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
		07/02/2014

Mr Justice Leggatt :

Introduction

1. The claimants are asking the court to continue an injunction granted ex parte on notice on 8 October 2013, which restrains the first defendant, whom I shall refer to as "the Bank", from making payment to the second defendant, whom I shall refer to as "WFS", under a guarantee dated 14 December 2013.

The Guarantee

2. The guarantee was provided in order to obtain the release from arrest in France of a vessel owned by the first claimant, "Aria".
3. The factual background is that the vessel "Rainbow" was chartered by Aria under a time charter dated 10 March 2010 to AMN Bulk Carriers Inc. They in turn sub-chartered the vessel to the second claimant in this action, Allied Maritime, whom I shall call "Allied".
4. During the period of the sub-charter, Allied arranged for the vessel to purchase bunkers from WFS. There is uncontradicted evidence that, before the bunkers were supplied, the owners, Aria, made it clear to WFS that the bunkers were being purchased purely for Allied's account and not for the account of the vessel. Allied did not pay for the bunkers, and it became apparent that they were suffering financial difficulties. In pursuit of its claim for the money owed for the bunkers WFS arrested the vessel in Bordeaux. Aria sought to challenge the arrest, taking the point that the claim for the bunkers was a claim in debt against Allied, the sub-charterer, alone and did not give rise to a maritime lien. That argument was, however, rejected by the French court in Bordeaux and again on appeal. I understand that there is a further appeal pending in France to the Cour de Cassation.
5. Whatever the outcome of that appeal, the result of the arrest proceedings in the Commercial Court of Bordeaux was that, in order to obtain the release of the vessel, Aria arranged for a bank guarantee to be provided by the Bank on 14 December 2012. The guarantee is written in French. It is, however, expressly governed by English law and contains a provision that any dispute about its enforcement and/or interpretation will be referred to the High Court in London. The operative part of the guarantee in the agreed English translation, after referring to the claim for payment for the bunkers, states:

"In consideration of your immediately releasing the conservatory arrest effected over the above vessel and ordered by decision of the President of the Tribunal de Commerce de Bordeaux on 29 November 2012 and your undertaking not to effect a further conservatory arrest over the vessel 'Rainbow' or any other property of Aria Inc we hereby undertake to pay you on first demand such sum as may be due in respect of the above claim to you by Aria Inc and/or the owner of the 'Rainbow' and/or the Master of the 'Rainbow' and/or its operators and/or Allied Maritime Inc by virtue of an enforceable decision of a competent court or arbitration award of a competent tribunal or pursuant to a settlement agreement with Aria Inc, it being understood our liability shall not exceed US$550,000."

Subsequent proceedings

6. On 27 December 2012 WFS commenced further proceedings in the Commercial Court of Bordeaux against Aria, seeking to obtain a judgment against them that can be used to found a claim under the guarantee. A hearing in those proceedings is due to take place on 28 February 2014. Although this fact was not known to Aria or to WFS at the time when the guarantee was issued, Allied was declared insolvent on 6 November 2012 by the Piraeus Court of First Instance in Greece and a liquidator, Mr Antonis Mantzavinos, was appointed by the order of the Greek court.
7. In addition to the proceedings commenced against Aria, WFS have subsequently brought proceedings against Allied in pursuit of a judgment against Allied that again, if obtained, would allow a claim to be made under the guarantee. The first attempt made by WFS in that regard was an action brought against Allied in the United States District Court for the Southern District of Florida. Aria became aware of those proceedings, applied to intervene and was successful in having those proceedings dismissed on the basis of forum non conveniens. There was reference made in the course of the Florida proceedings, to which I will come back, to the fact that Allied was insolvent and the subject of an insolvency order made in Greece.
8. Having failed to achieve success in obtaining a judgment against Allied in Florida, WFS turned its attentions back to France. Fresh proceedings were commenced again in the Commercial Court in Bordeaux, this time against Allied. I will return to those proceedings in the context of an allegation made by the claimants in this action that a judgment was obtained from the Bordeaux court by fraud. In brief, however, service of the proceedings on Allied was sought to be made at its business address, but no service took place because it was found that the office had closed down. Allied was nonetheless successful in persuading the court in Bordeaux that the proceedings could be treated as validly constituted and on 1 October 2013 an order was granted against Allied in its absence for payment of the amount claimed for the bunkers. I understand the nature of that order to be a provisional order, somewhat equivalent to an order for an interim payment in English procedure. In other words, it is not a final adjudication of the claim but it is an order of the court said to be as a matter of French law immediately payable and enforceable by the party to whom it was granted, WFS.

The present case

9. Relying on that order, WFS proceeded to make a demand under the guarantee. The Bank did not immediately make a payment, taking the view that the question of whether WFS was entitled to collect payment and the Bank was obliged to make payment under the guarantee raised complex issues involving the interaction of French, Greek and English law. Before the Bank had come to any decision about whether the claim was valid or not, Aria applied to this court for an injunction which was granted on 8 October 2013. This is then the return date when the court is being asked to continue the injunction until trial or further order.
10. In support of the application to continue the injunction, separate arguments are advanced on behalf of the first claimant, Aria, and on behalf of the liquidator of Allied, who has been added as a second claimant in these proceedings. The arguments made on behalf of Aria have taken up by far the greater amount of time at the hearing today and I will consider those arguments first.

Aria's case

11. Aria's case was originally advanced by Mr Smith, who appears for both claimants, on the basis that the guarantee in this case is a demand guarantee similar in character to a performance bond or letter of credit. He consequently accepted that in order to support a claim for an injunction it would be necessary for Aria to show that the demand made by WFS under the guarantee is fraudulent to the knowledge of the Bank.
12. In a supplemental skeleton argument, however, served yesterday afternoon, Mr Smith indicated that he would seek to withdraw that concession and advance an alternative argument on the footing that the guarantee in this case is not correctly characterised as a demand guarantee but is one giving rise to a claim on Aria's part even in the absence of fraud. Ms Healy, who appears for WFS, says that she is taken by surprise by that argument, and would wish to have the opportunity to make written submissions in answer to it. I do not consider that necessary, as in my view Mr Smith's first position was plainly correct and Aria can have no claim for an injunction if it cannot establish fraud in this case. The reason for that is that I am unable to see how in the absence of fraud Aria would have any cause of action against anyone if the Bank were to make a payment under the guarantee.
13. There is no evidence before the court about the terms of the contract made between Aria and the Bank under which the Bank issued the guarantee dated 14 December 2013. In the particulars of claim served in this action the claimants have asserted at paragraph 17 that it was a necessary and/or obvious term of the "security agreement" (that being a reference to the contract between Aria and the Bank pursuant to which the guarantee was issued) that:

"the Bank would only make payment under the guarantee issued by it in the event of an immediately enforceable decision by a competent court being granted against the charterers in favour of WFS."

14. It is clear that under the express terms of the guarantee the Bank only has an obligation to make payment if there is an enforceable decision by a competent court against one of the named parties, who include Allied. There are serious arguments to be made, irrespective of fraud, that there is in this case no such "enforceable decision by a competent court" within the meaning of those words. One issue is what is meant by a "competent court" and, in particular, by what system of law the question of competence is to be determined. Ms Healey has submitted that the term "competent court" must mean a court competent under its own jurisdiction. If that were right, the effect would be that any court which decided that it had jurisdiction over proceedings would thereby, ipso facto, become a competent court within the meaning of the guarantee.
15. It is well arguable that this interpretation is not correct and that competence for this purpose - in the context of a guarantee expressly governed by English law - should be understood to mean competence under English rules of conflict of laws. Under those rules a court is of competent jurisdiction for the purpose of a claim against a defendant if that defendant is present within the territorial jurisdiction of the court or voluntarily submits to that jurisdiction or agrees to submit to the jurisdiction. None of those conditions is met, as I understand it, in relation to Allied here.
16. Another point that is at least seriously arguable is based on Article 25 of the Greek Insolvency Code. The effect of that provision, according to the expert evidence served on behalf of the claimants, is that the proceedings taken against a company subject to a Greek insolvency order are invalid, and accordingly the decision made by the Bordeaux Court against Allied in this case is null and void. It is at least arguable that when that provision is taken together with the EC Insolvency Regulation the effect is that the decision that forms the basis of the demand made by WFS under the guarantee is not an "enforceable decision" within the meaning of the guarantee and/or again for that reason also is not a decision made by a "competent court".
17. All those arguments, however, while they would potentially (if correct) give the Bank a defence to a claim under the guarantee, do not give Aria any cause of action. The guarantee is not enforceable by Aria because Aria is not a party to it and I can see no reason why there should be any implied term of the contract between Aria and the Bank that the Bank will only make payment under the guarantee if on the correct analysis of the law and the facts it has a liability to make such a payment. I can see every reason to imply a term that the Bank will not make a payment in satisfaction of what it knows is not a valid demand under the guarantee. However, I can see no reason why the parties to the security agreement would necessarily have intended that the Bank should be in breach of its contract to its customer if it were to pay in an honest but mistaken belief that payment under the guarantee was due. That view, which I would reach on the basis of first principles, is also supported by the decision of Thomas J (as he then was), in the case of Ermis Skai Radio & Television v Banque Indosuez SA, an unreported judgment dated 24 February 1997, of which a transcript has been provided.
18. Nor do the other authorities to which Mr Smith referred demonstrate any seriously arguable basis on which Aria could have a cause of action against the Bank in this case in any situation other than where the Bank knowingly paid out in satisfaction of a fraudulent claim under the guarantee. I therefore consider that Mr Smith was right in his original approach to the case when he accepted that, in order to succeed in justifying the claim for an injunction in this court, it is necessary to satisfy what is often referred to as the "fraud exception" to the rule that no such claim arises where the nature of the guarantee is a demand guarantee. The test to be applied in that context is common ground between the parties. For today's purposes, Aria needs to show a seriously arguable case of a clear fraud of which the Bank has knowledge or, as it has been expressed in the alternative, that fraud is the only realistic inference which the court can draw.

Is there a seriously arguable case of fraud?

19. Mr Smith submits that this test is satisfied. He submits, first of all, that it is plain that WFS and in particular the lawyers acting for it were well aware at the time when the proceedings in Bordeaux against Allied were brought that Allied was the subject of an insolvency order in Greece. They must also have been aware, he submits, that the effect of that order on the plain wording of Article 25 of the Greek Insolvency Code was to render invalid any proceedings brought against the insolvent company. They must further have been aware, he submits, that the business address of the company now in liquidation was not a valid address for service. The only realistic inference to draw, he submits, from the fact that service was made at that address is that WFS and its lawyers were deliberately seeking to avoid the proceedings coming to the notice of the liquidator of Allied because they knew that, if that were to happen, the liquidator would intervene in the proceedings in Bordeaux and, as Mr Smith put it graphically if somewhat colloquially in argument, would "snuff them out".
20. Mr Smith further submits that it appears from the evidence of Mr de Bascher, the French lawyer who acted for WFS in the Bordeaux proceedings, that he must have deliberately misled the judge about the fact that Allied was the subject of an insolvency order in Greece.
21. Those are all serious allegations but Mr Smith says that Mr de Bascher in his evidence has singularly failed to address or answer them satisfactorily despite the opportunity to do so, and in those circumstances the only realistic conclusion to draw is that the judgment given by the Bordeaux Court was dishonestly obtained. If that is so, he submits, it inexorably follows that WFS cannot honestly have believed it was entitled to be paid under the guarantee because no one making a demand under the guarantee could honestly have believed that the guarantee gave rise to a right to be paid founded on the judgment dishonestly obtained.
22. The last step of the argument Ms Healey realistically does not dispute, if it gets to that point. On behalf of WFS, however, she vigorously takes issue with the first stage of the argument and with the contention that the judgment was dishonestly obtained.
23. Of the fact that WFS and specifically its lawyer in the French proceedings, Mr de Bascher, were aware of the Greek insolvency order at the time when the proceedings took place there can be no doubt. Among other matters relied on by the claimants to demonstrate this are the following. First, on 21 December 2012 Mr Preston of Clyde & Co, who represent the claimants in this case, sent an email to Mr de Bascher referring to the claims made by WFS against Allied and said:

"Although you should be aware, for the avoidance of doubt we give you notice that Allied Maritime has been declared bankrupt by the Greek court. Please find attached a copy of the bankruptcy order and a translation. WFS' alleged claims against Allied Maritime must therefore be directed to the bankruptcy administrator and any action taken in any other jurisdiction will be unlawful."

24. Second, on 23 February 2013, after the proceedings brought in Florida by Allied had come to the notice of the liquidator of Allied, Mr Mantzavinos, he sent an email to WFS referring to the Florida proceedings, giving notice that Allied had been adjudicated bankrupt by an order of the Piraeus court and that he had been appointed as the liquidator. He went on to say:

"According to the Article No. 25 of the Greek Insolvency Code, as from the declaration of bankruptcy and on, it is forbidden to file any action against the insolvent company, or to proceed with any commenced actions against her. If, however, any such action is brought against the insolvent company contrary to Article No. 25, it is completely invalid. As a conclusion, you are not legitimised to proceed with the hearing before the United States District Court, for the Southern District of Florida against the insolvent company [Allied] therefore kindly note that you have the right to renounce any claim you may have against the insolvent company before the First Instance Court of Piraeus by latest 28 February 2013 in order for your claims to be satisfied proportionately among all beneficiaries of the insolvent company once the whole procedure is completed and depending on the amount of money available at the time in the bankruptcy account."

25. That was followed on 28 February 2013 by a further email sent by Mr Mantzavinos to representatives of WFS, including Mr de Bascher, in similar terms to the email which I have just read, save that it cut off after mentioning the First Instance Court of Piraeus and did not go on to refer to the latest date by which claims before that court could be presented and to explain the purpose of that procedure.
26. There was also a declaration made by Mr Mantzavinos in the Florida proceedings in which once again he explained the status of Allied as an insolvent company, and the existence of the order made by the Piraeus court declaring it insolvent, and quoted from what he said was his email dated 28 February 2013, although the quote contained in fact the fuller text which had been included in his original email of 23 February 2013.
27. It is clear from those documents and others that WFS, and in particular its French lawyer Mr de Bascher, knew full well at the time when the proceedings against Allied in Bordeaux were commenced that Allied was the subject of an insolvency order in Greece. They had been told, moreover, in clear terms that the effect of Article 25 of the Greek Insolvency Code was to prohibit the filing of any action against the insolvent company and to render any such proceedings completely invalid.
28. One would expect in those circumstances a full explanation from Mr de Bascher in the witness statements that he has made in these proceedings to answer the allegation that he has behaved dishonestly of how it is that he considered, if he did, that there was any legitimate legal basis for bringing proceedings against Allied in Bordeaux - given the fact that Allied was subject to an insolvency order in Greece, given the apparently clear terms of Article 25 of the Greek Insolvency Code, which had been drawn to his attention, and given the effect of the EC Regulation on insolvency, which in broad terms has the effect that any insolvency order made anywhere in the EU is effective in other member states.
29. I have to say that I find the statements which Mr de Bascher has made in these proceedings far from satisfactory. Nowhere in his two witness statements does he acknowledge in terms that he was in fact aware of the Greek insolvency order; indeed, if anything, such passing references as he makes to it might tend to give the impression that he was seeking to suggest otherwise. The principal paragraphs of his first witness statement which touch on the point are paragraphs 7, 19 and 22-23. In paragraph 7 he says that:

"No independent evidence of the effect under the applicable law of any purported liquidation order was adduced."

30. He is referring there to the proceedings that took place before the Bordeaux Tribunal of Commerce in December 2012 to attempt to lift the arrest of the vessel. At that time it was not known by either party that there had been a liquidation order made so it is unsurprising that no evidence about its effect was adduced. Mr de Bascher does not suggest, however, that once he became aware of it he took any steps or made any inquiries which gave him any reason to believe or caused him in fact to believe that the liquidation order had anything other than the effect which it purported to have, namely to prohibit any proceedings being brought against the insolvent company and to render such proceedings, if they were brought, invalid.
31. He goes on to state in that same paragraph 7:

"Further, my firm were unable to obtain any records from the register of companies in Liberia which suggest Allied is in liquidation/administration and we were unsure about the effect of the Greek proceedings, particularly as they related to a Liberian company."

From the context, I understand that to be a statement about Mr de Bascher's state of mind in December 2012 at the time when the application was made to lift the arrest of the vessel. It seems inconceivable that no attempt was made by Allied and its lawyers after that time, and after notice of the liquidation had been served on Allied and a copy of the insolvency order sent to them, to determine the effect of the order; nor indeed does Mr de Bascher state that at the stage of bringing these further proceedings against Allied in Bordeaux he was under some impression that, because the company was registered in Liberia, even though it had its seat and place of business in Greece, that somehow meant that the Greek insolvency law was not applicable.

32. At paragraph 19 of his witness statement, Mr de Bascher goes on to explain why he says it was that service of the Bordeaux proceedings was effected, not on the liquidator or on the court in Piraeus, but at the business address of Allied in Greece. He refers there to a number of documents, which he says suggested that even after Allied was insolvent its business office remained its address, or might have remained its appropriate address, at least for proceedings which were not claims in the insolvency itself, but were proceedings against the company which, if a judgment was obtained, might then result in a claim in the insolvency.
33. There is some support for that as being a possible understanding in the terms of the communications from the liquidator to Mr de Bascher and Allied's other legal representatives sent in the context of the Florida proceedings. For example, in the email dated 23 February 2013, which I read earlier, although that email referred to the right to announce any claims before the First Instance Court of Piraeus, the last words of the email are reasonably capable of being understood to mean that this applied only to claims made in the liquidation itself and not to other claims against the company.
34. I am therefore prepared to accept that there is a realistic inference which does not involve dishonesty that Mr de Bascher could have been under the impression that the Piraeus Court was not the appropriate place to serve the proceedings which WFS wished to bring. I would give Mr de Bascher the benefit of the doubt about that, even despite the fact that the information received back after service had been attempted at the business address of Allied was that it had not been possible to effect service because Allied had "closed down".
35. Mr de Bascher goes on to deal with what happened then at paragraphs 22-23 of his first witness statement. In paragraph 22 he says that:

"The significance [of Allied having closed down] was not entirely clear, and I contacted the transmitting authority to seek clarification, but was not able to obtain any further meaningful information from that source. I did not understand 'closed down' to mean 'subject to insolvency proceedings'."

At paragraph 23 he goes on to say that:

"At the hearing on 17 September 2013 [in the Bordeaux Court] I showed the certificate received back from Greece to the judge together with a translation. The phrase 'closed down' was specifically discussed. I requested the Président du Tribunal de Commerce de Bordeaux to consider the steps taken to serve the proceedings on Allied were sufficient, alternatively to specify any further steps he wished implemented, to decide that he has jurisdiction, and to hold Allied liable to make a provisional payment in respect of the claim against Allied pending the final determination of the claim on the merits."

That submission to the court was successful because precisely such an order was made.

36. What Mr de Bascher does not suggest is that he said anything to explain to the Bordeaux Court that Allied was the subject of insolvency proceedings in Greece. It is said that there is no obligation in France on a lawyer to make full and frank disclosure of material facts to the court and that Mr de Bascher had no professional obligation, let alone was he dishonest, in omitting (as he evidently did) to inform the French court of the existence of the insolvency order.
37. I can readily accept that there may be no obligation on lawyers in France to disclose facts adverse to their clients' interests voluntarily to the court if not asked. However, I would be astonished if it were permissible for a lawyer in any system in the world to be permitted knowingly to mislead the court or to tell a lie. On the material presently before the court, I have the greatest difficulty in understanding how Mr de Bascher could have conducted a discussion with the judge on 17 September 2013 about the effect of the information received from Greece that the office of Allied had closed down in which he did not, by one means or another, knowingly mislead the court by suppressing in that context the vital piece of information that Allied was the subject of an insolvency order.
38. I also find it difficult to understand - and it does not seem to me that Mr de Bascher has satisfactorily explained - what he contends or suggests that the unclarity was. As I mentioned before, nowhere in his evidence does he expressly grapple with the question of whether or not he was aware of the existence of the insolvency proceedings and the order made by the Piraeus Court, although it seems to me absolutely plain that he must have been so aware.
39. In those circumstances, it seems to me that the only conceivable explanation for why the office of Allied in Greece had closed down was because the company was insolvent and had gone into an insolvency process. In the absence therefore of any better explanation than the inadequate one that Mr de Bascher has given here, I cannot understand how he could honestly have taken the position that he could discuss with the judge the possible reasons why Allied had closed down and the significance of that while not mentioning anything about the insolvency and its potential impact on the proceedings.
40. Mr de Bascher had an opportunity to explain his understanding further in a second witness statement, which he made in response to clear accusations that not only had he been dishonest in his conduct in the French proceedings, but he was also being dishonest in his evidence given to this court. I have looked in vain, however, in Mr de Bascher's second statement for any explanation of how he honestly believed at the time when the Bordeaux proceedings were brought that WFS was entitled to bring those proceedings, notwithstanding the insolvency order made by the Greek court. Ms Healy in argument has relied on paragraph 35 of that statement. There Mr de Bascher says that:

"... in circumstances where: (1) there is no substantive defence to the claim, and (2) the judgment was being sought in order to demand payment under a bank guarantee which was issued by a third party and is secured by funds which are Aria's, not Allied's, I fail to see what complaint Allied can have. This is the approach taken by the President de la Cour d'Appel de Bordeaux in the judgment of 17 October 2013."

41. That statement, however, seems to me wholly insufficient to explain how Mr de Bascher could have been acting honestly in what he did or to answer the case which he is invited to meet.
42. In the first place his reference to the approach taken by the President of the Court of Appeal in Bordeaux on 17 October 2013 is nothing to the point. That is a reference to a judgment given by the Court of Appeal refusing a stay of execution of the judgment of the lower court. The basis on which a stay was refused, however, was simply that the court was not persuaded that serious prejudice would be suffered by Allied in the absence of a stay if payment is made and it ultimately is established that payment ought not to have been made. The Court of Appeal took the view (rightly or wrongly) that in those circumstances WFS would refund the money. It was therefore not necessary for the Court of Appeal to consider the second limb of the test which was in effect whether there had been a serious procedural irregularity in the proceedings brought in the Bordeaux court. Since the Court of Appeal expressed no view about that point, I am entirely unable to see how Mr de Bascher can seek to rely on the Court of Appeal decision as somehow vindicating his conduct in the court below.
43. As to his other point that he cannot see what complaint Allied can have in circumstances where the bank guarantee, under which a demand is being made is secured by funds which were provided by Aria and not Allied, whatever merit that point might have in broad moral terms, it simply does not address the question of how Mr de Bascher can have thought, if indeed he did, that there was any right on the part of Allied to bring proceedings against a company which was insolvent in circumstances where the apparently clear terms of Article 25 of the Greek Insolvency Code, previously brought to his attention, precluded any such right.
44. In these proceedings WFS have served evidence from a Greek lawyer, Mr Karavasileiadis, who advances an argument that despite the terms of Article 25 the prohibition in that article does not apply in circumstances where the intention of the proceedings, objectively established, is to enforce any judgment obtained against security provided by somebody other than the insolvent company. That opinion is contradicted by Mr Chrissanthis, the Greek law expert instructed by the claimants in this case, who states that in his opinion: "That view is wrong and misguided for a number of reasons". I do not need for today's purposes, and it would not be appropriate, to take any final view about the true position in Greek law. I would however, say that the argument advanced by Mr Karavasileiadis seems to be both difficult to reconcile with the express terms of Article 25 of the Greek Insolvency Code and difficult to understand in principle, given that any judgment obtained in the French court against Allied could be enforced against any assets of Allied and there was nothing which would confine it to being enforced only against the guarantee. In any event, for reasons which Mr Chrissanthis also explains, a claim under the guarantee would potentially prejudice creditors of Allied because it would give rise to an additional claim made in the liquidation on the part of Aria, if it was in turn obliged to fund the amount collected under the guarantee.
45. Be all that as it may, however, there is nothing in Mr de Bascher's evidence to suggest that he had this point of Greek law in mind when the proceedings were being pursued in Bordeaux.
46. It is not for this court today to make any final determination on the question of fraud and I am not in a position to do so. However, on the material before the court, it seems to me that Mr de Bascher has failed to provide any satisfactory explanation of his conduct which would show it to be consistent with an honest belief that WFS was entitled to pursue proceedings against Allied in France, notwithstanding the Greek insolvency order. I also consider that he has not provided to date any sufficiently full or clear explanation to rebut the inference that he dishonestly misled the Bordeaux Court. I therefore am persuaded that there is a seriously arguable case of a clearly established fraud. That is sufficient in principle to invoke the fraud exception and to surmount the first stage of the American Cyanamid test for the purpose of Aria's claim for an injunction.

Balance of convenience

47. I must therefore turn to consider whether damages would be an adequate remedy and the balance of convenience. Here WFS relies on a passage in the judgment of Kerr J (as he then was) in the case of R D Harbottle (Mercantile) Limited v National Westminster Bank Limited [1978] QB 146 at 155. The claim in that case was for an injunction to restrain payment by a bank under a letter of credit on the basis of the fraud exception. In the event Kerr J found that the fraud exception was not satisfied. But he also identified what he saw as being an insuperable difficulty for the plaintiffs in terms of the balance of convenience. He said:

"The plaintiffs still then face what seems to me to be an insuperable difficulty. They are seeking to prevent the bank from paying and debiting their account. It must then follow that if the bank pays and debits the plaintiffs' account, it is either entitled to do so or not entitled to do so. To do so would either be in accordance with the bank's contract with the plaintiffs or a breach of it. If it is in accordance with the contract, then the plaintiffs have no cause of action against the bank and, as it seems to me, no possible basis for an injunction against it. Alternatively, if the threatened payment is in breach of contract, which the plaintiffs' writs do not even allege and as to which they claim no declaratory relief, then the plaintiffs would have good claims for damages against the bank. In that event the injunctions would be inappropriate, because they interfere with the bank's obligations to the Egyptian banks, because they might cause greater damage to the bank than the plaintiffs could pay on their undertaking as to damages, and because the plaintiffs would then have an adequate remedy in damages. The balance of convenience would in that event be hopelessly weighted against the plaintiffs."

48. If no injunction is granted in the present case, the Bank might still decide that it should not make a payment under the guarantee. In that event Aria would suffer no loss. If, however, the Bank decided to make a payment under the guarantee, the same dilemma would arise as identified by Kerr J in this passage: either such a payment would be a breach of the contract between the Bank and Aria or it would not. If payment under the guarantee would not be a breach of contract (because the demand by WFS was not fraudulent to the knowledge of the Bank), then Aria has no cause of action against the Bank and hence no basis for obtaining an injunction to prevent payment. If on the other hand payment would amount to a breach of contract, Aria would have a good claim for damages against the Bank.
49. Strictly, in those circumstances, one does not get to the balance of convenience test at all because damages would be an adequate remedy. But if one does, then Mr Healy submits that, just as in the Harbottle case, the balance of convenience is hopelessly weighted against Aria.
50. I am unable to see any convincing answer to that analysis. Mr Smith pointed out that in many cases where these issues have arisen, in the event of a fraudulent claim the claimant has potential remedies, not only against the bank if it pays, but also against the party making the demand on the bank - because in most cases that party has a contractual relationship with the bank's customer. He points out that in the case of Czarnikow-Rionda Sugar Trading Inc v Standard Bank London Limited & Others [1999] 2 Lloyd's Rep 187, in which Rix J applied a similar analysis when considering the balance of convenience to that of Kerr J in the Harbottle case, part of the reasoning of Rix J was that, if no injunction was granted to restrain payment by the bank, the claimant would in any event have potential alternative remedies to secure its claims against its counterparty - for example, by seeking a freezing order or injunctive relief against that counterparty. No such relief, Mr Smith points out, is applicable here because there is no contractual relationship between Aria and WFS.
51. I accept that argument so far as it goes. However, it does not seem to me to engage the second and separate reason why the balance of convenience is said to weigh decisively against the claimant based simply on the analysis that I have referred to already of the position as between the claimant and the Bank.
52. Mr Smith also submits that the balance of convenience should be looked at more broadly and that the most just and convenient order to make in this case is to continue the injunction so that the issues can ultimately be argued and decided before this court. I have no doubt that, unless a settlement is arrived at one way or another, many of the issues which have been canvassed today will have to be decided by the court. But I do not see any compelling reason of justice or convenience which requires those issues to be decided in a context where the Bank has been restrained from making a payment under the guarantee. As I have indicated, it seems to me that in the event that the Bank does not make a payment and that is held to amount to a breach of its obligations owed to Aria, Aria will have an adequate remedy in damages at the end of the day against the Bank.
53. For those reasons, I have come to the conclusion that, although I am persuaded that Aria has shown a seriously arguable claim against the Bank to the effect that it would be a breach of contract for the Bank to make a payment under the guarantee, it has not shown that damages would not be an adequate remedy if that breach of contract is established at trial or that the balance of convenience makes it necessary to grant an injunction until trial in this case.

Allied's claim

54. I turn then to the claim made on behalf of Allied for an interlocutory injunction. That is put on a quite different basis and, due to the lack of time at the hearing today, less focus has been placed on that argument than ideally I would have liked. I have, however, to do the best I can on the basis of the arguments and material presented.
55. The basis of Allied's claim is the EC Insolvency Regulation. Article 4(2) of the Regulation provides that:

"The law of the State of the opening of proceedings shall determine the conditions for the opening of those proceedings, their conduct and their closure. It shall determine, in particular: … (b) the assets which form part of the estate and the treatment of assets acquired by or devolving on the debtor after the opening of the insolvency proceedings ... (f) the effects of the insolvency proceedings on proceedings brought by individual creditors, with the exception of lawsuits pending ... (m) the rules relating to the voidness, voidability or unenforceability of legal acts detrimental to all the creditors."

56. Allied contends that, pursuant to those provisions, Greek law determines: first, whether the rights under the guarantee are to be treated as part of the insolvent estate; second, whether, in the light of the insolvency order made in Greece, the proceedings brought in Bordeaux against Allied are valid; and third, the question whether the judgment which has been obtained in those proceedings is valid and enforceable by way of the claim made under the guarantee against the Bank.
57. Reliance is then placed on Article 18 of the Regulation, which deals with the powers of the liquidator. Article 18(1) states that:

"The liquidator appointed by a court which has jurisdiction pursuant to Article 3(1) [that is to say, in this case, the Greek court] may exercise all the powers conferred on him by the law of the State of the opening of proceedings in another Member State, as long as no other insolvency proceedings have been opened there, nor any preservation measure to the contrary has been taken there further to a request for the opening of insolvency proceedings in that State."

Article 18(3) states:

"In exercising his powers, the liquidator shall comply with the law of the Member State within the territory of which he intends to take action, in particular with regard to procedures for the realisation of assets. Those powers may not include coercive measures or the right to rule on legal proceedings or disputes."

58. I do not find the effect of Article 18(3) in particular very clear. No relevant authority or academic commentary on Article 18 has been provided to me today. Doing the best I can on the basis of the wording of Article 18 itself, I interpret Article 18(1) first of all to mean that the liquidator of Allied, Mr Mantzavinos, can exercise in any other member state - including therefore this country - all the powers which he has under Greek insolvency law. On the evidence before the court, those powers include the power of the liquidator set out under Greek law to prevent acts being taken which will damage the interests of the creditors. According to Dr Chrissanthis (to whom I referred earlier), if payment is made under the guarantee:

"....the bankruptcy estate will be significantly compromised due to the existing, registered and already verified back to back contingent claim of Aria Inc through the Vessel's disponent Owner, AMN Bulk Carrier Inc against Allied for the exact amount and identical nature of the claim. This is a claim that has already been lodged and which is intended to be pursued in the bankruptcy proceedings, to the extent that WFS are paid out under the bank guarantee."

59. Various arguments under Greek insolvency law are advanced by WFS's expert, Mr Karavasileiadis, as I have mentioned earlier, principally to the effect that the guarantee is not to be regarded as an asset of the estate. It seems to me that there is at least a seriously arguable case, first, that Greek law is the applicable law, second, that under the Insolvency Regulation the liquidator has power to enforce his rights under Greek law in this country, and third, that those rights included a right to restrain payment under the guarantee.
60. I do not accept the submission made by Mr Smith that Greek law applies even to the test which the court should use when deciding an interim application for an injunction of the present kind. That seems to me to be a matter of the English court's procedure and must, on ordinary principles of the conflict of laws, be governed by the local law. Furthermore, I would interpret Article 18(3) as meaning that the law of England applies with regard to procedural matters.
61. Applying the American Cyanamid test to this claim, as I have to the claim made by Aria, having accepted that the liquidator has shown a serious issue to be tried, I have to consider the balance of convenience. Ms Healy has submitted that, as with Aria, the balance of convenience militates against the granting of any injunction for two reasons. First, she submits, the creditors of Allied will suffer no prejudice if payment is made under the guarantee, given that the guarantee has been issued on the security of funds provided not by Allied, but by Aria. Secondly, she submits that there would in any event be no prejudice because Allied is now participating in the proceedings in France. The decision of the French court is an interim decision only, not a final decision. If Allied succeeds in the French proceedings, the money will be repayable by WFS. There is no reason to consider that the money will not, in that event, be refunded to Allied - so the creditors of Allied will again, for that reason, suffer no prejudice.
62. As to the first point, it seems to me that it is answered by the evidence of Dr Chrysanthis to which I have just referred that, for the reasons explained by him, there will, if payment is made under the guarantee, be potential prejudice at least to the creditors of Allied. That is because an additional claim will arise against Allied's assets made by Aria or passed on by Aria to AMN and then made against Allied as a result of the loss suffered by Aria in having to fund the guarantee.
63. As for the second argument that no prejudice will be suffered by Allied's estate if payment under the guarantee is made because the money can be recovered if Allied is successful in the French proceedings, I am not persuaded that that is an adequate answer. I see force in the point made by Mr Smith that attempts to recover from WFS would potentially involve both cost and difficulty in attempting to enforce a judgment. It is true that the French Court of Appeal was not persuaded by a similar argument albeit applying a somewhat different test that there would be serious prejudice to Allied if a stay of execution was not granted. However, as pointed out by Mr Smith, it appears that the French Court of Appeal was under the mistaken impression that the French proceedings had been brought by World Fuel Services Private Limited, whereas in fact they had been brought by World Fuel Services (Singapore) Private Limited. There is no evidence before the court as to the assets and financial position of World Fuel Services (Singapore) Private Limited. In these circumstances I see no reason for confidence that a payment made under the guarantee would subsequently be recoverable.

Conclusion

64. In all the circumstances I am persuaded that the balance of convenience justifies making an order to prevent payment under the guarantee in favour, not of Aria, but of the liquidator of Allied. That is the order I propose to make.