Clear and distinct--UK court stays proceedings in favour of Saudi courts

Why did the High Court decide to stay proceedings brought by Cayman liquidators in relation to the avoidance of s 127 property dispositions?

 Original news

Akers v Samba Financial Group  [2014] EWHC 540 (Ch), [2014] All ER (D) 02 (Mar) The Companies Court considered an application for a stay of proceedings pursuant to the  Civil Procedure Rules 1998, SI 1998/3132, Pt 11 (CPR) by the defendant financial group (Samba Financial Group) (Samba). The proceedings sought a declaration under  IA 1986, s 127 that the transfer of shares in five Saudi Arabian companies was a void disposition of Saad Investments Company Limited's (SICL's) property. The claim was made by the joint liquidators of SICL (a Cayman Islands company). In granting the stay, the court decided that the courts of Saudi Arabia were clearly and distinctly a more appropriate forum.

 What is the significance of this case?

The case gives an interesting overview of which law governs:

  • whether or not the company had a proprietary interest in the assets disposed of, and
  • any underlying trusts

What did the court decide?

Sir Terence Etheron J decided that:

  • the UK proceedings under IA 1986, s 127 should be stayed as Saudi Arabia was a more appropriate forum
  • Saudi law governs whether or not, at the date of the disputed share transfer, SICL had a proprietary interest in the shares
  • Saudi law is the governing law of the trusts created by the seven transactions

What were the key dates in this case?

The relevant chronology was:

  •  30 July 2009--winding up petition presented against SICL in Cayman Islands
  • 20 August and 25 September 2009--UK court recognises (under the Cross Border Insolvency Regulations 2006, SI 2006/1030 (CBIR)):      

◦            Cayman joint liquidators as foreign representatives, and

◦            Cayman insolvency proceedings as foreign main proceedings   

  • 16 September 2009--disputed share transfer takes place from Mr Al-Sanea (who allegedly held the shares on trust for SICL) to Samba
  • 18 September 2009--winding up order made in Cayman

 What were the key jurisdictional facts?

 Cayman Islands:

SICL incorporated in Cayman Islands

SICL entered liquidation in Cayman Islands

Saudi Arabia:

Disputed share transfer relates to shares in five Saudi Arabian companies (under seven transactions)

Four of the share transfer transactions contained choices of Saudi Arabian law or Bahraini law

Transferor of disputed shares—Mr Al-Sanea is a citizen, domiciled and ordinarily resident in Saudi Arabia

Transferee of disputed shares—Samba is incorporated and registered on the Saudi Arabian stock exchange, carrying on business as an international bank in Saudi Arabia

 SICL's ultimate beneficial owner and one of its directors and chair of the board (Mr Al-Sanea) is a Saudi resident

One of Samba's directors (Mr Al-Sanea) is a Saudi resident

England and Wales:

$60m facility agreement between SICL and Samba governed by English law with an exclusive jurisdiction clause in favour of the English courts

$2.815bn revolving facility agreement between bank syndicate and SICL governed by English law with an exclusive jurisdiction clause in favour of the English courts.

 The effect of the disputed share transfer (if the shares constituted property of SICL) was to give Samba priority over other creditors of SICL to the extent of their value (alleged to be around $318m).

The joint liquidators decided to bring proceedings in England, rather than the Cayman Islands, because Samba had no presence there and they believed that Samba would refuse to submit to the jurisdiction of the Cayman Islands--meaning a Cayman judgment would be difficult to enforce. The UNCITRAL Model Law has not been enacted in Saudi Arabia.

 What factors were relevant to the decision to stay proceedings?

Spiliada Maritime Corpn v Cansulex Ltd  [1987] AC 460, [1986] 3 All ER 843 The court applied the principles in Spiliada in deciding whether to exercise its discretion to stay the proceedings--proceedings will be stayed if there is another more appropriate forum, even where, as in the present case, the court's jurisdiction has been invoked by the claimant as of right. However, it will only stay proceedings if certain conditions are satisfied and will ask the following questions:

 Whether there is a more appropriate forum

In determining that issue, the court will consider with which forum the issues in the proceedings have the most real or substantial connection, including:

  •  the governing law of the relevant transactions
  • the places where the parties respectively reside or operate, and
  • the convenience of witnesses and the location of evidence

If the court considers that there is no other forum which is clearly more appropriate for the trial of the action, it will ordinarily refuse a stay.

 Whether justice requires that the proceedings continue in England

If the court is satisfied that there is another forum which is clearly more appropriate, then the court will ordinarily order a stay unless the claimant can satisfy the court that justice requires that the proceedings continue in England because--for example, it is established objectively and by cogent evidence that justice will not be done in that other forum. Ultimately, the question for the court is whether it is more suitable that the case should be tried in England having regard to the interests of all the parties and ends of justice.

After considering the additional matters below, the court decided that proceedings would be stayed on the ground that the courts of Saudi Arabia were clearly and distinctly a more appropriate forum.

Which law governs this dispute?

The purpose of the UNCITRAL Model Law on Cross-Border Insolvency (enacted in Great Britain by the CBIR) is to enable a foreign office holder to use British insolvency law to obtain the same relief as if the insolvency was commenced in England (see CBIR, reg 3(1) and CBIR, arts 20(1)(c), 20 (2)). The effect of those provisions is to enable the foreign representative to take advantage of IA 1986, s 127 (for further details on IA 1986, s 127, see Practice Note Restrictions on dispositions of property and for UNCITRAL, see Practice Notes: When does UNCITRAL (implemented by the Cross-Border Insolvency Regulations) apply and what are the effects? and Effects when the UNCITRAL Model Law (implemented by the Cross-Border Insolvency Regulations) applies).

Accordingly, any disposition of SICL's property made after, at the latest, the date of recognition of the foreign proceedings under the CBIR on 20 August 2009 was void under IA 1986, s 127. The disputed share transfer was made after that date.

The critical issue is whether or not, applying the relevant law, SICL had any property interest in the disputed shares at the date of the transfer. While Saudi law does not recognise trusts, it recognises an 'amaana', an arrangement similar to bailment. It was common ground that Saudi law did not recognise a category of trust, like the common law trust, in which there was a separation of the legal and equitable interests.

As regards which law governs whether or not, at the date of the disputed share transfer, SICL had a proprietary interest in the shares:

The court decided that the governing law of the trusts created by the seven transactions could not be resolved by reference to the Convention, art 6 (a trust shall be governed by the law chosen by the settlor, but if the chosen law doesn't provide for trusts, art 7 shall apply) because:

  • only four of the seven transactions contained express choices of Saudi Arabian law or Bahraini law
  • assuming that the seven transactions contained an express or implied choice of Saudi Arabian or Bahraini law, it was common ground that those laws did not recognise a category of trust, like the common law trust, in which there was a separation of the legal and equitable interests (meaning that the Convention, art 7 is applicable)
  • in the absence of cross-examination of an expert, it was not possible to resolve whether each of the seven transactions gave rise to an amaana and that was a trust within the Convention, art 2 so that the express and implied choices of Saudi Arabian and Bahraini law in the seven transactions were conclusive under art 6

Applying the Convention, art 7, in order to ascertain the law with which a trust is most closely connected with, the court must consider the place of administration of the trust designated by the settlor, the situs of the trust assets, the place of residence or business of the trustee, the objects of the trust and the places where they are to be fulfilled. In this case, the court decided:

  •  in the case of the seven transactions, there had been no express designation of any place as the place of administration of the trusts
  • the situs of the disputed shares was Saudi Arabia, which was where the companies were incorporated and where the shareholders were registered
  • the trustee was Mr Al-Sanea, who was resident in Saudi Arabia--he was a citizen of Saudi Arabia and also domiciled there
  • the beneficiary of the trusts was SICL, which was incorporated in the Cayman Islands
  •  the construction of the trusts and the agreements on which they were based, suggested that their wider purpose was to circumvent the restrictions under the Saudi Arabian foreign investment regulations on foreigners investing in Saudi Arabian companies

Those matters taken together overwhelmingly indicated that the closest connection of the seven transactions for the purposes of the Convention, art 7 was with the law of Saudi Arabia and not the law of the Cayman Islands (see paras [66]-[73] of the judgment).

VTB Capital v Nutritek International [2013] UKSC 5, [2013] 2 AC 337 .  The governing law is always an important factor in forum challenges because it is generally preferable, all other things being equal, that a case should be tried in the country whose law applies (see VTB Capital v Nutritek International, at para [46]). In the present case it is decisive. It is common ground that, if the law of Saudi Arabia governs the seven transactions, the claim in the present proceedings pursuant to IA 1986, s127 will fail because SICL will not have had a property interest in the shares at the relevant date. Once it was decided that the law of Saudi Arabia or the law of Bahrain governs the trusts, the joint liquidators accepted their IA 1986, s 127 claim fails on two counts:

  •  because the law of those countries does not recognise the type of trust where there is a division between legal and beneficial ownership
  • because the courts of those countries do not recognise or enforce foreign law

 What does this mean for practitioners?

This case is a warning to foreign insolvency practitioners that even though they may be successful in obtaining recognition in the UK as foreign representatives under the CBIR, the UK courts will not always apply UK provisions and reliefs--especially if there is a closer connection to another country.

For further details, see Lexis R&I PSL Practice Notes: Restrictions on dispositions of property, When does UNCITRAL (implemented by the Cross-Border Insolvency Regulations) apply and what are the effects? and Effects when the UNCITRAL Model Law (implemented by the Cross-Border Insolvency Regulations) applies.

Kathy Stones, solicitor in the Lexis®PSL Restructuring & Insolvency team.

 

 

 

Relevant Articles
Area of Interest