England and Wales High Court (Commercial Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		25/01/07

Mr Justice David Steel :

Introduction

1. This is an application by the Second Defendant, De Wind GmbH "(DWG") for a declaration that the court has no jurisdiction in respect of the claims brought against it by the Claimants (being respectively "FKI Ltd" and "FKI plc") and for orders setting aside service of the proceedings and dismissing the action.
2. The action arises out of a Share Sale Agreement dated 4 July 2005 (the "SSA") made between FKI Ltd and the First Defendant, Dewind Holdings Ltd ("DWL"). Various claims are pursued by the Claimants:

i) FKI Ltd claims against DWL €1,649,716 pursuant to clause 8.2 of the SSA by way of an indemnity against payments made under various performance bonds and guarantees.

ii) Both Claimants claim against DWG a declaration that neither is liable to DWG in respect of claims asserted against them in draft German proceedings which had not been issued prior to the commencement of the action (the "German Proceedings") in the sum of €57,167,751.

iii) Both Claimants claim against DWG a declaration that, in the event that either should be liable to DWG in respect of the German Proceedings, they would be entitled to repayment from DWG of any sum they might be ordered to pay.

iv) FKI Ltd claims damages from DWL pursuant to the SSA contingent on the disputed liability of the claimant to DWG in respect of the German Proceedings (certainly in so far as that liability arose from a failure to make payment of approximately €25.6million under various capital reserve agreements).

3. This application, being made by the Second Defendant, was accordingly directed at claims (ii) and (iii). The Claimants rely upon Article 6 (1) of Council Regulation (EC) 44/2001 as justifying jurisdiction. The Defendants challenge the legitimacy of applying Article 6.1. Further or in the alternative the Defendants contend that the German courts have exclusive jurisdiction in respect of all or some of the claims by virtue of Article 22 (2). (As regards the claims made against DWL there was no basis for any jurisdictional challenge as DWL is domiciled in England and in any event the SSA contained an English exclusive jurisdiction clause.)
4. DWG is a German company. It designs wind turbines. Prior to 4 July 2005 FKI Ltd was the sole owner of DWG. FKI Ltd is a wholly owned subsidiary of FKI plc. By virtue of the SSA, FKI Ltd sold its share holding in DWG to DWL. Because DWG had always been loss making, the theme of the SSA was that FKI Ltd "paid" DWL to take DWG off its hands. In return for a nominal payment, DWG was transferred to DWL together with cash reserves of €3,278,000 and net tangible assets forecast to be €27,778,000. For the purpose of assessing the net tangible asset figure, it was a pre condition to completion of the SSA that all inter group indebtedness as between DWG and all companies within the FKI Group should have been repaid.
5. Following completion, in the absence of agreement between the parties by way of an exchange of draft completion accounts, there was to be an expert determination pursuant to the SSA of the need or otherwise of any adjustment in the net tangible asset figure. This provision led in due course to a determination by an independent expert that FKI Ltd was obliged to pay DWL €339,000.
6. FKI Ltd and FKI plc had entered into a number of performance bonds and guarantees to secure bank loan facilities provided to DWG. By the terms of the SSA, DWL undertook fully to indemnify FKI Ltd against all losses incurred by the FKI Group under these performance bonds and guarantees.
7. Following completion, FKI Ltd duly paid €1,649,716 under a deed of guarantee in favour of Deutsche Bank to secure various guarantees provided by that bank for the benefit of DWG. Pursuant to the SSA, FKI Ltd sought reimbursement from DWL. When DWL failed to make payment, FKI Ltd served a statutory demand in June 2006.
8. In correspondence DWL pressed for withdrawal of the statutory demand and in doing so asserted that one of the defences to the claim was a cross-claim which it threatened to pursue in the German courts. These claims fell into two categories: (i) claims alleging that FKI Ltd and/or FKI plc failed to pay sums due to DWG under various Capital Reserve Agreements ("CRAs") and (ii) claims alleging that payments made by DWG to FKI plc by virtue of a cash pooling arrangement within the FKI Group were in breach of the CRAs and of statutory provisions of German company law.

Background

9. The background was as follows. DWG had maintained a capital reserve account at Deutsche Bank to hold monies paid in by shareholders over and above the stated capital of the company. At various stages between June 2004 and July 2005, FKI Ltd entered into five CRAs with DWG. These provided for FKI Ltd to make "non repayable voluntary payments as a contribution to the capital reserves" of DWG, the purpose being to maintain the latter's solvency.
10. The individual CRAs were dated 15 June 2004, 14 April 2005, 8 June 2005, 16 June 2005 and 1 July 2005 and were in respect of the following sums €30 million, €10million, €500,000, €30,771,000 and €96,662.89. Whilst payment for the third, fourth and fifth agreements were paid in full, DWG contended that only €15 million was paid in regard to the first agreement and none of the second.
11. The Claimants' position was that payment of any balance had been effected by setting the monies off against existing liabilities of DWG. In response DWG'S case was that such setting off was not permissible both by virtue of the express terms of the CRAs and by virtue of German company law. DWG also asserted that both in breach of the CRAs and in breach of German company law some €31.6 million furnished under the CRAs was paid out again into the FKI Group cash pooling system.
12. The thrust of the threatened proceedings in Germany as regards claims relating to the capital reserves was spelt out in a draft complaint sent on behalf of DWG to the Claimants' solicitors under cover of a letter dated 29 June 2006. The terms of the draft complaint led the Claimants to suggest that it had no bearing on the indemnity claim. That approach was described by DWG in their response as "a matter for you".
13. The present action was commenced on 6 July 2006. The German proceedings were commenced by DWG on 20 July 2006.

Contentions on jurisdiction

14. As already indicated the Claimants contend that this court has jurisdiction to entertain these claims against DWG, albeit that DWG is domiciled in Germany, by virtue of Article 6 (1) of the Judgments Regulation:-

"A person domiciled in a member state may be also sued … where he is one of a number of defendants, in the courts for the place where anyone of them is domiciled, provided the claims are so closely connected that it is expedient to hear and determine them together to avoid the risk of irreconcilable judgments resulting from separate proceedings".

15. The basis of this submission, on which it is accepted the Claimants have the burden of establishing a good arguable case that the presumption in Article 2 (2) should be displaced, is twofold:

i) since at the time the proceedings were issued DWL asserted that the claims later advanced in the German proceedings constituted a defence to the indemnity claim, there was a clear risk of irreconcilable judgments if they were also pursued separately in Germany: and

ii) since the "contingent" claim against DWL required this court to determine the validity of all or some of the claims that had later been brought in the German proceedings, there was again a clear risk of irreconcilable judgments.

16. Thus, it was submitted by the Claimants that the claims were "so closely connected that it was expedient to hear and determine them together".
17. The threshold point taken by DWG (albeit taken at a remarkably late stage) was that the claims advanced by them in Germany, or at least part of them, were "principally concerned with, and have as their subject matter, the validity of decisions of the managing director of DWG and of DWG's shareholder FKI Ltd". Accordingly, it was submitted such claims had to be advanced in Germany by virtue of Article 22 (2) of the Regulation:-

"The following court shall have exclusive jurisdiction, regardless of domicile … in proceedings which have as their object the validity of the constitution, the nullity or the dissolution of companies or other legal persons or associations of natural or legal persons, or of the validity of the decisions of their organs, the courts of the member state in which the company, legal person or association has it seat. In order to determine that seat, the court shall apply its rules of private international law".

18. Running in parallel with this submission on the part of DWG was the mirror image submission on the part of the Claimants that the self same claims as pursued in Germany were justiciable under the terms of the Judgments Regulation only in this court being the court of the defendants' (in the German proceedings) domicile.

Article 22(2)

19. The structure of the claims in the German proceedings is canvassed in the draft complaint sent to the Claimants in July, although notably there was at that stage no suggestion that Article 22(2) would afford jurisdiction.
20. The complaint, as issued and served, neatly summarised the claim as follows:-

"The Plaintiff claims from the Defendant, the former sole shareholder of the Plaintiff, payments based on several Capital Reserve Agreements, which the Defendant either did not fulfil at all or which the Defendant paid into an account of the Plaintiff and immediately arranged for a repayment to the third party. Furthermore the Plaintiff's claims arise from the violation of provisions for the maintenance of capital."

21. Thereafter the complaint goes on to emphasise that the payments made under the CRAs were rendered necessary by the "under capitalisation of DWG", the payments being authorised by FKI Ltd as sole shareholder of DWG "at a shareholders meeting of DWG" (although strikingly the annexed minutes were not of a shareholders' meeting of DWG but of a board meeting of FKI Ltd). The complaint then turns to the payments "back" into the pool.
22. It is said that both claims fall within the scope of Article 22(2) although perhaps the latter claim in particular since, on the case of DWG, the payments violated the provisions relating to equitable subordination under Section 30 and following of the German company code.
23. Two primary reasons in support of this submission as regards the applicability of Article 22(2) are advanced through the advice of Dr Schmedemann a German lawyer retained by DWG. In his opinion, it is a requirement of German law:-

i) that the original payments under the CRA must be available for the disposal of the managing director as he sees fit in his unfettered discretion, and

ii) that the payments back must as a matter of German law be by way of a shareholders' resolution dissolving the capital reserves of DWG.

24. The response advanced by the Claimants pursuant to the advice of Dr Von Falkenhausen is that, whatever the merits of these contentions, they are not remotely within the scope of Article 22. In particular, he refers to a number of German appeal decisions in which it has been held in Germany that Article 22 (2) does not apply to claims under Section 30 and the following sections.
25. The approach of the English courts is helpfully summarised in Grupo Torras v Al Sabah [1996] 1 Lloyds Reports 7 by way of approval of the essential test identified by Knox J in Newtherapeutics Ltd v Katz [1991] 2 All England Reports 151:-

"The problem therefore is to identify from the material before the court what it is that the proceedings are in substance or principally concerned with. If the answer to that question is the validity of the decision of the organ of the company, Article 16 (2) [the pre-cursor to Article 22 (2)] applies and this court has exclusive jurisdiction."

26. I am not persuaded that the substance of the claims advanced in Germany and in respect of which the Claimants seek declaratory relief involve the validity of a decision of the organ of DWG. To the contrary, they are principally concerned with contractual claims and thus not within the scope of Article 22.

Article 6(1)

27. I turn now to Article 6 (1) and gratefully adopt the approach summarised by Gross J in ET Plus SA v Welter [2006] 1 Lloyds Reports 251 at Paragraph 59 and following:-

"(i) The test now contained in Article 6 (1) of the Regulation codifies the effect of the earlier decision of the Court of Justice of the European Communities ("The European Court") on the Brussels Convention in Kalfelis v Schroeder, Muenchmeyer, Hengst & Co [1988] VCR 5565 at page 5584 (para 12) namely: whether there is such a connection between the claims at the time when they are instituted that it is expedient to hear and determine them together to avoid the risk of irreconcilable judgments resulting from the separate proceedings ("the Kalfelis test"). The risk of irreconcilability may arise from potential conflicting findings from fact or from potential conflicting decisions on questions of law: Gascoine v Pyrah [1994] ILPR 82 at 93. Whilst Article 6(1) constitutes an exception to the general rule contained in Article 2 (that the Defendants domicile governs jurisdiction) and must not be abused, it does not follow that Article 6 (1) is so subservient to Article 2 that it could only be invoked in special circumstances: Gascoine v Pyrah at 94.

(ii) In applying the Kalfelis test, a "broad common sense approach" is to be adopted and an "over sophisticated analysis" is to be avoided Casio v Sayo [2001] ILPR 43 at paras 32-37 together with the authorities there sighted…… "

28. As already indicated, the Claimants relied on the fact that, in the correspondence leading up to the issuance of the present proceedings, DWL was insisting that the claims later advanced by DWG constituted a defence to the claim against it for an indemnity under the performance guarantees. Thus it was submitted that, "at the time of institution of the proceedings", there was a risk of irreconcilable judgments. I reject that submission:-

i) In my judgment the matter must be tested objectively. The suggestion that DWG's claim would constitute a set off against the indemnity claim, even if advanced as more than a negotiating stance, was clearly misconceived as indeed the Claimants recognised.

ii) It is true that DWG could have assigned the claims to DWL but it had not done so.

29. It follows that the "anchor" claim must be the "contingent" claim against DWL. DWG raises two principal points in this regard:

i) the claim is truly contingent and thus premature, and

ii) the claim fails to meet the merits requirement and should be struck out.

30. I can take the issue of prematurity in brief. It is somewhat inapposite to describe the claims as "contingent": the findings are not dependent on events yet to happen. It cannot be said that no cause of action has accrued. Neither declaration is itself dependent upon the outcome of the German proceedings. To the contrary the issues that arise from the German proceedings will be determined in this action: that is how the risk of irreconcilable decision arises.
31. I turn therefore to the merits of the contingent claim. The basis of them is two fold;

"(i) it is alleged that in breach of the SSA, DWL failed to provide FKI Limited with the "financial information reasonably necessary for the purposes of the agreement" namely that the defendants "were in the process of preparing a claim" against [FKI Limited or FKI PLC] for [€25.6 million]: this is called for the short "financial information claim".

"(ii) It is alleged that the expert appointed under the SSA made a manifest error in his determination to the same effect: the "manifest error claim."

32. It is DWG's submission that neither claim passes the relevant merits threshold. The relevant merits test in my judgment is whether the claimants have established a "real issue to be tried." Put the other way, the Claimants must establish that the claim cannot be struck out: see Canada Trust v Stolzenberg [No. 2] [2002] 1AC.1, ET Plus SA v Welter Supra.

The financial information claim

33. As regards the financial information claim, DWG has purportedly identified no less than seven insuperable hurdles faced by the Claimants in the presentation of the claim.

Hurdle 1

34. The SSA made provision for access to financial information of DWL "as is reasonably necessary" for the purposes of the SSA. It is the submission of DWG that such information was entirely irrelevant to the determination of the completion balance sheet of DWG. The Claimants' pleaded case on this issue was to the effect that "the information to be provided by DWL for the purpose of the completion account should have been (as is commercially obvious and as was intended by the parties) information of or pertaining to DWG. FKI Limited will if necessary claim rectification of paragraph 8 in this regard".
35. Given that DWG became a fully owned subsidiary of DWL on completion there is in my judgment a clearly triable issue on these matters.

Hurdle 2

36. The submission of DWG was to the effect that the obligation of DWL under the SSA was not to "provide" the relevant financial information as pleaded but only to give "access to it". The response of the claimant is that, if it be more than a insubstantial pleading point, it is arguably a distinction without a difference. I agree.

Hurdle 3

37. Here it is contended by DWG that neither its own preparation of claims nor its entitlement to recover are "financial information" of DWL. In my judgment this is simply a reformulation of hurdle 1.

Hurdle 4

38. DWG's argument here is that, as at the date of the submission of the competing draft completion balance sheets in 2005, and indeed when submissions were addressed to the expert in 2006, it could not be contended that DWG had any "entitlement" to the sums claimed. In short the claim necessarily failed for the same reason as the repayment claim for €31.6 million which was recognised to be misconceived.
39. In fact the claim for payment was, on the Claimants' case, quite distinct from the claim for repayment, the latter depending by virtue of German law on insolvency. In short the recovery of the €31.6 million was not "virtually certain" but a mere claim. In contrast there was a dispute between the experts retained by each side as to whether the €25.6 million claim should be treated as a valid debt. This is not an issue that I can summarily determine.

Hurdle 5

40. DWG submits that, since FKI Ltd asserts that DWG's claim in respect of the €25.6 million constitutes a debt which was required to be treated as an asset on the completion balance sheet, such would give rise to an admitted corresponding debt in the same amount owed to the Claimants in the form of a revival of pre-existing debt owed by DWG.
41. The point here is that what is described as logical difficulty by DWG is in fact a proposition which is denied by them. The position of DWG appears to be that the previous loans would not revive, as it was a condition of the SSA that all outstanding group indebtedness had to be repaid. This is an issue that I cannot decide summarily.

Hurdle 6

42. DWG submits that, since it was a requirement of the SSA that the completion balance sheet should be prepared on the same basis principles and "assumptions" as used in producing FKI Ltd's management accounts, it followed that, since those management accounts were based on the assumption that the CRAs had been fully performed, it would not have been proper to make an adjustment in the completion statement on some different basis.
43. The answer, as put forward by the Claimants, is that no want of consistent treatment is involved. The payments under the CRAs were simply treated as an investment in both the management accounts and group accounts. This is clearly a triable issue

Hurdle 7

44. DWG submits that, even if DWL was in breach of the SSA in failing to disclose DWG's claim in respect of €25.6 million, it does not follow that the completion balance sheet overstated the assets by the same sum. Neither DWL nor FKI Limited would have included the figure in the draft completion figures:

"(a) FKI Limited would not have done so because it would involve an admission that DWG had a valid claim in the sum of €57 million.

(b) DWG would not have done so because it would have involved payment of such a sum to FKI Limited."

45. FKI Limited simply asserts that the causative impact of the debt being revealed at this early stage is something which calls for examination at a trial. I agree.

Manifest error

46. DWG submits that the determination of the independent expert in the dispute between the draft completion accounts cannot be impeached for an error, manifest or otherwise, simply on the basis that he was unaware (let alone told) of the €25.6 million claim.
47. The SSA provided that the determination of the experts should be "final and binding" on the parties. The principles in this field are well established: see Veba Oil v Petrotrade [2002] 1 Lloyd's Report 295: -

i) such a determination is binding unless there has been fraud or bias on the part of the expert or he has been guilty of a mistake.

ii) in this context, a mistake means departure from instructions."

48. Since I did not understand the Claimants to pursue this matter, I leave it there.

Summary.

49. Standing back and approaching the matter as one of common sense:

a) the claims against DWL and DWG were instituted before the German proceedings;

b) indeed some of the claims in the German proceedings may need to be determined in England;

c) the claims for declaratory relief are not premature;

d) the contingent claim against DWL will involve all the same issues that arise in the German proceedings;

e) the claim is of sufficient merit to represent a valid anchor claim;

f) the risk of an irreconcilable judgment is manifest.

Against that background, I have concluded that the claims are so closely connected that it is expedient to hear them together.