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You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Stocznia Gdanska Sa v Latreefers Inc [2000] EWCA Civ 36 (9 February 2000)
URL: http://www.bailii.org/ew/cases/EWCA/Civ/2000/36.html
Cite as: [2001] BCC 174, [2000] EWCA Civ 36, [2001] 2 BCLC 116, [2000] CPLR 65, [2001] CLC 1267
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Case No: CHANI 1999/0272/B3 CHANI 1999/0686/A3
QBCMI1999/0718/A3 CHANF1999/0784/B3
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
Royal Courts of Justice
Strand, London, WC2A 2LL
Wednesday, 9th February 2000
LORD JUSTICE MORRITT
LORD JUSTICE MAY
and
MR JUSTICE WALL
STOCZNIA GDANSKA SA |
Applicant | |
- and - |
||
LATREEFERS INC |
Respondent |
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(Transcript of the Handed Down Judgment of
Smith Bernal Reporting Limited, 180 Fleet Street
London EC4A 2HD
Tel No: 0171 421 4040, Fax No: 0171 831 8838
Official Shorthand Writers to the Court)
- - - - - - - - - - - - - - - - - - - - -
Mr A.Glennie QC and Mr M. Pascoe (instructed by Lawrence Graham for Latreefers Inc.) appeared on behalf of the Applicant.
Mr G.Moss QC and Miss S. Prevezer (instructed by Ince & Co for Stocznia Gdanska SA) appeared on behalf of the Respondent.
As Approved by the Court
Crown Copyright ©
Wednesday, 9th February 2000
LORD JUSTICE MORRITT:
This is the judgment of the court to which all members have made substantial contributions.
1. In these appeals from the orders of Lloyd J made on 21st December 1998 and 27th May 1999 and from the order of Toulson J made on 10th June 1999 we are concerned with three questions:
(1) whether Lloyd J should have ordered the compulsory winding up of Latreefers Inc ("Latreefers"), a company incorporated in the Republic of Liberia;
(2) whether an Agreement dated 12th October 1994 ("the Funding Agreement") between Stocznia Gdanska SA ("the Yard") and a third party ("the Funders") for the payment by the latter of the costs incurred by the former in the prosecution of the petition to wind up Latreefers and related proceedings in the Commercial Court to which Latreefers and its ultimate holding company Latvian Shipping Company ("Latco") are parties was and is champertous and, if so, whether the winding up petition and Commercial Court action should have been stayed by Lloyd J and Toulson J respectively;
(3) whether Lloyd J was entitled, pursuant to s.51 Supreme Court Act 1981, to order Latco to pay the costs incurred by the Yard in the prosecution of the petition to wind up Latreefers in so far as they were increased by the opposition of Latreefers.
2. Latco is a corporation established under the laws of the Republic of Latvia and is concerned with shipping. In 1992 Latco was engaged in negotiations with the Yard for the design, building, completion and delivery of six refrigerated vessels. The final negotiations took place in London. It was envisaged that each vessel would be the subject of an individual contract and that each contract would be made with a subsidiary of Latco and contain an English choice of law clause. Latco had a wholly owned subsidiary incorporated in Liberia called Latmar Holdings Corporation ("Latmar"). Latco and Latmar procured the incorporation in Liberia of Latreefers on 9th September 1992 for the purpose of entering into the six contracts with the Yard.
3. The issued share capital of Latreefers was 100 bearer shares of no par value. They have at all times been held by Latmar. Latreefers had three duly appointed directors, residents in the Isle of Man and associated with Capco Trust IoM Ltd, a company concerned in the formation and administration of offshore companies, namely Mr Hobson, Ms Potts and Mr Brickel. From time to time those directors appointed persons to act as attorneys for Latreefers for specific purposes. Such attorneys included partners or employees in Watson Farley & Williams, a firm of solicitors practising in London, officers or employees of Latmar Services Ltd, a company incorporated in England with offices in London and Mr Henriksen, a Norwegian ship broker operating through a Bermuda service company but with offices in England.
4. The contracts for the six vessels were entered into by the Yard and Latreefers on 11th September 1992. The total price was US$170m payable by Latreefers by instalments. The first payment of 5% was duly made in respect of vessels 1 to 3 in the sum of US$4.145m on 19th October 1992. Latreefers has made no further payments in regard to those vessels. The contracts for vessels 4 to 6 were conditional on Latreefers deciding to continue them. Latreefers so decided on 11th January 1993. Shortly thereafter, on 1st February 1993, Latreefers opened a US$ account with Hambros Bank in London. The first payment of 5% in respect of vessels 4 to 6 was made out of that account in the sum of US$4.325m on 4th March 1993. Latreefers has made no further payment in respect of those vessels either. The account of Latreefers with Hambros remained active until 30th November 1993. On the latter date there was a credit balance of US$13.4m which was deposited by Latreefers with CFM.
5. The evidence before us includes documents which suggest that on 2nd December 1993 Latreefers (a) acknowledged a loan from Latco of US$ 13.4m as of 30th November 1993, (b) repaid the same by assigning to Latco the benefit of Latreefers deposit with CFM and (c) lent US$218,132 to an associated company Tangent. On the following day a representative of Latreefers told a representative of the Yard that Latreefers could not pay for any of the vessels.
6. On 7th January 1994 the Yard issued proceedings in the Commercial Court against Latco, Latreefers, Mr Henriksen and CFM seeking payment of the further sums due under each of the six contracts, damages for their breach and damages for and injunctions to restrain procurement of such breaches of contract. On 5th December 1994 the Yard obtained summary judgment against Latreefers for US$11m. in respect of the second instalment due for the first and second vessels. Appeals on this and other issues between the parties were finally determined by the House of Lords on 26th February 1998. The position thereby established is, so far as relevant to the issues before us, that (1) the Yard has an indisputable judgment against Latreefers for US$11m. and interest thereon in respect of the second instalment due for vessels 1 and 2; (2) the Yard's claim for damages for breach of contract in respect of vessels 1 and 2 is subject to an express obligation to mitigate its loss and bring sums into account under Article 5.05 which Latreefers say, if established, would exceed the claim of the Yard and (3) in respect of vessels 3 to 6 Latreefers claim for the return of the initial payments of 5% on the basis of a total failure of consideration remains to be tried as does the Yard's claim for damages for repudiatory breach.
7. As we have already mentioned on 14th October 1994 the Yard entered into the Funding Agreement now alleged to be champertous. The need for such an agreement was underlined when on 8th August 1996 the Yard was declared to be bankrupt in Poland.
8. The petition with which we are concerned was presented to the Companies Court on 1st July 1998. It is based on the unpaid judgment debt of US$11m with interest thereon amounting, in all, to US$15.8m. In paragraph 5 it is averred that sufficient connection with this jurisdiction is to be found in the facts that the six contracts which constituted the only business of Latreefers were entered into in England and contained English choice of law clauses, the appointment as attorneys for Latreefers of eight persons resident in England and the operation of Latreefers' account with Hambros. In paragraph 10 it was averred that an order to wind up Latreefers would benefit the Yard as a creditor of Latreefers in enabling a liquidator to pursue claims available to Latreefers, to investigate its affairs and collect and realise its assets for the benefit of its creditors. The Yard expressly submitted to the jurisdiction of this court in respect of the winding up of Latreefers. In addition in paragraph 11 it was alleged that there is no more appropriate forum in which to wind up Latreefers.
9. The petition came before Lloyd J on 9th and 10th December 1998. Before
Lloyd J gave judgment on 21st December 1998 Latreefers' solicitors had received
an anonymous telephone call informing them of the existence of the Funding
Agreement of which they had been previously unaware. Though, in due course, a
full copy was put before the court the Yard is concerned at what appears to
them to be a breach of confidence and have invited us to preserve their alleged
right to confidentiality so far as we can. We will explain its terms, without
identifying the Funders, at the later stage of this judgment when we come to
deal with the issue of champerty.
10. In his judgment given on 21st December 1998 Lloyd J decided that he had
jurisdiction to entertain the petition to wind up Latreefers. He considered
that the position was not entirely clear and thought it better, rather than
wind up Latreefers then and there, to appoint provisional liquidators under
s.135 Insolvency Act 1986 and adjourn the petition. He required the
provisional liquidators to investigate and obtain advice on possible claims of
Latreefers against its former directors, including de facto and shadow
directors and on the merits of its defence and counterclaim in the Commercial
Court proceedings.
11. On 10th February 1999 the defendants to the Commercial Court proceedings,
including Latreefers and Latco, applied for an order staying those proceedings
and the execution of all judgments therein obtained by the Yard on the grounds
that the Funding Agreement was champertous. In the alternative they sought an
order for the disclosure of all documents relating to the Funding Agreement.
This is the application which, in due course, came before Toulson J.
12. On 9th April 1999 the provisional liquidators appointed by Lloyd J on 21st
December 1998 made their report to the court. They reported that the assets of
Latreefers within the jurisdiction appeared to include US$363 in the Hambros
Account and US$218,132 lent by Latreefers to Tangent. They concluded, amongst
other things, that Latreefers was insolvent, Latreefers had potential
misfeasance, wrongful and fraudulent trading claims against its de jure, de
facto and shadow directors, all of which required further investigation and
that a winding up order would be in the best interests of the general body of
unsecured creditors.
13. The restored hearing of the winding up petition commenced before Lloyd J on
22nd April 1999. On that day Latreefers applied for a stay of the petition on
the ground that its prosecution was being maintained by the Funders pursuant to
the Funding Agreement it alleged to be champertous. Lloyd J dismissed this and
other objections to making the winding up order sought for the reasons given in
his judgement handed down on 27th May 1999. He then heard an application of
the Yard, to which he acceded, that he should exercise the jurisdiction
conferred by s.51 Supreme Court Act 1981 and order Latco to pay the costs of
the Yard in relation to the petition insofar as they had been increased by the
opposition of Latreefers.
14. The application of the defendants in the Commercial Court proceedings to
which we have referred in paragraph 11 above came before Toulson J. By then
CFM and Latreefers had ceased to be applicants with the consequence that the
claim for a stay on the execution of judgments obtained by the Yard could not
be maintained. On 10th June 1999 Toulson J dismissed the remainder of the
application.
15. Also on 10th June 1999 Latreefers, acting by its liquidators, instituted
proceedings against Tangent for the recovery of the sum of US$218,132 to which
the provisional liquidators had referred in their report. On 11th November
1999 Latreefers, acting by its liquidators, and the liquidators in their own
name instituted proceedings against 14 defendants claimed to be de jure, de
facto or shadow directors of Latreefers. The relief sought is damages for
breach of fiduciary, contractual or tortious duty and declarations pursuant to
ss. 212 to 214 Insolvency Act 1986 arising out of the conclusion, performance
or non-performance of the six contracts, the dealings with the deposits in the
name of Latreefers with CFM and the payment by Latreefers to Tangent of
US$218,132 on or about 3rd December 1993.
16. The claim of Latreefers against Tangent for repayment of the debt of
US$218,132 came before Langley J on 14th January 2000. At the conclusion of
that hearing he dismissed the claim for reasons to be given later. We have
been provided, with the consent of Langley J, with a draft of his judgment.
The reason for dismissing the claim is, in short, that the debt was repaid
when, in January 1994 Tangent paid a larger sum to a creditor of Latreefers and
all three parties agreed that it should be treated as repayment of the debt of
Tangent to Latreefers. Thus, subject to any appeal for which permission would
be required, it is now established that one of the assets of Latreefers, to
which the provisional liquidators referred in their report, did not exist at
the time the winding up petition was presented. The proceedings instituted by
the liquidators against the directors to which we have referred continue.
17. The appeal of Latreefers against the orders of Lloyd J made on 21st December 1998 and 27th May 1999 concerns his decision, underlying the first order, that he had jurisdiction to entertain the winding up petition and, in making the second, that it was a proper case in which to make a winding-up order. There is no appeal against the appointment of the provisional liquidators as such.
18. Part V Insolvency Act 1986 deals with the winding up of unregistered companies. It is not disputed that Latreefers was and is an unregistered company within the definition contained in s.220. S.221, headed Winding up of unregistered companies provides, so far as relevant,
"(1) Subject to the provisions of this Part, any unregistered company may be wound up under this Act; and all the provisions of this Act and the Companies Act about winding up apply to an unregistered company...;
[(2) - (4)]
(5) The circumstances in which an unregistered company may be wound up are as follows -
(a) if the company is dissolved or has ceased to carry on business, or is carrying on business only for the purpose of winding up its affairs;
(b) if the company is unable to pay its debts;
(c) if the court is of opinion that it is just and equitable that the company should be wound up."
S.225 provides that an oversea company which has been carrying on business in
Great Britain but has ceased to do so may be wound up notwithstanding that it
has been dissolved under the law of the place of its incorporation. S.229
provides that the provisions of that part with respect to unregistered
companies are in addition to, not restrictive of, the provisions in Part IV
with respect to the winding up of companies incorporated in England and
Wales
"and the court or liquidator may exercise any powers or do any act in the case of unregistered companies which might be exercised or done by it or him in winding up companies formed and registered under the Companies Act."
19. Thus both s.221(1) and s.229 apply to unregistered companies the statutory provisions governing the winding up of companies registered under the Companies Act. Amongst those provisions are a number to which we should draw attention. S.125(1) provides that the court shall not refuse to make a winding up order on the ground only that the company's assets have been mortgaged to an amount equal to or in excess of those assets or that the company has no assets. S.143 provides that it is the function of the liquidator to get in the assets of the company, distribute them pari passu amongst the general body of creditors and to pay the surplus to the persons entitled to it. S.212 provides a summary remedy against, amongst others, an officer of the company or one who has taken part in the management of the company who has misapplied or retained, or become accountable for, any money or other property of the company, or been guilty of any misfeasance or breach of fiduciary or other duty in relation to the company. By s.213 the court is empowered on the application of the liquidator to declare persons who have been knowingly party to fraudulent trading by the company to be liable to contribute to the assets of the company to such extent as the court thinks fit. S.214 contains a similar power in respect of a director, including a shadow director, where the company has gone into insolvent liquidation and that director knew or ought to have concluded before the commencement of the winding up that there was no reasonable prospect of avoiding it.
20. In his first judgment Lloyd J dealt with the question of jurisdiction to wind up a foreign company as a necessary pre-condition for a power to appoint provisional liquidators under s.135. We are not now concerned with the appointment of the provisional liquidators. But in his second judgment Lloyd J applied his earlier decision on jurisdiction to determine whether he had the power to order Latreefers to be wound up. In respect of that jurisdiction Lloyd J observed that the power conferred by s.221 is in entirely general terms. He pointed out that in the decided cases the courts have laid down constraints as regards the circumstances in which the jurisdiction will be exercised and quoted from the judgment of Sir Raymond Evershed MR in Banque des Marchand de Moscou (Koupetschesky) v Kindersley [1951] Ch. 112 at page 125
"As a matter of general principle, our courts would not assume and Parliament should not be taken to have intended to confer jurisdiction over matters which naturally and properly lie within the competence of the courts of other countries. There must be assets here to administer and persons subject, or at least submitting, to the jurisdiction who are concerned or interested in the proper distribution of the assets. And when these conditions are present, the exercise of the jurisdiction remains discretionary."
Lloyd J continued
"The formulation of these principles has changed over time, and in
particular the presence of assets in the jurisdiction is no longer regarded as
essential. Mr. Pascoe for Latreefers reserves for argument in a higher court
the question whether the principles as laid down in recent first instance
authority are correct, but he does not invite me to depart from them.
As a result of the decisions of Megarry J in Re Compania Merabello San
Nicolas SA [1972] 3 All ER 448, [1973] Ch 75, Nourse J. In Re Eloc
Eloctro-Optiek and Communicatie BV [1981] 2 All ER 111, [1982] Ch 43 and
Peter Gibson J. In Re A Company (No 00359 of 1987) Ch 210 (also known,
less enigmatically, as International Westminster Bank plc v Okeanos Maritime
Corp [1987] BCLC 450, [1987] 2 All ER 137, and to which I will refer as
the Okeanos case) the statement of the relevant principles has evolved
to the point at which they were summarised, most recently, by Knox J in Real
Estate Development Co [1991] BCLC 210 at 217, as consisting of three core
requirements, as follows:
(1) There must be a sufficient connection with England and Wales which may, but
does not necessarily have to, consist of assets within the jurisdiction.
(2) There must be a reasonable possibility, if a winding-up order is made, of
benefit to those applying for the winding-up order.
(3) One or more persons interested in the distribution of assets of the company
must be persons over whom the court can exercise a jurisdiction."
21. Latreefers first submission, as foreshadowed in that passage, is that the
judge was wrong to consider that the principles have changed. It is submitted
that it is still a necessary requirement for the existence of the jurisdiction
to wind up a foreign company that the company has an asset or assets within the
jurisdiction sufficient to provide a reasonable possibility of benefit to the
creditors as a whole or to the petitioning creditor alone. We are invited to
hold that the decisions of Nourse J in Re Eloc Electro-Optiek and
Communicatie B.V. [1982] Ch. 43 and of Peter Gibson J in Re A Company
("Okeanos") [1988] Ch. 210 are wrong.
22. Counsel for Latreefers points out that the most appropriate jurisdiction
within which to wind up a company is that in which it is incorporated so that
the jurisdiction for which s.221 provides is exorbitant. As the prime purpose
of any liquidation is the collection of the company's assets and their
distribution pari passu amongst the general body of creditors, it would, so the
argument ran, be odd if the jurisdiction conferred by s.221 extended to
companies which have no assets here capable of providing a benefit even for the
petitioning creditor alone. Great reliance was placed on the statement of Sir
Raymond Evershed MR in Banque des Marchand de Moscou (Koupetschesky) v
Kindersley to which we have already referred.
23. In that case the plaintiff, the Bank of Moscow had substantial assets in
England at the time, 1918, it was dissolved in Russia by Soviet Decree. In
1932 Eve J had made an order to wind it up under s.338 Companies Act 1929 which
was in substantially the same terms as s.221(5). The Bank, through its
liquidators, then sued a firm in England alleged to owe the bank a substantial
sum. The firm sought an order dismissing the action on the ground that the
Bank did not exist. The firm contended that not only had the Bank been
dissolved in Russia but that there had been no jurisdiction to wind it up in
England. Harman J held that the fact that the Bank had had assets in England
was a valid ground for making the winding up order. On appeal the firm claimed
that Harman J was wrong in that respect. The issue was whether to found
jurisdiction it was necessary to demonstrate that the Bank had a place of
business or had been carrying on business in the United Kingdom. The decision
of this court was that it was not. We have quoted the relevant passage in the
judgment of Sir Raymond Evershed MR in paragraph 20 above and need not repeat
it. For Latreefers it is submitted we are bound by that case to uphold its
submission that for jurisdiction to be established it must be demonstrated that
the foreign company has assets within the jurisdiction sufficient to provide
some benefit for the petitioning creditor.
24. As Lloyd J pointed out judges at first instance have not so regarded the
decision in that case. Thus in Re Compania Merabello [1973] Ch 75
Megarry J referred to the presence of assets and creditors within the
jurisdiction as the usual essentials for otherwise it would be futile to make a
winding up order (p.86). He considered (p.87) that Sir Raymond Evershed MR was
not laying down a requirement which had to be satisfied in all cases. When
summarising the essentials to jurisdiction in a normal case (p.91) he treated
the existence of assets within the jurisdiction as a factor in establishing a
proper connection with the jurisdiction. In that case the asset of the company
was a claim against insurers which, if a winding up order were made, would,
pursuant to the Third Party (Rights against Insurers) Act 1930, vest in the
petitioning creditor.
25. In Re Eloc Electro-Optiek and Communicatie B.V. [1982] Ch. 43 the
company had no assets within the jurisdiction. But if the company were wound
up then the petitioners who had been unfairly dismissed from their employment
with the company would be entitled to claim from the Redundancy Fund maintained
under the Employment Protection (Consolidation) Act 1978 for the amount of the
judgment it had obtained against the company. Nourse J considered this to be
sufficient. He referred to the judgment of Megarry J in Re Compania
Merabello, in particular the summary on pages 91 and 92, and concluded that
"the ownership of assets by the company is not a matter of crucial importance".
He emphasised that the essentials to which Megarry J had referred were
applicable to "normal cases".
26. In Okeanos Peter Gibson J was concerned with a case where the
foreign company had no assets within the jurisdiction; but if it were wound up
the liquidator would have claims for fraudulent or wrongful trading under ss
213 and 214 Insolvency Act 1986. He held (p.221) that those claims were not
assets of the company at the time the petition was presented. He then
considered Banque des Marchand de Moscou (Koupetschesky) v Kindersley,
Re Compania Merabello and Re Eloc Electro-Optiek and Communicatie
B.V. and held that in an abnormal case, such as the one before him, the
presence of assets in this country is not an essential condition for the court
to have jurisdiction to make a winding up order. He considered (p.225/6)
that
"..provided a sufficient connection with the jurisdiction is shown, and there is a reasonable possibility of benefit for the creditors from the winding up, the court has jurisdiction to wind up the foreign company."
27. Finally in Re Real Estate Development Co. [1991] BCLC 210 at p.217
Knox J summarised the three core requirements in the terms quoted in paragraph
20 above. Thus it can be seen that in the space of 40 years the principles to
be applied have undergone some reformulation. For Latreefers it is submitted
that such subsequent modification is impermissible for the decision of this
court in Banque des Marchand de Moscou (Koupetschesky) v Kindersley has
at all times been binding on not only judges at first instance but also on this
court.
28. That submission is inconsistent with statements in three recent cases in
this court in which all or one or more of the first instance cases we have
considered have been referred to with approval. The first is Re Paramount
Airways Ltd [1993] Ch.223. At p. 240 Sir Donald Nicholls V-C, with whom
Taylor and Farquharson LJJ agreed, said, albeit not as part of the reasons for
his conclusion,
"Section 221 provides that an unregistered company may be wound up under the Act. This embraces all overseas companies, but in practice this has not given rise to difficulties. Despite the width of the statutory provision, the English Court does not exercise its jurisdiction to wind up a foreign company unless a sufficient connection with England and Wales is shown and there is a reasonable possibility of benefit for the creditors from the winding up: see the review of the authorities by Peter Gibson J. In Re A Company (No 00359 of 1987) [1988] Ch. 210."
In Re: Titan International [1998] 1 BCLC 102 at p.106 Peter Gibson
LJ, with whom Lord Bingham of Cornhill LCJ and Phillips LJ agreed, referred
with apparent approval to the fact that the judge had considered that the
relevant principles were those summarised by Knox J in Re Real Estate
Development. As Lloyd J observed that case was very different.
29. The most recent is Banco National de Cuba v Cosmos Trading (Court of
Appeal: Sir Richard Scott V-C, Swinton Thomas and Robert Walker LJJ 9th
November 1999 unreported). In that case Neuberger J had held that once a
petitioner could bring himself within s.221(5) there was no further statutory
fetter on the jurisdiction of the court to wind up an unregistered company.
But he then recognised that there are three requirements to be satisfied before
an English court will make such an order and referred to judgment of Knox J in
Re Real Estate Development and to the judgment of Peter Gibson LJ in
Re Titan International Inc. In the Court of Appeal, Bank of Cuba, in
its written argument, submitted that in addition to compliance with the express
requirements set out in s.221(5) the petitioner had to demonstrate the three
further requirements summarised by Knox J in Re Real Estate Development
Co. Sir Richard Scott V-C, with whom Swinton Thomas and Robert Walker LJJ
agreed, said
"The courts of this country have jurisdiction (using the word "jurisdiction"
in the broad sense) to make winding-up orders against foreign companies.
Foreign companies are for company law purposes treated as unregistered
companies. Section 221 (1) of the Insolvency Act 1986 provides that:
"An[y] unregistered company may be wound up under this Act."
I emphasise the word "may". Whether the power should be exercised in respect
of a foreign company is a matter of discretion depending on the facts of the
case. In a number of cases judicial guidance has been given as to when the
discretion should and when it should not be exercised in relation to foreign
companies. It is clear and common ground that the court should not exercise
its jurisdiction in respect of a foreign company where there is no connection
whatever between the foreign company and this jurisdiction, other than the
decision of the petitioning creditor (which would be present in every case) to
present a winding up petition here.
Recent judicial statements as to the correct approach to petitions to wind up
foreign companies are to be found in the judgment of Knox J in Re Real
Estate Development Co [1991] BCLC 210, and in the judgment of Lloyd J in
Re Latreefers Inc, Stocznia Gdanska SA v Latreefers Inc [1999] 1 BCLC 271."
30. There was some debate before us whether the three core requirements were
pre-conditions for the existence of the statutory jurisdiction or principles to
be observed in considering its exercise. Sir Richard Scott's reference to
jurisdiction "in the broad sense" suggests that he did not draw any such
distinction. Nor do we for there seems to be no reason so to do. It is common
ground that if a winding up order is to be made then, at least, the three core
requirements must be satisfied. The issue is whether, in addition, the
petitioner must demonstrate that the company has sufficient assets within the
jurisdiction to provide a reasonable possibility of benefit to either the
petitioner or the general body of creditors.
31. Having considered the previously decided cases on the subject at some
length we reject the submission for Latreefers that the presence of assets is
essential. First, the issue before the Court of Appeal in Banque des
Marchand de Moscou (Koupetschesky) v Kindersley was whether it was
necessary to demonstrate that the company had had a place of business in
England or had previously carried on business in England, not whether the
presence of assets was a necessary condition. Any opinion of Sir Raymond
Evershed MR deserves the greatest respect but we cannot regard his statement as
a decision laying down what is necessary in all cases rather than what was
sufficient in that case. As Megarry J, Nourse J and Peter Gibson J have all
observed the court must have good reason to make the winding up order and that
the existence of assets here will constitute good reason in the normal case.
But, like them, we do not regard what is sufficient to provide good reason in
the normal case as necessary in all cases.
32. Second, we can see no reason why, in addition to the three core
requirements referred to by Knox J, the presence of assets should advance the
presumed intention of Parliament. As counsel for the Yard observed liquid
assets may be moved from one jurisdiction to another at the entry of a computer
command anywhere in the world. An additional requirement for the presence of
an asset would introduce an arbitrary element which Parliament cannot have
intended. Moreover if the core requirements are satisfied there is no need for
the addition of a fourth to ensure that this exorbitant jurisdiction is only
exercised for good reason.
33. Thirdly, though the precise point was not argued in Banco National de
Cuba v Cosmos Trading so that we may not, strictly, be bound by the
decision of this court in that case we consider that we should follow the
dictum of Sir Richard Scott unless good reason to the contrary is shown. The
statement of Sir Raymond Evershed MR in Banque des Marchand de Moscou
(Koupetschesky) v Kindersley is not such a reason.
34. Accordingly we consider that we can and should apply only the three core
requirements to which we have referred in determining whether Lloyd J was right
to order the winding up of Latreefers. Latreefers contends that even applying
those principles Lloyd J was wrong because no sufficient possibility of benefit
to the Yard from the making of a winding up order has been shown. The judge
dealt with this argument in his second judgment. He considered that there was
sufficient possibility of benefit from (a) the Tangent debt, (b) misfeasance
claims against the de jure directors in exposing Latreefers to liabilities
under the six contracts without having made any adequate provision to meet
them. The judge did not base his decision that there was sufficient
possibility of benefit on (c) the credit balance in the Hambros Account, (d)
misfeasance claims relating to the disposal by Latreefers in December 1993 of
the CFM Deposits or (e) claims under ss. 213 and 214 for fraudulent or wrongful
trading. The Yard does not challenge the judge's conclusion regarding (c) but
relies on (d) and (e) as additional support for his conclusion. We will
consider each in turn.
35. Since Lloyd J made the winding up order Langley J has decided that the
Tangent debt was repaid in January 1994. The Yard claims that the subsequent
decision must be ignored for it came after the winding up order had been made.
We do not accept that submission. The decision of Langley J establishes,
subject to appeal, that the Tangent debt did not exist at the time the petition
was presented or the winding up order was made. This court must make such
order as is appropriate in the circumstances as they are now shown to have
existed at the time the petition was presented and the order made - New
Brunswick Ry Co. v British and French Trust Corporation [1939] AC 1, 32/3.
It has not been shown that Latreefers is likely to obtain permission to appeal,
let alone that the prospects of success on any such appeal would alone warrant
the making of a winding up order.
36. With regard to the misfeasance claims relied on by the Yard, Latreefers
contended that they could not succeed. First it was suggested that they are
statute-barred. We reject that submission for we have been shown the Claim
Form issued on 11th November 1999. The claim covers not only the causes of
action summarised in (b) in paragraph 34 above but those referred to in (d) and
(e) as well. In the absence of any evidence from Latreefers as to the law of
Liberia concerning the duties of directors incorporated in Liberia we must
assume that they are the same as those of directors of companies incorporated
in England. Moreover we accept that the payment in October 1992 and March
1993 of the first instalments due under all six contracts shows that some
provision had been made to enable Latreefers to comply with its contractual
obligations. Even so the failure to obtain any commitment for further funding
or even a comfort letter coupled with the curious sequence of events
surrounding the disposal of the benefit of the CFM deposits when it was known
that Latreefers was insolvent appear to us to raise a prima facie case which,
at least, requires the further investigation suggested by the provisional
liquidators. In our view the judge was right to regard the misfeasance claims
described in paragraph (b) above as a potential source of benefit and should
have so regarded the claims summarised in (d) likewise.
37. There remain the suggested claims under ss. 213 and 214 referred to in (e)
above. Latreefers submitted that no such claims may be made in respect of a
foreign company. This submission was not foreshadowed in the written argument
and no authority was cited in support of it. It was suggested that it was
evident that, notwithstanding the terms of ss.221(1) and 229, some of the
provisions relating to winding up generally could not apply to foreign
incorporated companies. Examples were provisions concerning dissolution.
Reliance was also placed on the provisions of ss. 216 and 217 dealing with the
re-use of company names in which there are subsections expressly including
companies liable to be wound up under Part V.
38. We are prepared to accept, without deciding, that a foreign company cannot
be dissolved here for the purposes of English law. We recognise that in the
two sections to which we were referred Parliament considered it necessary to
provide expressly for the inclusion of foreign companies. Nevertheless we see
nothing in the terms of ss.221(1), 229, 213 or 214 to warrant the exclusion of
the powers of the court under the latter two sections being exercisable in
respect of a foreign company if an order for its winding up has been made in
this jurisdiction. This was the view of both Peter Gibson J in Okeanos
[1988] Ch.210, 227 and Chadwick J in Re Howard Holdings Inc. [1998] BCC
549, 552, though in each case without argument. It is true that so to hold
involves applying to the directors of a foreign company English notions of
commercial probity. But we agree with Chadwick J in Re Howard Holdings
Inc, at p. 555, that it is difficult to envisage any developed system of
corporate law which does not impose some obligation on directors to consider
whether the company is solvent and, if not, to consider what should be done
about it. Moreover both sections confer on the court a discretion as to the
amount (if any) which the director should contribute to the company's assets.
Such a discretion seems to us to be sufficient to enable account to be taken of
any problems which might otherwise arise from the fact that the company was
incorporated in a foreign jurisdiction.
39. With regard to the merits of such claims the provisional liquidators have
again expressed the view that Latreefers has a potential claim for wrongful and
perhaps fraudulent trading which require further investigation. There is
apparent justification for this view in relation to the events surrounding the
disposal of the benefit of the CFM deposits at a time when it was known that
Latreefers was insolvent. Such claims may only be brought by a liquidator in
a winding up in England. There is no reason to think that Latreefers is likely
to be wound up in Liberia or indeed anywhere else. The fact that the wrongful
or fraudulent trading claims were not assets of Latreefers at the time the
petition was presented or the order made, see Okeanos [ibid] p.224, is
immaterial in the light of our decision on jurisdiction for if they are
successful the petitioner and general body of creditors will benefit.
40. In summary we consider that the potential claims for misfeasance and
wrongful and fraudulent trading do provide a reasonable possibility of benefit
to the Yard and other creditors of Latreefers so as to comply with the second
core requirement. As we have observed there is no dispute that the other core
requirements are satisfied. Subject therefore to the issue of champerty, we
would dismiss the appeal of Latreefers against the first and second orders of
Lloyd J whereby he ordered Latreefers to be wound up.
41. We now turn to those parts of the appeals by which it is contended that proceedings should be stayed or that Lloyd J's order for costs against Latco should be reversed because of the nature of the Yard's arrangements to fund the litigation. It was submitted in the winding up proceedings before Lloyd J. that these funding arrangements were champertous and that in consequence the winding up proceedings should be stayed. He was not so persuaded. It was also contended that to make a costs order against Latco would be to enforce a champertous agreement contrary to public policy. In the Commercial Court proceedings, the defendants applied by summons dated the 10th February 1999 for an order that the claimants's claims against each of the five defendants should be stayed or that the execution of judgments given in the proceedings in favour of the claimants should be stayed. The summons sought in the alternative an order for discovery of documents relating to the Yard's funding arrangements. The summons was dismissed by Toulson J. in a judgment given on 10th June 1999. He gave permission to appeal mainly because the substance of his decision was going to be challenged in the appeals against Lloyd J.'s orders. The first, third and fifth defendants (Latco, Mr Henriksen and Latmar) appeal against Toulson J's judgment and order. The second defendants (Latreefers) and the fourth defendants (CFM Finance Limited) do not appeal. We are told that CFM Finance is in liquidation. Latreefers is in liquidation by virtue of the order of Lloyd J. which is the subject of the second appeal before this court and Mr Glennie is not instructed by the liquidator. In consequence, the appeal against Toulson J's judgment is limited to seeking a stay of the Commercial Court proceedings against Latco, Mr Henriksen and Latmar or, in the alternative, an order for discovery. There is no appeal before us which seeks to stay proceedings upon the judgment which has been obtained against Latreefers.
42. The Commercial Court proceedings started in March 1994 and it was rather late in the day to apply in 1999 for them to be stayed. The Yard had by then obtained a substantial judgment against Latreefers which had been upheld in the House of Lords. However, it was not until December 1998 that the defendants received information that the Yard was funded by a third party. This prompted the application which came before Toulson J. and the making of equivalent submissions to Lloyd J. in the winding up proceedings. The Yard maintains that the funding agreement is both confidential and privileged, but, in circumstances which it is not necessary to relate in detail, a copy of it is exhibited to a solicitor's affidavit in the winding up proceedings with certain matters blanked out. Subject to this, the Yard has not waived privilege or confidentiality, nor has it adduced evidence of any other facts about the making of the funding agreement.
43. The agreement was made between the Yard and an English shipping broker. It is dated 12th October 1994. The evidence is that the English broker entered into the agreement as agent for an overseas broker who arranged the shipbuilding contracts which are the subject of these proceedings. We are asked to respect as confidential the identity of these brokers and Mr Glennie does not object to us doing so. Points have been taken about the agency in the past, but Mr Glennie now accepts that he is not in a position to challenge the evidence of the agency. We shall refer for convenience to the overseas broker as "the Funders".
44. At the time of the agreement, the Commercial Court proceedings had started but had not got very far. Vessels belonging to Latco had also been arrested in France and that had given rise to proceedings there. The Funders consented to continue the legal proceedings against Latreefers, Latco and the other defendants on terms which included:
"1. [The Funders] will cover all expenses outside Poland connected with
legal proceedings, both those actually being proceeded and as well as of those
that may probably arise, and also expenses connected with the problem of
arrested vessels in France, belonging to Latco.
2. In the event of lost trials, [the Funders] will not make a claim against
[the Yard] regarding the reimbursement of the born by [the Funders] expenses.
[The Funders] will also cover all costs adjudged by any award in favour of all
and any of the defendants.
3. All awarded proceeds received by [the Yard], after having won the trial or
reached a negotiated settlement with Latco, will [be] shared 45pct by [the
Yard] and 55pct by [the Funders]. The above split of proceeds excludes the
moneys of pre-delivery instalments already paid by Latreefers Inc/Latco and
received by [the Yard]. The split will also not concern the commission already
paid by [the Yard] to [the Funders].
4. Ince & Co to be in charge of all legal proceedings and also in charge
of all negotiated settlements.
...
6. The Commission Letters of 11th September 1992 and of 28th January 1993 are
hereby null and void."
By an addendum agreement dated 26th February 1997, the Funders agreed to
continue to fulfil their obligations under the agreement despite the fact that
by then the Yard was in bankruptcy.
45. The commission agreements of 11th September 1992 and 29th (as it in fact
was) January 1993 referred to in the funding agreement were agreements between
the Yard and the Funders. The fact that the funding agreement purports to
bring these agreements to an end is incidentally a strong indication that the
English brokers did indeed make the agreement as agent for the Funders. The
commission agreements each recite the fact that the Funders acted as brokers in
the negotiations for the shipbuilding contracts. The September 1992 agreement
relates to the first three hulls and the January 1993 agreement to the fourth,
fifth and sixth hulls. The September 1992 agreement provided for the Funders
to receive a total commission of 4% of US$ 27,139,000 for each of the three
ships to which that agreement related. The January 1993 agreement provided for
the Funders to receive a commission of 5% of US$ 28,619,000 for each of the
three ships to which that agreement related. These commissions were to be
payable in four equal instalments after the payment of each instalment provided
for in the shipbuilding contracts had been paid by Latreefers to the Yard's
bank.
46. It was submitted to Lloyd J. at the hearing which resulted in his second
judgment of 27th May 1999 that, since the Yard's litigation had been funded by
an agreement which was champertous, any proceedings pursuant to that agreement
were an abuse of the process and should be stayed. He was referred to
Grovewood Holdings plc v. James Capel & Co Ltd [1995] Ch. 80. It
was submitted in the alternative that the proceedings before him should be
adjourned until the outcome of the similar application which was eventually
heard by Toulson J. in the Commercial Court. Lloyd J. rejected this
submission. He said:
"It is true that in Grovewood Holdings Lightman J. stayed an action on the grounds that it was being financed by a champertous arrangement. It is however clear that neither maintenance nor champerty provides a defence to a cause of action and that, even before 1967 when each constituted both a criminal offence and a tort, neither was a ground for staying an action: see Martell v. Consett Iron Co Ltd [1955] Ch. 363. The debt is therefore undoubtedly due from the company. In Abraham v. Thompson [1997] 4 All ER 362 the Court of Appeal held that an action could only be stayed (apart from particular procedural grounds) if it constituted an abuse of the process and that maintenance of the action did not make it an abuse of the process. That case was not concerned with champerty, but both members of the Court of Appeal made comments on the decision in Grovewood Holdings such that it seems to me that it would not be appropriate for me to stay the petition, nor to hold its progress up to await a consideration of the same point in the Commercial Court: See Potter LJ at 374 and Millett LJ at 378."
47. Toulson J considered authorities relating to maintenance and champerty. He
accepted that in the present case the Funders had some legitimate interest in
supporting the Yard's claims against the buyer for unpaid instalments and for
damages for breach of contract, and those against the other defendants for
damages for wrongful inducement of contract. The Funders had an obvious
interest in supporting the Yard's claims for unpaid instalments because
payments of those instalments would trigger the Funders' entitlement to receive
commission. The Funders had a legitimate commercial interest in supporting the
Yard's claims against the buyers for damages for breach of contract both
because they might be able to recover sums which would have been paid as
commission if the contracts had been performed, and on the broader ground that
they had suffered commercial loss as a result of the buyer's breach of
contract. He rejected a submission that the Funders had no commercial
interest in the Yard's claims against the other defendants on equivalent
general grounds. The judge recorded and considered Mr Glennie's submission
that the funding agreement was champertous because the share of the spoils for
which the Funders had contracted was disproportionate to its genuine commercial
interest.
48. It was submitted to Toulson J. on behalf of the Yard that it was not
necessary to decide whether the funding agreement was champertous, but rather
whether the proceedings were an abuse of process. It was submitted that the
judge was not in a position to decide the matter properly on the material
before him and in the absence of the Funders whose interests would be affected
by any such decision. Mr Glennie countered this last point by submitting that
it was for the Yard to establish that an apparently champertous agreement was
not champertous. It was open to them to call any necessary evidence. In so
far as it might be held that it was for his clients to establish that the
agreement was champertous, Mr Glennie promoted his alternative application for
discovery.
49. Toulson J. referred to authorities which consider the circumstances in
which the court will stay proceedings which are said to be champertous or
affected by champerty. These included two recent decisions of this Court,
Abraham v. Thompson [1997] 4 All ER 362 and Faryab v. Smyth
(unreported) 28th August 1998. He noted that the forms of mischief with which
the modern law of champerty is concerned were those identified by Lord Mustill
in Giles v. Thompson [1994] 1 AC 142 at 164 as being the protection of
the purity of justice and the protection of the interests of vulnerable
litigants. There is a public interest that impecunious litigants with genuine
claims should be able to bring them before the courts: and a public interest
that vulnerable litigants are protected from opportunistic exploitation.
Toulson J. considered, however, that, if a Funder has been over-greedy in the
bargain for which he has stipulated, it will hardly protect the litigant to
stay his action from proceeding at all. The question in this case was whether
the action should be stayed to protect the purity of justice. There remained a
public interest in preventing the development of an unlicensed and unregulated
market in litigation for fear of the abuses to which that might lead in the
hands of the unscrupulous. It was a legitimate potential ground of concern if
the Funder's interest in the litigation was tenuous by comparison with his
prospective share of the spoils.
50. Mr Glennie submitted to Toulson J. that the funding agreement in the
present case necessarily gave rise to a legitimate fear of the kind of abuses
which the cases have identified. He submitted that it was not necessary to
look at the precise circumstances of the individual case because the
consideration was one of wider public policy. Toulson J. did not accept that
it was unnecessary to look at the circumstances of the individual case. He
then said:
"If the action against the applicants is to be stayed, it must be because it has been established that in this case there is sufficient likelihood of abuse to justify staying the action by the claimant, notwithstanding the fundamental principle emphasised by the Court of Appeal in Abraham, in the passage which I have already cited from the judgment of Potter L.J., that litigants with bona fide claims should ordinarily be entitled to have them determined by a court."
Having considered further submissions, Toulson J. then said:
"It has not been suggested that [the Funders] are shady companies, nor does the evidence before me suggest that they are in the habit of supporting litigation by third parties. Their role appears to be that of a pure funder, the conduct of the action being, as the funding agreement itself provided, in the hands of the solicitors for the Yard. There is, in my view, no ground to conclude that there has been, or that there is any real basis for fear that there is a true risk of any of the forms of abuse referred to by Lord Denning in In re Trepca and no basis on which I could properly hold that the continuation of the claims against the applicants is an abuse of the process of the court. It is therefore unnecessary for me to reach a conclusion whether the agreement was champertous and it is better that I should not do so for the reasons which I have already given and for those referred to by Chadwick L.J. in Faryab."
51. In his costs judgment of 27th May 1999, which is the subject of the fourth
appeal before this Court, Lloyd J. said this on the subject of champerty:
"Mr Pascoe [who appeared on behalf of Latreefers] had a separate point as a reason for not making a s. 51 order against Latco, and that is this. He says that the evidence shows that the proceedings by the Yard have themselves been funded by a third party under an agreement which he says offends against the legal principles of public policy as being champertous. He says that if that is the case the court should not make an order for costs because such an order would either result in the champertous maintainer receiving the benefit of funds under an illegal agreement or, if the maintainer does not receive the funds, then the Yard receives the funds and that is in breach of the indemnity principle as regards costs. ...
... I am prepared to assume for present purposes without having decided,
that the agreement is champertous, but it seems to me that what is clear is
that if the costs are paid they will go to pay the bills pro tanto of the
solicitors and counsel who have acted for the Yard. That may indeed reduce the
amount for which the maintainer is liable, as between it and the Yard; but I do
not see any reason to suppose that that is, in itself, necessarily contrary to
public policy or in breach of the indemnity principle ..."
52. Before this Court, Mr Glennie submitted that the funding agreement was
champertous. The Funders had agreed to give financial assistance to one of the
parties to litigation and in return were to receive a share of the proceeds of
the litigation. Although it might be said that the Funders had an interest in
the litigation deriving from their commission agreements, their potential share
of the proceeds of the litigation was disproportionately large in comparison
with their pre-existing interest. Accordingly they had no legitimate interest
to intermeddle with the litigation to that extent so that they should be
regarded as trafficking in the litigation. The Court should regard this as an
abuse and should stay the proceedings. Mr Glennie calculated that the total
commission which the Funders would have received if all six vessels had been
completed and paid for would have been just over $7.5m. Of this, approximately
$500,000 had been paid, leaving approximately $7m. The funding agreement
provided for the Funders to receive 55% of "all awarded proceeds received" by
the Yard. If the pleaded claims in the Commercial Court action succeeded in
full and were paid in full, the Funders' share would amount to approximately
$40m. Mr Glennie accepted that this Court is bound to decide the issues
relating to champerty in accordance with recent decisions of this Court,
including Faryab v. Smyth. But he submitted that the door was open for
the Court to stay a case where there is a funding arrangement which has
significant hallmarks of trafficking in litigation. He submitted that this is
such a case. He submitted that, where the principle is one of public policy,
there should be a general rule referable to the nature of the funding agreement
and the litigation to which it relates. He submitted that Toulson J. was wrong
to say that the question whether there was a real risk of abuse should be
decided by reference to the particular detailed facts of the case. He
submitted that an agreement should be regarded as champertous if the potential
profit to the Funder is significantly greater than his pre-existing interest.
On the question of abuse, he submitted that the Court should look to see if the
agreement has a tendency to corrupt the proceedings.
53. The law relevant to these submissions may conveniently be taken, as Mr
Glennie accepted, from the judgments of this Court in Faryab v. Smyth.
Mr Faryab claimed against the defendant an interest in substantial properties
on the basis of an alleged partnership. After a lengthy trial, Blackburn J.
dismissed Mr Faryab's claims. Mr Faryab appealed. His notice of appeal
originally extended to some 60 pages. An amended notice of appeal reduced that
to 18 pages. The order which he sought on appeal was limited to payment of
£2m plus interest said to be due under a compromise agreement. Mr Faryab
had been ordered to provide security for the costs of the appeal by paying
£40,000 into court. He provided this security in accordance with the
order. The respondent applied to the court for an order that the appeal be
dismissed as an abuse of the process of the court. One of the grounds of this
application was that Mr Faryab had entered into a champertous agreement in
order to raise the £40,000. Mr Faryab's evidence was that he was
impecunious but that he had managed to raise the £40,000 by agreements
with four people. He said that he had offered a "pyramid package" by which
"the higher the total investment from any individual member of the consortium
the higher the return exponentially". Under one of the agreements, a
contributor had agreed to provide £10,000 towards the sum required as
security for costs. Mr Faryab had agreed to repay this sum plus interest at
the annual rate of 8% plus a sum of £30,000 upon the determination of Mr
Faryab's appeal. The Court had not seen the other three agreements, but the
evidence was that they were in identical terms except for the respective
amounts. Those who financed the security for costs which Mr Faryab had been
ordered to give therefore stood to receive a profit of 300% in addition to
interest at a commercial rate upon the determination of the appeal and
irrespective of its result.
54. The first judgment of this court was that of Chadwick L.J. He said that
there were two questions for decision: The first, whether the agreements were
unlawful and contrary to the public policy on the ground of champerty; and,
second, if so, whether further proceedings on the appeal should be stayed on
that ground. He said that it was convenient to consider the second question
first. If the conclusion was that the proceedings should not be stayed even if
the agreements were champertous, it was unnecessary to resolve the first
question. Unless it was plain and obvious that the funding contracts were
champertous, which in his view it was not, the court should avoid deciding that
question in the absence of the lenders, who would be affected by a finding of
champerty, unless it was necessary to do so. He considered that it was not
necessary to decide whether the funding agreements were champertous in order to
determine the application. He was satisfied that, upon a true analysis of the
authorities, it would not be right for the court to stay further proceedings on
the appeal on the basis that the funding agreements were (if they were)
unlawful and contrary to public policy on the grounds of champerty.
55. Chadwick L.J. considered the authorities at some length. He gave extended
consideration to Martell v. Consett Iron, which was a decision before
criminal and tortious liability for maintenance and champerty were abolished by
the Criminal Law Act 1967. This case emphasised the important distinction
between the proceedings themselves, which may be genuine and viable, and the
means by which and the purpose for which they are maintained. It was well
settled that illegal maintenance of the plaintiff in an action is no defence to
the action. There was the possibility of staying proceedings as an abuse, but
each of the three judgments suggested that it might well not be just to do so
in particular cases. Chadwick L.J. referred to Grovewood Holdings v. James
Capel, where Lightman J. considered that it would be both logical and
right in any ordinary case to stay proceedings which were maintained
champertously as constituting an abuse of process. Lightman J. had noted that
Martell v. Consett was concerned with maintenance where there is no
aggravation. He had no doubt that he was free in the case of a champertous
agreement such as that before him to grant a stay to prevent a continuing abuse
of process. Chadwick L.J. recorded that Lightman J's approach had been
considered by this court in Abraham v. Thompson. He cited a passage
from the judgment of Potter L.J. in that case at 374A-D, and also this passage
from the judgment of Millett L.J. at page 377G:
"Before 1967 maintenance was not only contrary to public policy but also
both tortious and criminal. Even so, it was not an abuse of the process of the
court for a plaintiff without the means to pay his own costs let alone to meet
those of the defendant to bring proceedings with financial assistance provided
by a third party, and the court would not stay such proceedings on this ground
(see Martell v. Consett Iron Co Ltd [1955] 1 All E.R. 481, [1955] Ch.
363).
In that case Jenkins L.J. gave three reasons for this. First, it was well
settled that the fact that an action was being illegally maintained was no
defence to the action, and it was impossible to reconcile this with the
proposition that it afforded a proper ground for a stay of the proceedings.
Secondly, once there had been illegal maintenance the proceedings were
irretrievably tainted; the taint could not be purged except by discontinuing
the proceedings and bringing a fresh action. But this would effectively make
maintenance a defence to the action, which it does not. Thirdly, it was
undesirable that the question whether the action was being illegally maintained
should be adjudicated upon in interlocutory proceedings in the action, for this
procedure involved the trial of what was, at least theoretically, still a crime
in the absence of the accused."
Chadwick L.J. then said:
"It was accepted by this Court in Abraham v. Thompson that, although the court retains the power to stay proceedings if satisfied that they constitute an abuse of process, the mere fact that the proceedings are being financed by a third party with no interest in the outcome - other than in relation to the prospects of repayment - is not of itself sufficient abuse to invoke the jurisdiction of the court. The court is entitled to protect its own procedures; see Roache v. News Group Newspapers The Times, November 23, 1992; but it should be careful not to use that power so as to deny access to justice to a party who has sought to fund his proceedings in a way which may itself become contrary to public policy, unless that which has been done can be seen to amount to an abuse of the court's own process."
56. Chadwick L.J. considered what element of public policy was affronted by the
funding arrangement in the case before the court. He referred to the well
known passage from the speech of Lord Mustill in Giles v. Thompson
[1994] 1 AC 142 at 161B. He said that the description of maintenance
referred to in that passage was indistinguishable from that given by Jenkins
L.J. in Martell v. Consett Iron. Chadwick L.J. then said:
"That conduct, of itself, has not been regarded as an abuse of process. Does the offensive conduct become an abuse because there is some notion of a division of the spoils? In my view the court is required to consider in the light of the facts in each case whether its process is affected or threatened by the agreement for the division of spoils."
57. Chadwick L.J. considered that there was no abuse of the process of the
Court of Appeal if the appellant's ability to comply with an order for security
for costs resulted from a funding agreement provided on terms that the funders
would obtain a substantial premium on repayment of the loan. He considered
that the court did not have any other interest in protecting its process from
abuse which required it to prevent the appeal from continuing. He said that,
although there might well be cases where the court could see that there is some
feature - "some element of trafficking in litigation" - which must be regarded
as abusive, that feature was not present in the case before the court. He also
considered that the court should discourage satellite litigation of the kind
before the court in that application.
58. Simon Brown L.J. agreed that the application for a stay should be
dismissed. He said:
"What distinguishes lending from maintenance on the one hand and, in turn, maintenance from champerty on the other, seems to me at the border lines to raise very difficult questions. Similarly, the point at which any particular funding agreement, even assuming it is technically champertous, could be said to constitute an abuse of process is itself very far from clear. Many factors are likely to be in play. Amongst them will be these: (1) the terms of the funding agreement between the litigant and his funder; (2) their relationship quite apart from that agreement; (3) whether or not (and if so how and in what circumstances) the litigant proposes to repay the funder; (4) the relationship between the fund provided, the sum (if any) to be repaid and the sum at issue in the action; (5) the precise purpose within the proceedings for which the fund was provided."
He considered that the all important feature of the case then before the Court
was that the money was provided to meet the order for security for costs and
was therefore money available for payment not of the appellant's costs, but
rather of the respondent's costs, assuming that she succeeded in defeating the
appeal. It was less than clear that the funders had engaged in what Lord
Mustill in Giles v. Thompson had described as "wanton and officious
intermeddling with the disputes of others in which they have no interest and
where that assistance is without justification or excuse".
59. Maintenance and champerty are no longer criminal or tortious. In certain
circumstances, they remain contrary to public policy. There are many
commonplace and unobjectionable circumstances in which modern litigation is
funded by those who are not the nominal parties to it. Obvious examples of
this are funding by insurers, trade unions or lawyers engaged on legitimate
conditional fee agreements. If an agreement of this general kind is held to be
contrary to public policy, it may be unenforceable. That may have a variety of
consequences. A claim which depends on the assignment of a bare right of
action may fail because the assignment is ineffective. A person who has funded
an action champertously may fail to enforce recovery of the agreed proportion
of the spoils. A person who has secured a champertous agreement to fund his
litigation may be unable to enforce payment of the agreed funds. But the fact
that a funding agreement may be against public policy and therefore
unenforceable as between the parties to it is by itself no reason for regarding
the proceedings to which it relates or their conduct as an abuse.
60. As Chadwick L.J. said in Faryab v. Smyth, the question whether the
courts' process is affected or threatened by an agreement for the division of
spoils is one to be considered in the light of the facts in each case. We
reject Mr Glennie's submission that the court should formulate a more
circumscribed test limited to a consideration of the structure and apparent
purpose of the funding agreement and the kind of litigation to which it is
directed. The considerations to which Simon Brown L.J. referred in Faryab
v. Smyth may in a particular case be relevant and important but they are
not exclusive nor necessarily determinative in the abstract. Unless the
funding agreement is plainly and obviously champertous, it will usually not be
necessary to decide that question for the reasons given by Chadwick L.J. and by
Millett L.J. in Abraham v. Thompson.
61. Abuse of the court's process can take many forms and may include a
combination of two or more strands of abuse which might not individually result
in a stay. Trafficking in litigation is, by the very use of the word
"trafficking", something which is objectionable and may amount to or contribute
to an abuse of the process. We think that it is undesirable to try to define
in different words what would constitute trafficking in litigation. It seems
to us to connote unjustified buying and selling of rights to litigation where
the purchaser has no proper reason to be concerned with the litigation.
"Wanton and officious intermeddling with the disputes of others in which they
[the funders] have no interest and where that assistance is without
justification or excuse" may be a form of trafficking in litigation. Lord
Mustill's words, quoted by Simon Brown L.J. in the context of an application to
stay, are powerfully descriptive of the kind of plain and obvious champerty of
which Chadwick LJ considered Faryab v. Smyth itself not to be an
example. A large mathematical disproportion between any pre-existing financial
interest and the potential profit of funders may in particular cases contribute
to a finding of abuse but is not bound to do so.
62. In the present appeals, Mr Glennie's only point of substance on this topic
is the disproportion for which he contends. It is not, we think, an
insignificant point, but we agree with both judges who have considered it that
it does not lead to a conclusion on the facts of this case that there has been
or is likely to be an abuse of the court's process. The question is not, we
think, to be judged only on the facts as they would have appeared in October
1994, since the question is whether there is now an actual or threatened abuse.
But, even in October 1994, Mr Glennie's calculated disproportion, which is
substantial but not grossly so, was capable of being seen as theoretical only.
The real chances of the Yard actually receiving the full amount of their
pleaded claim must have been seen as doubtful. Meanwhile, the Funders were
themselves undertaking to be responsible for the costs of what was likely to
become (and has in fact obviously become) very expensive litigation. They had
an obvious and substantial pre-existing interest in the subject matter of the
litigation. Their commission agreements had entitled them to very substantial
payments if the shipbuilding contracts had been fully performed. It is also,
we think, significant both that the Funders agreed to cover all costs awarded
against Latreefers in favour of all or any of the defendants, and that the
conduct of all legal proceedings and settlement negotiations was to be in the
hands of experienced solicitors. The Funders therefore had no opportunity to
influence the conduct of any proceedings abusively. These features, in our
judgment, make it plain that this funding agreement was not trafficking in
litigation and came nowhere near being wanton and officious intermeddling with
the disputes of others as described by Lord Mustill in Giles v.
Thompson. In our judgment, there is no abuse of process and Lloyd J. and
Toulson J. were correct so to find.
63. We are strongly inclined to the view that this funding agreement was not
champertous. It is not necessary to reach this conclusion for the reasons
given by Chadwick L.J. in Faryab v. Smyth, and we only refrain from
doing so for those reasons. We should reach the conclusion that there was no
abuse even if, at the conclusion of further satellite litigation, we were
persuaded that technically this agreement should be given the label
champertous. The alternative application for discovery would therefore serve
no purpose and was rightly refused.
64. In the result, we dismiss the appeal against Toulson J's order and hold
that the submissions about champerty have no force in the first two appeals
against Lloyd J's decisions in the winding up proceedings. As to the appeal
against Lloyd J's costs order in the winding up proceedings, the proceedings
themselves were not an abuse. There was, in our view, no breach of the
indemnity principle. The principle is that you cannot recover under a costs
order against another party more than you yourself are obliged to pay in costs
to your own lawyers. The funding agreement has no effect on this question in
this case. The Yard's lawyers are no doubt entitled to be paid irrespective of
the terms of the funding agreement. If, contrary to our strong inclination,
the funding agreement was champertous and therefore unenforceable, an order for
costs against Latco would not constitute enforcing it. It would simply be an
order to pay costs which had been incurred. These were in substance Lloyd J's
reasons for rejecting the submissions made to him. In our judgment, he was
right to do so.
65. On 14 December 1998, the Yard's solicitors wrote to Latreefers' solicitors giving them notice that in the event of the winding up petition succeeding they would seek an order for the Yard's costs to be paid by Latco. Affidavits by the solicitors on either side were exchanged, and Latco was represented on the Yard's application for costs by Mr. Pascoe.
66. The judge acceded to the Yard's application by ordering Latco to pay the Yard's costs of the petition in so far as they had been increased by the opposition of Latreefers. He refused permission to appeal but permission was granted by Robert Walker LJ on 21 July 1999 largely on the basis, as he put it, that
"since the substance of this troublesome matter is to be considered in pending appeals against two substantive orders in the same matter, it is appropriate that the costs made on 27 May 1999 should also be before the court".
67. The parts of section 51 of the Supreme Court Act 1981 which are relevant
for current purposes read as follows: -
"Subject to the provisions of this or any other enactment and to rules of
court, the costs of and incidental to all proceedings in -
the civil division of the Court of Appeal;
the High Court ............
shall be in the discretion of the court .........
The court shall have full power to determine by whom and to what extent the
costs are to be paid."
68. As has been pointed out many times, section 51 of the Supreme Court Act
1981 gives no guidance as to the manner in which the discretion to award costs
falls to be exercised. However, following the decision of the House of Lords in
Aiden Shipping Co. Ltd. V Interbulk Ltd. [1986] AC 965, it is now well
established that the discretion to award costs is not subject to any implied
limitation that costs can only be awarded against those who are parties to the
litigation but may, in appropriate cases, be exercised to make orders for costs
against non-parties where justice so requires.
69. In Symphony Group PLC v Hodgson [1994] QB 179 at 191-2, Balcombe LJ
made an analysis of the various circumstances in which the court had, by that
date, been prepared to make orders for costs against non-parties. He went on to
identify a number of applicable principles. Those principles have been given
further consideration in a number of subsequent cases; in particular in three
decisions of this court, Murphy v Young's Brewery [1997] 1 WLR 1591;
TGA Chapman Ltd v. Christopher [1998] 1 WLR 12 and Globe Equities Ltd
v. Globe Legal Services Ltd (5 March 1999: unreported).
70. In the latter case, Morritt LJ, giving the leading judgment, with which
Butler-Sloss and Sedley LJJ agreed, made a number of observations on the first
principle set out by Balcombe LJ in Symphony Group PLC v Hodgson [1994]
QB 179 at 192, namely that "an order for the payment of costs by a non-party
will always be exceptional". He pointed out that the answer to the question as
to the standard by which the circumstances of a given case were to be judged
exceptional had been given by Phillips LJ in Chapman v Christopher
[1998] 1 WLR 12 at 20, namely: -
"The test is whether they (i.e. the features relied on) are extraordinary in the context of the entire range of litigation that comes to the court."
Morritt LJ continued: -
"I would also comment that there appears to me to be a danger of treating
the requirement that the circumstances are "exceptional" as being part of the
Statute to be applied. It is not. The epithet originates in the first
proposition enunciated by Balcombe LJ in Symphony Group PLC v Hodgson,
but it is based on what Lord Goff said in Aiden Shipping Co. Ltd v Interbulk
Ltd [1986] 1 AC 965,980.
"In the vast majority of cases, it would no doubt be unjust to make an award of
costs against a person who is not a party to the relevant proceedings. But as
the facts of this case show, that is not always so."
In none of the cases to which I have referred have "exceptional circumstances"
been elevated into a precondition to the exercise of the power; nor should they
be.
Ultimately, the test is whether in all the circumstances it is just to exercise
the power conferred by subsections (1) and (3) of section 51 of the Supreme
Court Act 1981 to make a non-party pay the costs of the proceedings. Plainly,
in the ordinary run of cases where the party is pursuing or defending the claim
for his own benefit through solicitors acting as such there is not usually any
justification for making someone else pay the costs. But there will be cases
where either or both these two features are absent. In such cases, it will be a
matter for judgment and the exercise by the judge of his discretion to decide
whether the circumstances relied on are such as to make it just to order some
non-party to pay the costs. Thus, as it seems to me, the exceptional case is
one to be recognised by comparison with the ordinary run of cases, not defined
in advance by reference to any further characteristic."
71. We adopt this approach in the current appeal. Mr. Glennie in the course of
argument sought to persuade us that in cases such as the present, where a
parent company had been made liable for the costs of proceedings incurred by
its subsidiary, the criteria upon which such orders have been made are unclear,
and that this court should lay down guidelines for the assistance of judges of
first instance and the legal profession. We have considered this request with
care, but for the reasons given by Morritt LJ in the passage from Globe
Equities Ltd v. Globe Legal Services Ltd which we have cited, we do not
think that such an exercise would be either helpful or productive. This is an
area of the law in which the truism that each case depends on its individual
facts is particularly applicable, and in which satellite litigation (including,
of course, appeals) is to be discouraged. Parliament has given the judiciary an
unfettered discretion to make orders for costs which are just, and further
judicial guidance beyond that which exists already, designed to identify what
may or may not be just in different factual circumstances is, in our judgment
both unnecessary and likely to expand the scope for further argument.
72. Thus we approach this part of the case by asking the simple question: on
the facts of this case was the judge right to exercise his discretion to make
an order for costs against Latco?; or to put the matter in a more technical
way: does the judge's decision to make an order against Latco exceed the
generous ambit within which reasonable disagreement is possible thereby making
it plainly wrong?: see Bellenden (formerly Satterthwaite) v Bellenden
[1948] 1 All ER 343 at 345 per Asquith LJ, cited with approval in G v G
(Minors: Custody Appeal) [1985] 1 WLR 647, 651/2 per Lord Fraser of
Tullybelton: see also Hadmoor Productions Ltd v Hamilton and Another
[1983] 1 AC 191 at 220B-c, E per Lord Diplock.
73. The essence of Lloyd J's judgment on this point appears at page 12 of the
transcript of his judgment, where he summarises his reasons for making the
order against Latco in the following terms:
"My principal reasons are that this company is not and was not a trading company, that it has had no realisable assets beyond the tiny credit balance in its bank account and that it is, on any footing, insolvent; and that the effective decision to contest the petition was a decision taken by Latco to make available the funds for the conduct of that defence. In my judgment, the circumstances of this case show that, in so doing, Latco was consulting its own interests and not that of Latreefers, and that makes it appropriate to order Latco to pay those costs."
The judge added that the costs were not the whole costs of the petition,
because Latco could not be made liable for such costs as would have been
incurred if the petition had gone through on an uncontested basis. The
judgment, therefore, was for the costs of the petition "in so far as they had
been increased by Latco's opposition, including the costs of the two contested
hearings before the judge."
74. In reaching his conclusion, Lloyd J directed himself correctly on the
principles laid down in Aiden Shipping Co. Ltd. V Interbulk Ltd. [1986]
AC 965, and considered a number of the subsequent cases, including Abraham
v Thompson [1997] 4 All ER 362 and Chapman v Christopher [1998] 1 WLR 12. He accepted Mr. Pascoe's argument that the mere fact that Latco had
funded the proceedings was not, of itself, a sufficient reason for making an
order for costs against Latco. He considered, and distinguished on its facts,
the decision of Colman J in The Kommunar (No 3) [1997] 1 Lloyds Rep. 22.
Lloyd J also specifically rejected Mr. Pascoe's argument that because it had
transpired that the Yard was itself (as Mr. Pascoe argued) being champertously
funded by a third party, to make an order for costs against Latco would result
in the Yard receiving the benefit of the champertous agreement which was
otherwise unenforceable as being contrary to public policy.
75. Four points are advanced in the notice of appeal, three of which were
developed in argument before us. The first is that just summarised. Mr.
Glennie, in oral argument, accepted that this point effectively stood or fell
on the view which the court took on the third appeal (the appeal against
Toulson J's refusal to stay the proceedings by the Yard in the Commercial
Court) and for the reasons we have already given, we reject it as a ground for
attacking the exercise of Lloyd J's discretion to make an order for costs
against Latco in the winding up proceedings.
76. The second ground is to the effect that the judge, having correctly held
that funding by Latco of Latreefers' opposition to the petition was not of
itself sufficient to justify an order against Latco under section 51
nevertheless held that the effective decision to contest the petition was
Latco's decision to make available funds for the defence and that was
sufficient to justify the order sought. We reject this ground, which fails to
do justice to the judge's judgment. The fact of funding, as the judge
recognised, is only the first step in the argument. The judge then had to
consider all the relevant circumstances of the case, including, of course, the
nature of the proceedings, the purpose of the funding and the merits of the
case advanced by Latreefers in the winding up. The judge then had to decide
whether or not, in all the circumstances, an order against Latco met the
justice of the case. This exercise the judge performed. To suggest that there
is an internal inconsistency within the judgment, or that the judge decided the
point on the mere fact of funding is to misread the judgment.
77. The third ground of appeal is that the judge held that in funding
Latreefers' defence to the petition, Latco was consulting its own interests and
not those of Latreefers. It is contended that he thereby wrongly failed to take
any sufficient account of the principle established by The Kommunar (No
3) [1997] 1 Lloyd's Rep. 22 in which it was recognised (in the context of
section 51 proceedings) that a parent company has a legitimate interest in
preserving and maximising the assets of its subsidiary.
78. We can deal shortly with this point. The judge distinguished The
Kommunar on its facts, and in our judgment was plainly right to do so. As
the judge put it:-
"So far as funding by a parent company is concerned, [counsel] cited in particular The Kommunar which is a very different case on the facts but in which Colman J refused to make an order that the parent company be jointly and severally liable for a subsidiary's costs as plaintiff in some unsuccessful proceedings. That was a case in which he said that the parent company stood to gain by the increase in the assets of its subsidiary if the action succeeded and that was a legitimate motive for the proceedings and for lending assistance to the subsidiary. That is, I think a very different case both on the facts and in the relevant analysis from the present case."
In our judgment, The Kommunar lays down no general principle. It simply
decides that on the facts of that case the parent company in question had a
legitimate interest in preserving and maximising the assets of its solvent
subsidiary. In the instant case the question is not, as in The
Kommunar, whether the parent company's funding of the litigation could be
justified on the basis that the interests of the shareholders were synonymous
with those of the parent company; the proper question in the instant case is
whether or not persistence by Latco in the defence of the winding up petition
was in the interests of Latreefers' creditors - a proposition to which there
could only be one answer. Mr. Glennie invited us, if we were against him on
this point, to hold that The Kommunar was wrongly decided. For the
reasons we have given, we think it neither necessary nor appropriate to do
so.
79. The fourth ground of appeal depended in substance upon the proposition that
there was a reasonable possibility that the debt owed by Tangent Shipping to
Latreefers would be realised in the winding up and that, accordingly, the judge
erred in principle in failing to take any or any adequate account of that
possibility. Mr. Glennie realistically recognised that the judgment of Langley
J in the action between Latreefers and Tangent Shipping was fatal to this
point, notwithstanding that the judgment may be subject to an application for
permission to appeal. Accordingly we need say no more about this ground of
appeal.
80. In our view it is necessary to bear in mind that Latreefers is insolvent.
The evidence does not indicate that it ever had sufficient loan or share
capital to enable it to perform its contractual obligations. The order sought
by the winding up petition was opposed in the interests of Latco, not those of
either Latreefers or its creditors. In our judgment the answer to the simple
question "is it just, if a parent company in these circumstances chooses, for
its own reasons, to defend a winding up petition brought against its subsidiary
by the latter's principal creditor to order it to pay the costs?" is in the
affirmative.
81. For all these reasons, there is in our judgment no substance in any of the
grounds of appeal against the order for costs against Latco made by Lloyd J.
Far from being an inappropriate exercise of judicial discretion, we think that
the judge was plainly right to make the order, and the appeal must be
dismissed.
82. For all these reasons we dismiss the appeals
(a) of Latreefers from the orders of Lloyd J made on 21st December 1998 and 27th May 1999; and
(b) of Latco, Mr Henriksen and Latmar from the order of Toulson J made on 10th June 1999.
Order: Appeal dismissed. Order as per minute of order.