14 pages
COURT OF APPEAL
24th September 1998
Before: | Sir David Calcutt, Q.C., (President); Miss E. Gloster, Q.C.; and The Hon. M.J. Beloff, Q.C. |
Between | (1) Armco Inc. | Plaintiffs |
(2) Armco Financial Services Corporation | ||
(3) Armco Financial Services International Limited | ||
(4) Armco Pacific Limited | ||
(5) Northwestern National Insurance Company | ||
And | (1) Roger Thomas Donohue | Defendants |
(2) Patrick Henry Rossi | ||
(3) Larry Loyd Stinson | ||
(4) David Wilmot Atkins | ||
(5) Wingfield Limited | ||
(6) C.I. Services Holdings Limited | ||
(7) NPV Limited | ||
And | (1) Paul Anthony Brereton Evans and Colin Graham Bird | Parties Cited |
(2) Abacus Secretaries (Jersey) Limited | ||
(3) Landau Limited |
Applications by the fifth and sixth Defendants for:
(1) leave to appeal (leave having been refused at first instance) against so much of the Order of the Royal Court of 27th August, 1998, as refused the application of the fifth and sixth Defendants to have the injunctions contained in the Plaintiffs amended Order of Justice varied so as to permit the payment of their legal fees and disbursements; and
(2) an Order that the substantive hearing of the fifth and sixth Defendants’ appeal take place forthwith after the hearing of the present summons to this effect.
Advocate W.J. Bailhache for the fifth and sixth Defendants;
Advocate J. Martin for the Plaintiffs.
judgment
GLOSTER, JA: This is an application for leave to appeal by the 5th and 6th Defendants, Wingfield Limited (“Wingfield”) and CI Services Holdings Limited (“CISHL”), from an order of the Royal Court (the Deputy Bailiff, assisted by Jurats de Gruchy and Tibbo) made on 27 August 1998, whereby the Royal Court varied ex parte injunctions granted in an Order of Justice by the Bailiff on 13 August 1998[1] (which, in effect, restrained the Defendants from disposing of any of their[2] assets within the jurisdiction[3] and required them within a stipulated period to make certain disclosures on affidavit as to their assets). The variation made by the Deputy Bailiff on 27 August 1998 allowed
“the 5th or 6th Defendants, or both of them, to apply up to £10,000 of their assets for the sole purpose of complying with a fourteen day disclosure order”,
but refused the 5th and 6th Defendants’ application to have the injunctions varied so as to permit payment generally of their legal fees and disbursements in connection with the proceedings brought against them in Jersey. The Royal Court also refused the 5th and 6th Defendants’ application for leave to appeal.
Before this court (and if leave to appeal is granted) the 5th and 6th Defendants seek an order varying the injunctions granted on 13th August 1998 so as to permit payment of their legal fees and disbursements in connection with the proceedings brought against them in Jersey, and, in particular, legal fees and disbursements incurred in connection with (i) their application to the Royal Court, issued on 26th September 1998 (after the hearing in the Royal Court) to discharge the injunctions restraining them from disposing of their assets, or, in the alternative, to vary such injunctions so as to permit them to pay legal fees and disbursements in connection with their defence to the legal proceedings in the United States; (the date for hearing of which has been fixed), and/or (ii) advice which the 5th and 6th Defendants wish to seek on jurisdictional matters in connection with the Plaintiffs’ application issued on 9th September 1998 (again after the hearing in the Royal Court) to have the Jersey proceedings stayed. The date for the hearing of this application has been fixed for 27th October 1998. At the time of the hearing before the Royal Court the Court was told by counsel for the 5th and 6th Defendants that it was a possibility that an application might be made to discharge the injunctions, but it was not known at that time whether such an application would in fact be made.
The Plaintiffs are companies incorporated respectively in the states of Ohio and Delaware in the United States and in Singapore. The proceedings in Jersey are one in a set of parallel proceedings brought by the Plaintiffs against one or more of the Defendants in various jurisdictions including the United States, the United Kingdom, Singapore and Hong Kong.
In summary the Plaintiffs’ case is that the 1st to 4th Defendants (all of whom are individuals) were involved in a fraudulent conspiracy to procure the Plaintiffs to transfer substantially more assets than were necessary to CISHL to enable it to purchase, from the Plaintiffs, a group of insurance companies (“the insurance subsidiaries”), in run-off, as part of a management buy-out scheme. What is alleged is that the 2nd and 3rd Defendants (a Mr. Rossi and a Mr. Stinson), who were the executives responsible, on behalf of the Plaintiffs, for negotiating the terms of the management buy-out with the 1st and 4th Defendants (a Mr. Donahue and a Mr. Atkins), had in fact, prior to completion of the buy-out agreement, entered into a fraudulent, secret agreement with the 1st and 4th Defendants to join them and participate (through Wingfield, as the proposed owner of CISHL) in the ownership of the acquired group of insurance subsidiaries after completion of the management buy-out. Accordingly, the Plaintiffs allege that the corporate executives entrusted by the Plaintiffs to negotiate the sale on their behalf, were in fact undisclosed partners of the buyers . The Plaintiffs allege that, as part of this secret agreement, the 2nd and 3rd Defendants, fraudulently and in breach of their fiduciary duties of loyalty, good faith and fair dealing, procured the transfer to CISHL, by one or more of the Plaintiffs, of substantially more assets than were necessary to meet potential liabilities of the insurance subsidiaries that were being sold by the Plaintiffs. It is alleged that subsequently the 1st to 4th Defendants extracted from CISHL, for no, or no adequate consideration, a substantial proportion of the assets (which had, in the Plaintiffs’ case, been transferred as a result of the fraud), by means of “commissions”, dividends to CISHL’s shareholder, Wingfield, “consulting fees” and other types of payment, some of which were allegedly paid to the 7th Defendant NPV Limited, a Nevis company, which is alleged to be controlled by the 1st to 4th Defendants. The Jersey proceedings allege that, because of the knowledge of the 1st to 4th Defendants of the 2nd and 3rd Defendants’ breaches of fiduciary duty, and pursuant to the applicable US and/or English and/or Jersey Law, CISHL received $42.5 million upon constructive trust for the Plaintiffs, and that likewise Wingfield received the amounts acquired by it upon constructive trust for the Plaintiffs, and that both Defendants hold all sums that they retain upon constructive trust for the Plaintiffs (see paras 35 and 36 of the amended Order of Justice). The prayer claims inter alia against the 5th and 6th Defendants an order that they should pay to the plaintiffs
“All funds found to be held for the Plaintiffs by any defendants and/or any Parties Cited within the jurisdiction;”
and an order that the interim injunctions should be confirmed.
At the time of the hearing before the Royal Court, the 5th and 6th Defendants were the only Defendants who had been served with the Jersey proceedings. They had also been served with proceedings brought by the Plaintiffs against them and others in the United States Bankruptcy Court, for the Southern District of New York, under section 304 of the US Bankruptcy Code (“the US proceedings”), which in addition to claims for damages for inter alia fraud, conspiracy, conversion, breach of fiduciary duty, and for racketeering pursuant to the Federal Racketeer Influenced and Corrupt Organisations Act (“RICO”) 18 USC claimed proprietary remedies against the 5th and 6th Defendants based upon constructive trust; see e.g. paragraph 188 of the complaint in the Us proceedings. The Royal Court was told that a trial of the substantive action in the US proceedings had been applied for and that a jury trial had been demanded. This Court was informed that since the hearing before the Royal Court certain other Defendants had also been served with the Jersey proceedings, pursuant to leave that had been given to serve out of the jurisdiction. Ex parte applications for Mareva type injunctions (but not against the 5th and 6th Defendants) have been made in Guernsey, Singapore and Hong Kong. In Singapore the relief was obtained ex parte and subsequently discharged. In Hong Kong an application to have the ex parte relief discharged was due to be heard on 21st September, but this Court was not informed of the outcome (if any) of that application.
It can be seen from this brief description that the litigation is complex, involving serious allegations of fraud, proprietary claims and, potentially, large sums of money. So far as the 5th and 6th Defendants are concerned, they face legal proceedings in at least two jurisdictions, namely New York and Jersey and possibly more. The Plaintiffs have retained eminent firms of lawyers in various jurisdictions and it has apparently taken them over a year since they say that they first discovered the allegedly dishonest conduct of the Defendants to consider whether they had sufficient evidence to bring proceedings, and, if so, to decide in which jurisdiction such proceedings should be brought[4]. This court was informed that the 5th and 6th Defendants have retained, or will shortly have to retain, US lawyers to act on their behalf. The costs of the proceedings, if defended, are likely to be substantial on all sides. It is common ground, and known to the Plaintiffs, that the 5th Defendant, Wingfield, has substantial sums within the jurisdiction, which are held to its order by Abacus Nominees Limited, one of the Parties Cited, and which are subject to the injunctions obtained by the Plaintiffs.
The 5th and 6th Defendants deny the alleged secret agreement and the allegations of fraud. A short affidavit sworn on their behalf on 26 August 1998 by Mr. Stinson, the 3rd Defendant, one of the two directors of the 5th and the 6th Defendants and a shareholder in Wingfield, was before the Royal Court on 27 August 1998. It appears that the advocates for the 5th and 6th Defendants had only received the affidavit of Brian Cooper dated 5th August 1998 in support of the Plaintiffs’ amended Order of Justice on 26th August 1998 and therefore that Mr Stinson had not had time to review that affidavit at the time of swearing his first affidavit. Mr. Stinson’s affidavit nonetheless denied the existence of the alleged secret agreement and the allegations of fraud. At the hearing before this Court there was a further affidavit sworn by Mr. Stinson, (his third affidavit) which was sworn in support of the application by the 5th and 6th Defendants to have the ex parte injunctions set aside (an application which is not, of course, before us). That third affidavit not only descended into further detail as to the basis for the 5th and 6th Defendants’ denial of the alleged secret agreement, but also exhibited a copy of a lengthy affidavit sworn by Mr Donahue, the 1st Defendant in the Jersey proceedings and a shareholder with approximately a 50% interest in the 5th Defendant, on 25th August 1998 in similar proceedings begun by the Plaintiffs in Singapore. That affidavit also dealt at some length with the Defendants’ defence to the Plaintiffs’ allegations. Further since the hearing before the Royal Court, the 4th Defendant, Mr Atkins, one of the alleged participants in the alleged fraud, has signed a statement dated 7th September 1998 in the context of a settlement which he has apparently reached with the Plaintiffs, which purports to support certain allegations made by the Plaintiffs. At the time of the hearing before the Royal Court, his statement was in unsigned form. Further the third affidavit of Mr Stinson exhibited a copy of a signed statement by Mr Atkins dated 15th April 1997, which was different from the unsigned version, and which, in particular, did not include certain of the statements asserting a pre-existing agreement between the 1st to 4th Defendants.
The merits (or otherwise) of the Plaintiffs’ claims were only lightly touched on before this court. Advocate Bailhache for the 5th and 6th Defendants submitted that there was clearly a triable issue as to whether the alleged secret agreement had been concluded; Advocate Martin for the Plaintiffs did not go so far as to submit that this was one of those “exceptional cases” where, after review of the merits, the Court could be satisfied:
“that the proprietary claim was so strong that it could be demonstrated that such proprietary claim was well founded at an interlocutory stage”
and that accordingly the
“Defendant should not be free to draw on enjoined funds”;
see United Mizrahi Bank -v- Doherty & Ors [1998] 2 All ER 230 at 234, per Mr Michael Burton QC, sitting as a Deputy Judge of the Chancery Division, citing Lord Bingham MR in Sundt Wrigley & Co -v- Wrigley [1993] Unreported Judgment of the Court of Appeal of England. She contended that the Royal Court did not approach the matter on the basis that the proprietary claim was so well founded that the Defendants could not draw upon the enjoined funds. However, since, as I have said, there has been no real analysis before this court of the strengths or weaknesses of the parties’ respective contentions on the evidence as it now stands, I do not consider that it is appropriate for this Court to express any view as to the strength, or otherwise, of the Plaintiffs’ proprietary claims or to express a view as to whether there is, or is not, a triable issue. For the limited purpose of the application before us, and in the absence of any detailed arguments on the evidence, I consider it appropriate to proceed on the basis that this is not an exceptional case and that the Court should assume that there is a triable issue on the fraud, and other, allegations. This appears to be the basis upon which the Royal Court proceeded on 27th August 1998. However the fact that, for the limited purposes of this application, this Court proposes to proceed on this basis, should not be regarded as definitive, or in any way as precedent, for the approach to be adopted in later applications that are pending, such as, for example, the application to discharge the injunctions.
It was common ground that, where the Royal Court has exercised a discretion, this Court should only intervene in three cases:
“(1) where the judge has misdirected himself with regard to the principles in accordance with which his discretion has been exercised;
(2) where the judge, in exercising his discretion, has taken into account matters which he ought not to have done, or has failed to take into account matters which he ought to have done; or,
(3) where his decision is plainly wrong”
see per Lord Brandon of Oakbrook in The Abidin Daver [1984] 1 All ER 470 at 482, cited with approval by this Court in Rahman -v- Chase Bank (C.I.) Trust Co Ltd and Ors [1984] JJ 127 at 133-134, where it was held (following the speech of Lord Diplock in Hadmoor Productions Limited -v- Hamilton [1983] 1 AC 191 at 220D) that an additional ground justifying this Court’s interference was where there had been a change of circumstances following the Royal Court’s decision.
Advocate Bailhache for the 5th and 6th Defendants criticised the judgment of the Royal Court in various respects. His principal arguments may be summarised as follows:
(1) First he submitted that this Court could interfere because it was not clear that the Plaintiffs were making any proprietary claims at all. He submitted that all the Plaintiffs were in reality doing were seeking pure Mareva injunctions from the Jersey Court, or, in other words, personal remedies, in support of their claims in the US proceedings for damages. If that were so, then the invariable practice on granting Mareva injunctions was to make provision for payment of the Defendants’ reasonable legal fees, without the need to do any balancing exercise between the possible injustice to a plaintiff of permitting the use of what might turn out to be a Plaintiff’s funds for costs, against the possible injustice to a Defendant of denying him the opportunity of advancing what may turn out to be a successful defence. He contended that the Royal Court had failed to recognise that the Plaintiffs’ claim in the Jersey proceedings to an injunction was not in fact a proprietary claim.
In my judgment this argument is misconceived. It is clear in my view that in both the Jersey and the US proceedings the Plaintiffs are making proprietary constructive trust claims to assets held by the 5th and 6th Defendants and allegedly derived from the $42 million transferred by the Plaintiffs to CIHSL, and that the injunctions which the Plaintiffs seek in the Jersey proceedings are to protect not only their personal claims to damages but also their proprietary claims to have the assets which they allege the Defendants hold upon constructive trust for the Plaintiffs transferred to the latter; see e.g. paras 35 and 36 of, and the prayer in, the amended Order of Justice, and para 188 of, and para c of the prayer in, the complaint in the US proceedings. In my judgment the Royal Court cannot be criticised for regarding the Plaintiffs’ claim as a proprietary claim.
(2) Advocate Bailhache’s second argument was that the Royal Court failed to appreciate that it was clear that on the Plaintiffs’ case not all of the assets of the 5th and 6th Defendants could be treated as being subject to the Plaintiffs’ proprietary claim. This was because, he submitted: (1) the Plaintiffs recognised that to arrange the sale of the North Atlantic Group some of them had to make funds available to meet liabilities; (2) there is no allegation that the 5th Defendant’s only assets are those which have derived from the 6th Defendant; and (3) there is an implied admission in the Order of Justice by the Plaintiffs that some of the assets injected into the 6th Defendant were required to meet the liabilities of the North Atlantic Group. In my opinion this criticism is also without foundation. All the Royal Court said was that the Plaintiffs “on the face of it, have a proprietary claim to a substantial sum of money” (page 3 of the transcript). Upon the assumptions stated above, that was correct. I do not think that the exercise of the Royal Court’s discretion was in any way dependant upon, or influenced by, a belief on the Royal Court’s part that the Plaintiffs were making a proprietary claim to all the assets of the 4th and 5th Defendants, as opposed to (possibly) merely some substantial proportion thereof. In any event, the extent of the Plaintiffs’ proprietary claims, if any, to the assets presently held by the 5th and 6th Defendants, will no doubt be a matter that will be in dispute in the proceedings.
Advocate Bailhache’s third criticism is that the Royal Court did not give any cogent, or indeed any, reasons for its decision not to allow the 5th and 6th Defendants’ funding for legal costs and disbursements in respect of the then possible application to discharge or vary the injunctions or otherwise in connection with the Jersey proceedings. He submits that the Royal Court may have taken the view that no legal fees and disbursements would be incurred in Jersey (other than to comply with the interim disclosure orders), and that, in reality, the Royal Court simply did not address its mind to whether or not it should allow the 5th and 6th Defendants monies for costs incurred in connection with the Jersey proceedings. He points to the statement by the Royal Court that the fact that an application might be made to discharge the injunctions was “not a matter that can concern us today”. He also points out that the Royal Court may have formed the view from the Plaintiffs’ statements that the injunctions were sought in aid of the US proceedings, and that those were to be the substantive proceedings, that no other costs would be incurred in Jersey other than the costs of compliance with the disclosure orders.
In response to this point, Advocate Martin for the Plaintiffs, submitted that it was not surprising that the Royal Court had made a limited order, because the prime focus of the argument of Advocate Lewis, who appeared for the 5th and 6th Defendants in the Royal Court, was the funding of legal costs to enable compliance with the disclosure Orders. She accepted that application was expressly made for liberty to use the enjoined funds for the wider purposes of the Jersey proceedings, including a possible application to discharge the injunctions. She also said that, when asked by the Royal Court who was funding the 5th and 6th Defendants’ representation before that Court, Advocate Lewis had declined to give an answer, saying that such matters were privileged.
In my judgment there is substance in Advocate Bailhache’s criticisms in this respect. The Royal Court gives no reason for its decision not to allow the 5th and 6th Defendants to use the enjoined funds for the purposes of legal fees and disbursements in connection with the Jersey proceedings generally. It is clear from the Royal Court’s own Judgment that they were told that the 5th and 6th Defendants wished their lawyers to give consideration as to whether an application should be made to discharge the injunctions, and that, subject thereto, it might well be that an application to discharge would be made. It is also clear that the Royal Court were told that the application before them included an application for legal fees and disbursements “for considering the discharge of the injunctions now in place” and indeed the summons itself was in general terms, simply referring to a variation “to permit the payment of the Defendants’ legal fees.” In my judgment the fact that the Defendants had not made up their minds whether or not to apply to discharge the injunctions was no reason to refuse the variation requested, if indeed that was the, or a, reason for the Royal Court’s decision. It was or should have been clear that costs had to be found immediately for the purposes of considering the matter. In the absence of any stated reasons for their decision not to allow funding for legal costs and disbursements, beyond that required for compliance with the disclosure Order, I can only infer that the Royal Court exercised its discretion wrongly taking into account the fact that, as at that date, no application to discharge had been issued, or failing to take account of relevant matters that should have guided its discretion, such as, for example, the need to ensure that it was not depriving the 5th an 6th Defendants of access to the judgment seat as to which see below. In the circumstances in my judgment this Court is entitled to exercise its discretion de novo in this matter, and accordingly I would grant leave to appeal to enable it to do so.
(4) Advocate Bailhache also submitted that the fact that there are now two applications actually pending before the Royal Court involving the 5th and 6th Defendants (i.e. their application to discharge the injunctions and the Plaintiffs’ application to stay the Jersey proceedings), which were not actually pending at the time of the hearing before the Royal Court (albeit reasonably capable of contemplation at that time) is a change of circumstances which also justifies this Court’s intervention.
Advocate Martin conceded that the issue of these applications did indeed constitute a change of circumstance, but argued that the correct course in the circumstances was for the 5th and 6th Defendants to reapply to the Royal Court. She attempted to reinforce this argument by a submission that the time requirements stipulated in Rules 9(2) and (4) of the Court of Appeal (Civil) (Jersey) Rules 1964 had not been complied with by the 5th and 6th Defendants, and that, as a result, the Plaintiffs had not had the time which the Rules allowed them to lodge their case nor had had the period of notice of the proposed appeal which the Rules afford a respondent. However she candidly admitted that she and her clients were adequately prepared to deal with the application for leave and the appeal, were not embarrassed in any way, and were not asking for an adjournment. She also conceded that this Court had power to abridge time in cases of urgency.
In my judgment, and given the Plaintiffs’ concession that the issue of the new applications did indeed constitute a change of circumstance, I take the view that this is another reason which justifies this Court’s intervention in the matter, and I would grant leave to appeal on this ground also.
(5) Advocate Bailhache also submitted that the Royal Court had wrongly approached the matter on the basis that the case was one of those “exceptional cases” where, after review of the merits, the Court could be satisfied: “that the proprietary claim was so strong that it could be demonstrated that such proprietary claim was well founded at an interlocutory stage” and that accordingly the “Defendant should not be free to draw on enjoined funds”; see United Mizrahi Bank v Doherty (supra). In support of this contention he relied upon the Royal Court’s statement on the first page of its judgment that
“We need only to note that the first sentence of the American substantive action begins with these words: “This action concerns an international financial fraud of immense proportions”.” (Emphasis supplied).
He inferred from the word “only” that the Royal Court were, wrongly in his submission, regarding the case as undisputedly well-founded at that stage and he went on to argue that they accordingly did not apply the right test as to whether monies such be released from the enjoined funds for the payment of costs. In my judgment this criticism is not justified as it is clear from later passages in the Judgment that the Royal Court appreciated that on the affidavit evidence before them the fraud allegations were disputed. As I said earlier in this Judgment, it would appear (although the matter is not clear) that the Royal Court proceeded on the basis that this is not an exceptional case and that the Court should assume that there is a triable issue on the allegation of fraud.
I turn now to consider how this court should exercise its discretion in the circumstances that now prevail.
By the time the argument had reached the stage of Advocate Bailhache’s reply there was little, if no, dispute as to the relevant principles that govern the exercise of the Court’s discretion to allow payment of a defendant’s legal costs out of enjoined funds, in circumstances where a plaintiff is asserting a proprietary claim. For present purposes they may shortly be stated as follows, although I emphasize that this is not an exhaustive list of the very many different factors that may affect a court’s discretion in such circumstances:
1. Only in an exceptional case, “where the merits could be gone into for the purpose of satisfying a Court that the proprietary claim was so strong that it could be demonstrated that such a proprietary claim was well founded at an interlocutory stage” .... [should] a Defendant .... not be free to draw on enjoined funds to finance his defence”; see the passage from United Mizrahi Bank -v- Doherty [1998] 2 All ER 230 at 234, already cited above, citing Lord Bingham MR in Sundt Wrigley & Co -v- Wrigley [1993] Unreported Judgment of the Court of Appeal of England.
2. In non-exceptional cases where a proprietary claim is made a “careful and anxious judgment has to be made....as to whether the injustice of permitting the use of the funds by the defendant is outweighed by the possible injustice to the defendant if he is denied the opportunity of advancing what may turn out to be a successful defence”; see per Lord Bingham MR in Sundt Wrigley & Co -v- Wrigley (supra).
3. A defendant should not be allowed to draw on a fund which may belong to a plaintiff for the purpose of paying the defendant’s legal costs unless and until he has shown that there are no funds of his own upon which he can draw for that purpose; see Fitzgerald -v- Williams [1996] QB 657 at 669G-H. The burden of proof is upon the defendant to do so; see A -v- C (No. 2) [1981] 2 All ER 126 at 127h-128c.
4. The Court looks at the reality of what is likely to occur if no order were made. If the costs would, in practice, be funded by a third party, then the Court will take this into account; see Gee on Mareva Injunctions and Anton Piller Relief (4th Ed’n) page 319.
5. The Court will not normally concern itself with the quantum of individual items of costs, although it may well fix a limit to the overall amount to be allowed for this purpose pending further application to the Court; it will not act as a form of provisional taxing body for the purposes of scrutinising the defendant’s legal fees; see Cala Cristal SA -v- Emran Al-Borno (6th May, 1994) “The Times”.
6. The Court may impose safeguards such as, for example, an undertaking by the defendant that he will make good, out of funds to which the plaintiffs have no proprietary claims, any sums which are spent on costs which at the end of the day are found to have come out of property to which the plaintiffs have a good proprietary claim; see Cala Cristal SA -v- Emran Al-Borno (supra), (although one might have thought that this would follow in any event, since all the Court is authorising is an act that would otherwise be in breach of an injunction, and is not in any way altering the beneficial interest in the funds, which, on the stated hypothesis, would at all times have remained subject to the plaintiffs’ equitable proprietary claim).
I now turn to consider the application of those principles to the facts of this case. As his submissions developed, and under some pressure from the Court, Advocate Bailhache formulated his application as one for liberty to use a sum not exceeding £50,000 in connection with legal costs and disbursements of the proposed application to discharge (or vary) the injunctions in the Jersey proceedings and in connection with the Plaintiffs’ application for a stay and generally in connection with jurisdictional issues relating to those proceedings.
Advocate Martin made three principal submissions in this context.
First she submitted that the policy underlying equitable proprietary and Mareva injunctions (namely to prevent dissipation of a defendants’ assets) would be frustrated if funding were permitted out of the enjoined assets. She relied on the fact that, according to the evidence in the recently signed statement of the 4th Defendant, Mr Atkins, the 1st to 4th Defendants, as part of the alleged secret agreement, had specifically agreed to leave a $1 million in Wingfield as a “fighting fund”. She contended that it would wholly wrong if the Defendants were to have access to that “fighting fund”, since that would, in effect, be giving effect to their fraudulent intention to dissipate the Plaintiffs’ assets. In my judgment this submission is of no assistance to Advocate Martin. These allegations are disputed, and the point takes her case no further than the basic contention by the Plaintiffs that they maintain a proprietary claim to all the enjoined assets.
Second, and relying in particular on principles three and four above, she contends that the 5th and 6th Defendants have not discharged the burden on them of showing that they do not have their own free funds available to fund this litigation. She criticised the first affidavit of Mr Stinson on the grounds that it did not clearly state the position (if such be the case) that the 5th and 6th Defendants do not have available assets out of the jurisdiction with which to fund their legal representation in connection with the Jersey proceedings. She made the point that the affidavit does not mention a chose in action vested in CISHL which Advocate Bailhache mentioned in opening (and of which the Plaintiffs appear to be aware). Finally under this head she asked the Court to infer that, as a matter of reality, funding would be available to the 5th and 6th Defendants, even if the Court were not to vary the injunctions. In support of this submission she relied upon the fact that the 5th and 6th Defendants had indeed been represented on at least two occasions before the Royal Court, and for the purposes of the application, and proposed appeal, to this Court and that, when the Royal Court had asked Advocate Lewis, who was paying for the legal fees to date, as I have already said, he had declined to give an answer on the grounds that the information was privileged.
In my judgment, although some criticisms can be made of Mr Stinson’s first affidavit (which Advocate Bailhache informed us was prepared in something of a hurry), it does, (with one exception) in paragraph eight, adequately set out the evidence upon which they rely to the effect (i) that all their assets are within the jurisdiction; (ii) that all such assets are currently subject to the terms of the injunctions; and (iii) that, in the absence of a variation, they will have no assets with which to fund their representation in the Jersey proceedings. The one exception is the chose in action represented by a claim which CISHL has against a Jersey company, Landau Limited, arising out of arrangements concluded with the provisional liquidators of certain of the Insurance Subsidiaries, which chose may, on one construction of the injunctions, not be subject to their terms. However, as Advocate Bailhache informed the Court in opening on instructions, and as has now been confirmed in a fourth affidavit sworn by Mr Stinson on 22nd September 1998, (pursuant to the Court’s direction that what it had been so informed on instructions should be formally put in evidence), the chose has no presently realisable value such that it could be used in payment of legal costs. Moreover, even if not subject to the injunctions on their strict wording, it is likely to be subject to the Plaintiffs’ alleged proprietary claims, if such claims are well-founded. Further if there was any ambiguity about what the 5th and 6th Defendants had stated in Mr Stinson’s first affidavit is their asset position, that has likewise been clarified or confirmed in what Advocate Bailhache told the Court on instructions, and what has been said in Mr Stinson’s latest affidavit. Accordingly, in my judgment, the 5th and 6th Defendants have discharged the onus upon them of showing that they do not have available free assets with which to fund their legal costs.
Likewise, in the light of what Advocate Bailhache told the Court on instructions, as apparently confirmed in Mr Stinson’s latest affidavit, I do not accede to Advocate Martin’s submission that the Court should infer that, even if no variation is granted, the 5th and 6th Defendants will be able to obtain funding for legal representation from a third party. The interim funding has been explained, and, prima facie at least, it seems unlikely that any of the 1st to 3rd Defendants will be prepared to, or will be in a position to, fund the costs of the 5th and 6th Defendants in the Jersey proceedings. Nor does Mr Stinson have any expectation that the provisional liquidators of the two Insurance Subsidiaries will make any further monies available to the 6th Defendant for legal costs in connection with the Jersey proceedings.
Third, in this context Advocate Martin submitted that it was appropriate to pierce the corporate veil and look through to the shareholders behind the 5th and 6th Defendants, and to treat their assets as available to the 5th and 6th Defendants for the purposes of funding their costs. I do not consider that it is appropriate to pierce the corporate veil in the present circumstances, and it seems to me that this was not, in any event, a doctrine which Advocate Martin needed to invoke, given the fourth principle set out above. Since the shareholders appear to be the 1st to 3rd Defendants, from a factual point of view the argument leads nowhere, since as I have already said, Mr Stinson’s latest affidavit indicates that it is unlikely that any of the 1st to 3rd Defendants will be prepared, or will be in a position, to fund the costs of the 5th and 6th Defendants in the Jersey proceedings.
Accordingly, in my judgment, and on the basis of the evidence before the Court, I take the view that there is a real risk that, unless the injunctions are varied, and the 5th and 6th Defendants are permitted to draw some monies for legal costs and disbursements, there is no real prospect of their being in a position to pursue their applications to discharge or to vary the injunctions, or otherwise to take advice in relation to jurisdictional issues, or appear, if appropriate, on the Plaintiffs’ application for a stay. It has not been suggested by Advocate Martin in argument that such applications are doomed to failure or cannot properly be made. In my judgment the risk of injustice to the Plaintiffs in having what they allege to be their funds used in the payment of the 5th and 6th Defendants’ legal costs, is outweighed by the possible injustice to the 5th and 6th Defendants if they are precluded from pursuing their applications to discharge or to vary the injunctions, or otherwise to take advice in relation to jurisdictional issues, or appear, if appropriate, on the Plaintiffs’ application for a stay . In conducting this balancing exercise, I bear in mind among other things and in addition to the matters to which I have already referred:
(1) that, in relative terms, the sum of £50,000 is modest when compared to the amount of the plaintiffs’ claim and the likely overall costs of the worldwide litigation to date and in the future;
(2) that one of the grounds upon which the 5th and 6th Defendants intend to rely to set aside the injunctions is non-disclosure;
(3) that, according to Mr Stinson’s evidence, the 1st Plaintiff is a major United States Corporation with no difficulty in paying its legal fees;
(4) that one of the purposes of the application to discharge and/or vary the injunctions is to obtain funding for the US proceedings, and thus, enable the 5th and 6th Defendants to defend the substantive proceedings in the United States.
Accordingly, in my judgment, the appeal should be allowed, and the relevant injunctions should be varied so as to permit payment from the 5th and/or the 6th Defendants’ assets, subject to the injunctions, in a sum or sums not exceeding in total £50,000, of the 5th and/or 6th Defendants’ reasonable legal costs and disbursements (to include foreign lawyers if appropriate) in connection with their proposed application to discharge and/or vary the injunctions and/or in connection with their defence or conduct of the Jersey proceedings generally, subject to the following provisions:
(a) an undertaking by the 5th and 6th Defendants to be incorporated in the Order that they will respectively make good, out of funds to which the Plaintiffs have no proprietary claims, any sums which are spent pursuant to this Order on costs which by judgment or compromise shall subsequently be found or agreed to have come out of property to which the Plaintiffs have a good proprietary claim;
(b) that the issue of reasonableness if relevant is determined after judgment or compromise on the Plaintiffs’ proprietary claims, and in the meantime the 5th and 6th Defendants are to maintain records of the costs and disbursements paid pursuant to this order so as to be able to show for what purposes such costs have been paid;
(c) that all parties are to be at liberty to apply to the Royal Court generally.
Finally I should like to thank both counsel for their lucid and helpful submissions which enabled this case to be concluded within the day.
CALCUTT JA: I agree.
BELOFF JA: I also agree.
Authorities.
Abdel Rahman -v- Chase Bank (CI) Trust Co Ltd [1984] JJ 127.
A & Anor -v- C & Ors (No. 2) [1981] 2 All ER.
Fitzgerald & Ors -v- Williams & Ors [1996] QB 657 CA.
United Mizrahi Bank Ltd -v- Doherty & Ors [1998] 2 All ER 230.
Sundt Wrigley & Co -v- -v- Wrigley [1993] Unreported Judgment of the Court of Appeal of England.
Cala Cristal SA -v- Emran Al-Borno (6th May, 1994) “The Times”.
The Abidin Daver [1984] 1 All ER 470.
Hadmoor Productions Ltd -v- Hamilton [1983] 1 AC 191.
Newhart Developments Ltd -v- Co-op Commercial Bank [1978] 2 All ER 896 CA.
Re Emmadart Ltd [1979] 1 All ER 599.
Tudor Grange Holdings Ltd -v- Citibank NA [1991] 4 All ER 1.
Court of Appeal (Civil) (Jersey) Rules, 1964: Rule 9(1).
Gee: Mareva Injunctions and Anton Piller Relief (4th Ed’n): pp.318-326.
Atlas Maritime Co SA -v- Avalon Maritime Ltd (The Coral Rose) (20th February, 1990) TLR 132.
[1]The injunctions had originally been granted on 6th August 1998 by the Deputy Bailiff in an Order of Justice of that date, but on 13th August 1998 the Plaintiffs obtained an amended Order of Justice signed by the Bailiff which, amongst other matters, changed certain of the Parties Cited.
[2]Including assets alleged to be held upon constructive trust for the Plaintiffs.
[3]It was accepted by counsel for the Plaintiffs that, despite some ambiguity in the wording of the order of justice, the injunctions only operated to prevent dispositions within the jurisdiction.
[4]See paragraph 44 of the first affidavit of Brian Cooper sworn on behalf of the Plaintiffs in the Jersey Proceedings.