The Administrative Court made a declaration under s 6 of the Justice and Security Act 2013 that a closed material procedure could be used in the judicial review of a decision of the Secretary of State to propose the addition of the Claimants as designated individuals under EU sanctions.
The Claimants were added to the list of designated individuals under an EU Decision and Regulation on the proposal of the Secretary of State to the EU Council on the basis that they were “senior members” of the Islamic Republic of Iran Shipping Lines. The IRISL was a designated entity under an earlier EU Decision and Regulation enacted to restrict or prevent Iranian nuclear proliferation. The IRISL and the Claimants successfully challenged their designations before the General Court of the European Union.
The Claimants issued a claim for judicial review seeking a declaration that the proposal to list them was unlawful and damages for losses suffered as a result of the listing. The Secretary of State made an interlocutory application for a declaration under s 6(2) of the Justice and Security Act 2013 that closed material procedure could be used in the case.
The judge made the declaration as the two conditions in ss 6(4) and 6(5) were met and it was an appropriate case for the court to exercise its discretion under s 6(3). There was sensitive material (being damaging to national security if disclosed) which was disclosable, subject to any PII application; the detail of the material available to the decision-maker was essential to an evaluation of the substantive case; and there was no practicable alternative to a closed material procedure if the case were to be fairly tried.
The court emphasised that the decision under review was that taken by the Secretary of State as distinct from the decisions of the EU Council and that it did not follow that because the Council’s decisions had been wrong that the Secretary of State’s decision was wrong on the basis of the different material before him. It rejected the Claimants’ submission that the Secretary of State could not seek to support his decision on the basis of material which he did not share with the Council, the Claimants or the General Court.
The judge also noted that CPR r 82.23(4) could not be read literally and that it should be interpreted as meaning that “the hearing of the application shall so far as necessary take place in the absence of the claimants, their lawyers and the public” and that this was only necessary when submissions referred to closed material.
The common law jurisdiction of the English courts over foreign company derivative claims has not been revoked by the Companies Act 2006.
The Claimant owned 50% of the Third Defendant, a company incorporated in the BVI. It commenced English proceedings, both in its own right and in a derivative action on behalf of the Third Defendant. The claims were brought against the First Defendant, the owner of the other 50% of the Third Defendant, for breaches of, amongst other things, a shareholders’ agreement, and against the First Defendant’s representative director on the board of the BVI company, the Second Defendant, for breaches of fiduciary duty.
The First and Second Defendant applied to the English court for, inter alia, an order setting aside permission to serve the English proceedings out of the jurisdiction.
The High Court acceded to the application to set aside permission in respect of both the claims in the Claimant’s own name and the derivative claims, holding that:
(1) The Claimant had established a real case that the common law jurisdiction over foreign company derivative claims had not been revoked by the operation of Part 11, Chapter 1 of the Companies Act 2006. The court drew support from the decisions of Briggs J in Universal Project Management Services ([2013] EWHC 348 (Ch)) and David Richards J in Abouraya([2014] EWHC 277 (Ch)) which were consistent with the conclusion that the whole of the common law relating to derivative claims had not been abolished (Paragraphs 27-30).
(2) As a matter of English conflicts law, the law of the country of incorporation of the company governed the right of a shareholder to bring a claim in England (following Konananeni [2002] 1 WLR 1269). Section 184C of BVI Business Companies Act 2004, requiring a member of a BVI company to seek to leave in the BVI court, was a substantive condition precedent to the bringing of a derivative claim in relation to a BVI registered company and thus a requirement that must be complied with as a matter of English conflicts law before such a claim could be brought in England. The Claimant had failed to show more than a fanciful case that it had the right to commence derivative proceedings in the absence of such permission and accordingly permission to serve out in respect of the derivative claims would be set aside (Paragraphs 31-46).
(3) In respect of its personal claims, permission would also be set aside because the Claimant had failed to show that it had more than a fanciful claim for damages which were not reflective of the losses suffered by the Third Defendant (Paragraphs 54-61).
While this was held sufficient to grant the application, the judge went on to bolster his reasoning by considering that the Claimant had failed to establish an arguable case in respect of the alleged breaches of the shareholders’ agreement or a realistic case that the declarations sought would be granted.
Finally, the judge noted that he would have concluded that England was the most appropriate forum giving most weight to the exclusive jurisdiction clause in the shareholders’ agreement than to other factors such as the familiarity of the courts of the country of incorporation with the law applicable to the claims concerning breach of fiduciary duty (given the unlikelihood of material differences with English company law).
Novatrust Ltd v Kea Investments Ltd [2014] EWHC 4061 (Ch), 10 December 2014
A bank challenging financial restrictions affecting it was entitled to disclosure of sufficient information about the allegations against it to enable it to give effective instructions to special advocates in a closed hearing.
The Claimant bank applied pursuant to section 63 of the Counter-Terrorism Act 2008 to set aside financial restriction decisions affecting it in the Financial Restrictions (Iran) Orders 2011 and 2012, which restricted the access of Iranian banks to UK financial markets. The Defendant had relied on material which it was not prepared to disclose since it would breach national security to do so. The Defendant argued that the standard of disclosure required by the decision of the House of Lords in Secretary of State for the Home Department v AF (No 3) ([2010] 2 AC 269) did not apply and that there was no requirement in this case to disclose the details of allegations to the Claimant where the interests of national security required secrecy.
This approach was rejected by the judge who was persuaded that Article 6.1 of the ECHR required disclosure that met the requirements of AF (No 3). While the Claimant’s liberty was not affected in the same way as an individual, the utterly damaging effect on its ability to function was material and its exclusion from London as a major centre for financial institutions was particularly damaging.
Bank Mellat v HM Treasury [2014] EWHC 3631 (Admin), 5 November 2014
A bribe or secret commission received by an agent in breach of his fiduciary duty to his principal is held on trust for his principal. The principal has a proprietary remedy in addition to his personal claim for equitable compensation.
The Respondents purchased the issued share capital of a Monegasque company which owned a leasehold interest in a Monte Carlo hotel. The Appellant acted as the Respondents’ agent in negotiating the purchase. The Appellant had also entered into an agreement with the vendor which provided for the payment to the Appellant of a €10 million fee following successful conclusion of the sale. The Respondents issued proceedings seeking recovery of the sum of €10 million.
At first instance the judge found that the Appellant had acted in breach of fiduciary duty and ordered it to pay the sum to the Respondents, but he refused to grant the Respondents a proprietary remedy in respect of the monies. The Court of Appeal allowed the Respondents’ appeal and made an order which included a declaration that the Appellant had received the fee on constructive trust for the Respondents absolutely. The Appellant appealed to the Supreme Court.
The Supreme Court dismissed the appeal, accepting the Respondents’ submission that a bribe or secret commission received by an agent is held on trust for his principal. The previous authorities taken as a whole and the practical and policy considerations supported this conclusion. The law had taken a wrong turn in Heiron ((1880) 5 Ex D 319) and Lister((1890) 45 Ch D 1), and those decisions and any subsequent decisions (such as Sinclair([2012] Ch 453) in so far as they relied on or followed Heiron and Lister, should be treated as overruled.
The supporting arguments based on principle and practicality included its consistency with the fundamental principles of agency, the merits of simplicity and intolerance of bribery and corruption, which outweighed concerns over potential prejudice to an agent’s unsecured creditors. This also aligned the English courts with the position taken in other common law jurisdictions, including Australia, where the Federal Court had previously declined to follow Sinclair (see Grimaldi (2012) 287 ALR 22).
FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45, 16 July 2014
The Court of Appeal confirmed that the principles to be derived from the decisions in Mitchell([2013] EWCA Civ 1537) and Denton ([2014] EWCA Civ 906) applied to applications for extensions of time for filing a notice of appeal.
The Applicants had each failed to file a notice of appeal within the time prescribed by CPR r 52.4(2) and sought extensions of time. The Applicants argued that since applications for extensions of time were neither applications for relief from sanctions under CPR r 3.9 nor sufficiently analogous, the court’s jurisdiction was untrammelled by the Mitchell/Dentonprinciples and the court should make whatever order it considered just.
Whilst the Court of Appeal accepted that the applications were not formally applications for relief from sanctions under r 3.9, it held that applications for extensions of time for filing a notice of appeal should be approached in the same manner because the implied sanction of the loss of the right to pursue the appeal meant they were analogous. Therefore the Mitchell/Denton principles apply to such applications (paragraph 36).
The Court of Appeal confirmed the implied sanction basis upon which the courts had proceeded since Sayers v Clarke Walker ([2002] EWCA Civ 645) and had continued following the Mitchell decision. Moore-Bick LJ reaffirmed certain established rules and made some general observations on the Mitchell/Denton approach, which included:
(i) For the purposes of r 52.4(2), time runs from the date on which the court pronounces its decision. Where determination of application for permission to appeal is adjourned, the judge could be asked to extend time.
(ii) In most cases the merits of the parties’ respective cases will have little to do with whether it is appropriate to grant an extension of time. Only in cases where the court can assess without much investigation that the merits are very strong or very weak will they have a significant part.
(iii) The litigant’s shortage of funds or a lack of representation does not provide a good reason for non-compliance.
(iv) There are no special rules for appeals from the Administrative Court or for public authorities. The nature of proceedings (including issues which are in the public interest) may, however, be a relevant factor.
Regina (Hysaj) v Secretary of State for the Home Department [2014] EWCA Civ 1633, 16 December 2014
France and Germany have taken a cautious approach to EU sanctions against Russia.
The French president, François Hollande, has suggested lifting the EU sanctions on Russia ahead of a multinational summit on the situation in Ukraine, which is due to take place on 15 January. The current sanctions regime is due to expire in March and requires renewal. France is particularly concerned about the adverse effects of continued sanctions on EU-Russian relations, in the light of issues such as energy security.
The German Vice-Chancellor, Sigmar Gabriel has also spoken against imposing further sanctions against Russia. Gabriel has opined that renewed restrictive measures would bring with them the risk of Russia’s political and economic destabilisation, which would be counterproductive to the country’s willingness to engage in international cooperation and potentially very dangerous for Europe.
France seeks end to Russia sanctions over Ukraine
Whether a claimant can enforce an eventual judgment may depend on the defendant having insurance. Finding out about insurance can be relevant to whether to pursue proceedings. However, the case law shows that it can be difficult to obtain disclosure about whether the defendant has effective insurance cover.
Dowling v Bennett Griffin concerned an agreement made in 2001 between a company (APAL) controlled by Alan Phillips (AP), an architect, and the Dowlings, under which APAL agreed to perform architectural and design services on a development project in Hove. The terms of the contract included the following:
“We confirm that we maintain Professional Indemnity Insurance cover of £250,000.00 for any one occurrence … arising out of one event and this will be the maximum of our liability arising out of this agreement.”
The project did not go according to plan, and the Dowlings fell out with AP. County Court proceedings were brought by APAL in 2003 for outstanding fees. The Dowlings counterclaimed for negligence. AP decided not to notify the insurers in order to avoid any increase to insurance premiums and because he was confident that there was no negligence.
The Dowlings succeeded at trial in 2005 both on the fee claim and on their counter-claim. It was not until 2006 that AP notified the professional indemnity insurers of the claim, and by then it was too late. APAL went into insolvent liquidation. The insurers avoided the contract of insurance on the grounds of non-disclosure, misrepresentation and late notification. APAL’s directors and shareholders were AP, who was a chartered architect and a member of the RIBA, and his wife. APAL in liquidation may perhaps have had a claim against its directors for allowing the insurance cover to lapse thereby leaving it with no assets to satisfy the claim. A third party costs order was made against Mr Phillips personally, but the Dowlings only managed to recover £95,000 from him.
The Dowlings then sued their solicitors for negligence in failing to ensure that APAL’s insurance cover was in place. Lewison LJ (with whom the other members of the court agreed) said of the conduct of AP in not notifying the claim that “[s]uch behaviour is, in my view, both irrational and probably dishonest…”. As to what was apparent to the Dowlings’ solicitors in the county court proceedings he said: “I do not think that it would have occurred to a reasonably competent solicitor that an insured professional being sued for negligence would deliberately decide not to notify his insurers of the claim. Still less would it have occurred to him if he had recently been told by his opposite number that a suspicion that APAL was not insured was groundless and that the question itself was malicious.”
Whether APAL had insurance cover was not relevant to the substantive issues in the county court proceedings, and so disclosure would not have been ordered for the purpose of resolving those substantive issues: West London Pipeline and Storage Ltd v Total (UK) Ltd[2008] EWHC 1296 (Comm) declining to follow Harcourt v FEF Griffin [2007] EWHC 1500; XYZ v Various [2013] EWHC 3643 (QB). In XYZ it was decided that CPR part 3.12 (m) enables the court to order disclosure of information about insurance so as to enable the court to manage a case. This did not help the Dowlings because insurance was not relevant to case management of the county court proceedings and the possibility of using CPR part 3.12 (m) was only apparent from the XYZ case.
In the Court of Appeal the principal way in which the Dowlings argued their professional negligence case was that there was an implied term to the effect that APAL would promptly notify its insurers of any claim made against it which could and should have been enforced by injunction. Lewison LJ said that “..[i]n order to persuade the court that a mandatory injunction should be granted there would have to be placed before the court some evidence that the term in question had been breached but there was no such evidence…”. The result was that the Dowlings failed to establish any negligence, and their claim against their solicitors was dismissed.
When judgment has been obtained for a liquidated sum which is covered by insurance the judgment creditor can use section 1 of the Third Parties (Rights against Insurers) Act 1930 (which is still in force and has not replaced by the 2010 Act) to enforce payment from the insurers. Under section 2 there is also a statutory duty to give information to third parties, which arises in the event of bankruptcy or a winding-up order, or following the other events set out in the section. Transfer of the insurance rights occurs on the happening of a section 2 event. This is so regardless of whether judgment has been obtained: Re OT Computers (In Administration) [2004] EWCA Civ 653. None of those events had occurred prior to the insolvent liquidation of APAL.
One has to say that the Dowlings were not served well by the legal system. After 11 years of litigation they had not recovered their losses because of the conduct of the architect described as “..irrational and probably dishonest..”, which was concealed from them.
Was there a remedy? The words “We confirm that we maintain Professional Indemnity Insurance cover of £250,000.00 for any one occurrence…” are a contractual assurance that the maintained insurance cover is effective. The words commencing “we maintain” mean not just that an insurance policy had been taken out, but also that insurance “cover” was being maintained. The contract promised effective continuing insurance cover. That promise included within it a promise to do what was necessary to maintain effective cover. This included (but was not limited to) notification of the claim to the insurers. In principle this contractual promise was capable of specific performance. It was a key to obtaining satisfaction of a judgment, and damages against APAL would not have been an adequate remedy: Beswick v Beswick [1968] AC 58. The risk was of being left with a useless judgment for damages which could not be enforced. The act of notification is a single act capable of being specifically enforced: Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd [1997] UKHL 17.
In these circumstances the Dowlings could have included as part of their counterclaim for damages a claim for specific performance of the promise to maintain insurance cover. Summary judgment could have been sought together with an inquiry as to what steps needed to be taken to maintain effective insurance cover. There would also have been available disclosure under CPR in relation to the claim for specific performance so as to ascertain the form of order to be made on the application.
In paragraph 65 Lewison LJ said: “..In order to persuade the court that a mandatory injunction should be granted there would have to be placed before the court some evidence that the term in question had been breached..”. In the case of quia timet relief it is necessary to show a real threat of a wrong being done. There would have been jurisdiction to entertain an application for an interim injunction on the grounds that a wrong was threatened, but that would have required some evidence of a real threat to break the contract. In contrast the specific performance route does not seek an interim mandatory injunction. Whilst there can be interim mandatory injunctive relief in aid of a claim for specific performance (see Astro Exito Navegacion SA v Southland Enterprise Co Ltd [1983] 2 AC 787) this does not affect the analysis that specific performance is itself final relief granted to carry into performance promises made in the contract. There was no clear evidence that the promised effective insurance cover was in place, and there was some indication that it may not be (paragraph 44 CA Judgment: no contact from the insurers, and no expert appointed for APAL to deal with the counter-claim). On a claim for specific performance there can be an issue of whether the contract has been performed and there can be disclosure ordered in relation to that issue.
There was also another route available on the facts once it came to light that AP had not or may not have notified the insurers. The insurance was an asset of APAL. The non-notification made irrationally and probably dishonestly threatened to destroy that asset which was a valuable asset against which a judgment could be enforced. In principle Mareva jurisdiction applied to prevent destruction of the asset. This could have been prevented by appointment of a receiver under section 37 of the Senior Courts Act 1981 to give notice on behalf of the company. Alternatively there could have been an injunction under the Mareva jurisdiction compelling maintenance of the insurance cover by the company.
The Court of Appeal held that, while section 9 of the Arbitration Act 1996 did not apply to require the stay of a winding-up petition, it would be appropriate to dismiss or stay a petition pending resolution of a dispute over the petition debt where such dispute was within the scope of an arbitration agreement.
The Appellant petitioned to wind up the Respondent. The Appellant and the Respondent were the lessor and lessee respectively under a lease of commercial property. The Appellant claimed that the Respondent owed sums due to it under the lease. The lease contained an arbitration agreement. The Respondent objected to the petition on the grounds that the debt due was disputed and the dispute had to be referred to arbitration. (It was not in issue that the disputed debt fell within the arbitration agreement.)
On the application of the Respondent, the court ordered that the petition be stayed under section 9 of the Arbitration Act. The Appellant appealed.
The Court of Appeal dismissed the appeal, holding that:
(1) The mandatory stay provisions in section 9 of the Arbitration Act 1996 did not apply to the petition to wind up the Respondent on the ground of its inability to pay its debts and where the issue in dispute was whether the debt under the petition was due (Paragraphs 26, 38).
(2) As a matter of the exercise of its discretionary power to wind up a company under section 122(1) of the Insolvency Act 1986, it was right in the present case to dismiss or stay the petition so as to compel the parties to resolve their dispute by their chosen method of dispute resolution. It was entirely appropriate for the court, save in exceptional circumstances, to exercise its discretion consistently with the policy of the Arbitration Act (Paragraphs 39-41).
The Chancellor balanced the court’s statutory discretion to wind up companies in the public interest where they are not able to pay their debts with upholding the parties’ agreement and respect for the policy of the Arbitration Act. As the Chancellor noted, parties to an arbitration agreement would otherwise be encouraged to by-pass that agreement and the Arbitration Act by presenting a winding-up petition or to use the threat of liquidation to apply pressure on the alleged debtor.
Salford Estates (No 2) Ltd v Altomart Ltd [2014] EWCA Civ 1575, 8 December 2014
On 18 December 2014 the High Court (Henderson J) gave judgment on the quantification issues arising in the FII group litigation following a hearing in May and June of this year. In relation to the Schedule D Case V tax charge on EU-source dividends, Henderson J confirmed the finding in his judgment in Prudential (2013) that effect was to be given to the ECJ’s judgments in FII (ECJ) I and II by granting a foreign underlying tax credit at the higher of the nominal and actual rates. However, whereas Prudential’s dividends were from portfolio holdings for which there was no underlying tax information, the FII claimants’ dividends were from holdings in group companies. They could therefore be expected to make proportionate inquiries into the actual and nominal tax rates applicable in the State in which the profits were earned. The nominal rate credit was to be calculated by following as closely as possible the existing statutory machinery; in particular, where dividend income passed through a mixer company a blended nominal rate had to be determined (rather than disaggregating the income as HMRC had argued). The Judge also gave provisional views on two situations which did not arise on the test cases: first, where EU-source income was taxed in an intermediate company on its way to the UK, the relevant nominal rate was that of the intermediate company (if higher than that of the ultimate source country); secondly, while in principle a nominal rate credit was not required for income originating in a third country (even where it was paid to the UK via an EU mixer company), where the income was taxed in the EU on its way to the UK the income would attract a nominal rate credit at the rate of the intermediate company.
The judgment also deals with detailed issues relating to the quantification of the Claimants’ ACT claims. Here again Henderson J followed the principle that the solution adopted should do as little violence as possible to the UK machinery, upholding the Claimants’ methodology based on an adaption of the ACT return (CT61) system. The Judge held further that HMRC had failed to demonstrate that on the facts they had changed their position so as to make restitution unconscionable: there was no short term relationship between taxation and spending and even in the longer term no causal relationship had been shown. The Judge also confirmed his rulings in Prudential that restitution should be by way of compound interest (the parties having agreed that the appropriate rate was the ten year moving average of the yield rate on ten year gilts).
The Test Claimants in the FII Group Litigation v HMRC [2014] EWHC 4302 (Ch), 18 December 2014
Originally printed in International Tax Review, 16 September 2014
By Nicola Hine
On 2 September 2014, the Court of Appeal handed down its latest judgment (the third from the Court of Appeal) in the long running Franked Investment Income Group Litigation (“FII GLO”) case. This particular appeal dealt with an important point of principle: that taxpayers should be entitled to have finality in long running cases. If HMRC were allowed to re-open arguments which had been decided against them, it could increase the uncertainty of litigation and the protracted nature of tax disputes.
The Court of Appeal decided the UK tax authorities should not be allowed to change their defence in the Franked Investment Income Group Litigation on the issue of liability as that aspect of the case has already been finalised. As a result, the appeal was dismissed.
This is a further success for the Claimants in this action and, hopefully, brings the case closer to reaching its conclusion.
Continue reading on International Tax Review.
