Icelandic banks, jurisdiction and the Lugano Convention—Tchenguiz and others v Grant Thornton UK LLP and others

What should lawyers take from the latest decision in the ongoing Kaupthing litigation? Lydia Pemberton, barrister at St Philips Chambers, considers the judgment of Mrs Justice Carr dealing with the application of the Insolvency Regulations and the Lugano Convention.

Original news

Tchenguiz and others v Grant Thornton UK LLP and others [2015] EWHC 1864 (Comm), [2015] All ER (D) 36 (Jul)

The fourth and fifth defendants (Kaupthing and Jóhannes Rúnar Jóhannsson (JJ) respectively) sought the dismissal or stay of the proceedings. The Commercial Court held that the proceedings against Kaupthing had been brought in breach of a prohibition on legal action against it contained in art 116 of the Icelandic Bankruptcy Act 1991, which had effect in the UK by reason of the Credit Institutions (Reorganisation and Winding Up) Regulations 2004, SI 2004/1045, reg 5 (the Credit Institutions Regulations). However, the claims against both Kaupthing and JJ were not excluded by the Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters, art 1(2)(b).

How did the issue arise?

On 24 November 2008, the Icelandic Court had made a moratorium order against Kaupthing Bank HF (Kaupthing) due to its insolvency, under the Financial Undertakings Act 2003. Kaupthing was made the subject of a winding-up order on 22 November 2010.

On 27 November 2014 Vincent Aziz Tchenguiz (VT) and others issued proceedings against a number of parties including Kaupthing, in respect of whom VT was a former customer, and JJ, a member of the winding-up committee appointed over Kaupthing. The claimants alleged various torts including malicious prosecution of VT, conspiracy to injure the claimants by unlawful means and malicious procurement of the arrest and search warrants and execution of the same against VT.

The proceedings were issued without any prior notice and were served out of the jurisdiction without first seeking the court’s permission on the basis that the defendants were domiciled in the UK or another convention territory (see the Civil Procedure Rules 1998, SI 1998/3132, r 6.33(1)(b)(i)) (CPR), or so the claimants claimed.

Kaupthing and JJ did not accept that the UK courts had jurisdiction. By their application dated 15 January 2015, Kaupthing and JJ mounted a challenge under CPR 11 seeking a dismissal or a stay of proceedings on the basis that either:

  • as against Kaupthing, that the claimants were barred from bringing a claim under Icelandic law, which, by virtue of the Credit Institutions Regulations, meant that they were barred from bringing the claim in England (the insolvency ground)—this assumed that the Lugano Convention applied and that the exception thereto in art 1(2)(b) did not apply, accordingly bestowing upon the English court territorial jurisdiction, or
  • as against both Kaupthing and JJ, that the English court had no jurisdiction under the Lugano Convention because proceedings fell under one of the exceptions as set out at art 1(2)(b) (the jurisdictional ground)

Did the Credit Institutions Regulation apply?

The primary instrument dealing with cross-border insolvency in the EC is the Insolvency Regulation (EC) 1346/2000. The basic jurisdictional rule under the Insolvency Regulation is that insolvency proceedings are reserved to the state of the centre of main interest, and that is the primary focus in relation to jurisdiction. However, the Insolvency Regulation does permit the opening of ‘secondary proceedings’ in Regulation States, other than that of the main proceedings, in which the debtor has an establishment.

The basic choice of law rule under the Insolvency Regulation is that the lex concursus (the law of the state where the company is being wound up), is to apply.

Similarly, the basic choice of law rule under the later Credit Institutions Directive 2001/12/EC (as implemented by the Credit Institutions Regulation), much of the wording of which follows the Insolvency Regulation, is that the laws, regulations and procedures of the lex concursus will be effective across all member states, save where the Directive provides otherwise, for example in relation to law suits pending.

The reasoning behind the cross-border regime is to bring uniformity and to ensure that creditors are not dealt with on a ‘first come, first served’ basis. In Lornamead Acquisitions Ltd v Kaupthing Bank HF [2011] EWHC 2611 (Comm), [2011] All ER (D) 214 (Oct) Gloster J stated:

‘[…] the purpose of the 2001 Directive, namely to give effect throughout the EEA to all aspects of the relevant insolvency regime of a credit institution's home state, as part of one universal and unitary process, including its moratorium and dispute resolution mechanisms.’

Mrs Justice Carr concluded that the effect of arts 9 and 10 of the Credit Institutions Directive (incorporated into English law by the Credit Institutions Regulations) was that the only court with jurisdiction to wind-up a credit institution, like Kaupthing, is the home member state, in this case Iceland.

Further, that those winding-up proceedings are governed by the lex concursus, in this case the prohibition governed by the Bankruptcy Act 1991, art 16. There was no suggestion that the proceedings were ‘lawsuits pending’ and thus exempt.

The Bankruptcy Act 1991, art 116 applies to credit institutions, of which Kaupthing is one, and prohibits court proceedings against a bank in winding-up proceedings—rather a claim has to be submitted to the bank’s winding-up committee, the decisions of which can then become the subject of judicial scrutiny.

Accordingly, the answer is yes. The Bankruptcy Act 1991, art 116 has effect in England because of the European-wide cross-border insolvency regime for banks, as created by the Directive 2001/24/EC on the reorganisation and winding-up of credit institutions (the 2001 Directive) and transposed into UK law by the Credit Institutions Regulations, which includes Iceland as a member of the EEA. Legal action could not be brought against Kaupthing.

Mrs Justice Carr concluded that the art 116 prohibition was imported into English law as a result of the 2001 Directive, regardless of whether art 116 has extra-territorial effect as a matter of Icelandic Law. However, the court went on to consider each side’s expert’s opinion on the issue and found in favour of Kaupthing that:

‘The legislative intent, namely that Article 116 is to apply in respect of proceedings in any EEA territory, is clear.’

Were the English proceedings against Kaupthing stayed by virtue of the stay arising under Icelandic law?

Yes. Kaupthing succeeded on the insolvency ground (ie the applicability of art 116 to English law) but the jurisdiction ground failed, meaning that proceedings against JJ were not stayed.

What guidance did the court give on claims directly derived from or closely connected to the winding up proceedings under the Lugano Convention?

The Lugano Convention applies to Iceland as a member of the European Free Trade Association (the EFTA). The Lugano Convention applies to the UK following its incorporation into UK law by the Civil Jurisdiction and Judgments Regulations 2009, SI 2009/3131.

There are exceptions to its application, one such exception being art 1(2)(b), which stipulates that the Lugano Convention shall not apply to ‘bankruptcy, proceedings relating to the winding-up of insolvent companies or other legal persons, judicial arrangements, compositions and analogous proceedings’.

For proceedings to fall within the exception they must derive directly from the bankruptcy or winding-up and be closely connected with the insolvency proceedings. In other words, they must be ‘the principal subject matter’ of the claim (see Re Hayward [1997] Ch 45, [1997] 1 All ER 32).

In Polymer Vision R & D Ltd v Van Dooren [2011] EWHC 2951 (Comm), [2011] All ER (D) 170 (Nov) Beatson J considered the scope of art 1(2)(b):

‘the exception had to be construed narrowly and that, to be excluded, claims had to be derived directly from the bankruptcy or winding-up, and be closely connected with the insolvency proceedings. The fact that proceedings were consequential upon a bankruptcy, or arose in the context of a bankruptcy was insufficient to engage the exception. The fact that a liquidator or trustee in bankruptcy was a party to the proceedings was similarly insufficient. At the same time, a direct juridical derivation is not necessary. A factual derivation may be sufficient.’

Mrs Justice Carr said that:

‘No single factor is likely to be determinative, as Polymer well demonstrates, and each case will turn on its own facts. Standing back then, and examining all the circumstances of this case, as a matter of both analysis and instinct, in my judgment the claims are not proceedings relating to the winding-up of Kaupthing for the purpose and within the narrow carve-out of art 1(2)(b).’

It is quite clear from the judgment that the determination of whether proceedings fall within the exception to art 1(2)(b) will be fact-specific and although guidance may be derived from previous authorities, it will dealt with on a case-by-case basis.

Did the proceedings fall within the Lugano Convention?

The basis of challenge under the jurisdictional ground was that the Lugano Convention did not apply because the proceedings fell within the exception at art 1(2)(b).

As to the whether the exception applied, the court determined that:

‘The gravamen and root of those claims is an alleged tortious conspiracy between three individuals, SA and HH at Grant Thornton, and JJ at Kaupthing, involving deliberate and malicious wrongdoing in connection with an investigation by the SFO. The winding-up of Kaupthing is of course the context, and relevant context. But the claims do not derive directly from it. There is no reliance on any insolvency aspect of the winding-up proceedings, nor are breaches of any duties or powers by JJ in his capacity as a member of the Winding-up Committee relied upon. No reliance is placed on JJ’s status under Icelandic insolvency law nor is any liability under the Bankruptcy Act suggested…in addition, JJ is not sued because of his position as a member of the Winding-up Committee but rather for his alleged wrongful acts as an individual at Kaupthing dealing with the SFO and others (albeit in his capacity as a member of the Winding-up Committee).’

Accordingly, Mrs Justice Carr concluded that the proceedings against both Kaupthing and JJ did not fall within the exception and were thus subject to the Lugano Convention.

What guidance did the court give on the relationship between the Lugano Convention and the Credit Institutions Regulations?

Kaupthing’s first proposition was based on the assumption that the Lugano Convention applied and the exceptions thereto did not.

The claimants argued that where the Lugano Convention applies then the 2001 Directive is of application only where art 1(2)(b) is met. They argued that it could not have been intended that the effect of the Insolvency Regulation, carried through into the 2001 Directive so far as credit institutions were concerned, would be to ‘trump’ the provisions of the Lugano Convention.

The judge rejected this argument and was of the view that the claimants had missed the point in their conflation of ‘choice of law’ with ‘jurisdiction’. In her conclusion:

‘There is no basis for saying that such dovetailing carries over to questions of choice of law so as to exclude from the insolvency regime all matters falling within the Lugano Convention…The insolvency instruments go beyond jurisdiction and recognition and impose separate conflicts of laws rules which play no part in the Lugano Convention (or other jurisdictional instruments).’

In conclusion it was said:

‘There is no limitation on the proceedings affected by the winding-up proceedings: it applies to any lawsuits brought by individual creditors (save for lawsuits pending). Whether or not the proceedings fall within the Lugano Convention is an irrelevance.’

What are the practical lessons for parties subject to cross-border litigation?

The purpose of the cross-border insolvency regime is to have a regulated system of law, which is uniform and unified in its scope, so as to prevent a free-for-all.

In practical terms, the starting point for any potential case of this nature is to look at the law of the home country—ie where the insolvency proceedings commenced, and to trace the applicable law through the relevant directives and into the incorporating regulations to ascertain whether the insolvency ground bites. In reality, it is probably safe to start from the position that proceedings will be prohibited as this accords with the very purpose of the cross-border insolvency regime, rather than press on regardless.

Lydia Pemberton is a chancery/commercial barrister at St Philips Chambers where she oversees their junior commercial team. Her practice covers all matters of personal and company insolvency. Lydia is a member of the TSol Regional Panel and undertakes work on behalf of HMRC in insolvency matters and the Secretary of State, Business, Innovation and Skills in DDA proceedings.

Interviewed by Janine Isenegger.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

Further Reading

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Establishing Centre of Main Interests (COMI) under the EC Regulation

Allocating jurisdiction in cross-border insolvency cases

The Credit Institutions (Reorganisation and Winding Up) Directive and implementing Regulations

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First published on LexisPSL Restructuring and Insolvency

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