Legal Eye: City & International Disputes

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1 View the online September 2012 Legal Eye: City & International Disputes Welcome to the latest bulletin from Bristows' Commercial Disputes team. This bulletin has been prepared by the City & International Disputes group within the team. Should you have any comments on this bulletin, we would be delighted to hear from you. Please your comments to Directors remuneration under scrutiny - a case of our times Zoё Bent A recent decision of the Court of Appeal (in Geoffrey Maidment v Allan Attwood & Ors [2012] EWCA Civ 998) picks up on the topical issue of excessive pay for company executives. Geoffrey Maidment, a minority shareholder applied to Court for relief under the Companies Act 2006 (s.994(1)) regarding what he claimed was the unfairly prejudicial conduct of Mr Attwood, a co-shareholder, regarding his activities as sole director in Tobian Properties Ltd ( Tobian ). Unfair prejudice was alleged on several basis, including the fact that Mr Attwood had paid himself what Mr Maidment considered to be excessive remuneration in respect of his director s duties. By way of example, picking up on the two particular examples cited by the Appeal judge: (1) in 2002 Mr Attwood paid himself 170,750 plus benefits in kind of 10,777; (2) in the following year he paid himself 145,000, notwithstanding that the company had made a loss of ( 169,508) and that the shareholders funds had gone down from 133,540 to ( 9,680). At first instance, although the judge found that the payments Mr Attwood had paid to himself were excessive, this was held not to be unfairly prejudicial to the interests of the claimant because they had been disclosed in the company s annual accounts, which Mr Maidment could have, but failed to, review. The rationale of court was that a shareholder could not complain of an act which would otherwise have qualified as unfair prejudice if, by his/her own diligence s/he could have found out about it earlier. Forward to a colleague In this issue Directors remuneration under scrutiny - a case of our times Case Review: Sibir Energy Ltd -v- Chalva Pavlovich Tchigirinski [2012] EWHC 1844 (QB) Company Directors Disqualification does it continue to hold the appropriate threat? Funding Litigation: ATE Insurance Piercing the corporate veil to establish jurisdiction under a contract About Us Geoffrey Gauci Partner +44 (0) Charles Pugh Partner +44 (0) Jessica Fisher Associate +44 (0) Click HERE to find out about Bristows' Commercial Disputes practice

2 The Appeal Court however disagreed with the decision of the trial judge. In particular, that there was an onus on shareholders in such circumstances to read the company accounts. It concluded that by reason of having fixed his remuneration by reference to his own interests, contrary to his duty as a director, Mr Attwood, had acted in a manner which was unfairly prejudicial. Click HERE to see previous Legal Eye - Arbitration Bulletins The Court clarified, (following a previous decision (Irvine v Irvine [2007] 1 BCLC 349)), that when looking at the question of appropriateness of a director s remuneration, reference should be made to objective commercial criteria adding:...in light of the public debate that has taken place in recent years over executive pay in large companies, much guidance can be found about the remuneration of directories in listed companies in the various guidelines that have been produced, such as the Association of British Insurers Principles of Remuneration Moreover, the Appeal Court did not consider that the fact that Tobian was in liquidation as being prohibitory in terms of being able to provide a remedy, confirming that it had wide powers (under the Companies Act 2006 (s.996(1)) to fashion appropriate relief to meet the circumstances of a particular case. The case is a timely reminder that directors pay may be open to scrutiny by shareholders who may also have the means to do something about it, even where the company has gone into liquidation, and, unlike derivative claims, unfair prejudice claims are not limited to minority shareholders. Case Review: Sibir Energy Ltd -v- Chalva Pavlovich Tchigirinski [2012] EWHC 1844 (QB) Geoffrey Gauci This case concerned the interpretation of Article 6(1) of the Lugano Convention which allows a person domiciled in a Member State to be sued in another Member State in certain situations. Proceedings had been instituted in March 2009 and the Claimants made an application to join a Swiss national to the English proceedings under Article 6(1). The claim arose out of a fraud involving the misappropriation of more than US $400 million. There were several alleged participants in the fraud. The proceedings were brought against four Defendants and by the time the application had been made to the Court to join the Swiss national, proceedings had been settled against three of the Defendants. The claim against the English anchor defendant had not been settled. Counsel for the Claimant sought to argue that the words in Article 6(1): provided that the claims are so closely connected that it is expedient to hear and determine them together to avoid the risk of irreconcilable judgments resulting from separate proceedings, require a broad commonsense approach taking all relevant facts into account. The Claimants argued that the motive for proceeding against the anchor

3 Defendant (the English national Defendant) and the extent to which litigation against him will impact the pursuit was irrelevant. The Swiss Defendant sought to be joined, argued that one had to take a broader and more pragmatic view. In reviewing the authorities the English Court said that they clearly established that Article 6(1) cannot be applied to allow an applicant to claim against a number of Defendants with the sole objective of ousting one Defendant s domicile. To put it in other words, there must be a genuine claim or a claim which is properly brought against the Defendant who is being sued in the courts of his domicile. This being said, the Court was of the view that there must come a point at which the law requires an application under Article 6(1) to be refused where its provisions are being abused. On the facts of this case, if the Swiss national to be joined established that the Claimants are pretending to continue a claim against the English anchor defendant, but would not in truth take it forward and are doing that with the sole object of bringing the Swiss national into the action, that may well be a reason to refuse relief under Article 6(1). At the hearing, the Court investigated the reason why the case against the English anchor defendant was not being actively pursued which was for reasons of commercial proportionality, but there was a possibility that the claims would be renewed. However, the Claimants agreed to give further disclosure concerning what had been discussed or agreed in relation to proceeding against the English anchor defendant. The Claimants solicitors also wrote a detailed letter insisting that there had been no collusion or other arrangement with the English anchor defendant concerning settlement or an agreement not to proceed against him. On the basis that a witness statement would be provided confirming the matters set out in the Claimants solicitors letter that the allegations of collusion and/or that the Claimants had no intention of pursuing the English anchor defendant, would fall away and that there was therefore no factual basis for the Swiss domiciliary Defendant to resist being joined to the English proceedings under Article 6(1) of the Lugano Convention. Company Directors Disqualification does it continue to hold the appropriate threat? Charles Pugh The merits of company directors disqualification proceedings are back in the spotlight following recent high profile rulings. This article considers the impact of the recent decisions in Farepak, which represents a significant blow to the government in this field and raises questions over the ability of such cases to be successfully pursued, and Mistry, in which disqualification proceedings were brought by a liquidator against a former liquidator. It is not the purpose of this article to analyse the test for successful proceedings for disqualification. The Company Directors Disqualification Act was enacted in 1986 and the key sections, 6 and 8,

4 deal with the circumstances in which disqualification is appropriate where a person s conduct is shown to be unfit to be concerned in the management of company. It is important to note that the application for disqualification is in the power of the Secretary of State and handled by the Insolvency Service and is not open to being pursued by shareholders or creditors impacted by a company s collapse, who understandably may wish to see the directors punished. In the recent case of Wood v Mistry [2012] EWHC 1899, judgment in which was handed by Mr Justice Newey on 10 July 2012, the application for disqualification was brought, not by the Secretary of State but by the liquidators of the relevant companies. Further it was not against one of the directors but Mr Mistry, who was the liquidator originally appointed after the respective companies collapse. On the issue of the relevant claimant, Mr Justice Newey reviewed the various authorities and rejected the defendant s submissions that the liquidators, partners from Grant Thornton, did not have any genuine interest in the relief sought and that there was a risk that they might be using company s funds for improper purposes. The Judge concluded that there was no reason to believe that the liquidators were acting with some ulterior motive. In addition, it could not be said that the company s assets were being used in prejudice to the creditors interests, when the principal creditor, HMRC, supported the proceedings. Further, the Secretary of State had been approached and supported the proceedings, even though it was unable to become a co-claimant because there was insufficient time to undertake the necessary work before the trial. As to the fact that disqualification proceedings were pursued against the liquidator rather than the directors of the collapsed company, the Judge observed that section 4 of the CDDA (unlike sections 6 and 8 under which disqualifications orders are usually made) is not confined to company directors but includes liquidators. Based on the evidence before him, Mr Justice Newey was satisfied that there was sufficient evidence of misconduct and a 12-year disqualification order made. The credit for this success lies with Grant Thornton for taking the risk to pursue this claim independently of the Insolvency Service. The Farepak case has received a lot of coverage since its collapse in 2006, in particular as it involved the collection of funds from the public as part of a Christmas savings scheme. On the collapse of Farepak, there were no or insignificant funds left to repay the original savers, the moneys having been used for other companies within the group and not adequately protected in a trust account or otherwise. Proceedings for disqualification were later brought against a number of the directors of Farepak, including Sir Clive Thompson, the former President of the CBI. However, when the matter came to trial in June of this year, it emerged that part of the reason why funds could not be made available for the Christmas savers was that, despite significant attempts by the directors, its bankers, HBOS, refused Farepak directors request to safeguard the savers money. s were disclosed in the proceedings showing that the HBOS bankers had referred to the Christmas savers moneys as Doris money, which was highly embarrassing. Having heard the evidence, Mr Justice Smith appeared to conclude that the real blame lay with HBOS and told the Insolvency Service lawyers to go away and consider whether they still wished to pursue disqualification against the directors. The next day, the disqualification proceedings were discontinued, leaving the Insolvency Service with

5 the risk of a substantial liability for costs. Since the proceedings were withdrawn, it is understood that a substantial sum has been released by the Lloyds Banking Group (on HBOS s behalf), as a result of which there is a prospect that at least half of the savers money may be recovered. The Farepak case has, however, left a significant question mark over the ability of the Insolvency Service to successfully pursue such disqualification proceedings. In times of government cuts, humiliating climb-downs of this nature are not going to encourage the Insolvency Service to continue to pursue such high profile cases. It remains important that disqualification proceedings can be successfully brought upon the collapse of a company, not only against directors where their actions are worthy of punishment but, as seen in the Mistry action, also potentially against the liquidator appointed after the company s collapse, if there is evidence of malpractice. The benefits of the rescue culture, enabling companies to be quickly rehabilitated and jobs to be saved, will be damaged unless there remains adequate protection for creditors and the public at large against rogue officers. Funding Litigation: ATE Insurance Zoё Bent ATE insurance is commonly used as a means of funding litigation and has been accepted by the Courts (through the implementation of certain provisions in the Access to Justice Act 1999 which allow recovery of insurance premiums as part of costs orders) as a way of encouraging better access to justice. This article considers the recent decision in Hawksford Trustees and the recoverability of ATE insurance premiums in light of that decision. In Hawksford Trustees Jersey v Stella Global UK Ltd & Anor [2012] EWCA Civ 987), the claimants, Hawksford, having won at trial, then obtained ATE insurance before the appeal, the terms of which, amongst other things, made provision for recovery of the other side s costs both leading-up to and of the trial and of the appeal. The appellant having lost the appeal, the Court was then faced with the question of costs. Hawksford accordingly sought recovery of its ATE insurance premium from the respondents (the sum of which was in fact higher than both sides appeal costs) whereupon the respondents objected to paying for that part of the premium insofar as it related to the first instance trial. The discrete point of principle the Appeal Court had to consider was, whether it was permissible, under the costs rules, for an unsuccessful appellant to be made to pay, as part of the costs ordered against it, that part of the ATE insurance premium which related to the costs of the claim up to and including the trial. The issue fell to be decided as a matter of statutory interpretation under section 29 of the Access to Justice Acts which provides that: where in any proceedings a costs order is made in favour of any party who has taken out an insurance policy against the risk of incurring a

6 liability in those proceedings the costs payable to him may,...include costs in respect of the premium of the policy. By a majority, the Court of Appeal concluded that section of 29 was to be interpreted narrowly, so that proceedings at trial were to be treated as separate and distinct from appeal proceedings. One aspect of the Courts reasoning was that although the legislation had been set-up to improve access to justice, it would be unfair to make a costs order for recovery of an insurance premium in circumstances where the other party was ignorant even as to the existence of the funding arrangement, in particular, given that litigants are required to provide notice of any such arrangements under the rules of court (CPR 44). The net effect of this decision is that it is not possible for litigants to recover ATE insurance premiums in one proceeding insofar as it relates to another, notwithstanding that they are part of the same litigation. Piercing the corporate veil to establish jurisdiction under a contract Pietro Franchi In VTB Capital plc v Nutritek International Corp, Marshall Capital Holdings Ltd, Marshall Capital LLC, Konstantin Malofeev [2012] EWCA Civ 808 the Court of Appeal clarified the law that allows a claimant to look to the shareholders of a company for compensation for the actions of the company. This judgment reverses two earlier first instance decisions given in 2011, which had extended the traditional doctrine known as piercing the corporate veil. The case relates to a loan by a Russian bank (VTB), which lent $225 million to Russagroprom (RAP) to fund its acquisition of six dairy plants from the first defendant, Nutritek, under the terms of a facility agreement. RAP defaulted on the loan. VTB was able to recover only a small part of the loan by way of enforcement of the securities taken under the facility agreement. VTB alleged that it was induced to enter into the agreement by fraudulent representations made by Nutritek, firstly because there was a misrepresentation as to the value of the dairy companies, and secondly because it emerged that RAP and Nutritek were under common control and therefore the transaction was not a commercial transaction at arms length. VTB therefore brought a claim in contract against RAP, and tortious claims of unlawful means conspiracy and deceit against Nutritek and the controllers of RAP, which were not a party to the facility agreement. As the facility agreement was governed by English law and subject to the non-exclusive jurisdiction of the English courts, to establish jurisdiction over the controllers of RAP in England VTB sought to amend its particulars of claim to add contractual claims against them as well. This was on the basis that RAP was a mere puppet in the hands of these controlling puppeteers and therefore the court should pierce the corporate veil, look at the true facts and make the

7 controllers parties to the agreement that had been entered into by their puppet, RAP. The Court of Appeal s decision was that: There is indeed a doctrine in English law that allows for the piercing of the corporate veil, as established in Woolfson[1] and Adams[2] and followed in other cases; In the circumstances of this case, the misuse of the corporate structure to hide wrongdoing was sufficient to enable the piercing of the veil; however There was no principle as a matter of law that allowed the controllers of the company to be a party to a contract entered into by their puppet and to be held liable under it. There was no basis for an extension of the doctrine in this way and it was not an extension that the Court of Appeal was prepared to make. The Court held that if the corporate veil is pierced, any remedy against the puppeteers would fall under the discretionary jurisdiction of the court, which is enough to provide effective relief as appropriate. In putting its case, VTB relied on the decisions of Mr Justice Burton in Gramsci v Stepanovsi[3] and Alliance[4], but the Court of Appeal held that they were wrongly decided. Permission to appeal was granted by the Supreme Court, so the final word on this matter is yet to be pronounced, but this decision brings some deserved clarity to this area of the law and has already been followed by the High Court in Antonio Gramsci Shipping v Recoletos Limited [2012] EWCH [1] Woolfson v Strathclyde Regional Council 1978 SLT 159 (HL) [2] Adams and Others v. Cape Industries Plc and Another [1990] Ch 433 (CA) [3] Antonio Gramsci Shipping Corporation and Others v Stepanovs [2011] EWHC 333 (Comm) [4] Alliance Bank JSC v. Aquanta Corporation and Others [2011] EWHC 3281 (Comm) The information contained in this document is intended for general guidance only. If you would like further information on the above, or advice on any other commercial disputes issues, please do not hesitate to contact geoffrey.gauci@bristows.com or any other member of our team. Update my subscription preferences Forward to a colleague Unsubscribe 100 Victoria Embankment London EC4Y 0DH T +44 (0) , F +44 (0) info@bristows.com, Bristows, see Terms of Use