these factors persuaded the

Court on a balance of probabilitiesthat the applicant was not a creditor.He therefore lacked standing.Further, while a rescissionapplication must be made within fivedays of the winding-up order, therewas in this case a period of over twoyears between order and application.The Court held (following Re LehmanBros International (Europe) [2014]EWHC 1687 (Ch)) that Rule 3.9 of the

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Civil Procedure Rules applied to theexercise of its discretion as towhether to extend the applicationperiod. This required the Court(following Denton v White [2014]EWCA Civ 906) to consider whether

the delay was serious and significant,why it had occurred, and whether inall the circumstances it should beoverlooked. Here, the delay inseeking rescission was serious andsignificant; the explanation proffered

for it was inadequate; and theinterests of established significantcreditors of the company wereserved by the winding-up.Unsurprisingly, the applicationfailed.

Premier Motorauctions Ltd v Pricewaterhousecoopers LLP [2016]EWHC 2610 (Ch) (Snowden J, 24 October 2016)Insolvency – security for costs – relevance of ATE insurance

In considering whether to ordersecurity for costs on the basis thatthere was reason to believe that theclaimant would be unable to paycosts if ordered to do so, pursuant toCPR r.25.13, the existence of an after

the event insurance policy wasrelevant and should not be ignored,even where the claimant was aninsolvent company. The question waswhether, having regard to the termsof the ATE policy, the nature of the

allegations in the case and all theother circumstances, there wasreason to believe that the ATE policywould not respond so as to enablethe defendant’s costs to be paid.

This case is a continuation of thecases digested in prior issues thatrelates to a bankruptcy petitionbrought against Mr Maud. On 3 June2016, Mr Registrar Briggs made abankruptcy order against Mr Maudwhich was subsequently appealed.At the hearing before Mr RegistrarBriggs there was an issue as towhether the respondent petitionershad an ulterior motive in seeking tomake the debtor bankrupt. TheRegistrar held that: (1) where thedebt was undisputed there was apresumption that a bankruptcy orderwould be made; and (2) if the debtorcould show that there was an ulteriormotive and that it was not in theinterest of the creditors to make animmediate order the presumptionwould be negated and the burden ofproof would fall on the petitioner.Based on the information before himthe Registrar found that therespondents did not have an ulteriorobject so that burden of proof shiftedback to the debtor to show why an

order should not be made. TheRegistrar then concluded that therewas no prospect of the debt beingpaid within a reasonable time and sohe made a bankruptcy order.The debtor appealed the Registrar’sorder on the basis that he was wrongto find that the respondents were notpursuing an ulterior object. Therespondents on the other handargued that the petitioner’s motiveswere wholly irrelevant where one ofthe objectives included lawfullyseeking a dividend.At the hearing of the appeal theJudge granted permission to appealand allowed the appeal against thebankruptcy order.The Judge held that the presence ofan ulterior motive did not render thepetition an abuse of process wherethere was also a legitimate purpose.The Judge referred to and relied oncases in the winding up context suchas Re A Company [1983] BCLC 492 insupport of this. The Judge howevermade it clear that those cases did not

decide that the motives of apetitioning creditor were irrelevantwhere the petition was opposed byother creditors. In such cases thecourt had to evaluate the creditors’wishes and attribute weight to theviews of individual creditors indeciding whether to grant the reliefsought in the interests of the class.Such an approach would necessarilyrequire consideration of all thecircumstances including the motivesof the petitioning creditor.As for the shifting burden of proof,the Judge held that the Registrar’sapproach created a real risk that thecourt would conflate or not addressdistinct questions. In particular: (1)whether a petitioner with anundisputed debt was abusing theprocess by seeking an order that wascontrary to the interests of thecreditors as a whole; (2) whether thecourt should grant an order wherethere was no abuse of process in lightof the circumstances as a whole; and(3) whether the court should exercise

PERSONAL INSOLVENCY Digested by MATTHEW ABRAHAM

Maud v Aabar Block Sarl [2016] EWHC 2175 (Ch), (Snowden J, 8September 2016)

The impact of an ulterior purpose in the making of a bankruptcy order ANTONY ZACAROLI QC

WILLIAM WILLSON

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its case management powers andadjourn the petition if there was areasonable prospect of payment.The Judge found that the Registrar

had erred in his finding of noulterior purpose. This wasparticularly in light of newadmissions by the respondents who

admitted that they had some otherobjectives in pursuing thebankruptcy order.[Antony Zacaroli QC and William Wilson]

Cooke v Dunbar Assets Plc [2016] EWHC 1888 (Ch)(Jeremy Cousins QC, 29 July 2016)Costs of an unsuccessful appeal of a bankruptcy order

This case relates to the treatment ofcosts where a bankruptunsuccessfully appeals a bankruptcyorder. The original bankruptcy orderwas made on 18 December 2014 andthe judgment dismissing the appealwas handed down on 6 April 2016.The issue of the treatment of thecosts was adjourned to anotherhearing which formed the basis ofthe judgment digested.The bankrupt submitted that theappeal costs should be treated: (1) asa cost and expense of the bankruptcythus falling to be dealt with inaccordance with the order of priorityin r.6.224(1) of the Insolvency Rules1986 (IR); or (2) as a provable debt inthe bankruptcy. To this extentreliance was placed on: (1) r.12.2 IRwhich states that fees, costs, chargesand other expenses incurred in thecourse of bankruptcy proceedingswere to be regarded as an expense;and (2) that the appeal was acontinuation of the underlying

proceedings commenced below suchthat the parties had submittedthemselves to a statutory regimewhich gave rise to a contingentliability for the costs of any appeal(Bloom v Pensions Regulator [2013]UKSC 52).The respondent argued that r.7.51AIR gave the court an unfettereddiscretion as to what order shouldbe made for the costs of an appeal. Itwas further argued that theconsequence of the bankrupt’sargument was that the costs of thebankrupt’s unsuccessful appealwould fall on the creditors. As aresult of this the creditors would beworse off which could not becorrect. The respondent furtherargued that the court was able toorder that if the bankrupt did notpay the costs then they should betreated as a cost of the bankruptcy.The Judge ordered that the bankruptwas liable for the costs personallyoutside of the bankruptcy and to the

extent they were not paid by himthey should be treated as an expenseof the bankruptcy. In relation to theapplication of r.12.2 the Judge heldthat it was there to safeguardpersons who had incurred costs andexpenses which would promote theinterests of the creditors. It was notdesigned for the protection of thosewho made unsuccessful claims orapplications which cause thebankruptcy estate to incur costs.Further, r.12.2 was not anexhaustive statement as to how costswere to be treated. The Judge heldthat there was no inconsistencybetween the provisions of r.12.2 IRand the general rules as to costs inCPR Pt 44 (introduced by r.7.51A IR).As a result of this, the starting pointwas that as an unsuccessful partythe bankrupt was liable personallyfor the costs. In relation to theapplication of Bloom the Court heldthat the costs of the appeal were nota provable debt.

Grant v Baker [2016] EWHC 1782 (Henderson J, 18 July 2016)

Indefinite postponement of an order for sale not permitted even in the presence ofexceptional circumstances

This was an appeal in relation to anorder that the sale of a bankrupt’sproperty be postponed until thebankrupt’s adult daughter (D) nolonger resided at the property. Inmaking the order the first instanceJudge considered the effect of a saleon D and whether the circumstanceswere exceptional and outweighed thesole creditor’s interests as requiredby s.335A of the Insolvency Act 1986(IA). The Judge concluded that there

were exceptional circumstances andthat D’s needs could not be met inrented accommodation. The appealby the joint trustees in bankruptcywas allowed. The appellate Judgeheld that while the first instanceJudge was entitled to find that therewere exceptional circumstancesdisplacing the presumption in favourof the creditor’s interests the Judgewas not entitled to postpone the saleindefinitely. The requirement in

s.335A(2)(c) IA required the Judge tohave regard to “all the circumstancesof the case other than the needs ofthe bankrupt”. It was held that thosecircumstances included the statutoryscheme of the bankruptcy legislationwhich had at its core the vesting ofthe bankrupt’s property in the trusteefor the purpose of realisation anddistribution among unsecuredcreditors. With this in mind, theappellate Judge held that the first

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instance Judge failed to giveappropriate weight to the fact thatthe indefinite stay was incompatiblewith the underlying purpose of thebankruptcy legislation. It was furtherheld that in all but the truly

exceptional circumstances thepurpose of the legisation requiredrealisation in a short timeframe(usually months).As a result of the appellate court’sdecision that the first instance judge

had erred in the exercise of herdiscretion, it was for the appellateJudge to form his own view. Theappellate court ordered that thelongest reasonable postponementwas for approximately 12 months.

PROPERTY & TRUSTS Digested by ANDREW SHAW

Angove’s Pty Ltd v Bailey and another [2016] UKSC 47 (LordNeuberger of Abbotsbury PSC, Lord Clarke of Stone-cum-Ebony,Lord Sumption, Lord Carnwath, Lord Hodge JJSC, 27 July 2016)

The applicant, Angove’s Pty Ltd(“Angove’s”), is an Australianwinemaker, which had engaged anEnglish company, D & D WinesInternational Ltd (“D & D”) as itsagent and distributor in the UnitedKingdom under an agency anddistribution agreement (the “ADA”).D & D entered administration andthen moved into creditors’ voluntaryliquidation (“CVL”). When it enteredadministration, there wereoutstanding invoices for A$874,928.81in respect of wine which D & D hadsold to two customers but for whichthese customers had not yet paid.While D & D was in administration,Angove’s gave written notice that itwas terminating the ADA and therebyD & D’s authority to collect the sumdue under the invoices from itscustomers. Instead, Angove’sintended to collect these monies itselfand then account to D & D for itscommission.After D & D had moved into CVL, itsliquidators objected to Angove’scourse of action. The liquidatorsmaintained that D & D was entitled tocollect the monies, deduct itscommission and then leave Angove’sto proof in the CVL for the sum owingto it. Initially the liquidatorscontended that the relationshipbetween Angove’s and D & D wasbuyer and seller, not agent andprincipal. Angove’s disputed this andfurther argued that any monies heldby D & D for Angove’s account was

held on trust.At first instance, Judge Pelling QCheld that the relevant relationshipbetween Angove’s and D & D was thatof principal and agent and that,consequently, D & D’s authority tocollect the sums due under theinvoices ceased upon thetermination of the ADA. On appeal,the liquidators accepted this andinstead argued that if D & D did actas agent then its authority to collectthe price of the wine sold onAngove’s behalf survived thetermination of the ADA because D &D required this authority to collectits commission. This argumentsucceeded before the Court ofAppeal; Angove’s trust argumentfailed both at first instance and onappeal.The Supreme Court allowed Angove’sappeal on the basis that the generalrule was that a principal couldrevoke the authority of an agent,even if it were contractually agreedto be irrevocable. An exception tothis general rule would apply if thecontract provided, either expresslyor impliedly, that the authority wasirrevocable and that the authoritywas given to secure an interest of theagent, so that the authority of anagent is irrevocable while theinterest persists. However, on its trueconstruction the ADA did not providefor the authority to be irrevocable,nor had the authority been grantedto secure D & D’s right to collect its

commission. Accordingly, Angove’sappeal succeeded.Although it was not necessary for theSupreme Court to deal with Angove’strust argument, it did so because ithad been fully argued and was apoint of some general importance. Inaddressing this argument, theSupreme Court proceeded on thebasis that Angove’s was not able toterminate D & D’s authority as agent.Although an agent has a duty toaccount to his principal for moniesreceived on the latter’s behalf, thisduty does not give rise to a trust ofthe monies held by the agent unlessthe intentions of the parties,determined from the agencyagreement or, in some instances,from the parties’ conduct, indicatesotherwise. At first instance, the judgehad held that the liability of D & D toaccount to Angove’s under the ADAwas a purely personal liability;whereas sums collected outside theADA after the termination of D & D’sauthority would be held on trust.Escrow arrangements put in placerendered these points moot though.On appeal, the Court of Appeal drewthe parties’ attention to a passage inLewin on Trusts which stated thateven if no express trust existed,money received by an agent might beheld on a constructive trust if, “itwould be unconscionable for theagent to assert a title to the moneyhaving regard to the circumstancesof the agent at the time of receipt.”

ANDREW SHAW

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CASE DIGESTS

SPORT Digested by ROBERT AMEY

ROBERT AMEY

International Tennis Federation v Maria Sharapova (Court ofArbitration for Sport, 30 September 2016)

Doping – meaning of ‘no significant fault or negligence’

The Court of Arbitration for Sport(CAS) has accepted Ms Sharapova’ssubmission that she bore nosignificant fault or negligence inrelation to a positive test forMeldonium, setting aside thecontrary decision of the ITFIndependent Tribunal (see the August2016 edition of the South SquareDigest, page 31).On 26 January 2016, Maria Sharapovaplayed against Serena Williams in thequarter-final of the Australian Open.Following that match a sample wastaken from Ms Sharapova under therules of the Tennis Anti-DopingProgramme 2016. That sample testedpositive for Meldonium, a substancewhich had been added to theProhibited List with effect from 1January 2016. Before the ITF Independent Tribunal,Ms Sharapova had asserted that shedid not know that the activeingredient of Mildronate, amedication which she had regularlybeen using for over 10 years (andwhich is not licensed for humanconsumption in the USA or the EU,although it is in Russia), had been

added to the Prohibited List from 1January 2016. Further, she arguedthat she bore no significant fault ornegligence, such that the period ofineligibility should be reduced to 1year. The ITF Independent Tribunal sat fortwo days and heard evidence from anumber of factual and expertwitnesses, before giving a judgmentdescribing Ms Sharapova’s evidenceas “untenable”, “remarkable”,“wholly incredible” and“unbelievable”. Ultimately, thetribunal held that Ms Sharapova hadmade a “deliberate” decision toconceal her use of the drug from anti-doping authorities, and that she tookMildronate “for the purpose ofenhancing her performance”.Rejecting her submission that shebore no significant fault or negligencein relation to the ADRV, the tribunalhad imposed a period of 2 yearsineligibility. According to its usual procedure, theCAS conducted a de novo review ofthe matter. Setting out the law inrelation to the ‘no significant fault ornegligence’ ground of mitigation, the

CAS held that a mere failure toexercise ‘utmost caution’ is not on itsown an indicator that an athletebears significant fault. Nor will anathlete bear significant fault merelybecause she has left some ‘stonesunturned’. The CAS held that thefailure of Ms Sharapova and her teamto realise that consumption ofMildronate would result in an ADRVdid not amount to significant fault ornegligence. Furthermore, the CASaccepted Ms Sharapova’s claim thatshe had entirely delegatedresponsibility for compliance withanti-doping rules to her manager, MrEisenbud. The CAS considered thatthis did not involve significant faultor negligence on the part of MsSharapova, despite the fact that MrEisenbud had received no anti-dopingtraining, and had clearly failed in hisduty to ensure that his athlete wasnot taking a prohibited substance.As a result of the finding that MsSharapova bore no significant fault,the 24 month period of ineligibilityimposed by the ITF IndependentTribunal was replaced with a 15-month ban.

Having considered the authorities,including the decision of Bingham Jin Neste Oy v Lloyd’s Bank plc [1983] 2Lloyd’s Rep 658, the Court of Appealconsidered that D & D’s contractualright to collect the invoice monies inorder to recover its commission onsales meant that it was notunconscionable for D & D to retainthose monies and so no constructivetrust arose.Giving judgment in the SupremeCourt, Lord Sumption held that where

money is paid with the intention thatthe recipient will hold the entirebeneficial interest then a constructivetrust will only arise if: (i) thatintention is vitiated somehow, forexample if the money is paid as aresult of a fundamental mistake; or(ii) irrespective of the payor’sintentions, in the eyes of equity themoney has come into the wronghands, for example where itrepresents the proceeds of a fraud.Neither of these conditions had been

satisfied in the Neste Oy case, whichLord Sumption held was wronglydecided as was In re Japan Leasing[1999] BPIR 911, another caseconsidered by the Court of Appeal.The customers had paid D & D in thebelief that such payment woulddischarge their liability under theinvoices on the basis that D & D wasauthorised to collect it and this beliefwas not mistaken. Consequently, thequestion of a constructive trust didnot arise.

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UK Anti-Doping v Samuel Barlow (National Anti-Doping Panel, 27June 2016)

Tampering with doping control – assault on a Doping Control Officer

Mr Barlow was a rugby league playerfor Leigh Centurions and Scotland. On31 July 2015, an experienced DopingControl Officer, Mark Dean, attendedMr Barlow’s home to carry out an out-of-competition test. What happenednext was caught on CCTV.Mr Dean, wearing a prominentlydisplayed ID badge (visible on theCCTV footage) and a top displaying thewords ‘Doping Control’, parked his carand rang the doorbell. After a fewminutes, Mr Barlow’s partner cameout of the house and was told by MrDean that he had come ‘to do a drugtest on Mark Barlow’. Mr Barlow thenappeared at an upstairs window,accusing Mr Dean of attempting toburgle him. Mr Barlow then camedownstairs, and after a briefconversation (in which Mr Dean canbe seen showing Mr Barlow his IDbadge), Mr Barlow invited Mr Dean

inside the house.Once inside the house, Mr Barlowassaulted Mr Dean. He then called thepolice, saying that he had caught aburglar at his house. The police didnot accept Mr Barlow’s claim to havemistaken Mr Dean for a burglar, andcharged him with perverting thecourse of justice, false imprisonment,and assault. Mr Barlow pleaded guiltyto the assault at Bradford CrownCourt on 23 May 2016, and the othercharges were not proceeded with.Before the National Anti-DopingPanel, Mr Barlow persisted with hisclaim that he had mistaken Mr Deanfor a burglar. This version of eventswas emphatically rejected by thetribunal. The tribunal thenconsidered whether Mr Barlow wasguilty of an ADRV in having tamperedwith a doping control. The tribunalnoted that mere offensive conduct

towards a doping control officialwould not amount to the offence oftampering, which normally involvedinterference with sample bottles.However, it was common ground inthe instant case that, subject to UKAnti-Doping establishing Mr Barlow’sstate of mind (i.e., that he knew MrDean was a Doping Control Officer),Mr Barlow’s assault on Mr Deanwould amount to the offence oftampering.The tribunal considered that, contraryto his claims to have mistaken MrDean for a burglar, Mr Barlow did infact know that Mr Dean was a DopingControl Officer. Accordingly, MrBarlow was guilty of the offence oftampering, and was therefore bannedfor four years. An appeal by MrBarlow was dismissed by the appealtribunal in a judgment dated 6September 2016.

SAMUEL BARLOW: ADMITTED TO HITTING DOPING CONTROL OFFICER MARK DEAN

44

IntroductionOne of the most important issues which arisesin any insolvency proceeding concerns thepriority in which the assets in the insolventestate are to be distributed to the variousclaimants on the fund.

In the case of the insolvency of a company,the general principle of course is that assetsare to be distributed between unsecuredcreditors pari passu, with any surplusremaining then being for the shareholders.However, the position is in practice usuallymore complicated than that since it is alsonecessary to take account of (amongst otherthings) secured creditors, preferentialcreditors, claims to interest and non-provableliabilities.

The Position in EnglandSo far as an English liquidation ordistributing administration is concerned, thedistribution waterfall can be summarisedbroadly as follows. The property held by the

liquidator or administrator is required to bedistributed in the following order:

1/. Fixed charge creditors;2/. Expenses of the insolvency proceedings;3/. Preferential creditors;4/. Floating charge creditors;5/. Unsecured provable debts;6/. Statutory interest;7/. Non-provable liabilities1; and8/. Shareholders.See Bloom v The Pensions Regulator [2014]

AC 209 at [39] per Lord Neuberger.

The Position in CaymanThe priority waterfall in a Caymanliquidation broadly follows the same schemeas the waterfall in an English insolvency,which is not surprising given the commonorigins of the legislation. However, there arecertain differences, primarily relating to theranking of liquidation expenses. Thus thewaterfall in a Cayman liquidation can be

CAYMAN ISLANDS

Waterfalls in Caymanand English InsolvenciesTom Smith QC, Rocco Cecere and Christopher Levers of Mourant Ozannesdiscuss how the priority of redemption claims in Cayman liquidations has beenclarified in the light of the recent Cayman Islands Court of Appeal decision in In reHerald Fund SPC.

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1/. i.e. the category of claims which are not provable in a liquidation but which nevertheless rank ahead of the claimsof members. The most well known examples of such claims are “currency conversion” claims which arise for losssuffered by a creditor as a result of his foreign currency claim being converted into sterling for the purposes of proofand where sterling then depreciates against the foreign currency by the time dividend payments are made: see ReLehman Brothers International (Europe) in administration [2016] Ch 50 CA.

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summarised as follows2:1/. Fixed charge creditors (section 140(2) ofthe Companies Law);2/. Preferred creditors3 (section 140(2),section 141(1));3/. Floating charge creditors (section 140(2),section 141(1));4/. Expenses of the liquidation including theliquidator’s remuneration (section 109(1));5/. Unsecured creditors (section 140(1));6/. Statutory interest on the unsecuredclaims admitted to proof (section 149(2));7/. Non-provable liabilities (to the extentsuch liabilities in fact exist as a matter ofCayman law); and8/. Shareholders.

Distributions to ShareholdersMany Cayman liquidations concern thewinding up of mutual investment fundswhich have been set up as Caymancompanies. In the case of such companies, itis of course the relative priority of the rightsof the shareholders which is usually of criticalimportance. As a result, the focus in aCayman liquidation will often be on the rightsof shareholders and may give rise to issueswhich are rarely focussed on in Englishliquidations and administrations, which aretypically more focussed on the rights andpriorities between creditors. One of the keyissues in the winding up of a Cayman mutualfund will often be whether investors who

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2/. The difference between the English scheme and the Cayman scheme relates to the ranking of the expenses of theliquidation. The Cayman scheme follows the position in England prior to the amendments introduced by theCompanies Act 2006 (introducing a new section 176ZA into the Insolvency Act 1986) and elevating the status ofliquidation expenses above floating charge claims and those of preferential creditors. The position in the CaymanIslands follows the law in England prior to these changes as explained by the House of Lords in Buchler v Talbot[2004] 2 AC 298.

3/. As to the categories of preferred debts, see Schedule 2 to the Companies Law. By virtue of section 141(2),preferential debts rank in priority over claims of secured creditors which are secured by a charge which, as created,was a floating charge but not over the claims of fixed charge creditors.

CAYMAN COURT BUILDING:THE PRIORITY WATERFALL IN A

CAYMAN LIQUIDATIONBROADLY FOLLOWS THE SAME

SCHEME AS THE WATERFALLIN AN ENGLISH INSOLVENCY

46

sought to redeem their investmentsimmediately prior to the fund’s winding upenjoy any sort of priority over the remaininginvestors.

Re Herald Fund SPCThe recent decision of the Cayman IslandsCourt of Appeal in In re Herald Fund SPC,CICA 17/2015, 19 July 2016, considered, for thefirst time, the priority enjoyed by the claimsof redeemed shareholders in the liquidationof a Cayman Islands mutual fund vis-à-vis“ordinary” or “outside” creditors andremaining shareholders.

The case concerned two Cayman Islandscorporate mutual funds: Primeo Fund(Primeo) and Herald Fund SPC (Herald) andthe fallout from the collapse of Bernard LMadoff Investment Securities LLC (BLMIS).

Primeo invested in Herald, which in turninvested in BLMIS, the world’s largest Ponzischeme.

Primeo, along with a number of otherHerald shareholders (referred to as theDecember Redeemers), submitted redemptionrequests in respect of certain of its shares (theShares) for a redemption date of 1 December2008. Herald accepted those requests and itwas common ground between the partiesthat, as a matter of law and pursuant toHerald’s articles of association, the Shareshad in fact been redeemed on 1 December2008. However, on 11 December 2008, beforethe redemption proceeds in respect of theShares were paid to Primeo and otherDecember Redeemers, Bernard Madoffconfessed that BLMIS was an elaborate fraud.Herald suspended the determination of its netasset value and the payment of unpaidredemption proceeds almost immediately.Herald subsequently went into liquidation, asdid Primeo.

This left a question as to how the DecemberRedeemers should be treated in Herald’sliquidation: as creditors who have provableclaims in the liquidation for the unpaidredemption monies or as shareholders? Atfirst instance in the Grand Court of theCayman Islands, Jones J agreed with Primeoholding that investors who had beenredeemed under a fund’s articles ofassociation were to be treated as creditors ofthe fund and were able to prove in the fund’sliquidation for the amount of the unpaidredemption proceeds.

Delivering the unanimous decision of theCourt of Appeal, which affirmed Jones J’sdecision at first instance, Field JA went on toaddress the issue of where the creditor claimsof redeemed investors rank in a liquidation.

Redemption CreditorsThe Court of Appeal agreed with Jones J that,since Primeo and the other DecemberRedeemers had in fact redeemed their sharesprior to the commencement of Herald’sliquidation, they had ceased to beshareholders and therefore had claims ascreditors for the unpaid redemptionproceeds. This was not itself a surprisingconclusion: since it was common ground thatthe shares had been redeemed, the December

CAYMAN ISLANDS

TOM SMITH QC

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NOVEMBER 2016 SOUTH SQUARE DIGEST

Redeemers were no longer shareholders andany claim to payment to the redemptionproceeds had to be in their capacity ascreditors. However, the further question waswhether the claims of “ordinary” creditorsranked ahead of the claims of so-called“redemption creditors” such as those ofPrimeo and the other December Redeemers.

The notion that the claims of redemptioncreditors should be subordinated to ordinarycreditors appears to have its genesis in anumber of Victorian cases dealing with theposition of withdrawing members of buildingsocieties. Perhaps the most well-known ofthese is Walton v Edge (1884) 10 App Cas 33 inwhich the House of Lords held that the claimsof ordinary creditors were entitled to be paidin priority to the claims of withdrawingmembers who had not been paid.

Although each of these decisions turned onthe construction of the bespoke rules of thebuilding society in question, the existence of acommon law principle which distinguishedthe respective priorities of redemption andordinary creditors appears to have beenaccepted somewhat uncritically by a numberof subsequent decisions. For example, inSomers Dublin Ltd v Monarch Pointe FundLimited [2013] ECSC J0311-10, the EasternCaribbean Supreme Court seemingly acceptedthe existence of “an old common law legalprinciple that redeemed members are deferredcreditors postponed behind ordinaryunsecured creditors”.

Whether such a common law principleactually exists in the context of moderncompany liquidation was, however, largelyirrelevant in Herald. The Court of Appeal heldthat the question of ranking or different typesof creditors was dependent upon the properconstruction of section 49(g) of the CompaniesLaw (substantially identical to section 74(2)(f)of the Insolvency Act 1986) which provides:

…no sum due to any member of a companyin his character of a member by way ofdividends, profits or otherwise, shall bedeemed to be a debt of the company, payable tosuch member in a case of competition betweenhimself and any other creditor not being amember of the company; but any such summay be taken into account for the purpose ofthe final adjustment of the rights ofcontributories amongst themselves.

The effect of section 49(g) is to subordinatethe claims of creditors, based on sums due tothem in their character as members orformer members of the company, to theclaims of those creditors whose claims are notbased on their character as a member.

In Soden v British & CommonwealthHoldings plc [1998] AC 298, the House ofLords considered section 74(2)(f) of theInsolvency Act 1986. Lord Browne-Wilkinsonconsidered that, in order to fall within theambit of the provision, the claim had to bemade by a creditor relying on his status as amember:

The relevant principle is that the rights ofmembers as members come last, i.e. rightsfounded on the statutory contract are, as theprice of limited liability, subordinated to therights of creditors based on other legal causesof action.

CHRISTOPHER LEVERS OFMOURANT OZANNES

48

The issue was, therefore, whether sums dueto the December Redeemers were sums due tothem in their capacity as members or formermembers. Field JA found that they were. Heconsidered that [a]lthough the Claimantsceased to be members of Herald uponredemption of their shares, their claims forredemption proceeds would be founded on thestatutory contract between them as membersand Herald and as such would be claims forsums “due to any member of a company in hischaracter of a member” within s. 49(g).

On this basis, the creditor claims of theDecember Redeemers would not share paripassu in the distribution of Herald’s assetswith ordinary creditors but rank immediatelybehind them.

However, the effect of section 49(g) ismerely to subordinate such claims as againstthe ordinary unsecured creditors of thecompany. So far as the remainingshareholders of the company wereconcerned, the claims of redemption creditorsranked ahead of the rights of those membersto a return of capital on a winding up. Thus,the Court of Appeal confirmed that, although

subordinated to the claims of outsidecreditors, redemption creditor claims willrank ahead of claims of members since “anyadjustment…must give higher priority toformer members who have become creditors asa result of a redemption than to merecontinuing members”.

Section 37(7) of the Companies LawThe further question which arose in Heraldconcerned the effect of section 37(7) of theCompanies Law. As determined by the GrandCourt and the Court of Appeal, section 37(7)applies to the claims of an investor who hadan accrued right to have his shares redeemedbut whose shares had in fact not beenredeemed by the time of the commencementof the liquidation of the company. Ordinarily,such an investor would not be entitled toenforce the unperformed contract forredemption against the company inliquidation, thereby converting his statusfrom that of shareholder to that of creditor.However, section 37(7) permits theshareholder to enforce the contract ofredemption, subject to the two provisos to the

CAYMAN ISLANDS

PRIMEO FUND AND HERALDFUND SPC WERE CAUGHT UPIN THE FALLOUT FROM THE COLLAPSE OF THE MADOFFPONZI SCHEME

who are permitted to enforce the terms ofredemption against the companypursuant to section 37(7)(a)6;

7/. Statutory interest on unsecured creditorclaims;8/. Non-provable liabilities; and9/. Distributions to shareholders in theircapacity as such i.e. the rights ofshareholders to a return of surplus capitalon the winding up.

Tom Smith QC, Rocco Cecere and ChristopherLevers acted for Primeo Fund before the GrandCourt and the Cayman Islands Court of Appeal.

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NOVEMBER 2016 SOUTH SQUARE DIGEST

application of the sub-section being satisfied.On the facts of Herald itself, the Court of

Appeal agreed with the Grand Court thatsection 37(7) had no application to the claimsof the December Redeemers to redemptionproceeds since their shares had in factalready been redeemed prior to thecommencement of the liquidation of Herald.

Where an existing shareholder at the dateof commencement of the liquidation ispermitted pursuant to section 37(7) to enforcethe contract of redemption so as to redeemhis shares, notwithstanding thecommencement of the liquidation, then thepriority of the resulting claim to redemptionproceeds is dealt with by section 37(7)(b). Inessence, like a claim of a redemption creditorto redemption proceeds, the claim ranksahead of the claims of existing shareholdersto a return of capital, but behind the claims ofordinary unsecured creditors.

SummaryThe decisions of the Grand Court and of theCourt of Appeal have usefully clarified thepriority waterfall which will be applicable inthe winding up of a Cayman corporatemutual fund. Subject to any furtherconsideration by the Privy Council4, this cannow be summarised as follows:

1/. Fixed charge creditors;2/. Preferred creditors;3/. Floating charge creditors;4/. Expenses of the liquidation;5/. Unsecured creditor claims - claims ofordinary third party creditors;6/. Unsecured creditor claims – claims ofredeemed investors – comprising:

(a) redemption creditor claims i.e.creditors who redeemed their shares pre-liquidation and have claims for unpaidredemption proceeds5; and(b) section 37(7) shareholder claims i.e.shareholders who fall within section37(7)(a) i.e. shareholders whose shareswere not redeemed prior to thecommencement of the liquidation but

ROCCO CECERE OFMOURANT OZANNES

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4/. The Additional Liquidator has obtained leave to appeal to the Privy Council.5/. Such claims rank behind ordinary third party creditors by virtue of section 49(g) of the Companies Law but rankahead of the rights of remaining shareholders to capital or income.6/. Such claims rank behind ordinary third party creditors but ahead of the rights of remaining shareholders to capitalor income by virtue of section 37(7)(b) of the Companies Law. The Court of Appeal did not address specifically therelative priority of redemption creditor claims and section 37(7) claims as between each other.

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On 28 September South Square andMourant Ozannes held their annualLitigation Forum in London. As usual,the event brought together key figuresin financial litigation, insolvency andrestructuring to analyse the keydevelopments in those areas over thepreceding year and consider what theymight mean for the future.

The future is never entirelypredictable, but the decision of theBritish people in June to vote “Leave”in the Brexit referendum has left thebusiness community in London andbeyond with a sense of uncertainty.The Forum’s aim was to take stock ofwhat intelligence we have. However,intelligence itself is a slippery thing.South Square’s David Alexander QC,who co-chaired the conference,reminded us in his welcoming addressof the categories into which DonaldRumsfeld divided military intelligenceduring the Iraq war. There are, MrRumsfeld said, known knowns (thingswe know we know) and knownunknowns (things we know we don’tknow). But there are also unknownunknowns (“the ones we don’t knowwe don’t know”), and as the former USSecretary of Defence observed, withsome understatement, “it is the lattercategory that tends to be the difficultone.”

Session 1: Brexit: Possibilitiesand ProbabilitiesThe first session of the afternoonaddressed the implications of Brexit

for the legal community andparticularly those of us specialising ininsolvency and restructuring. BarryIsaacs QC of South Square chaired apanel with a wide range of views onthe topic, and featuring voters on bothsides of the referendum.

The panellists noted that theoutcome of Brexit negotiations - andhence what changes the legalcommunity will have to react to - arethemselves far from certain. Viewsdiffered as to whether a hard or softBrexit would be more likely, but thepanel agreed that given how closely toits chest the UK Government is holdingits cards, at this stage neitherpossibility could be firmly ruled in orout.

Robert Duggan, managing partner ofMourant Ozannes’ London office,made the interesting point that,

although unsettling, Brexit offers theUK an opportunity to recast its laws tomake it more competitive than EUlegislation currently allows. Robert,who works with complex financialproducts, foresaw a strengthenedrelationship between Britain and thoseoffshore jurisdictions most importantin cross-border financial services. ABritish government with a greaterdegree of control over its own policiesis also likely to be more robust andresponsive in its dealings on theinternational stage.

Adam Plainer, head of the LondonRestructuring practice at Weil, Gotshal& Manges, also took the view thatBrexit would allow Britain to reshapeits restructuring law in response tointernational competition. He madethe point that Brexit will mean the endfor the Insolvency Regulation, so thatone practical consequence of Brexitwill be that cross-border issues ininsolvency will be resolved byinternational agreements such as theLugano Treaty and the Hague Treaty

LITIGATION FORUM

Mourant Ozannes and SouthSquare Litigation Forum 2016Key developments in financial litigation and insolvencyand restructuring as reported by Pierre Ali-Noor, MourantOzannes and Madeleine Jones, South Square

BREXIT: POSSIBILITIES AND PROBABILITIES. (L TO R) ERIC LEWIS (LEWIS BAACH) DOROTHY LIVINGSTONE (HERBERTSMITH FREEHILLS), ADAM PLAINER (WEIL), ROBERT DUGGAN (MOURANT OZANNES) BARRY ISAACS QC (SOUTHSQUARE)

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on the Choice of Courts. He consideredthat the English legal system is still agold standard internationally, and willremain a strong export.

Dorothy Livingston, a consultant atHerbert Smith Freehills and aspecialist on EU law and regulation,was slightly less sanguine. Sheconsidered that the uncertainty ofBrexit was likely to lead to reducedcorporate activity in the short term, atleast.

Eric Lewis of Lewis Baach inWashington, providing an American’sview, pointed out that the uncertaintyof Brexit was compounded by thelooming US presidential election andnext year’s French and Germanelections. Since financial marketsgenerally prefer certainty, this is likelyto produce some instability.

The panel’s overall impression wasthat lawyers are going to be busy overthe coming years and months. Thepeople of the United Kingdom have, forbetter or worse, had their say and it isnow incumbent upon the Governmentand those in the legal sector to focustheir efforts on effecting Brexit in themost beneficial way possible.

Session 2: Schemes ofArrangement in CorporateRestructuringThis session took the form of a casestudy of a proposed restructuring of asolvent corporate group with a DutchTopCo, a Cayman Holdco and twosubsidiaries in Germany andSingapore. Both the TopCo and HoldCoare heavily indebted, the TopCo under$1bn notes governed by New York law,and the HoldCo under a £50m termloan facility governed by English law.

The panel of lawyers from aroundthe world considered what steps werepossible and most practical to effect arestructuring.

South Square’s David Allison QCbegan by considering whether therestructuring could take place througha Scheme of Arrangement underEnglish law.

The question for the English courtswhen considering whether to sanctiona scheme involving foreign companiesis whether there is a sufficientconnection to the jurisdiction andwhether the scheme would have asubstantial effect. In the case of theCayman company, the “sufficientconnection” test will be satisfied as therights of the creditors under the loanagreement are governed by Englishlaw. In the case of the Dutch company,although the bonds are governed byNew York law and so do notthemselves establish a connection, theEnglish courts are open to companiesestablishing a connection for thepurpose of bringing a proposedscheme under English jurisdiction.This could be achieved by changing thegoverning law of the bonds to Englishlaw, shifting the COMI to England orhaving an English NewCo assumeliabilities as a co-issuer of the bonds.

Michael Rosenthal, a partner inGibson Dunn based in New York andthe co-chair of the firm’s BusinessRestructuring and ReorganisationPractice Group, explained that therestructuring could also be effected inthe American Courts under Chapter 11of the US Bankruptcy Code. The USCourts take a generous approach tojurisdiction under Chapter 11: Section

109 of the Bankruptcy Code enablesany party that “resides or has adomicile, a place of business, orproperty in the United States” to be adebtor in bankruptcy. The most likelyobstacle to jurisdiction is pendingplenary proceedings in anotherjurisdiction: the US Courts may welldismiss a Chapter 11 case in thesecircumstances.

With David and Michael havingconvincingly shown that the notionalcreditors of the group would be able toeffect rearrangement in either theEnglish or the US courts, the nextquestion was which creditors would belikely to pick.

Katrina Buckley, a London-basedpartner in Allen & Overy’s globalrestructuring and insolvency group,considered the commercial factorslikely to weigh upon this decision.

The English procedure has severaladvantages. The court can allow theexclusion of specific liabilities,allowing certain creditors (for exampletrade creditors) to be unaffected and sostreamlining the process. It can alsoeffect releases by the scheme creditorsof third parties, for exampleguarantors, and so protect the schemecompanies against claims forindemnities. Furthermore, since ascheme of arrangement is not effected

SCHEMES OF ARRANGEMENT IN CORPORATE RESTRUCTURING PANEL. (L TO R): MANOJ SANDRASEGARA (WONGPARTNERSHIP), MICHAEL ROSENTHAL (GIBSON DUNN), SIMON DIXON (MOURANT OZANNES), DAVID ALLISON QC(SOUTH SQUARE), KATRINA BUCKLEY (ALLEN & OVERY),

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under insolvency legislation, it is lesslikely than Chapter 11 proceedings totrigger termination rights.

Commercial advantages of theAmerican procedure include anautomatic stay on all actions,worldwide. Furthermore, although it isa bankruptcy procedure, underChapter 11 the debtor remains inpossession of all property subject to theproceedings, and may continue tomake decisions in the ordinary courseof business, so that it may havecontinued access to financing and canassign unfavourable contracts.Furthermore, the voting thresholds forapproval of a Chapter 11 plan arelower than those required by theEnglish courts for approval of aScheme. A Chapter 11 plan requiresthe approval of more than one-half innumber and two-thirds in amount ofvoting creditors in each class. InEngland, the approval of a majority innumber and three quarters in value ofcreditors in each class is required.

However, one potential disadvantageof the Chapter 11 proceedings is thatthe court order affects all creditors, andmay be enforced against any creditorwith a connection to the US. This mightaffect the companies’ ability to carry on

business.Katrina concluded that in the

circumstances under discussion anEnglish scheme would be a betterchoice for the clients than a US Chapter11 procedure.

As David had explained earlier, inorder for the scheme to be approved,by the English court, it is necessary toshow that it will have a substantialeffect. The panel members discussedthe question of whether the schemewould be recognised in the variousjurisdictions in which the corporategroup has a presence.

The position under Dutch andGerman law is simple. Under theRecast Judgments Regulation, anEnglish scheme of arrangement will berecognised on the basis that anyvariations to creditors’ rights are madepursuant to the governing law of thecontract (presuming that this is variedin the case of the Dutch TopCo’s notesfrom New York to English law).

Michael explained that an EnglishScheme of Arrangement will berecognised in the US under Chapter 15if the debtor has a place of business orproperty in the US. The court will thenconsider whether the foreignproceeding is a main or non-main

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proceeding based on the debtor’sCOMI. Foreign main proceedings areentitled to a limited stay protectingassets in the US and certain otherforms of relief. Foreign non-mainproceedings may receive such relief,but this is within the court’s discretion.The US courts are willing to approveforeign restructurings which makeprovision for broader relief thanwould have been available underChapter 11, and will also give effect toforeign proceedings which purport tovary entitlements governed by US law.However, in order to grant approval,the US court will expect to be shownthat the foreign proceedings weresensitive to similar matters that a UScourt would have considered underChapter 11 proceedings.

In the Cayman Islands, SimonDickson, Head of the Litigation andInsolvency department in MourantOzannes’ Cayman office, explainedthat the Cayman court might recognisevariation by the English courts ofcreditors’ rights under the term loan asthe facility is governed by English law.Otherwise, it would be necessaryeither to implement a mirror schemein the Cayman courts, or to seekrecognition and enforcement of theEnglish scheme under Caymancommon law. Further, it might bedesirable to appoint ProvisionalLiquidators over the Cayman Holdco totake a monitoring and reporting roleand to protect the company fromhostile creditors.

Manoj Sandrasegara, Joint Head ofthe Restructuring & InsolvencyPractice at Wong Partnership inSingapore, described the position inSingapore. As with Cayman, theEnglish Scheme would notautomatically be recognised, and thebest options were a parallel scheme orrecognition and enforcement underthe common law. Protecting theSingapore company against creditoractions is simpler, since Singaporecourt will grant a moratorium at anearly stage in the scheme’s life, even

DAVID ALEXANDER QC (SOUTH SQUARE) FORUM CO-CHAIR

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prior to the calling of a first meeting. Manoj made some more general

remarks on the future of Singaporerestructuring law. These were areminder that this is an exciting timefor global restructuring law forreasons beyond Brexit. Singapore isconsciously positioning itself as aglobal restructuring hub, with theSingapore Ministry of Law havingearlier this year accepted therecommendations of a committee setup to transform Singapore restruct-uring law in order to make it moreattractive as a centre of internationaldebt restructuring. The Committee’srecommendations are based on acomparative analysis of restructuringlaw in various jurisdictions, includingthe US and the UK. Manoj reportedthat we can expect that Singapore’scross-border insolvency laws will bestrengthened in the near future, andthat the UNCITRAL Model Law will beadopted. The message is very much,watch this space.

Session 3: Commercial Fraud:Complex Problem Solving andLessons Learned from Recent CasesThe third session, chaired by SouthSquare’s Felicity Toube QC, focused onvarious issues raised by recentcommercial fraud litigation.

Robert Hickmott, a partner at QuinnEmanuel in London, discussed theEuropean Arrest Warrant (EAW)regime. An EAW may be issued by ajudicial authority in respect of asuspect being prosecuted for a crimecarrying a maximum penalty of 12months or more imprisonment. Itrequires other EU states to return thesuspect to the state in which theprosecution is ongoing. The regimewas introduced in order to encouragecross-border co-operation betweencriminal legal authorities in the EU, butit has proved to be open to abuse,particularly where a state authority isitself subject to recovery proceedingsin a different EU jurisdiction. Evenwhere the EAW has been procured on

demonstrably flimsy grounds, therecipient country within the EU has nodiscretion as to whether to adhere tothe regime. Thus, the EAW can be usedeffectively to blackmail litigants intodropping charges against a state or elseface extradition and imprisonment.

Justin-Harvey-Hills, a partner inMourant Ozannes’ Jersey office, spokeabout some recent attempts by foreignauthorities to enforce criminalconfiscation orders against assetsbelonging to Jersey trusts.

The starting point was the landmarkcase of Re Esteem Settlement[2003] JLR188 where a creditor of a fraudstersought to enforce a claim against theassets of a trust which the fraudsterhad settled and of which he was abeneficiary. There was no directproprietary, tracing or other in remclaim against those particular assets.The claimant therefore argued that itshould be able to “pierce the veil” ofthe trust. However, the Royal Courtdismissed this argument on the basisthat the doctrine of “piercing the veil ofa trust” simply did not exist. If theclaimant did not have an in rem claimagainst the assets, he would have toshow that the trust was either invalidor a sham. If he was not able to do that,there was no “third way” of “piercing

the veil” of a validly constituted truston the basis that the settlor/beneficiaryexercised a considerable degree ofinfluence or control over the trustee.The integrity of Jersey trusts istherefore a core principle that theRoyal Court has both guarded andpreserved.

In Tantular v AG [2014] (2) JLR 25,the Royal Court held that a saisiejudiciaire (akin to a freezing order)may not be granted over the assets of adiscretionary trust even incircumstances where the allegedoffender is both the settlor andbeneficiary of a discretionary trust.The rationale for this is that theProceeds of Crime (Enforcement ofConfiscation Orders) (Jersey)Regulations 2008, pursuant to whichthe saisie judiciaire was sought,stipulate that the order has effect onlyover a defendant’s “realisableproperty.” This means property in thehands of a defendant, property towhich he is beneficially entitled orproperty which he has gifted to a thirdparty. In circumstances where thetrust assets were not the proceeds ofcrime and where they were settledprior to any allegation of criminalconduct, they did not constitute theproperty of one of the beneficiaries or

COMMERCIAL FRAUD PANEL. L TO R ARE: NICHOLAS FOX (MOURANT OZANNES) BARNABY STUECK (JONESDAY), JUSTIN HARVEY-HILLS (MOURANT OZANNES), ROBERT HICKMOTT (QUINN EMANUEL), AND FELICITY TOUBEQC (SOUTH SQUARE)

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of the settlor and neither a beneficiarynor a settlor had any entitlement to theproperty. All that a beneficiary hadwas a right to be considered for benefitand a right to hold the trustee toaccount.

The third case was that of AG vRosenlund [2016] JRC 062. The Danishauthorities had prosecuted andconvicted the settlor of a Jerseydiscretionary trust (who was also abeneficiary) of tax evasion on the basisthat the assets of the trusts in realitybelonged to him. The Danishauthorities sought to enforce theresulting confiscation order in Jerseyagainst the assets of the trust,notwithstanding that the trust assetshad been settled prior to any allegationof criminal conduct. They also had toaccept that the trust was valid as amatter of Jersey law. After theproceedings commenced, Tantular wasdecided (see above) and the AG (onbehalf of the Danish authorities) wasforced to drop the argument that thedefendant was beneficially entitled tothe trust assets and that they weretherefore his realisable property. TheAG argued instead that the retirementof the previous trustee and itsreplacement with a new trustee hadconstituted a “gift” of the assets held intrust by the Defendant to the new

trustee and that the assets weretherefore the defendant’s realisableproperty. However, the Courtdisagreed with that contention for twomain reasons. First, it found that atransfer of trusteeship and theaccompanying transfer of assets couldnot amount to a gift since a giftrequired the transfer of the beneficialinterest in the assets. The beneficialinterest had not been transferred andthe new trustee held the assets on thesame basis and subject to the sameobligations as its predecessor. All thathad happened was that the legal title tothe assets had been transferred.Deconstructing the ‘gift’ argumentfurther, the Court considered that thetransfer of the trust assets from theoutgoing to the incoming trustee wasnot a voluntary act (an essentialrequirement for a gift), but rather aprocedure imposed on the retiringtrustee by Jersey trusts law, and wasanyway a transfer involving only theoutgoing and incoming trustees.Secondly, applying Tantular, thetransfer could not amount to a gift bythe defendant since the trust assetswere not his property and he had nobeneficial entitlement to them.

Barnaby Stueck, a partner withJones Day in London, spoke about thefrustrations the victims of fraud can

often feel when, even after they havesucceeded in civil proceedings againstthe wrongdoer, criminal prosecutingauthorities are unwilling or unable topursue the case, meaning that theperpetrators of serious frauds are ableto escape without any kind of criminalsanction being brought against them.The only prosecuting authority forcomplex fraud in the UK is the SeriousFraud Office, but it is only able topursue a relatively small number ofprosecutions a year.

There is accordingly an increasedtendency for victims to pursue theircivil case in such a way as to facilitatethe SFO’s use of the forensic andexpert evidence in a later prosecution.Victims can also engage directly withthe SFO and encourage it to bringprosecutions in appropriate cases.One such case was that of Ulf MagnusPeterson of Weavering Capital (UK), aUK company that was advisor to aCayman Hedge Fund with funds undermanagement of more than US$600m.The liquidators of the UK companythreatened judicial review of the SFO’sinitial decision not to prosecute MrPeterson, and also gained considerablemedia coverage of the decision.Eventually, the SFO did prosecute, andMr Peterson was sentenced to 13 years’imprisonment. However, theliquidators had to get permission fromthe creditor-victims to put aside moneyfrom the distributable assets of thecompany in order to engage with theSFO to bring about the prosecution.This will clearly not always be possible,and some liquidators may not feel it istheir role to undertake this task.

Finally, Nicholas Fox, a partner inMourant Ozannes in the BVIconsidered the question of whyfinancial frauds, which can often seemboth egregious and, with the benefit ofhindsight, large and obvious, are notcaught sooner. He cited the famousSEC investigations of Madoff’sfraudulent business, which repeatedlygave that business a clean bill of health– despite complaints from industry

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CHRISTOPHER HARLOWE (MOURANT OZANNES) FORUM CO-CHAIR

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insiders for many years before thefraud finally came to light (includingthe memo from Harry Markopolisentitled “The world’s largest hedgefund is a fraud”).

However, Nicholas pointed out thatthis is not exactly unusual – beinghuman beings, investigators rarely goin with a completely open mind. Thus,some of the SEC investigatorsexamined Madoff with the suspicionthat his too-good-to-be-true profitmargins were the result of insiderdealing, and accordingly looked forevidence to confirm or negate thishypothesis, missing entirely the cluesthat the fund was a Ponzi scheme. Asimilar inadvertent inattention mayalso be built into company’s duediligence procedures: this was the casein the Weavering fraud, where duediligence was a tick-box exercise.

Another obstacle to prosecutioncomes after the fraud comes to light.Those who have been taken in by thefraud are left embarrassed. Financialprofessionals may be reluctant totestify where this means admitting thatthey were fooled, particularly wherethey were responsible for duediligence or auditing.

Keynote SessionThe keynote speaker for the sessionwas Gregory Coleman. Gregory was,for over 25 years, a Special Agent at theFBI and is most famous for hisinvestigation and subsequentprosecution of Jordan Belfort, a stock-trader who manipulated the marketsin a fraud worth over $200 million.Belfort’s extravagant lifestyle at theheight of his fraud and his subsequentdownfall were portrayed by LeonardoDi Caprio in the Wolf of Wall Street.Gregory provided many amusinganecdotes collected from his career aswell as a fascinating insider’s review ofthe film itself. Gregory acknowledgedthat the film had several ‘Hollywood’elements to it where the reality of thesituation had been embellished forartistic effect but said that 80% of it

depicted exactly what happened. Forexample, Belfort’s yacht, Naomi, was infact far more impressive in real lifethan Scorsese’s version, but Belfortreally did invite Gregory aboard itwhen the FBI’s investigations ofBelfort’s fraud were close to theirculmination.

Gregory explained how Belfort’smarket manipulation actually worked.He would first find a company whosestock he could offer in an IPO.However, the offered stock was not infact sold to the public but to Belfort’sown stooges or “flippers”. Belfort’sbrokerage firm, Stratton Oakmont,would then buy the stock back fromthe flippers, who would make a smallprofit. Once Belfort controlled all thestock again, he would withhold itfrom sale while simultaneouslycreating a buzz around it on themarketplace via his brokers. Thecombination of increased demandand limited supply naturally causedprices to increase. Only once the stockprice had hit a target did Belfort allowcustomers’ orders to be executed.Belfort’s victims were falling overthemselves to pay high prices forworthless stock.

Gregory explained that his rationalewhen investigating individuals wasalways to ‘follow the money’ and that

this had brought him into contactwith regulators and authorities fromacross the world on throughout hiscareer. The trend, as Gregory sees it,is for greater cooperation betweendifferent jurisdictions. He ended bypraising many of those in theprofessional services sector who hehad worked with for the professionaland diligent manner in which theyhad kept records which had helpedhim to compile the evidencenecessary to prosecute the individualsin question, reserving particularacclaim for the English accountantswhose clear record-keeping allowedhim to trace the proceeds of a multi-million dollar fraud to the account ofa retired English schoolteacher (shewas taking care of them for herdishonest son-in-law). Paperwork canseem a thankless task so it wasrefreshing to hear that compliancework is not only crucial in the fightagainst corporate fraud, but also verymuch appreciated by those on thefront line in that battle.

Each of the sessions was extremelystimulating, as evidenced by the livelydiscussions among attendees whichcontinued into the evening drinks. Ourthanks go out to all the delegates andattendees for making this event asuccess.

KEYNOTE SPEAKER GREGORY COLEMAN, WHO APPREHENDED JORDAN BELFORT, THE WOLF OF WALL STREET

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INDIA

especially in the face of the withdrawal ofthe London Court for International Arbitration(LCIA) from the region.

This short article outlines some of the keypoints regarding the new insolvency andbankruptcy code and the launch of the MCIAfollowing this author’s recent visit to thecountry on an inaugural COMBAR trip.

India’s new Insolvency andBankruptcy CodeThe regime in India has been based on anelaborate and multi-layered system wherebythe legislative process is covered overmultiple laws and adjudication is in multiplefora. The inefficiency of the system wasnoted by the World Bank which stated thataverage time to resolve insolvency in Indiain 2014 was over four years.

The new regime seeks to consolidate theexisting framework and create a newinstitutional structure that will ultimatelyimprove the efficiency of the system. Thenew code applies to companies, limitedliability partnerships, partnership firms, othercorporate persons, and individuals, and anyother body specified by the Government.

For the purposes of this short article it isworth highlighting three aspects of the newcode: (1) the New Entities Created; (2) theInsolvency Resolution Process; and (3) theCorporate Liquidation Process and Cross-Border Insolvency.

1/. The New Entities CreatedThe code envisages the establishment ofnew bodies as well as the introduction ofinsolvency professionals. The insolvency

IntroductionThe Government of India, recognising thatreforms in the bankruptcy and insolvencyregime are critical to business in the region,recently introduced the Insolvency andBankruptcy Bill in parliament. India’sparliament passed the Bill in May 2016 andsome of its provisions have already comeinto force. It is hoped that this consolidatedcode will change India from one of theslowest insolvency regimes of any majoreconomy into one of the fastest.

In addition to the changes in India’sinsolvency and bankruptcy law, 2016 alsomarks the launch of the Mumbai Centre forInternational Arbitration (MCIA). The MCIAoffers a new option for parties who agree toresolve India-related disputes by arbitration

professionals will be, as in England,licensed professionals regulated by theinsolvency professional agencies that will becreated. There will also be the establishmentof information utilities that will aid in thecollection, collation and dissemination offinancial information. It is hoped that this willfacilitate corporate rescue and insolvencyresolution.

The bodies mentioned above will beregulated and operated by an Insolvencyand Bankruptcy Board. The adjudication ofcorporate insolvency disputes will be carriedout by the National Company Law Tribunal(NCTL) and the National Company LawAppellate Tribunal. Individual andpartnership insolvencies will be dealt with bythe Debt Recovery Tribunal and the DebtRecovery Appellate Tribunal.

2/. The Insolvency ResolutionProcessThe insolvency resolution process isfocussed on corporate rescue. Theinsolvency resolution and restructuringprocesses may be initiated by either thedebtor or the creditors. It sets a time limit of180 days, with one time extension of 90days for initiation and completion of theprocess from the date on which theinsolvency application is admitted. Therelevant body will appoint an insolvencyprofessional to coordinate and manage theprocess. A moratorium will also be declaredfor the duration of the time period. If aresolution plan cannot be agreed uponwithin the timelines then formal insolvencyproceedings will be initiated.

Key developments inthe Indian legal arenaMatthew Abraham outlines the new Insolvency andBankruptcy Code and reports on the opening of theMumbai Centre for International Arbitration.

MATTHEW ABRAHAM

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3/. The Corporate LiquidationProcess and Cross-BorderInsolvencyThe new code sets out the key gateways intoan insolvency process. Once the liquidationprocess has been commenced the NCTL willtake over all pending and future legalproceedings relating to the corporate debtor.To deal with the siphoning of assets bydirectors or promoters the new code sets outsimilar transaction avoidance provisions tothose under the English Insolvency Act 1986.The new code also enables the governmentto enter into bilateral arrangements to dealwith cross-border issues. It remains to beseen whether this will be an effective meansof dealing with cross-border issues withmany critics questioning why the governmentdid not opt for the adoption of the UNCITRALModel law.

The MCIAThe MCIA was established in a joint initiativebetween the Government of Maharashtraand the domestic and international business

THE MUMBAI CENTRE FOR INTERNATIONAL ARBITRATION (INSET) IS LOCATED IN THE FINANCIAL DISTRICT JUST BEHIND THE GATE OF INDIA

and legal communities. As it stands, most ofthe global disputes involving Indian partiestake place in Singapore and London. MCIAaims to be India’s premier forum forcommercial dispute resolution. It seeks toachieve this in three ways.

Firstly, it has a set of sophisticated arbitralrules which draw on recent innovations inarbitration practice that have been tweakedfor performance in the Indian market. Therules take into account the recentamendments to the Indian Arbitration andConciliation Act. Secondly, it provides adedicated secretariat aimed to be on parwith the LCIA and the SingaporeInternational Arbitration Centre (SIAC)thereby facilitating efficient, flexible andcost-effective administration of arbitrationproceedings. Finally, it has a newly purpose-built venue to conduct arbitrations thatmeets the high standard expected byinternational parties who are used to thevenues in London, New York, Dubai andSingapore.

The launch of the MCIA combined with

the exciting chatter surrounding the openingof the Indian legal market in relation to thepractice of non-Indian law has set the stagefor interesting developments in internationalcommercial arbitration going forward.

ConclusionBoth the Insolvency and Bankruptcy Codeand the new MCIA are welcomedevelopments in the expanding Indian legalmarket. Whether they will be a successremains to be seen but one thing is clear,India is taking the right steps towards dealingwith the criticisms of inefficiencies within itslegal system that have hindered progressover the years. India is certainly a jurisdictionthat this author will be keeping a close eyeon both in terms of developments ininsolvency law as well as in relation to itsexpansion in international commercialarbitrations.Matthew recently visited India on aninaugural COMBAR trip and is on theSteering Committee of the YoungMCIA Practitioners.

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Light at the end of thetunnel for Nortel?

Seven years on from the Nortel Group’s collapse, Alexander Riddifordlooks at the recently agreed global settlement

The Nortel Group, founded in 1895 as BellTelephone Company of Canada, operated aglobal networking solutions andtelecommunications business through morethan 130 subsidiaries located in more than 100countries.

The Nortel Group’s parent company wasNortel Networks Corporation, a publicly-tradedCanadian company, and the primary Canadianoperating company was Nortel NetworksLimited, which together with Nortel NetworksCorporation and a number of their subsidiariescomprised the Canadian part of the NortelGroup (the “Canadian Companies”). The NortelGroup also included a group of US entitiesheaded by Nortel Networks Inc (the “USCompanies”), and a group of 22 entities basedin the EMEA regions (the “EMEA Companies”).

The Nortel Group collapsed in January 2009.

Events since the Nortel Group’s collapseIn January 2009 the Canadian Companies andthe US Companies entered insolvencyproceedings or filed for bankruptcy protectionin the US and Canada, and 19 of the EMEACompanies entered administration in Englandon the basis that their COMI was in the UK(with the other three EMEA Companies –Norwegian, Swiss and South African entities –remaining solvent and under the control oftheir directors).

The Administrators of the 19 EMEACompanies in administration (the“Companies”) were all partners or executivedirectors of Ernst & Young. One of theCompanies, a French entity called NortelNetworks S.A. (“NNSA”), also enteredsecondary liquidation in France on 28 May

2009. Otherwise, no secondary proceedingshave been opened in respect of any of theCompanies, and each of the Companies’administrations is a main proceeding under theEuropean Insolvency Regulation.

After an attempt at a global reorganisation ofthe Nortel Group, which proved impossible, itwas decided to effect a global sale of the NortelGroup’s businesses and assets. This global salewas facilitated by an Interim Funding andSettlement Agreement, entered into on 9 June2009, with the approval of the US, Canadianand English Courts. It was a term of the IFSAthat the proceeds of the global sale would beheld in escrow pending agreement or Courtdetermination as to how the proceeds shouldbe allocated amongst the parties to the IFSA(which included the Canadian Companies, theUS Companies and the EMEA Companies). As aresult of the various sales pursuant to the termsof the IFSA, which included sales of businesslines, patents, patents applications and otherassets, some US$7.304bn in sales proceeds wererealised and paid into escrow accounts in NewYork known as the Lockbox.

In tandem with this global sale process, theAdministrators have become seized of anumber of factually and legally importantissues affecting the Companies (or some ofthem), some of which have required theAdministrators to seek the assistance of theEnglish Court.

Most notably (from a legal point of view),certain novel legal issues arose in respect ofany financial support direction (“FSD”)pursuant to section 43 of the Pensions Act 2004,and any contribution notice (“CN”) pursuant tosections 38 or 47 of the 2004 Act, that might be

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issued against certain of the Companies. FSDsand CNs had been threatened against theseCompanies, the Targets, on the basis that NortelNetworks UK Ltd (“NNUK”), which had apension scheme (with some 33,000 members),was insufficiently resourced to fund thatscheme. Various issues arose in this regardincluding as to whether any liability arisingunder or in relation to such an FSD or CNwould rank as an administration expense, aprovable debt or neither, in the Targets’administrations. This issue was finallydetermined by the Supreme Court in In reNortel GmbH (in administration) & Ors [2014]AC 209, which held, reversing (in part) thedecisions of Briggs J and the Court of Appealbelow, that the liabilities were provable debtsunder rule 12.3(1) IR 1986, on the basis thatthey fell within the concept of “obligation”under rule 13.12(1)(b) IR 1986, which provided(relevantly) that a “debt” included “any debt orliability to which the company may becomesubject after [the date of administration] byreason of any obligation incurred before [thedate of administration]”. Lord Neuberger,

overruling a series of decisions of the Court ofAppeal on the effect of rule 13.12(1)(b) IR 1986,set out the following threefold test: “in order fora company to have incurred a relevant‘obligation’ under rule 13.12(1)(b), it must havetaken, or been subjected to, some step orcombination of steps which (a) had some legaleffect (such as putting it under some legal dutyor into some legal relationship), and which (b)resulted in it being vulnerable to the specificliability in question, such that there would be areal prospect of that liability being incurred. Ifthese two requirements are satisfied, it is also, Ithink, relevant to consider (c) whether it wouldbe consistent with the regime under which theliability is imposed to conclude that the step orcombination of steps gave rise to an obligationunder rule 13.12(1)(b).”

Lord Neuberger’s test in Nortel has providedwelcome clarification on the scope of rule13.12(1)(b) IR 1986. This test has been applied,for example, by the Court of Appeal in theLehman Waterfall Application (In re LehmanBros International (Europe) (in administration)(No 4) [2016] Ch. 50), in holding that the liability

NORTEL GROUP, WHICH INCLUDED 130 SUBSIDIARIES

LOCATED IN MORE THAN 100COUNTRIES, COLLAPSED IN

JANUARY 2009

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of a member of a company in administrationunder section 74 of the Insolvency Act 1986 tocontribute to the company’s assets in the eventof a shortfall, which only applies once acompany is being wound up, is capable ofbeing a provable debt in the membercompany’s administration (under rules 12.3(1)and 13.12(1)(b) IR 1986).

Various disputes concerning the NortelGroup have also been litigated before the USand Canadian Courts, in some cases with adirect or indirect bearing on theadministrations of the Companies. Forexample, both the US and Canadian Courtshave heard motions by various of the USCompanies and Canadian Companies for ordersenforcing automatic stays against the Trusteeof the Nortel Networks UK Pension TrustLimited and the Board of the PensionProtection Fund (together, the “UKPI”), so as to

ensure that any (potentially very substantial)FSDs asserted against certain of the USCompanies and Canadian Companies would beof no effect in the US and Canada.

Of even greater moment, both for theCompanies and for the Nortel Group generally,have been the joint hearings before theCanadian and US Courts as to how the Lockboxmonies are to be allocated across the NortelGroup. By agreement, the task of determininghow the Lockbox proceeds are to be allocatedhas been given to the Ontario Superior Court ofJustice (Commercial List) and the USBankruptcy Court for the District of Delaware,with an allocation protocol requiring a jointtrial in the two Courts.

A critical issue arising in the allocation trialconcerned the ownership of the Nortel Group’sintellectual property (the “IP”), with the USCompanies, the Canadian Companies and theEMEA Companies contending for differentparadigms in this regard: the CanadianCompanies relying upon their legal title to thevarious pieces of IP that were assigned to themby employees and subsidiary entities; the USCompanies arguing that the value of the IPcame from the ability to exploit it for profit inaccordance with licences granted by the NortelGroup (and relying upon the fact that the USwas the biggest market and generated thegreatest share of global revenues as the basisfor claiming enhanced ownership rights inrespect of the IP); and the EMEA Companiescontending that the IP belonged beneficially tothose entities which had contributed to itscreation, and that the value of the respectiveownership interests should be measured byreference to the amounts spent on researchand development over the relevant years byeach relevant Nortel entity. The different IPownership theories propounded by theCanadian Companies, the US Companies andthe EMEA Companies respectively gave rise todifferent allocation theories in the allocationtrial, with the EMEA Companies obtaining thefollowing approximate per cent allocation fromthe Lockbox: (a) 4.1 per cent under theCanadian Companies’ theory (the “CanadaTheory”); (b) 16.8 per cent under the USCompanies’ theory (the “US Theory”); and (c)18.2 per cent under the EMEA Companies’theory (the “EMEA Theory”) (together, the“Theories”).

ALEXANDER RIDDIFORD

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administrator was appointed on 2 June 2015 inrespect of NNSA so as to facilitate NNSA’sappeal against the allocation judgments.

The Global SettlementFollowing some preliminary rulings in theappeals against the allocation judgments (withNNSA and others appealing), a further round ofmediation was held between the parties on 2and 3 June 2016. As a result, an over-archingsettlement was agreed in principle with a viewto settling all of the outstanding claims (bothpresent and future) as between the EMEACompanies and other entities within the NortelGroup; between the EMEA Companies and theUKPI; and between the EMEA Companies interse. Piecemeal settlement of certain discreteclaims and categories of claims had previouslybeen achieved in the course of the Companies’administrations, most notably the settlement ofcertain claims by the EMEA Companies againstNortel Networks Corporation and NortelNetworks Limited which was sanctioned byHHJ Hodge QC on 17 July 2014 (see Re NortelNetworks UK Limited (in administration) [2014]EWHC 2614 (Ch)). By contrast, the GlobalSettlement, which was agreed in principle inJune 2016, is intended to settle the vast majorityof disputes that have arisen in relation to theaffairs of the Nortel Group and, importantly,the allocation of the Lockbox monies across theNortel Group.

The contractual framework for the GlobalSettlement was finalised in early October 2016,with the parties executing the relevantdocumentation on 12 October. The GlobalSettlement falls into the following four parts:

(a) The Allocation Settlement: The AllocationSettlement settles the dispute regarding thedivision of the funds in the Lockbox. TheLockbox monies shall be released to therelevant Nortel Group entities (including toeach of the EMEA Companies) in set per centproportions, with the EMEA Companies beingallocated some 18.5 per cent. Among the EMEACompanies, NNUK is to receive about 14 percent, NNSA will receive a fixed amount ofUS$220 million (being about three per cent)and the other EMEA Companies will receive atotal of about 1.5 per cent of the Lockboxmonies. The Allocation Settlement involveseach of the EMEA Companies agreeing adiscount from the Modified Pro Rata basis, save

The judgments of Judge Gross in Delawareand Mr Justice Newbould in Ontario werehanded down on 12 May 2015. The allocationjudgments rejected each of the Theories andpreferred instead to order that the Lockboxshould be split in accordance with a modifiedpro rata scheme (“Modified Pro Rata”),calculated by reference to the percentage that“Allowed Claims” against each Nortel Groupentity’s estate bear to the total Allowed Claimsagainst all of the individual Nortel Groupentities, subject to certain modifications (that aclaim that might be brought against more thanone entity can only be recognized once; thatinter-company claims are to be included in thecalculation; and that cash in hand is to beexcluded from the calculation). The ModifiedPro Rata basis for allocation is likely to give asubstantially better return to many of theEMEA Companies than any of the parties’Theories would (including the EMEA Theory).NNSA, however, stood to do substantiallyworse from the Modified Pro Rata basis ofallocation compared with the likely outcome ofthe EMEA Theory. Accordingly, a conflicts

A critical issue was the ownership of Nortel intellectual property, with US, Canadian andEMEA Companies contending for differentparadigms

LORD NEUBERGER’S TEST INNORTEL HAS PROVIDED WELCOME CLARIFICATION ONTHE SCOPE OF PROVABLEDEBTS

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NORTEL

for NNSA which stands to receive a substantialuplift from the Allocation Settlement comparedwith what it would have received on theModified Pro Rata basis of allocation.

(b) The Pensions Settlement: The PensionsSettlement settles various claims including thedispute regarding the issue of FSDs and/or CNsbetween the UK Pensions Regulator, the EMEACompanies and the NNUK Pension Scheme.

(c) The Intra-EMEA Settlement: The Intra-EMEA Settlement serves to settle variousmatters between the EMEA Companiesthemselves, including (inter alia): (a) the issueof “top-up” payments to be made by NNUK tosome of the other EMEA Companies tocompensate them for having continued to tradeunprofitably after going into administration inorder to facilitate the advantageous global saleof the Nortel Group’s assets; and (b) the releaseof certain restitutionary claims that have beenasserted against NNUK by some of the otherEMEA Companies who faced a potentialliability to the NNUK Pension Scheme.

(d) The NNSA Settlement: The NNSA

Settlement settles the claims: (a) between NNSAand the other EMEA Companies; and (b)between the NNSA main proceeding and theNNSA secondary proceeding.

The decision of Snowden J on 3 November2016Each aspect of the Global Settlement, as set outabove, was conditional upon (inter alia) theapproval of the English Court by 4 November2016. Accordingly, the Administrators and theNNSA conflicts administrator applied to theCourt for Orders under paragraph 63 ofSchedule B1 to IA 1986, that they be at liberty toperform and to procure the Companies toperform the terms of the Global Settlement.Snowden J granted these applications and gavejudgment on 3 November 2016 (NortelNetworks UK Ltd (in administration) & Ors[2016] EWHC 2769 (Ch)).

Administrators of companies have the powerto enter into settlement agreements andcompromises under paragraph 60 of ScheduleB1 to IA 1986 and paragraph 18 of Schedule 1 toIA 1986. Accordingly, administrators only applyto the Court for directions in this regard if thereare “particular reasons” for doing so (see MFGlobal UK Ltd [2014] EWHC 2222 (Ch), at [41],per David Richards J (as he then was)). One“particular reason” which might justify such anapplication is derived by analogy from thesecond category of case in which trustees canseek directions from the Court, identified byHart J in Public Trustee v Cooper [2001] WTLR901, 922–924, as being a case “where the issue iswhether the proposed course of action is aproper exercise of the trustees’ powers wherethere is no real doubt as to the nature of thetrustees’ powers and the trustees have decidedhow they want to exercise them but, because thedecision is particularly momentous, the trusteeswish to obtain the blessing of the court for theaction on which they have resolved and which iswithin their powers.” The present case fellwithin this category, in that the Administrators(and the NNSA conflicts administrator) haddetermined that it would be in the bestinterests of the Companies to enter into theGlobal Settlement, but the issue was one ofsuch moment as to make an application fordirections appropriate. In Nortel Networks UKLtd (in administration) & Ors [2016] EWHC 2769(Ch), at [49], Snowden J summarized the

SNOWDEN J WAS SATISFIEDTHAT THE DECISION TO ENTERINTO THE GLOBAL SETTLEMENT WAS RATIONALAND PROPER

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elements of the test which must be satisfied onapplications such as this in the following way:(a) the proposed exercise is within theadministrator’s power; (b) that theadministrator genuinely holds the view thatwhat he proposes will be for the benefit of thecompany and its creditors; and (c) that he isacting rationally and without being affected bya conflict of interest in reaching that view.Snowden J emphasized that the Court shouldnot, however, withhold its approval merelybecause it would not itself have exercised thepower in the way proposed; but also stressedthat the Court will require the administrator toput all relevant material before it, including astatement of his reasons, and that the Court willnot give its approval if it is left in any doubt asto the propriety of the proposed course ofaction.

In his detailed judgment Snowden J made itclear that he was satisfied, as regards each ofthe 19 Companies, that the applicable test wassatisfied. It should also be noted that the Judgeplaced some emphasis on the importance of theAdministrators having notified the Companies’creditors of the Global Settlement (and of theirapplication for directions in respect of thesame), particularly given that an effect of theOrder sought is to prevent subsequentchallenge. In addition, he made the followinggeneral points in support of his conclusion thatit was rational for the Administrators (and theNNSA conflicts administrator) to decide toenter into the Global Settlement:

1/. First, there is a risk that on appeal theModified Pro Rata basis of apportionment inthe allocation judgments might be overturnedin favour of a Theory that is less favourable foreach of the Companies than the Modified ProRata basis of allocation. Indeed, there is also therisk of a divergence of views on appeal asbetween the US and Canadian appeal Courts,and a consequent deadlock arising.

2/. Secondly, even if the allocation judgmentswithstand the appeals in both the US andCanada, there will be further delay, uncertaintyand expense.

3/. Thirdly, and as noted by the Ontario Courtof Appeal, the Nortel insolvencies have beengoing on at great expense for over seven years,with no return to creditors, and continuedlitigation over the allocation of the Lockboxproceeds is likely to take several more years

and incur substantial further legal andprofessional costs. The Global Settlement hasthe obvious commercial merit of ensuring thatthe creditors of the EMEA Companies will seesome money in the near future.

4/. Fourthly, the combined result of theAllocation Settlement and the top-up paymentspayable under the Intra-EMEA Settlement(where applicable) is that it is anticipated bythe Administrators that all of the EMEACompanies, except for NNUK, Nortel Irelandand NNSA, will return 100p in the £ to theirunsecured creditors and some may also pay acommercial rate of interest.

On this basis, Snowden J was content, havingregard to the momentous nature of the decisionto enter into the Global Settlement and theexceptional circumstances of the case, to givethe directions sought. Echoing sentimentsexpressed by the Ontario Court of Appeal, theJudge commended the parties for arriving at acommercial solution to the complex disputes inwhich the Companies have been embroiled formany years.

ConclusionSnowden J’s approval of the Global Settlementrepresents a critical step towards the GlobalSettlement becoming effective and, therefore,the vast majority of the Nortel Group’s disputesbeing resolved consensually and without theexpense, delay and uncertainty that furtherlitigation would bring. Certain furtherconditions remain to be satisfied before theGlobal Settlement becomes effective, inparticular the approval of creditors and theCourts in the US and Canada. However, whilstthe Global Settlement remains conditional tothat extent, it now seems unlikely that theCourts (on either side of the Atlantic) will seeany further substantial litigation arising fromthe Nortel Group’s collapse.William Trower QC and Alex Riddiford actedfor the Administrators in Nortel Networks UKLtd (in administration) & Ors [2016] EWHC2769 (Ch), instructed by Herbert SmithFreehills LLP.

The Global settlement is conditional upon,among other things, the approval of the English Court

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What are weather derivatives?The weather risk market is designed toassist users in managing the adversefinancial impact of weather through risktransfer instruments based on weathervariables (chiefly temperature, rain, snow,wind and sunshine). Solutions to theproblem of weather-related financial riskwill normally take one of two principalforms: catastrophe insurance or weatherderivatives.

While catastrophe insurance is suitablefor addressing low probability weatherrisks with a high potential impact, such assevere drought or flooding, weatherderivatives are better suited to lowimpact/high probability events such as anunseasonably cool August or an unusuallywet May Bank Holiday. One of theadvantages of standardised weatherderivatives for low impact events is thatpay-out will occur automatically once theindex sinks or rises past a certain point. Incontrast, to recover under an insurancepolicy, the holder must file a claimdemonstrating loss. The samecharacteristic is, however, a disadvantagewhen it comes to covering high impactweather risks: derivatives do not normallycorrelate the pay-out to the loss and so donot typically provide good protectionagainst disproportionate or catastrophicloss.

To enter into a weather derivative, theuser pays a premium to a risk taker who

assumes the risk of adverse weather. Inexchange for the premium, the risk takerwill promise to pay the buyer an amount ofmoney corresponding to the anticipatedloss occasioned by the adverse weather.The purchase price, or premium, willcorrelate broadly to the perceived chanceof the risk materialising and the relevantprobabilities will be calculated from historicdata. In this respect, weather derivativesare analogous to other 'adverse event'derivatives, such as credit default swaps.

Standardised derivatives, such asoptions and futures, reference publishedrisk indices calculated from contemporaryweather data (such as temperature orprecipitation). Over-the-counter (OTC)derivatives are more flexible and includeboth 'multi-trigger' derivatives referencingcustomised data and less complextransactions on market standard terms.

Uses and users of weatherderivativesTraditionally, energy companies have beenthe most significant users of weatherderivatives. In the past this has largelymeant large gas and electricity providersprotecting themselves against thepossibility that moderate weatherconditions will lead to a reduction inconsumption. The renewable energysector, however, may be one to watch infuture. Hydropower, solar power and windpower all depend to a greater or lesser

extent on weather conditions for theirmeans of production and therefore carrythe risk of weather pattern fluctuations.

Other sectors have also benefitted fromthe protection that weather derivativesafford. Agriculture, in particular, has been agrowth area. Precipitation derivatives canhelp farmers manage the risks of lowrainfall. Urban users may includeconstruction companies, transportationproviders, travel operators, tourism centres(eg ski resorts), leisure venues (egamusement parks) and retailers (egapparel, food and drink) all of which maybe adversely affected by unseasonalweather. For example, an ice creammanufacturer might use a weatherderivative to hedge against the commercialrisks of a summer that forecasters thinkwill be several degrees cooler than thehistorical average.

In addition to commercial enterprises,municipalities and public authorities canuse weather derivatives to protectthemselves from the financialconsequences of weather events whichrequire a public response or rescueinitiative, such as flooding or heavysnowfall, with a consequential impact onbudget and expenditure.

Despite the prevailing view that therisks of high impact, low probabilityweather events are better managedthrough the purchase of insuranceproducts, the past decade has seen the

WEATHER DERIVATIVES

Planning for a rainy dayUnderstanding weather derivatives

How can businesses utilise weather derivatives to protect themselves fromadverse weather events? Joanna Perkins looks at their development and theirrole in managing risk.

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occasional and high-profile use ofcatastrophe derivatives. For example, anumber of sovereign transactions haveallowed emerging economies to managethe financial risks associated with severedrought or flooding. An early example isthe Malawi Rainfall Derivative of 2008–2009 (renewed in 2009 and again in2010), which was intermediated by theWorld Bank and involved a risk transfer tothe international financial markets withthe object of providing greater foodsecurity for the local population. Thestructure of the transaction was a putoption referencing a bespoke rainfallindex specifically to act as a proxy fordomestic maize production. If the rainfallvariable in the index caused proxyproduction levels to fall beneath the strikepoint, the government of Malawi wouldreceive a pay-out, size-adjustedaccording to the extent of the shortfall.

In 2009, the International Swaps andDerivatives Association (ISDA) introducedmarket standard documentation fornatural catastrophe swaps referencingwind events. These provide protection forenterprises looking to manage financialrisks relating to tornadoes, hurricanesand similar wind events.

History and popularity ofweather derivativesIn July 1996 a contract for the purchaseof one month’s electricity between AquilaEnergy and Consolidated Edison (ConEd)was agreed which is said to haveincluded a novel clause stipulating thatAquila, as the provider, would pay ConEda rebate if August turned out to be coolerthan expected. This is the first reportedexample of a transaction incorporating anembedded weather derivative.

The first full-scale OTC weather

derivatives trades took place one yearlater, in 1997, involving Willis, KochIndustries, and Enron. The following year,Enron introduced weather derivatives tothe UK when it sold a deal to ScottishHydropower. Then, in 1999, the WeatherRisk Management Association (WRMA)was founded by Aquila Power Company,Castlebridge Partners, Enron Capital,Koch Industries, Southern CompanyEnergy marketing and Swiss Re NewMarkets to represent participants in thenewly emerging market sector.

In the same year, the ChicagoMercantile Exchange (CME) introducedthe first exchange-traded weather futuresand options. At the launch of thesestandardised products, two temperaturecontracts (Heating Degree Days (HDDs)and Cooling Degree Days (CDDs)) werelisted for trading. These contracts weremonthly futures and options reflecting the

RENEWABLE ENERGY PROVIDERS WILL BECOME MAJOR CONSUMERS OF WEATHER DERIVATIVES

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accumulated differences between theaverage daily temperature and a basetemperature of 65°F for each day in acalendar month. Given that exposure toweather risks is normally localised, theproducts referenced ten individual UScities.

In the first four years of trading, theexchange-traded market consolidatedaround these early contracts but thereafterit rapidly gained traction and, in 2003, thenumber of US cities for which weatherderivatives could be listed was expandedand seasonal strip combinations (whichallow users to string together twoconsecutive calendar months or more)were sold for the first time. In 2005, newproducts were introduced, including frostand precipitation derivatives. By 2011,weather derivative contracts were listed byCME for nearly 50 locations worldwide.

Unfortunately, the era of marketexpansion did not last and the recent yearsrepresent a period of contraction forexchange-traded derivatives. In the firstfew months of 2016, CME slashed itslistings by half, delisting products forseveral US cities and for Paris. Listingsremain for products referencing weatherindices in eight US cities, London andAmsterdam. Of these, 13 CME weatherproducts are currently active. Ten are eitherfutures or options on HDDs or CDDs atvarious US locations. The remaining threeare for Amsterdam HDD, CDD, andseasonal strip combinations. Today, 'openinterest' (ie the number of contractsentered into that have not yet settled) isjust short of 33,000 contracts.

Although the market for weatherderivatives was born in the US, its centre ofgravity may be shifting eastwards.Derivatives are now being transacted onrisks from a much wider array of countries,with the most significant non-US OTCmarkets being found in Europe and Japan.The exchange-traded derivatives marketcontinues to be dominated by CME for thetime being but niche products are still beingdeveloped outside the US—in 2016,European Energy Exchange (EEX)announced plans to introduce wind powerfutures.

Transaction structures anddocumentationWeather derivatives will utilise one of fourpossible derivative structures: aforward/future, a put option, a call option or aswap. All four structures are broadly similarand can be represented by the diagrambelow. (The weather data provider may owe

contractual obligations to the principalparties, to the intermediary, to all three or tonone at all.)

The chief differences between the fourderivatives are the pay-out structures. A calloption will pay-out if the index rises above acontractually agreed 'strike point' at the pointof expiration and a put option will pay-out ifthe index remains below the strike point.

A vanilla swap transaction will, for theuser, be equivalent to the purchase of a callor put option on the weather index in

question and the sale of a weather-dependent income stream (say, ice creamsales or amusement park ticket sales). Thepay-out structure for a swap user will matchthat for either a call option or a put optiondepending on whether the user has hedgedagainst risks associated with anoutperforming index (eg in the case of an

amusement park wishing to buy protectionagainst excessive rainfall) or anunderperforming index (eg in the case of anice cream vendor wishing to hedge the riskof disappointing August temperatures).

The pay-out structure for futures andforwards is simpler: the user will receive apay-out if a rise in the index values causes

the settlement price to exceed the contractprice at the time of purchase.

More complex structures may be designedand offered, incorporating features such ascaps, floors and collars and investmentstrategies such as straddles and strangles.

CME exchange-traded weatherderivatives are bought and sold (andcleared) on terms set by the exchange andclearinghouse and can be purchased onCME’s electronic trading platform. CMEoptions are all 'European' style, which

means they can only be exercised at theexpiration date.

OTC temperature and precipitationderivatives can be executed on marketstandard terms published by ISDA or theWRMA. Complex or specialist weatherderivatives, however, still require bespokedocumentation.

WEATHER DERIVATIVES

WEATHER DERIVATIVES UTILISE ONE OF THE FOUR POSSIBLE DERIVATIVE STRUCTURES IN THE DIAGRAM ABOVE

THE TWO DIAGRAMS ABOVE ILLUSTRATE THE PAY-OUT STRUCTURES OF PUT AND CALL OPTIONS. THE X AXIS INBOTH REPRESENTS INCREASING INDEX VALUES, THE Y PRESENTS THE SIZE OF THE PAYOUT.

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Regulation of weatherderivatives and market abuseAccording to Annex 1, Section C(10) ofDirective 2004/39/EC on markets in financialinstruments (MiFID I), weather derivatives(being 'derivative contracts relating to climaticvariables… that must be settled in cash') arefinancial instruments for the purpose of theregulation of investment services. Thismeans that they are subject to obligationsregarding best execution and trade reporting,among others, and to rules on clientclassification and product appropriateness.Where investment advice on weatherderivatives is given stricter standards onproduct suitability apply.

Directive 2014/65/EU and Regulation (EU)600/2014 (commonly and collectively referredto as MiFID II) are due to become applicableon 3 January 2018 and replace MiFID I. Thestatus of weather derivatives as financialinstruments will not be affected and theobligations and standards listed above willcontinue to apply, subject to relatively minoradjustments.

MiFID II does, however, introduce anumber of key changes aimed at reducingspeculative activity in the commodityderivatives markets, including, in articles 57and 58 of Directive 2014/65/EU, the

introduction of position limits and positionreporting. In the case of weather derivatives,which are 'commodity derivatives' by virtue ofthe definition in article 2(1)(30) of Regulation(EU) 600/2014, the basis of the position limitcalculation will (according to draft RegulatoryTechnical Standards published by theEuropean Securities and Markets Authority(ESMA)) be a percentage of total openinterest controlled by an entity on EU tradingvenues and/or reflected in economicallyequivalent OTC contracts. Position limits willnot apply to positions held by or on behalf ofa non-financial entity which are aimed atreducing risks directly related to thecommercial activity of that non-financialentity.

Where supervised entities invest inweather derivatives, the exposure will attracta regulatory capital charge. For the purposesof the market risk requirements in Title IV ofRegulation (EU) 575/2013 on prudentialrequirements for credit institutions andinvestment firms (CRR), weather derivativesshould be assigned to the commodities riskcalculation.

Weather indices themselves may fall underthe purview of Regulation (EU) 2016/1011 onindices used as benchmarks. This measure,which applies broadly to benchmarks usedfor the purpose of valuing contracts,determining settlement prices or measuringperformance imposes strict regulatorystandards on benchmark administrators andcontributors, in particular as to the accuracyand adequacy of input data. The Regulationprohibits the use by EU regulated entities ofindices which do not comply with its rules.Bespoke indices which are producedexclusively for a particular transaction,however, and which are not made availableto the public are not within scope. There arealso exclusions for indices provided for publicpolicy reasons by public authorities and forindices provided by an administrator whocould not reasonably have been aware thatthe index was being used a reference rate orvaluation tool.

Manipulation of markets in weatherderivatives sold on exchanges or otherorganised platforms is prohibited by EURegulation 596/2014 on market abuse whichcovers, inter alia, financial instruments, as

defined under MiFID II, which are traded on aregulated market, multilateral trading facilityor organised trading facility.

In 2010 a documentary (What in the Worldare They Spraying? directed by PaulWittenberger) was released suggesting thatweather patterns had been influenced by thegovernment use of geoengineeringtechniques to control climate and mitigateglobal warming. In response, somecommentators have hypothesised that theweather derivatives market could bemanipulated with similar techniques. Forexample, it has been suggested that rainfalldata could be manipulated by cloud-seedingin areas where the data is collected in orderto increase the pay-out under precipitationderivatives.

Re-characterisation riskIn Definition of Insurance, a draft WorkingGroup White Paper published in 2000, theUS National Association of InsuranceCommissioners concluded that manyweather derivatives should be reclassifiedand regulated as insurance products. TheWhite Paper was subsequently withdrawnfrom publication following intervention bymarket representatives, including ISDA andthe WRMA, but not before it had given rise towidespread apprehension that weatherderivatives may be subject to re-characterisation risk under state law or thatstate legislatures might amend the law toregulate weather derivatives as insurance.

In the UK, where re-characterisationpotentially carries the unfortunateconsequence that the would-be derivativeprovider is in breach of the Financial Servicesand Markets Act 2000, this risk is likely to beminimal. The accepted definition of a'contract of insurance' under English law isclosely tied to the concept of the loss sufferedby the policyholder and weather derivativestypically provide that a pay-out is to be madeirrespective of loss. The risk of re-characterisation cannot be wholly discounted,however, in relation to bespoke derivativeswhich contractually link weather variables tothe performance or development of assetsowned by the user.A version of this article fist appeared onLexis PSL 13th May 2016

JOANNA PERKINS

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In Re A Debtor (Order in Aid No 1 of1979) [1981] Ch 384 was a landmarkcase in the history of cross-borderinsolvency affecting Jersey andEngland, and a significant one in thehistory of our Chambers, which waslocated at the time in Paper Buildingsdown in the Temple.

The case involved an applicationunder a letter of request from theRoyal Court of Jersey for the Viscountof the Royal Court, its chief executiveofficer, to be appointed receiver ofthe moveable assets in England of MrMyerson, an insolvent Englishsolicitor who had incurred debts hecould not pay in Jersey and had sincereturned to England.

Until this case, the problem ofdebtors absconding from Jersey hadof course been recognised but hadgenerally been dealt with by theprocedure of saisie conservatoire.This was not a bankruptcy procedure,but a form of arrêt available underthe customary law of Jersey,essentially a form of injunction under

which the assets of the debtor couldbe frozen and retained in Jersey toprotect the claimant(s), subject to anumber of safeguards andconditions. The problem in Re aDebtor was that Mr Myerson hadalready left Jersey and had assetsabroad. As a result, there needed tobe detailed consideration of thejurisdiction in Jersey and the Englishcourt’s jurisdiction to support it.

The application was brought undersection 122 of the Bankruptcy Act1914, which enabled the English HighCourt to act in aid of a ‘British Courtelsewhere having jurisdiction inbankruptcy or insolvency’. This wasthe first time an application undersection 122 was made from Jersey tothe English High Court. A youngMichael Crystal was pitted against thevenerable Muir Hunter QC and theyoung John Briggs. In the somewhatmore relaxed court atmosphere ofthat time, the trial in the spring of1980 lasted some 17 days.

The case reflected many of the

familiar issues which arise whendealing with cross-border insolvency,not least the need for lawyers andjudges to get to grips with thedifferent practices, norms and termsof another jurisdiction.

It was necessary for the judge toconsider whether the Royal Courtwas a British Court for thesepurposes, and the legal effect of aJersey order declaring the goods ofthe debtor en désastre. Evidence onbehalf of the Viscount was given byone Michael Wilkins, who at the timewas senior administrative assistant inthe Viscount’s department and headof the désastre section.

Expert evidence on theconstitutional position and the law ofJersey was given on behalf of theViscount by Mr (now Sir) PhilipBailhache, who at the time was HMSolicitor-General for Jersey.

The judge rejected Muir Hunter’ssubmission that the Jersey Court wasnot at British Court for thesepurposes, recording that he differedfrom the learned authors of Williams& Muir Hunter on Bankruptcy ‘in notfinding the status of the island courtsas British courts at all obscure’. Heconsidered carefully the law andpractice of declaration “en désastre”,one of several alternative methods

Re A Debtor was the first time that the regimein Jersey and the priciples of coroperation hasbeen subject to such detailed consideration

BOOK REVIEW

Jersey Cream...Glen Davis QC reviews the recently-published 5th edition ofJersey Insolvency and Asset Tracing by Anthony Dessain& Michael Wilkins.

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LIKE THE RENOWNED CATTLE OF THE ISLAND, THE AUTHORS OF JERSEY INSOLVENCY AND ASSET TRACKING HAVE AN ILLUSTRIOUS PEDIGREE

available to dispose of the affairs ofan insolvent debtor under the law ofJersey, and one which he said ‘hadbeen elaborated by the evolvingpractice of the Royal Court over thelast 200 years or thereabouts’, inorder to ascertain whether désastre isa matter of bankruptcy. Heconsidered it was, and the Viscount’sapplication was successful.

Although this was of course anEnglish authority and not of itselfpart of Jersey law, it was the first timethat the regime in Jersey and theprinciples for cooperation had beensubject to such detailedconsideration. As a result, the casewas an important milestone for thoseon both sides of the Channel advisingon the principles for recognition andcooperation.

In the course of his reasoning in Re

a Debtor, Goulding J observed that:‘…the written materials for the

ascertainment of modern Jersey laware comparatively meagre, andtextbooks are very few. The reasonsfor decisions in the Royal Court areoften expressed concisely and withoutlengthy discussion of principle.Accordingly, important parts of thelaw still reside in the breasts of thejudges and legal practitioners of theisland, and it is not always possible tofind a persuasive answer to a legalproblem by mere study of publishedmaterial.’

That remained the case for most ofthe following two decades, duringwhich Jersey faced (and on occasionmembers of these Chambers assistedwith) the challenges of a number ofsignificant insolvencies, not least theliquidation of Laker Airways Limited,

a Jersey-incorporated companywhose collapse was at the time thelargest corporate insolvency therehad been in England, let alone Jersey.

It was not until 1999 that the lackidentified by Goulding J wasremedied by the publication of thefirst edition of Jersey Insolvency andAsset Tracking. By then, AnthonyDessain was probably the leadingpractitioner specialising ininsolvency in Jersey, and his firm,Bedell Cristin, had been at the centreof many (if not all) of the significantcases to reach the Jersey Courts.Michael Wilkins had himself becomeViscount in 1981 (an appointment hecontinued to hold until June 2015).They were well qualified to writewith authority on the subject and thebenefit of practical experience.

Publication of the First Edition was

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welcomed in a Foreword by Sir PhilipBailhache, who by then had beenappointed Bailiff of Jersey (ie ChiefJudge of the Royal Court, President ofthe Jersey Court of Appeal, andSpeaker of the States (Jersey’sparliament)). He looked forward tothe work helping to lay foundationsfor further development of the law tosuit the commercial needs of Jersey.

That has proved to be the case. Totake just one example, the Jerseycourt has ancient power to appoint

an administrateur (administrator) ofa person who is absent l’isle. InRumasa v W&H Trademarks (Jersey)Ltd 1985-86 JLR 308, the Royal Courtadapted and developed the commonlaw to meet the needs of changingtimes, and appointed the Viscount asadministrator of a Jersey companywhich was wholly controlled andmanaged outside Jersey, explainingthat the appointment was to be‘likened to the appointment of areceiver in England’. In an earlier

edition, the authors suggested that itwas only a matter of time until theViscount was appointed receiver of aJersey-based entity or assets. And asthey record, that has now been done:see Viscount as the Receiver of thebusiness assets of KR Manning & Co -Act of Court 2014/350.

For this fifth edition, the headlineauthors are supported by AdvocatesRobert Gardner and EdwardDrummond of Bedell Cristin and EdShorrock, FCA of Baker & Partners,with expert input from AdvocatesMark Dunlop and William AustinVautier (again of Bedell Cristin, onsecurity interests and employmentrespectively), and the redoubtableDeborah Gregory of Hogan Lovells onguarantees.

It is not possible to understand thedevelopment and idiosyncracies(from an English lawyer’sperspective) of the insolvency law ofJersey without understanding itshistorical foundations and context.The authors provide a succinct andlucid account from the recognition ofRollo as Duke of Normandy in 911 tothe Security Interests Laws of 1983and 2012, and developments up to 30June 2016.

Broadly, the book is divided intotwo parts.

The narrative text in Part 1explains the background and deals inlogical sequence with Jersey’s law ofproperty and claimants’ rights, andits approach to contract, tort and dol(fraud), as well as trusts which havelong been recognised in Jersey(although a Jersey immovable cannotbe held on trust), articulating thesimilarities to and differences fromthe law in England. (As the authorscomment, ‘equity’ in Jersey does notcorrespond exactly with the Englishterm”.)

The text then proceeds to describeand discuss the insolvencyprocedures (désastre for individuals,désastre or creditors’ winding up forcompanies), although as the authors

GLEN DAVIS QC

BOOK REVIEW

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NOVEMBER 2016 SOUTH SQUARE DIGEST

point out, the Viscount may also beable to use his good offices topromote a voluntary scheme to avoida désastre, and the Royal Court haspower to assist in order to avoid adésastre. There is discussion of thestatutory processes of dégrèvementand réalisation under which propertycan be liquidated for the benefit ofcertain creditors, and the availabilityof relief for debtors under theprocedure of remise de biens. There isa brief discussion of the position oftraditional, limited and limitedliability partnerships. There is alsouseful discussion of Human Rightslaw as it applies and may affect andinsolvency in Jersey under theHuman Rights (Jersey) Law 2000.

Given the importance of Jersey asan international finance centre, oneof the most useful chapters addressescross-border insolvency from a Jerseyperspective, dealing both with theassistance Jersey will give to a foreigncourt and with outward requests forassistance by the Royal Court, with acomprehensive review of cases up toand including the English Court ofAppeal decision in HSBC Bank vTambrook (Jersey) Limited [2013]EWCA Civ 576 and the Isle of Mandecision in Capita Asset Services(London) Limited v Gulldale LimitedCHP 2013/145.

In Part 2 of the book, one findsdetailed commentary on particularaspects: on Guarantees; onEnforcement in Jersey of ForeignJudgments; on Special Situations –Foreign Taxation and Trusts andEstate Planning; on CompanyWinding Up; on Employment Law; apractitioners’ guide to applicationsunder Art 49 of the Désastre Law; onthe principle of Universality; onLimited Liability Partnerships; onJersey Foundations; on SaisiesJudiciaires; and an overview of theSecurity interests (Jersey) Law 2012.

For those of us who are reasonablyconfident that at one time weunderstood the formal difference

between the HypothèqueConventionelle Simple and theHypothèque Judiciare but could notquite put our finger on it just at thismoment, there is an invaluableglossary explaining the terms used inthe text.

I am told that for this edition therewere over 100 updates as a result ofjudicial decisions and of changes toprimary and secondary legislation,and that this Fifth Edition containsexpanded sections on variousbankruptcy procedures, aspects oftrusts, recognition and disclosureorders and an update on a range oftechnical matters includingemployment law changes, crossborder co-operation, human rights,foreign taxation, backward tracing,schemes of arrangement and the newaircraft registry.

One change from previous editionsis that the book no longer needs to

contain extracts from Jersey statutes,because all such statutes are freelyavailable in revised form on theJersey Legal Information Board’swebsite at www.jerseylaw.je.

From a purely personalperspective, I have found itinvaluable whenever a case has aJersey dimension to be able to consultDessain & Wilkins, to refresh mymemory and re-orientate myself in aforeign landscape where it can bedangerous to assume that apparently-familiar terms bear familiarmeanings, and so avoid completeembarrassment when working withthose who are expert in the laws ofthe Bailiwick. The work remains theleading textbook for anyoneinterested in Jersey’s law ofinsolvency and asset tracing, and Ihave no doubt that this Fifth Editionwill be a very welcome addition tomy shelves.

The work remains the leading textbook foranyone interested in Jersey’s law of insolvencyand asset tracking

Competition

ORDERING DETAILSContact Key Haven Publications Ltd, PO Box 669, Oxford OX3 3AU, or by email aw.khpplc@khpplc.co.uk.

Please quote MV240707 when ordering. The offer is open to readers of the South Square Digest only. Offer valid until 31 March 2017.The offer is only available when ordering direct from Key Haven Publications and is not available from the Key Haven website www.khpplc.co.uk

Delivery: UK and Channel Islands delivery free. Overseas delivery: Please add p&p £20.00 for orders outside the UK in Europe and £35 for elsewhere in the world. Payment is requested with orders in Sterling only.

Cheques payable to Key Haven Publications Ltd. Visa and Mastercard are accepted. Please allow 14 days for delivery.

‘… a masterpiece of clarity and an authoritative exposition of the subject, packed with technical

information, commentary and practical guidance.’Tolley’s Insolvency Law & Practice

New Edition for 2016

Special offer price to readers

of the South Square Digest £175.00

To be in with a chance of winning a copy ofthe Fifth Edition of Jersey Insolvency andAsset Tracing, just answer the followingquestion:

What’s the link between FrancescoCastellucio and Tommy DeVito and theauthors of Jersey Insolvency and AssetTracing?

Answers by email tokirstendent@southsquare.com.

The winner will be drawn from correctanswers received by 9 January 2017.

See inside back cover for an exclusivediscount for readers of the Digest.

72

CONFERENCE ROUND UP

IntroductionOn the 15 and 16 September 2016, SouthSquare sponsored the 3rd Regional InsolvencyConference in Singapore. The conference wasorganised by the Insolvency PracticeCommittee of the Law Society of Singapore andthe Insolvency Practitioners Association ofSingapore. The conference brought togetherthe leading legal, accounting and financialpractitioners in the region focussing on cross-border insolvency and general developmentsin the Singapore insolvency regime. SouthSquare was represented at the event byAnthony Zacaroli QC and Matthew Abraham.Anthony Zacaroli QC was invited to speak onthe Common Law Perspectives of Cross-BorderInsolvency.

The ConferenceThe first day of the conference started with atalk on the impact of technology on therestructuring and insolvency industry. Thiswas followed by a Judicial Colloquium whichbrought together Judges from Singapore, theUnited States, Indonesia and England. TheEnglish contribution to the colloquium camefrom the Honourable Mr Justice RichardSnowden. The colloquium covered varioushypothetical scenarios that related to thefacilitation and regulation of cross-borderrestructuring and insolvency. There was alively debate between the judges on a variety ofissues including avenues for judicialcooperation, recognising and assisting foreigninsolvency proceedings (including those not inthe company’s place of incorporation) andapproaches to resolving conflict of law issues

(including issues with the rule in Gibbs).The second day of the conference consisted

of five key sessions. The first two sessionsfocussed on cross-border insolvency. Inparticular, one from a civil law perspective andthe other from a common law perspective. Thecivil law session looked at the impact of theUNCITRAL Model Law in civil law countriesand the trends in those countries in the contextof cross-border insolvency issues. The impactof European Union legislation on the laws ofcivil law countries in Europe was also looked

3rd Regional ConferenceSingapore 2016Matthew Abraham reports from the recent 3rdRegional conference in Singapore.

ANTONY ZACAROLI QC

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at. The common law session focused on theimpact of the UNCITRAL Model law and itsinteraction with the common law. The sessiongave rise to interesting discussions on issues asto whether the approach of the common lawjurisdiction promoted or detracted from theobjectives of cross-border insolvency.

The third and fourth sessions focussed ondispute resolution and litigation funding in theface of insolvency as well as financing andeffecting successful restructuring. Both sessionsdealt with key issues facing a number ofjurisdictions with common law backgrounds.In particular, how common law doctrines ofchamperty and maintenance have preventedthe development of litigation funding. Duringthe discussions reference was made to thelandmark Singapore High Court decision in ReVanguard Energy Pte Ltd [2015] SGHC 156 thatconfirmed for the first time that litigationfunding may in the context of insolvency bepermitted in Singapore.

The final session of the conference dealt withSingapore as an international centre for debtrestructuring. Although this session focusedspecifically on issues in the insolvency context,it nevertheless dealt with a key issue in theworld today: whether, as a result of the slowingglobal economy and heightened uncertaintyfrom Brexit and the US presidential election,there would be a greater shift of trade towardsthe East with Singapore as the gateway into theregion. The panellists focused on the currentdevelopments in Singapore in particularinnovative legislative changes, changes to the

SINGAPORE’S FULLERTONHOTEL, VENUE FOR THE 3RD

REGIONAL CONFERENCEjudicial infrastructure and growing industryexpertise in the region.

Key TakeawaysThe general feeling at the conference was thatwe are heading into a global economicdownturn where businesses around the Asianregion are going to become increasinglyexposed to cross-border insolvency risk. Themost recent and famous example being HanjinShipping. With Singapore pushing to becomean international centre for debt restructuring itis certainly a jurisdiction to keep an eye out for.

South Square was privileged to be invited tothe conference and will continue to support itsfriends in the region through the sharing ofexperiences and knowledge in these verytesting times.Matthew spent 5 months on secondment inSingapore from 2015 to 2016 and continues tostrengthen his ties in the region.

HANJIN: FILED FOR COURT RECEIVERSHIP ON AUGUST 31.

74

For the third time Australia will hostthe INSOL Quadrennial WorldCongress, with the Tenth Congresstaking place from Sunday 19 toWednesday 22 March 2017 at theInternational Convention Centre inSydney.

INSOL conferences are alwaysinsightful and enjoyable and membersof South Square much look forward tocatching up with old friends andmeeting new faces. Some 800insolvency professionals from aroundthe world are expected to attend. Atpresent from South Square GabrielMoss QC, William Trower QC, FidelisOditah QC, David Alexander QC, TomSmith QC and Hilary Stonefrost are dueto be there with many others keen tojoin should other commitments permit.

The Congress kicks off with awelcome cocktail reception on theSunday evening, sponsored by BDOLLP. There then follows a three-daytechnical programme, culminating inthe Gala Dinner, sponsored byAlixPartners LLP, on the Wednesdayevening. South Square is delighted tobe supporting the event by sponsoringMonday’s breakfast, at whichmembers of Chambers look forward tocatching up with fellow delegates.

The theme for this year is“Embracing Change”, which feelsparticularly topical following the UKBrexit vote and uncertaintysurrounding the outcome of the USPresidential elections, both of whichmay have a major impact on the legaland economic landscape around the

globe. INSOL has, as always, drawntogether experienced professionalsand specialists from around the worldto discuss current issues that face boththe clients of restructuringprofessionals and also the changes thatour own professions are facing. TheINSOL Technical co-Chairs (PeterGothard of Ferrier Hodgson and JohnMartin of Henry Davis York) havecatered for both macro-national andinternational interests, and have alsoprovided a diverse range of breakoutsessions that are domestically relevant.

Topics covered by the main technicalsessions include the key themes anddynamics involved in globalrestructuring as illustrated by theTopOil crisis; the challenges and likelyfuture development of sovereign andmunicipality debt restructurings; adynamic question and answer sessionon the future of the insolvency andrestructuring profession; and a look atthe economies of Indonesia, China andIndia and what to expect over the nextyear or so.

Break-out sessions cover topics asvaried as “When disaster strikes”where an international panel willexplore the duties, obligations andexpectations of stakeholders, and“Swelling the insolvent estate” whichtakes a look at asset-tracing andrecovery in the post-Panama universeand how appointment-takers canpreserve the scene of the crime. FidelisOditah QC is part of an expert panelassembled to discuss “Rescue Capital –the value of new money to a distressed

INSOL PREVIEW

INSOL 2017 10th World CongressSydney, Australia

SYDNEY’S NEWLY-OPENED INTERNATIONAL CONVENTION CENTRE WILL BE THE VENUE FOR INSOL’S 10TH WORLD CONGRESS.

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NOVEMBER 2016 SOUTH SQUARE DIGEST

situation”, which will investigate howand why new capital is attracted to asituation that many would run awayfrom. “Financial sector restructuring:the problem with giants and zombies”examines whether the ‘too big to fail’problem has been or is likely to beresolved, together with the problem ofzombie banks around the world. Othersession topics include a discussionaround the increase in third partylitigation funding, national andregional insolvency law reforms, andthe groundswell of movement awayfrom formal insolvency proceedingstowards more fluid and flexiblerestructurings and reorganisations.

Gabriel Moss QC is part of an expert

panel assembled on the Wednesdayafternoon to discuss “Hot and heatingtopics”, both current andcontroversial. The panel will providediverse perspectives on keydevelopments in insolvency practiceworldwide. The final Congress sessionis the always useful “Views from thebench” where a panel of eminentjudges will participate in an interview-style forum on a range of topicalissues.

Registration for the conference isnow open online (www.insol.org). Thedeadline for early registration rates is12 December 2016 with a closingdeadline of 15 February 2017.

We hope to see you there.

HILARY STONEFROST TOM SMITH QC DAVID ALEXANDER QCFIDELIS ODITAH QC

WILLIAM TROWER QC

GABRIEL MOSS QC

SOME 800 INSOLVENCY PROFESSIONALS FROM AROUND THE WORLD ARE EXPECTED TO WEND THEIR WAY TO SYDNEY NEXT MARCH.

76

NEW TENANTS

New tenants arrive at South Square

South Square is delighted to welcome Riz Mokal, Madeleine Jones and Eduardo Lupi as newpractising tenants. Riz, who completed pupillage at South Square in 2005 and subsequentlybecame an academic member of Chambers, now returns as a full-time practising member. BothMadeleine and Eduardo successfully completed their pupillages with South Square and took uptenancy in October this year.

Riz returns to Chambers after having completed his pupillage here in 2005. Hepractices in all aspects of domestic and cross-border insolvency, restructuring,bank resolution, and trust law, and is currently instructed with David Allison QC inrelation to an aspect of the Lehman Brothers insolvency.

From 2009 to 2013, Riz served as Senior Counsel to the World Bank and Headof the Bank’s Global Initiative on Insolvency and Creditor/Debtor Regimes. In thiscapacity, and subsequently as a Consulting Counsel to the Bank, Riz worked withthe governments of some twenty countries in Africa, Asia, Europe, and the MiddleEast on reform of insolvency and creditor/debtor systems. His work involved policyanalyses of existing laws and practices, the development of new legislation, andthe training of judges, lawyers, insolvency practitioners, central bankers, and otherstakeholders.

Riz has also held full-time academic positions at University College Londonsince 2001, was the UCL Chair of Law and Legal Theory until 2016, is a VisitingProfessor at the University of Florence, and has previously held a researchposition at Cambridge University. His scholarship — which ranges over financialsector regulation, insolvency, property and trusts, and legal theory — hasinfluenced law reform in the UK, and has been cited with approval by severalcourts, including the House of Lords, the Australian High Court, and the Courts ofAppeal of England & Wales, New Zealand, Ontario, and Victoria.

As part of the World Bank’s delegation to the United Nations Commission onInternational Trade Law from 2009 to 2013 and of the United Kingdom delegationsince, Riz has been an active participant in UNCITRAL’s work on insolvency law.He sits on the Editorial Boards of a number of key publications includingInternational Corporate Rescue, and is a member of the World Bank’s GlobalInsolvency Task Force, and of the International Insolvency Institute.

Riz Mokal

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Edoardo graduated from Oxford University with a CongratulatoryFirst Class degree in Classics, obtaining the second highest mark inhis year. He was awarded the De Paravicini prize by the University,and the Haigh Prize by Corpus Christi College. He then completedthe Graduate Diploma in Law at City University, where he wasrunner up to the 7KBW Contract Law Prize. He was called to the Barby Inner Temple in 2015, from which he received a prize forachieving a grade of ‘Outstanding’ on the BPTC, an ExhibitionAward for both his law conversion and BPTC years, and the AllanLevy Award. Edoardo has spent time working at McKinsey in Milan,where he was part of a team reorganizing one of Europe’s largestcredit institutions, and in the Economic Crimes and GovernanceDivision at the Attorney General’s Chambers in Singapore. He alsomarshalled for Mr Justice Dingemans in the High Court. Duringpupillage at South Square, Edoardo was exposed to all of chambers’core areas of practice, including cross-border and domesticinsolvency, banking, company law, commercial litigation andoffshore. He sat with Tom Smith QC, Daniel Bayfield QC, RichardFisher, Stephen Robins, Marcus Haywood, William Willson,Georgina Peters and Adam Al-Attar. Notable cases he assisted onas a pupil include the Lehman Brothers Waterfall II Application, Heisv MF Global UK Services Limited in the Court of Appeal, and PrimeoFund v HSBC.

Madeleine studied Classics at Cambridge, where she obtained adouble first class degree, and at Princeton, where she wrote a PhDon Seneca, a Roman philosopher who believed that perfecthappiness is to be attained only through the contemplation of divinejustice. Inspired by this, she returned to England to become alawyer, assisted by Gray’s Inn’s most prestigious scholarships forthe GDL and BPTC, the David Karmel Entrance Award and theBedingfield Scholarship. During her pupillage at South Square,Madeleine was supervised by Adam Al-Attar, Daniel Bayfield QC,Marcus Haywood, Georgina Peters, Stephen Robins, Tom SmithQC and William Willson. Consequently, she has been exposed toall of chambers’ principal areas of practice, including insolvency,bankruptcy, general commercial, company and finance. She gainedextensive experience in drafting and advisory work relating toinsolvency matters (including cross-border insolvency), financialregulatory matters and banking disputes, and assisted in thepreparation for several substantial cases, including the Saad andPrimeo litigation (which are ongoing in the Cayman Islands).Madeleine is delighted to have been invited to be a tenant at SouthSquare and is looking forward to getting stuck in to practice.

Edoardo Lupi

Madeleine Jones

78

Leonmobili Srl v Homag (C–353/15)

On 24th May 2016 the Court of Justiceof the European Union (“CJEU”) cameout with an interesting decision onCOMI. At the time of writing, thejudgment is only available in Italianand French.

Leonmobili was an Italian limitedliability company whose business wasthe wholesale and retail sale offurniture and such like. Whilstregistered in Italy, the company wasadministered by Mr Leone and had itsregistered office in Italy.

On 18th July 2012, a meeting ofshareholders of the company decidedto transfer the registration of thecompany to Bulgaria. Following thisresolution, the registration of thecompany for VAT was closed in Italyalong with membership of varioussocial organisms. It ceased to beregistered in Italy on 12th September2012. The same day it was registeredin the companies’ registry in Bulgariawith its registered office in Sofia at aprovisional address.

On 9th November 2012 a resolutionof shareholders decided to change theregistered address to another place inSofia and appointed another companyadministrator, one who had Bulgariannationality. On 12th November 2012the company hired an office inBulgaria with equipment andemployees to carry on a new phase ofits activities.

Between 19th November 2012 and22nd March 2013, Homag and 7 other

creditors owed a total of €3 millionrequested from the court in Bari inItaly a declaration of insolvency forthe company. The matter wound itsway up to the highest court in Italy,the Supreme Court of Cassation. Inshort, the Italian courts held that thechange of registered office wasfictitious (“fictif” in the French) but theCourt of Appeal of Bari agreed to posepreliminary issues for the CJEU. Inparticular, the questions posed to theCJEU raised the issue of allocation ofjurisdiction to open main proceedingsin a situation where the registeredoffice had moved from one EUMember State to another and whereno establishment had been retained inthe original place of registration, beingthe situation in the Leonmobili case.Did the presumption of COMI being inthe place of registered office apply togive sole jurisdiction under Regulation1346/2000 (the original insolvencyregulation) to the place of the newregistered office in such a situation?

The Court of Justice reviewed theprevious case law, including the casesof Eurofood (C-341/04) and Interedil (C-396/09). Based in particular onInteredil, it repeated the interpretationof Article 3 of Regulation 1346/2000 asmeaning that if it could be establishedby facts which were objective andverifiable by third parties that thedirection and control of a companywas to be found in a Member Stateother than the place of the registeredoffice then the presumption of COMIbeing based on the place of the

COMI again?registered office could be overcome.

It followed, as far as the Court wasconcerned, that the absence of anyestablishment in the other MemberState (Italy), being the original place ofregistration, was not fatal to thepossibility that COMI was still locatedthere. The question remained whetherthe direction and control of thecompany, based on objective factsverifiable by third parties, was inItaly.

It follows that the maintenance ofCOMI in Italy could not be ruled outmerely because there was noestablishment remaining in Italy afterthe transfer of the registered office toBulgaria. It all depended on whetherthe effective centre of direction andcontrol of the company remained inItaly. That of course was a decision forthe Italian courts on the facts of thecase.

For insolvency and pre-insolvencyproceedings opened on or after 26June 2017, the Recast insolvencyRegulation 2015/848 will apply. Thenew Article 3(1) will disapply thepresumption of COMI being at theplace of the registered office wherethe registered office has moved toanother member State during the 3month period prior to the request foropening main proceedings. On factssimilar to Leonmobili, if the creditorsget their request to open mainproceedings into court within 3months of the change of registeredoffice, they will no longer need torebut the presumption based on the

EU/EEA LAW UPDATEGabriel Moss QC looks at an interesting CJEU decision on a move ofboth Registered Office and establishment, and an English decision on‘good’ forum shopping

GABRIEL MOSS QC

EUROLAND

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new location of the registered office.This will alter the onus of proof butmay not make a huge difference in

controlled from, rather than where itis doing its daily business.

practice, as the court will still be facedwith the same basic question as towhere the company is being

Article 4 of the original InsolvencyRegulation (1346/2000), if readliterally, disapproves of forumshopping generally:-

“It is necessary for the properfunctioning of the internal market toavoid incentives for the parties totransfer assets or judicial proceedingsfrom one Member State to another,seeking to obtain a more favourablelegal position (forum shopping).”

The realities of cross-borderrestructuring show that one needs to

distinguish between “good” and “bad”forum shopping. As a generalisation,as far as the English situation has beenconcerned, corporate moves of the“centre of main interests” (COMI) havebeen a good form of forum shopping,designed to achieve benefits forcreditors. On the other hand,individual insolvency shifts of COMIhave tended to be a bad form of forumshopping, seeking to escape ordisadvantage the individual’screditors. The case law has generally

involved “bankruptcy tourists” fromIreland and Germany, where getting adischarge is a much lengthier andmore difficult process. In reality,however, when one looks at the factsof such individual insolvency cases, inmany cases they are not so muchexamples of “bad” forum shopping asexamples of ‘fake’ forum shopping,where the move of COMI has beenillusory.

The corporate and individualinsolvency cases are summarised inMoss Fletcher and Isaacs on the EURegulation on Insolvency Proceedings,3rd Edition 2016. At paragraph 8.115 itis pointed out that:

“The courts in England have not,thus far, drawn a clear distinctionbetween ‘good’ forum shopping

English courts approve‘good’ forum shopping

THE DECISION AROSE FROM THE RESTRUCTURING OF THE GROUP OF COMPANIES OWNED BY CODERE SA, A SPANISH COMPANY, WHICH CARRIES ON BUSINESS BY WAY OFGAMING AND SIMILAR ACTIVITIES IN LATIN AMERICA, ITALY AND SPAIN.

80

(usually by a legal person) whichoccurs where a debtor moves COMI tobenefit creditors and ‘bad’ forumshopping (usually by a natural person)where the debtor moves COMI toescape creditors. Advocate GeneralColomer has pointed out in hisopinions in Staubitz-Schreiber[footnote omitted] and Seagon v DekoMarty Belgium … [footnote omitted]that Community law combatsopportunistic and fraudulent choicesof jurisdiction and not ‘forumshopping’ per se.”

The good news is that in Re CodereFinance (UK) Limited (17 December2015) Mr Justice Newey had in factrecognised the distinction betweengood and bad forum shopping.Predictably, this was a corporateforum shopping case.

The decision arose from therestructuring of the group ofcompanies owned by Codere SA, aSpanish company, which carries onbusiness by way of gaming andsimilar activities in Latin America,Italy and Spain. Group activities werefinanced principally by the issue ofnotes by a Luxembourg subsidiary ofCodere SA. The notes were governedby New York law and guaranteed byCodere SA and other groupcompanies, subject to an English lawinter-creditor agreement.

Using insolvency proceedings inContinental jurisdictions torestructure would have put at risklicences on which the groupdepended. A decision was thereforetaken in the interests of the creditorsto use an English law scheme. For thispurpose Codere SA incorporated anEnglish company, Codere Finance(UK) Limited which agreed to assumeboth a primary and a joint and

several obligation in respect of all theLuxembourg company’s obligations.The Scheme of Arrangement for theEnglish company thus became a keypart of the restructuring. No less than98.78% by value of the creditors votedin favour of the Scheme and not asingle creditor voted against it.Nevertheless, the question of ‘forumshopping’ had to be considered.Newey J at paragraph 18 stated asfollows:

“In a sense, of course, what … issought to be achieved in the presentcase, is forum shopping. Debtors areseeking to give the English courtjurisdiction so that they can takeadvantage of the Scheme jurisdictionavailable here and which is notwidely available, if available at all,elsewhere. Plainly forum shopping

can be undesirable. That canpotentially be so, for example, wherea debtor seeks to move his COMI witha view to taking advantage of a morefavourable bankruptcy regime and soescaping his debts. In cases such asthe present, however, what is beingattempted is to achieve a positionwhere resort can be had to the law ofa particular jurisdiction, not in orderto evade debt but rather with a viewto achieving the best possible outcomefor creditors. If in thosecircumstances it is appropriate tospeak of forum shopping at all, mustbe on the basis that there cansometimes be good forum shopping.”

Newey J went on to say that in thecircumstances of that case he couldnot see that the fact that the companyhad been acquired only recently andwith a view to invoking the schemejurisdiction, should cause him, in theexercise of his discretion, to refuse tosanction the Scheme. He took into

consideration the overwhelmingsupport from creditors, the lack ofopposition, the lack of alternativesavailable in other jurisdictions andthe fact that declining to sanction thescheme would cause the group and itscreditors a loss of around €600million.

We have therefore a clearstatement from the English courtsdifferentiating between good and badforum shopping. This decisionsuggests that two differentapproaches are possible. Firstly, itcould be said that in this type of casewhat is being done is not forumshopping but simply finding the mostconvenient jurisdiction for therestructuring. “Forum shopping” as aconcept should be reserved forfraudulent choices of jurisdictiondesigned to defeat, delay or otherwisedisadvantage creditors. Alternatively,one could say that it is forumshopping but “good” forum shoppingrather than “bad” forum shopping.What is clear however is that thepolicy of both English law and EU lawstands against the idea that a debtorcould go to a different jurisdiction inorder to disadvantage his creditorsbut supports the position that he cango to a different jurisdiction to createa substantial benefit for his creditors.Both the English courts and theAdvocate General of the CJEU shouldbe congratulated for taking apragmatic view, rather than adogmatic one held by someContinental commentators.

In terms of the recast InsolvencyRegulation (2015/848), which willapply to proceedings opened on orafter 26 June 2017, the recitals havetaken on board the differencebetween good and bad forumshopping. Recitals (29) and (31) referto “fraudulent or abusive forumshopping” and recital (30), refers to afiling which “…would materiallyimpair the interests of creditorswhose dealings with the creditor tookplace prior to the relocation.”

The good news is that in Re Codere Mr JusticeNewey recognised the distinction betweengood and bad forum shopping

EUROLAND

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NEWS in brief

82

Two companies which secured over£3million from film investors bymaking false claims, including oneabout a film starring John Travolta,have been shut down at the HighCourt.

Spice Factory (UK) Limited andGummy Bear Films Limited toldinvestors the Hollywood star wasvoicing the main character in GummyBear 3D: The Movie. They took

millions of pounds but never madethe film. Instead, funds were splitbetween company director MichaelCowan and business partner StevenWilkinson.

Cowan and Wilkinson have beenassociated with another film whichalso raised millions of pounds frominvestors but never materialised. InJuly 2015, Warlord Productions –where Cowan was a director – was

wound up after receiving almost£6million. The company claimed tobe remaking Shakespeare playsstarring Tom Hardy and Sacha BaronCohen.

According to Companies House,Cowan is listed as the director ondozens of film companies, many ofwhich no longer exist. The InsolvencyService can ban him from being acompany director for 2 to 15 years.

Investors lured by bogus film with John Travolta as a Gummy Bear

South Square is Set of the Year forInsolvency/Company at Bar Awards

Earlier this autumn both Chambers & Partners and theLegal 500 released their updated guides for 2017 toidentify the outstanding members of the London Bar.

Once again, both guides highlight Chambers’commercial work as being a particular strength (withSouth Square the only set to be ranked in Band 1 forRestructuring/Insolvency in both guides).

Our strong and growing profile in financial services andoffshore work, together with the diversity and breadth ofour Members’ practices (including sport and civil fraud) isalso noted. We thank all our clients who have contributedto our success.

We are particularly delighted that at the Chambers andPartners Bar Awards South Square was awarded Set of theYear for Insolvency/Company law, with William TrowerQC and Richard Fisher nominated respectively in thesame category as Silk and Junior of the Year. In the Legal500 UK Awards 2017 Robin Dicker QC was awardedInsolvency Silk of the Year.

We are also delighted that, in both the Legal 500 andChambers & Partners our clients appreciate the serviceprovided by our clerking team who are praised for theirknowledge, responsiveness and constructive attitude.SOUTH SQUARE’S ROBIN DICKER QC - CHAMBERS & PARTNERS’

INSOLVENCY SILK OF THE YEAR 2017

83

NOVEMBER 2016 SOUTH SQUARE DIGEST

New Master of the Rolls:Sir Terence EthertonSir Terence Etherton took overfrom Lord Dyson as Master of theRolls, the second most seniorjudge in England and Wales, on 3October 2016.

Sir Terence Etherton was calledto the Bar (Gray’s Inn) in 1974 andbecame a Queen’s Counsel in1990. He was appointed a HighCourt Judge on 11 January 2001and assigned to the ChanceryDivision, receiving the customaryknighthood. In August 2006, hewas appointed Chairman of theLaw Commission. In 2008 he wasappointed a Lord Justice ofAppeal and received thecustomary appointment to thePrivy Council. In 2009 he wasappointed President of theCouncil of the Inns of Court. On 11January 2013 he was appointedthe Chancellor of the High Court,head of the Chancery Division.

He is an honorary fellow ofCorpus Christi College,Cambridge University, and ofRoyal Holloway, LondonUniversity, a Visiting Professor ofLaw of Birkbeck, LondonUniversity, and an HonoraryProfessor of Law of KentUniversity. He has an honorarydoctorate in law from CityUniversity.

The number of businesses that havehad assets seized by HMRC has morethan doubled in the past year,according to a recent study.

Funding Options, a financematchmaker, found that businesseswho had assets seized to settleoutstanding debts increased from649 for the year ending March 2015,to 1,592 for the same period endingin 2016 – a total increase of 145percent.

Under the ‘taking control of goods’regulations, HMRC can seize assets inorder to settle debts from businessesthat have been unable to pay their

South Square is once again collaboratingwith The Restructuring and InsolvencySpecialists Association (RISA) in Caymanon the RISA Conference 2016. This year’shalf-day event will be held on Tuesday 22November at the Ritz-Carlton, GrandCayman. The three panel sessions willcover the implications of China Shenshui,obtaining documents abroad anddevelopments of common law of cross-border insolvency outside the EUframework.

South Square speakers - Mark Arnold

overdue tax bills. The assets seizedare then sold at auction to recoverthe debt.

Funding Options said that althoughthis tactic is often a last resort for thetax authority, the growing number ofthese cases suggests that HMRC iscracking down and usingincreasingly aggressive methods torecover overdue tax.

Research also found that theamount of debt these assets wereseized to cover amounted to £43m inthe last year, a dramatic increase of175 percent on last year’s figure of£15m.

Businesses with assets seizedincreases 145 percent

QC,Jeremy Goldring QC, Barry Isaacs QCand Felicity Toube QC – will be joined byguest panellists: Hugh Dickson - GrantThornton (RISA chair), Tony Heaver-Wren -Appleby, Margot MacInnis – Borrelli Walsh,Guy Manning - Campbells, Fraser Hughes -Conyers Dill & Pearman, Mike Pearson -Fund Fiduciary Partners, JeremyHollembeak - Kobre & Kim New York andRachael Reynolds – Ogier.

Antony Zacaroli QC will be moderatingthe event and a number of other SouthSquare barristers will also be attending.

RISA Cayman Conference 2016

RITZ CARLTON GRAND CAYMAN VENUE FOR THIS MONTH’S RISA.

84

Brexit already has negative impact on insolvency levelsThe trade credit insurer Atradiushas published an economic reportciting how Brexit has already been acatalyst for negativity across globaleconomies.

Looking ahead to the rest of thisyear and 2017, the report revealsthat there will be no overallimprovement of insolvency levels inadvanced markets - insolvencies inthe UK are projected to rise by two

percent in 2016 and by three percentin 2017. According to Atradius, thisis both a cause and effect of aweakening business cycle.

The report warns that Brexit islikely to affect confidence in manyadvanced markets and has createdfinancial market volatility; theEurozone insolvency level is already68 percent higher than it was in2007.

Simon Rockett, senior riskmanager for Atradius, said thatBrexit is already impactingconfidence in the UK and the “falloutis likely to extend further acrossEuropean markets”.

He recommends businessesemploy a robust risk managementstrategy to protect themselves “inwhat has become a more fragileeconomic climate.”

Former CEO and chairman of Wells Fargo,John Stumpf, sold $61million worth of stockin the month leading up to the bank beingcharged with fraud.

Wells Fargo was hit with charges ofallegedly falsifying more than two millioncustomer accounts in a bid to increase salesand fees. The San Francisco bank was fined$185million for creating the accounts.

CBS News reported Stumpf, who hasappeared before Congress, made $26millionin profits from the sales, and said the shareshe sold were: “incentive stock optionspurchased at a discount to Wells Fargo’s

current market price and then immediatelysold at a profit.”

Stumpf resigned in October withimmediate effect and was denied $41millionin compensation as punishment for thescandal.

The Justice Department was called on bysenators to open a criminal investigation ofWells Fargo executives over the fakeaccount revelations. Regulators saidemployees issued and activated debit cardsand signed customers up for online bankingwithout permission. The fraudulent practicesare said to have gone on for years.

Wells Fargo CEO sold over $60mof stock before fraud charge

NEWS in brief

WELLS FARGO FORMER BOSS, JOHN STUMPF

Half UK businesseshave no fraud riskpolicyOver half of UK businesses have noagreed written fraud risk policy inplace to prevent and detect fraud,according to new research by R3,the insolvency and restructuringtrade body.The survey of 500 senior financialdecision-makers found that 54% ofbusinesses had no such policy inplace, while 11% were not sure.Frances Coulson, Chair of R3’s FraudGroup comments: “Fraud is astaggeringly expensive problem forthe UK economy, yet half of thecountry’s companies don’t haveprecautions in place to protectthemselves against fraudsters.Businesses in every sector and of allsizes are at risk. An agreed writtenrisk policy should outline acompany’s strategy for preventing,detecting and dealing with fraud.”Other findings reveal 53% ofcompanies with a website do nothave an agreed fraud policy andneither do 48% of businesses thataccept online payments, leaving notonly the company but also theirclients exposed.

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NOVEMBER 2016 SOUTH SQUARE DIGEST

Makers of the latest Bridget Jonesfilm have created legal history byusing the UK Supreme Court as alocation.

Scenes in Bridget Jones’s Baby -based on the series by author HelenFielding and starring RenéeZellweger as Bridget - were shot in

Court One of the Supreme Courtbuilding in London. Barrister MarkDarcy, Bridget’s on-off beau playedby Colin Firth, can be seen arguinghis case at a hearing before fictionalSupreme Court justices.

A Supreme Court spokesmanconfirmed this was the first time thecourtroom had been used as a filmlocation as part of a widerprogramme of generating income.

“A film crew spent one weekend inthe building, avoiding any disruptionto court business. We were pleased tohave the chance to open up thebuilding to a new audience throughthe cinema screen”, said thespokesman.

Other London legal ‘hotspots’which appear in the film include theOld Bailey and Middle Temple.

Rising star - Supreme Court film debut with Bridget Jones

SUPREME COURT - MOVIE STAR

Fizzy rascal - jail forcyber-fraudsterThe mastermind behind one of theUK’s biggest ‘vishing’ bank frauds hasbeen jailed for 11 years after taking£113m from 750 small businesses.

Feezan ‘Fizzy’ Choudhary, 25, whoalso called himself ‘King’, grew sorich from his scams that he flew hispersonal valets 8,000 miles fromScotland to Pakistan to polish hisPorsches. Dressing in designer labelsand dripping in gold, he would sendhis ‘butlers’ shopping to luxury storeswith bin bags full of cash, approvingpurchases via FaceTime.

Hundreds of British firms had beenconned by the fraudster to fund hisextravagant lifestyle. He stolemillions by cold-calling bankcustomers from Lloyds and banks inthe RBS group, destroying lives andputting small businesses at risk ofbankruptcy. Fizzy and his gang

employed a technique called‘vishing’, using details of companyaccounts provided by corrupt bankemployees, as opposed to the morecommon internet scam ‘phishing’where fraudsters use email.

Unwitting bank customers weretold their accounts had been hackedand were duped into giving theirinternet banking passwords over thephone. Using sophisticated malwaresoftware, funds were transferred tomultiple accounts before beingwithdrawn by ‘money mules’. Thescam enabled the fraudster to steal£2.1m in minutes from one law firmalone.

According to Scotland Yard at least750 businesses were affected betweenJanuary 2013 and October 2015 andthere could be others. Nearly £70mwas laundered in London and sent toDubai and Pakistan but only £47mhas been recovered. Fizzy and hisgang were finally caught after anoperation involving 16 police forcesdeploying anti-terror techniques.

In all, 16 gang members were givensentences totalling more than 35years at Southwark Crown Court.

At the sentencing, Judge PeterTestar said the case was a “complex,clever, persistent and pitiless fraud”with cash “frittered away onfrivolous junk”.

FIZZY CHAUDHARY: £113M IN VISHING SCAM

86

At least one fifth of UK corporateinsolvencies in the past year werecaused by late payment or theinsolvency of another company,according to research by insolvencyand restructuring trade body R3.

A survey of the insolvencyprofession reveals that late paymentfor goods or services was a primaryor major cause of 23 per cent of

insolvencies in the last twelvemonths, while the failure of asupplier or customer was the primaryor major factor in 20 per cent ofcases.

The latest research reveals theextent of the problem has notimproved since 2014, when aprevious survey of the insolvencyprofession found that late payment

Late payment and other business failurescause 1-in-5 corporate insolvencies

was a primary or major factor in 20percent of corporate insolvencies.

Andrew Tate, R3 president, says:“The serious implications of latepayment is recognised by the highprofile the issue now commands.Unfortunately, government promisesand other initiatives don’t appear tohave yet made any real impact on thescale of the problem.”

Following the elevation of SirTerence Etherton to the post ofMaster of the Rolls, the Queen hasappointed The Rt Hon Sir GeoffreyVos as Chancellor of the High Courtwith effect from 24 October 2016.

The Rt Hon Lord Justice Vos wascalled to the Bar in 1977, and tooksilk in 1993. He sat as a Deputy HighCourt Judge from 1999 until 2009.He was the Chairman of theChancery Bar Association from1999 to 2001 and of the Bar Councilin 2007. Between 2005 and 2009 SirGeoffrey was a Judge of the Courtsof Appeal of Jersey and Guernsey,and a Judge of the Court of Appealof the Cayman Islands between2008 and 2009. He was appointed asa Justice of the High Court assignedto the Chancery Division in October2009 and was appointed as a LordJustice of Appeal in 2013. Among astring of prominent cases, hehandled the phone-hacking casesbrought against NewsInternational.

The Chancellor of the High Courtis the president of the Chancery

Division of the High Court and vice-president of the Court ofProtection. The Chancellor of theHigh Court is also an ex officiojudge of the Court of Appeal. As amember of the Privy Council, he isentitled to the prefix ‘The RightHonourable’.

Rt Hon Sir Geoffrey Vos appointed new Chancellor

NEWS in brief

RT HON JUSTICE VOS

The Supreme Court has accepted a leapfrogappeal (which jumps the Court of Appeal)from the government and will hear theappeal on the High Court judgment on 5-8December 2016. The High Court ruled thatMs May could not use royal prerogativepowers to trigger Article 50 of the LisbonTreaty, launching official Brexit talks.

Lord Thomas, Sir Terence Etherton andLord Justice Sales determined that thegovernment’s arguments were “contrary tofundamental constitutional principles of thesovereignty of parliament”, and as suchmust be put to a vote. Certain sections ofthe British media, instead of viewing thedecision as an illustration of the separationpowers, appeared to launch personalattacks on the judges involved with the MailOnline branding them as “enemies of thepeople”.

Meanwhile, the Scottish First Minister,Nicola Sturgeon, has ordered the LordAdvocate (the nation’s most senior lawofficer) to lodge a formal application at theSupreme Court to intervene in the case. MsSturgeon said it “simply cannot be right” thatrights linked to membership of the EuropeanUnion “can be removed by the UKGovernment on the say-so of a PrimeMinister without parliamentary debate,scrutiny or consent”.

Article 50leapfrog date set

SOUTH SQUARE DIGESTNOVEMBER 2016

87

Former BHSowner DominicChappell to refileaccounts?Former BHS owner Dominic Chappellis poised to file amended accounts forhis family firm showing £650,000 ofloans previously left out of thefigures.

The loans were made by Swiss RockLtd, which he jointly owned with hisfather, at the time he was working onhis takeover of BHS.

Swiss Rock was also liquidated lastmonth owing more than half amillion pounds in tax and VAT,according to Revenue & Customs.

Chappell is working withaccountant David Rubin & Partnerson the accounts.

Over the last quarter, South Squarebarristers have attended and/orspoken at various externalconferences in the UK and overseas.Matthew Abraham participated in theinaugural COMBAR trip to Indiavisiting Mumbai and New Delhi;Matthew Abraham also attended the3rd Regional Insolvency Conferencein Singapore, organised by the LawSociety and the InsolvencyPractitioners Association ofSingapore (IPAS), with AntonyZacaroli QC invited to speak; FidelisOditah QC attended the INSOL AfricaRound Table (ART) in Accra, Ghana,which South Square also sponsored;Gabriel Moss QC was a panellist at theImplementation of the New InsolvencyConference in Luxembourg; FelicityToube QC spoke at the TMA UKAnnual Conference held in London.

South Squaremembers onthe road

No squawk in courtA Kuwaiti court has declared that themain witness in an adultery case isunreliable - because it is a parrot. Awoman who suspected that herhusband was having an affair withthe housemaid produced the parrotto repeat what her husband hadallegedly said to the maid.

The court, whilst accepting that theparrot had repeated flirty phrases,decided that there was no evidencethat the bird had copied thesephrases from conversations betweenthe man and maid, and that it couldhave mimicked remarks overheardon the television.

Other parrots, however, have beenmore successful stool pigeons. In2014 a murderer was convicted inIndia after the victim’s widower readout a list of the names of a number ofsuspects in front of his late wife’s petparrot, Heera. When AshutoshGoswami’s name was called out the

parrot allegedly squawked “Usnemaara, usne maara”, or ‘he’s thekiller, he’s the killer’, which assistedthe police force in rather narrowingdown the number of suspects andeventually led to a successfulconviction! Currently, prosecutors inAmerica are trying to work outwhether the words of an African GreyParrot, named Bud, are admissible incourt as it apparently describes thelast words of the victim and assailantin a murder case. Glenna Duram ischarged with murdering herhusband, Martin (late owner of Bud)in 2015. Relatives of Mr Duram,including his ex-wife who now looksafter Bud, believe that the parrotwitnessed the couple’s final argumentand is now parroting back their finalwords, switching between a male anda female voice. “Get out”, he hassquawked, followed by “Where will Igo”, and “Don’t f***ing shoot”.

BUD, THE AFRICAN GREY PARROT: AN ‘UNRELIABLE WITNESS’

88

SOUTH SQUARE CHALLENGEWelcome to the South Square Challenge for the November 2016 edition. All you have to do is name the ninepeople in the pictures and then say what the connection is. Please send answers by email tokirstendent@southsquare.com or by post to Kirsten at the address on the back page. Entries by Monday 9January 2017 please. To the winner, if necessary drawn from the wig tin, will go a Magnum of Champagne andan ever so useful South Square umbrella. Good luck.

David Alexander QC

3 4

1 2

5

(2016-

(2000-2005)

(1962-1982)(1982-1992)

(1992-1996)

89

NOVEMBER 2016 SOUTH SQUARE DIGEST

JULY CHALLENGEThe answers to the August 2016 challenge were: 1/. Lord Justice Vos. 2/. Lord Justice Floyd. 3/. Lady Justice Arden. 4/. Lord Justice Briggs.5/. Lord Justice David Richards. 6/. Lord Justice Sales. 7/. Lord Justice Patten. 8/. Lord Justice Lewison.Whilst we had many answers that were nearly right, the only completely correct answer came from Graham Lane of Willkie Farr &Gallagher, who not only correctly identified the eight Court of Appeal Judges but recognised that they were all the Court of Appealjudges who had previously been in the Chancery Division. Many congratulations to Graham, to whom goes a magnum of Champagneand an ever so useful South Square umbrella!

And the connection is?

8 9

6 7

(2012-2016) (1996-2000)

(2009-2012)(2005-2009)

90

Diary Dates

South Square members will be attending, speaking at and/or chairing the following events:

TMA UK Annual Conference17 November 2016 – The British Library, London

RISA Conference 2016 (in association with South Square)22 November 2016 – The Ritz Carlton, Grand Cayman

INSOL 2017 Tenth World International Quadrennial Congress19-22 March 2017 – International Convention Centre, Sydney

R3 Annual Conference 201726-28 April 2017 – Dublin

International Insolvency Institute 17th Annual Conference19-20 June 2017 – Rosewood Hotel, London

South Square also runs a programme of in-house talks and seminars – both in Chambers and on site at our client premises – coveringimportant recent decisions in our specialist areas of practice, as well as topics specifically requested by clients. For more information contact

events@southsquare.com, or visit our website www.southsquare.com

The content of the Digest is provided to you for information purposes only, and not for the purpose of providing legal advice. If you have a legalissue, you should consult a suitably-qualified lawyer. The content of the Digest represents the view of the authors, and may not represent the views

of other Members of Chambers. Members of Chambers practice as individuals and are not in partnership with one another.

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Michael Crystal QC

Christopher Brougham QC

Gabriel Moss QC

Simon Mortimore QC

Richard Hacker QC

Mark Phillips QC

Robin Dicker QC

William Trower QC

Martin Pascoe QC

Fidelis Oditah QC

David Alexander QC

Antony Zacaroli QC

Glen Davis QC

Barry Isaacs QC

Felicity Toube QC

Mark Arnold QC

Jeremy Goldring QC

David Allison QC

Tom Smith QC

Daniel Bayfield QC

John Briggs

Adam Goodison

Hilary Stonefrost

Lloyd Tamlyn

Richard Fisher

Stephen Robins

Joanna Perkins

Marcus Haywood

Hannah Thornley

William Willson

Georgina Peters

Adam Al-Attar

Henry Phillips

Charlotte Cooke

Alexander Riddiford

Matthew Abraham

Toby Brown

Robert Amey

Andrew Shaw

Ryan Perkins

Riz Mokal

Madeleine Jones

Edoardo Lupi