England and Wales High Court (Queen's Bench Division) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION

		Royal Courts of Justice Strand, London, WC2A 2LL
		02/02/2010

Mr Justice Tugendhat:

1. The first Claimant ("DCL") applies for summary judgment in respect of debts alleged to be owed by the Defendant to it as assignee from the Second Claimant ("ENIC"). The bulk of the debt is said to be due under a series of loan agreements made between January 2005 and May 2007, the total advance being £2,877,670. Each of the agreements is in similar terms and is expressly stated to be governed by English law. The debt was repayable on demand. Repayment was demanded by letters dated 25 March 2009 and 23 April 2009 but has not been made. The balance of the debt claimed is said to be due under a Discounted Funding Agreement ("DFA") made on or about May 14 2005. Under that agreement a sum of £900,000 was advanced against a promise to repay £1,000,000 in specified circumstances. It is said that the defendant failed to make the payment of £1,000,000 due by 31 January 2006. This agreement is also expressly governed by English law.
2. None of that is controversial. But there is an issue as to an alleged agreement for compound interest at 5% in respect of the DFA.
3. A difference between the loan agreements on one hand, and the DFA on the other is that the former contain an express provision that interest will be payable at the rate of 5% compounded monthly, whereas there is no express agreement in the DFA as to the rate of interest payable in respect of the period following 31st January 2006. It is alleged that in an exchange of emails in June 2008, and by other means, it was agreed that the same rate of interest, with the same compounding, would apply in the case of the DFA and that a total sum was agreed to be due as at 31st December 2007 namely £3,575,434.
4. The grounds put forward for resisting summary judgment (apart from the issue of interest) are entirely based on what is said to be the law of the Czech Republic to the obligations of shareholders in corporations formed under the law of the Czech Republic. The Defendant was so formed.
5. This case came before me in October 2009 and on 3 November I handed down a judgment neutral citation number [2009] EWHC 2726(QB). That judgment related to matters of jurisdiction. The evidence put forward by the Defendant to resist summary judgment in this case consists of witness statements of Mr Radek Matous, namely his fourth, fifth and sixth witness statements, dated respectively 9 November, 4 January, and the day before the hearing 14 January 2010. His earlier statements related to jurisdiction.
6. The witness statements of Mr Matous contain a mixture of factual evidence, evidence of Czech law, and submission or argument. There is of course at this stage of the proceedings no order relating to the admission of expert evidence, and I accept that there does not need to be. Mr Keith points out, with some justification, the Claimants have not, as they did in relation to the earlier hearing, advanced any evidence of Czech law. The evidence of Mr Matous on that subject is therefore uncontradicted. It is accepted that he is a qualified lawyer in the Czech Republic. Nevertheless, Mr Brettler submits that the position is unsatisfactory, and I return to this point below.

THE RELATIONSHIP BETWEEN THE PARTIES

7. It is not in dispute that a company associated with ENIC, namely ENIC Football Management SARL ("SARL") was, in the period between 1997/8 and May 2006, the majority shareholder in the Defendant. SARL became the owner of between 96.7 and 99.8 percent of the shares. SARL is a wholly owned subsidiary of a company incorporated in Luxembourg called ENIC Sports SARL, which is in turn a wholly owned subsidiary of ENIC. The sole activity of SARL has been to acquire and dispose of shares in the Defendant. The individual through whom SARL has acted in its relationship with the Defendant is Mr Collecott. He has been an executive director, or finance director of ENIC. Until 27 February 2006 he was the chairman of the board of directors of the Defendant. ENIC is a company incorporated in England and Wales.
8. It is common ground between the parties that since May 2006 SARL was the registered shareholder of approximately 39% of the Defendant's shares; and that SARL is now the registered shareholder of less than 39% of the Defendants share capital, following an alteration to the Defendant's share capital in January 2008, the validity of which is contested by SARL. Evidence as to the exact proportion of the Defendant's shares registered in favour of SARL at the commencement of these proceedings is not before the court.

DISPUTED ISSUES OF FACT AND LAW

9. Mr Keith rightly recalls that the principles applicable to summary judgment. According to CPR 24.2 the question is whether the defendant has a real prospect of successfully defending the claim, and this hearing is not a trial of any kind. I am not in a position to make findings of fact and I do not do so.
10. Mr Matous is critical of the management of the Defendant at the time when that was conducted by persons appointed by, or associated with, ENIC. But nothing turns on that.
11. Mr Matous states that if the claim in this action succeeds it would be very likely to result in the liquidation or declaration of bankruptcy of the Defendant. Mr Matous sets out what he states would be the disastrous effects o f insolvency. On the other hand, he states that, if the Defendant is permitted to continue trading under its existing management, it has good prospects of receiving substantial amounts of revenue.
12. Mr Thompson notes that Mr Matous' claim that the Defendant would be unable to meet any judgement assumes that there is no one interested in the Defendant who would be willing to finance the Defendant's discharge of its liability to the Claimant. It is the case that in the evidence of Mr Matous there is no mention of any grounds for considering that any of the current majority shareholders, or any third party, might be unwilling to provide the funding.
13. On the other hand, according to Mr Matous, the Claimants are obliged under Czech law to continue to provide such funding, by reason of the former status of SARL as majority shareholder three years ago.
14. Mr Keith submits that under English conflict of law, and in particular as set out in the Rome Convention and the Contracts Applicable Law Act 1990, questions governed by the law of companies are excluded from the scope of the Rome Convention (Article 1(2)(e)). The law relating to the internal management of a company and the extent of an individual member's liability for the debts or engagements of a corporation and similar matters are determined by the law of the place of incorporation, namely in this case the Czech Republic. See Dicey Morris and Collins, The Conflict of Laws (14^th Ed) vol 2 para 30–024 and Base and Metal Trading Ltd. v Chermourin [2004] EWCA Civ 1316; [2005] 1 WLR 1157 54-56.
15. It is the Claimants case that it is English law, and English law alone that governs. I shall return to Mr Brettler's submissions on this point below.
16. In his fifth witness statement filed on behalf of the Claimant, Mr Thompson stated no more than that the Claimants did not accept that the position under Czech law would be as stated by Mr Matous.
17. The evidence Mr Matous gives of Czech law is as follows:

"12 One of the underlying principles of Czech company law, as regulated by the Czech Commercial Code (Act no. 513/1991 Coll.) is the principle of shareholder loyalty towards a company. Although this principle is not directly mentioned in the text of the law, it was expressly acknowledged in the case –law of the Czech Supreme Court (See Exhibit RM23). Thus it was there stated : "It should also be stated in this respect that legal theory has already concluded that the principle of the shareholder loyalty towards the company, which is the basis for all his obligation is one of the principles governing the Commercial Code. The principle of loyalty is an interpretation rule that must be used to construe the individual obligations is one of the principles governing the Commercial Code. The principle of loyalty is an interpretation rule that must be used to construe the individual obligations of a shareholder towards a company (see Cerná, S.: Obchodni právo. Aklová spolecnost. 3. díl (Commercial Law, Joint-Stock Company, Part 3), ASPI, Prague 2006, p 185 et seq).

13 The underlying principle of loyalty of a shareholder towards a company requires the shareholder to follow the aim for which the company has been established, to comply with its Articles of Associations and to respect the company's legitimate interests. The loyalty is the basis which must be applied to all conduct of a shareholder towards a company. The principle of loyalty has considerable practical implications, as follows: (i) it is a general rule within which framework the particular shareholder's duties towards the company are to be interpreted (ii) it can be a general regulation in situations which are not regulated in detail by statutory rules; and (iii) it can have a derogatory (that is, limiting) effect in situations where there is a special rule but its application will result in a breach of the loyalty obligation. The practical implication has been developed mainly in the German legal system but acknowledged also by Czech legal theory (See Exhibit RM24) and Czech case law.

14 It is an essential part of the loyalty duty to the company not to place the company in danger which is to an inappropriate degree and without justification.

15 In addition, Section 66(6) of the Czech Commercial Code (see Exhibit RM25) explicitly incorporated the consequences resulting, under certain circumstances, from a breach of the loyalty obligations by a shareholder, stipulating that the provisions of this law and special legal regulations on the responsibility and liability of the members of a Czech company's governing and controlling bodies also apply to persons who, based on an agreement, interest in the company or some other fact, substantially affect the company's conduct by having substantial influence over a company's business. The Second Claimant as a major shareholder of the Defendant would without doubt be a person with substantial influence over the Defendant's business." [emphasis added]

18. As can be seen from the concluding sentence of paragraph 15, the evidence of Czech law is in the same paragraph with submissions or argument. It is necessary to disentangle evidence of fact from other matters.
19. As already recited, from Mr Matous's own evidence, ENIC is not a shareholder of the Defendant. Since about three years before the issue of these proceedings ENIC has not even been associated with the majority shareholder of the Defendants.
20. There is no factual evidence adduced by the Defendant to support the statement that ENIC or any company associated with it exercises any influence over the Defendant's business.
21. In my judgment there is no real prospect of the Defendant persuading this court that ENIC, whether directly, or through SARL, has substantial influence over the Defendant's business, or that it has had such influence at any time material to these proceedings. It follows that the above mentioned provisions of Czech law have no application.
22. In paragraph 16 of his fourth witness statement Mr Matous refers to the assignment by ENIC dated 24 March 2009 of the debt due from the Defendant and to the demands made in March 2009. He goes on to advance the following argument:

"16 … It is the Defendant's case that that amounts to conduct endangering the existence of the Defendant to an inappropriate degree and without justification in the circumstances of the Claimants knowing full well that the Defendant can only pay off the loans by selling players in the FIFA transfer windows.

17 It is obvious that the Second Claimant has decided to acquire the repayment of all its claims through the First Claimant to oppress the Defendant and use any judgement it may obtain for its own shareholder dispute with the company Key Investments AS.

18 The Claimants' demand for full repayment of any judgement obtained in these proceedings will very likely result in the liquidation or declaration of bankruptcy over the Defendant and be a clear and substantial breach of the general loyalty obligation of the Second Claimant as a shareholder (formally the majority shareholder) towards the Defendant. Such conduct is considered under Czech law to be against good morals and/or the principles of fare business conduct.

19 Any act which by its content or purpose violates or evades the law or is contrary to good morals is invalid and void under Section 39 of the Czech civil code [references are given and a copy is exhibited] the exercise of a right which contradicts the principles of fair business conduct".

23. There are difficulties in understanding the suggestion of oppression by a minority shareholder of the company, or of the majority shareholder (at least on the facts of this case). There is nothing to support the assertion made by Mr Matous that ENIC has decided to pursue this course "to oppress the Defendant and use any judgment to obtain for its shareholder dispute with the company Key Investments AS". And I note that Mr Matous nowhere sets out what, under Czech law, might count as the justification referred to in paras 14 and 16 of his evidence. I can see no prospect of the Defendant succeeding in persuading this court that the enforcement of the debts here sued is without justification.
24. In the light of the conclusion I have reached, there is no real prospect of the court finding a factual basis upon which these provisions of Czech law could be applied.
25. Mr Matous goes on to make the following argument:

"19 … It is submitted that the First Claimant as an assignee, cannot be in any better position than the Second Claimant. The mere legal device of an assignment cannot create a greater right than that employed by the assignor, as a matter of principle.

20 It follows accordingly that the claimants cannot, in the circumstances take steps leading to immediate liability for repayment of the loans, but must allow the defendant reasonable opportunity to pay and the claimants must affect an agreement with the defendant on reasonable terms to achieve that. In effect, the claimants must allow the defendant the opportunity, using its best endeavours, to sell players so as to provide funds to settle the loans and interest accrued to date of payment. The claimants are fully protected in the meantime by the accrual of interest".

26. In his fifth witness statement dated 4 January 2010 Mr Matous returned to the topic of shareholder loyalty. Mr Matous states:

"5 The principle of shareholder loyalty towards a company is one of the underlying principles of Czech company law as set out in Part II of the Czech Commercial Code and is applicable to all shareholders of a Czech company irrespective of the shareholder's nationality. This principle must be applied to all conduct of a shareholder towards a company as explained in my fourth Witness Statement, paragraphs 12-13. The fact that a specific contract concluded between the company and its shareholder is governed under English law by choice of law made by the parties has no effect on the general applicability of the loyalty principle to all relations between a company and its shareholders.

6 Accordingly, it is no answer to say simply that the loan agreements are governed by English law. One cannot ignore the relationship of the parties, which overrides any specific contracts they enter into. It is a relationship issue, not a contractual one. The First Claimant, as a bare assignee, cannot, it is submitted, be in any better position, in effect acquiring greater rights by virtue of the lack in its case of the behaviour standards which govern the Second Claimant, than its assignor.

7 Section 66b (1) of the Czech Commercial Code (see "Exhibit RM32") set forth that:

"Concerted conduct" (in Czech "jednáná ve shode) means conduct by two or more persons undertaken in mutual agreement with a view to acquiring or conveying or exercising voting rights in a specific person (entity) or utilising voting rights to exert joint influence on the management or operation of such person's enterprise or to elect that person's (entity's) statutory organ (or most of its members) or supervisory organ (or most of its members), or otherwise influence that person's (entity's) conduct. Under Section 66b (2) of the Czech Commercial Code concerted conduct means conduct under subsection (1) undertaken in particular by (a) a legal entity and its statutory organ or a member of such, or persons directly managed by such, a trustee (settlement administrator) or an administrator concerned with enforced administration, or mutually between these persons; (b) the controlling person and persons controlled by it, (c) persons (entities) controlled by the same controlling persons or (d) persons (entities) forming a holding type-group.

Under Section 66b (4) of the Czech Commercial Code persons involved in concerted conduct must meet the duties (obligations) arising there from jointly and severally…

9 Under Czech law the loyalty principle of the shareholder towards a company is also applicable to the persons and entities controlling the shareholder based on the concerted practice liability. The Second Claimant cannot get around the application of the loyalty principle by relying only on its "shell company" registered in Luxembourg in cases when all shareholder's rights and duties have always been effectively performed by the Second Claimant represented in most cases by Matthew Collacott and ENIC as the Defendant's formal shareholder is fully controlled and influenced by the Second Claimant". [emphasis added]

27. Again, I find it hard to see how an assignment of a debt, such as it is agreed has occurred from ENIC to DCL, can be characterised as concerted conduct so as to attract the application of these provisions of Czech law on the facts of this case.
28. In his oral submissions Mr Brettler embarked on a detailed argument as to how this court should decide what is the law applicable to the claim. He did this with a view to establishing that there was no real prospect of the Defendant establishing that Czech law could apply, even on the facts assumed or asserted by Mr Matous. I found this argument difficult to follow, advanced as it was for the first time orally. He placed before me the case decided by Lord Brodie in the Outer House, Atlantic Telecom GmbH Noter 2004 SLT 1031.
29. I understand it is common ground that the process by which the court is to decide what system of law is to be applied remains accurately described by Staughton LJ in McMillan v. Bishopsgate Trust Plc (No 3) [1996] 1WLR 387. That is explained by Lord Brodie in para 29 of his judgment and following. There are three stages. First it is necessary to characterise the issue that is before the court. Second it is necessary to select the rule of conflict of laws which lays down a connecting factor for the issue in question. Third it is necessary to identify the system of law which is tied by the connecting factor found in stage two to the issue characterised in stage one.
30. As I understood Mr Brettler's submission, the issue to be characterised as being before the court in the present case is a contractual issue, because the claim is in contract. Accordingly he submits that the rule of conflict of law which lays down a connecting factor is that applicable to the law of contract, and so English law applies to all questions. I have to say that I am doubtful that so broad an approach is the correct one, but I do not have to embark upon this argument in detail.
31. Mr Brettler notes that it is one thing to submit that the duties of a shareholder in a Czech company to the company are governed by Czech law, but it goes very much further to state that it is Czech law that governs the question whether ENIC, or DCL is to be regarded as in substance a shareholder. For my part I am inclined to the view that that point would be a separate issue for the purpose of the analysis of Staughton LJ.

INTEREST AND THE DFA

32. There may not be great practical significance in the dispute about the rate of interest to be applied to the sums outstanding under the DFA. If the Claimants' case on this point were to fail they would be entitled to interest at the statutory rate. Mr Brettler submits that would be 5% simple interest or thereabouts. However, the point is at issue and I have to decide it.
33. The claim is on the footing that an agreement was reached by Mr Kulicka. There was an exchange of emails on and between 2^nd and 5^th June 2008.
34. In the first of these Mr Collecott asked that the Defendant confirm the balance on the loans as at 31 December 2007. Mr Kulicka replied on 3 June including spreadsheet calculations which he asked Mr Collecott to check. Mr Collecott queried the apparent omission of £1,000,000 owed under the DFA. On 4 June 2008 Mr Kulicka replied with an email including the following:

"As I understand it well, we sign our "discounted…"; you sent us 900 th GBP in several payments and we should repay 1 mil. GBP. The deadline was 31.1.2006 interest to this date is "somehow" in the difference 100 th GBP and as we didn't repay it at 31.1.2006 we should calculate the interest from this date (under the same conditions like other loan contracts so I put it into the sheet)".

35. After further adjustments, a schedule was agreed showing indebtedness as at 31 December 2007 of £3,575,434. Further exchanges of emails, in September 2008, are consistent with these figures.
36. In his fifth witness statement Mr Thompson exhibits the audited accounts for the Defendant for the financial year ending 30 June 2008 which are signed by Mr Kulicka. They are also signed by two directors of the defendant, Mr Rosen and Mr Dolezal. Sections 3.7 and 4.9.3 of these accounts are translated. The balance shown as at 30 June 2007, including interest and at 30 June 2008 is subject to a note. The note reads, in translation, "both loans are payable on request and they bear interest in the amount of 5% per annum".
37. In his fourth witness statement Mr Matous states that Mr Kulicka was not authorised by law, or by any of the defendant's internal regulations, to act on behalf of the company in any substantial matter. He alleges, but without giving supporting grounds for his belief, that he believes that ENIC was aware of limitations on the authority of Mr Kulicka. He does not challenge the interpretation put upon the exchange of emails.
38. In his fifth witness statement at paragraph 17 Mr Matous states that Mr Kalicka was acting under the instructions of Mr Callecott and that the information is incorrect. He accepts that on 17 December 2008 the two directors signed the annual financial statement as in their capacity as the board members and the authorised persons to act on behalf of the Defendant. But he states that their signature does not mean that any incorrect accounting information included in those statements has become correct, or that they acknowledge any amount shown in the annual financial statements towards the Defendants. I regard this interpretation of the documents as unrealistic.
39. In these circumstances I see no real prospects of the Defendant defeating the claim that there was a binding agreement that the interest payable on the sums overdue under the DFA should be at the same rate of interest as that agreed in relation to the loans.

THE EVIDENCE OF MR MATOUS

40. As I noted in my November judgment Mr Matous is an Advokat and senior associate of the firm of The Czech lawyers advising the defendant. He was in fact the lawyer who was responsible for drafting and filing the Defective Acknowledgement of Service of 20 July which I had to consider in my November judgment. I noted this at paragraph 7 of that judgment. I have in mind from that judgment the observations I made at paras 9 to 11 and 48.
41. It might have been expected that the defendant would advance evidence of Czech law through a person of independence, having regard to the observations I made in my November judgment. The explanation given for not doing so in the fourth witness statement of Mr Matous is:

"The defendant is not sought to incur the substantial extra costs of obtaining an independent opinion from a professor of Czech law, at this stage. No disrespect to the court is intended. The Defendant has very limited resources. The purpose of this witness statement is to demonstrate that there are real triable issues, and the Defendant has a defence under Czech law, given the relationship of the parties".

42. I find that explanation unconvincing. Significant sums of money have already been spent on this litigation. No information is given as to why, or by how much, the costs of obtaining an independent opinion on Czech law would have succeeded the costs of obtaining the opinion of Mr Matous on the same points.
43. So while I have had regard to the whole of the evidence of Mr Matous, I do so subject to considerable reserve as to the objectivity and completeness of his evidence as to Czech law in these proceedings against the Defendant. But in the event this has had no consequences. I have reached the conclusions that I have reached on the basis of the evidence of Czech law that he has given.

CONCLUSION

44. For the reasons given above, judgement will be entered for the claimant as sought.