LADY ARDEN:
Issues to be determined on this appeal
1.
The appeal concerns the question whether there is a jurisdictional
gateway available for the service out of the jurisdiction of the claims of the
liquidator of the respondent (“AWH”) in these proceedings and, if so, whether
the claims satisfy the merits threshold for an order by the court for such
service. The liquidator seeks orders that payments to the appellant, ZCM Asset
Holding Company (Bermuda) Ltd (“ZCM”), be declared void as undue or fraudulent
preferences pursuant to section 160 of the International Business Companies Act
2000 (“IBCA”) of The Bahamas and that such payments be repaid to him. The Court
of Appeal held in the liquidator’s favour but ZCM now appeals their decision to
the Board. For the reasons set out in this judgment, the Board concludes that
it should humbly advise Her Majesty that this appeal should be dismissed.
2.
ZCM is incorporated and resident in Bermuda. As part of its business it
acts as a sub-custodian under custody agreements between Zurich Bank and
various counterparties. One such counterparty was American Express Offshore
Alternative Investment Fund (“AMEX”). In January 2002, AMEX transferred to ZCM
as a sub-custodian a number of redeemable shares in AWH, an investment vehicle
incorporated in The Bahamas on 26 June 1997 to deal in securities listed on the
Asian markets.
3.
AWH registered those shares in the name of ZCM “for the benefit of
AMEX”. AWH was entitled under Article 2.06 of its articles of association to
recognise the registered holder of its shares as the sole owner and so it is
not suggested that the words “for the benefit of AMEX” have any significance.
Therefore, if AMEX wished to redeem any of its AWH shares, it had to request
ZCM to give notice to AWH to redeem the shares in question. This ZCM did, on
AMEX’s behalf, in respect of all AMEX’s shares in AWH in about April 2002. On
30 July 2002, AWH completed the process of redeeming AMEX’s shares by paying
the redemption monies, totalling US$13,148,013.01, to ZCM, out of the
jurisdiction. The redemption monies were calculated on the basis of the net
asset value of the shares as at 30 June 2002.
4.
AWH was incorporated as a particular type of corporate vehicle, adopted
to promote international business, namely an international business company
(“IBC”) formed under the IBCA. This has now been amended by the International
Business Companies Act 2011 (“the 2011 Act”). The 2011 Act was not, however, in
force when these proceedings were started. AWH is now in compulsory liquidation
in The Bahamas, commencing with the presentation of a winding up petition
presented by a number of investors on 17 October 2002. The petition alleged
that AWH was insolvent. A material averment in the petition was that AWH’s
corporate investment manager (and its chief executive officer) had been the
subject of sanctions imposed by the Takeovers and Mergers Panel of the
Securities and Futures Commission in Hong Kong (including a “cold shoulder
order” against the chief executive officer restricting transactions by
authorised dealers and others on his behalf) and so could no longer trade on
the Hong Kong Stock Exchange. This had jeopardised AWH’s investment business.
Only a small proportion of the petitioners’ redemption requests made in July
2002 had been met (by redemptions made in September 2002), which was less than
the amounts paid to ZCM (see para 3 above). The sole director of AWH had
proposed to investors that the assets of AWH should be liquidated and
distributed among investors but the petitioners pressed for an order that AWH
be wound up by the court. This order was in due course made.
5.
The liquidator of AWH, Mr Alan Bates, has begun these proceedings in The
Bahamas against ZCM to set aside the payment of the redemption monies to ZCM as
an undue or fraudulent preference of ZCM for the purposes of section 160 of the
IBCA by issuing a summons within the liquidation proceedings. (The liquidator
had to amend his summons but not in a way material to this judgment.)
6.
Section 160 provides:
“(1) Any conveyance, mortgage,
delivery of goods, payment, execution, or other act relating to property as
would, if made or done by or against any individual trader, be deemed in the
event of his bankruptcy to have been made or done by way of undue or fraudulent
preference of the creditors of such traders, shall, if made or done by or
against any company, be deemed, in the event of such company being wound up
under this Act, to have been made or done by way of undue or fraudulent
preference of the creditors of such company, and is invalid accordingly.
(2) For the purposes of this
section -
(a) the presentation of a
petition for winding up a company in the case of a company being wound up by
the court or subject to the supervision of the court; and
(b) a resolution for
winding up the company, in the case of a voluntary winding up,
shall be deemed to correspond
with the act of bankruptcy in the case of an individual trader, and any
conveyance or assignment made by any company formed under this Act of all or
any part of its estate and effects to trustees for the benefit of all or any
part of its creditors is void.”
7.
Section 160 by its terms incorporates section 72 of the Bankruptcy Act
1870 of The Bahamas, which provides in essence that transactions which an
insolvent person who is made bankrupt within the ensuing three months carries
out with a creditor with intent to prefer that creditor are void:
“72. Every conveyance or
transfer of property, or charge thereon made, every payment made, every
obligation incurred, and every judicial proceeding taken or suffered by any
person unable to pay his debts as they become due from his own moneys in favour
of any creditor, or any person in trust for any creditor, with a view of giving
such creditor a preference over the other creditors, shall if the person
making, taking, paying or suffering the same becomes bankrupt, within three
months after the date of making, taking, paying or suffering the same, be
deemed fraudulent and void as against the trustee of the bankrupt appointed
under this Act; but this section shall not affect the rights of a purchaser,
payee or incumbrancer in good faith and for valuable consideration.”
8.
Section 160 is similar to section 320 of the UK Companies Act 1948,
which in like manner incorporated section 44 of the Bankruptcy Act 1914. That
section was in force in England and Wales until it was replaced by section 239
of the Insolvency Act 1986 (“the IA86”), referred to below. A payment which is
found to be a fraudulent preference is void against the recipient. In
principle, it is the person who in law received the payment who has to repay it
to the liquidator. The clear intention of the legislature is that the status
quo ante the payment in issue should be restored.
9.
Under the express words of both section 72 and section 44, the recipient
of the payment may be a “creditor or any person in trust for any creditor.” A
“creditor” is the person who would, if the winding up had supervened
immediately before the impugned payment took place, be entitled to prove in the
liquidation.
10.
In this case, the liquidator filed a short affidavit in support of his
application for the court’s permission to serve the proceedings out of the
jurisdiction, in which he stated:
“5. Approximately two months
before the commencement of its liquidation, the company made a redemption
payment (‘the ZCM payment’) in the amount of US$13,148,013.01 to one of its
investors, namely ZCM Asset Holding Company (Bermuda) Ltd (‘ZCM’).
6. The Company is advised
by its attorneys and verily believes that pursuant to section 160 of the
International Business Companies Act 2000 the ZCM payment is deemed to have
been an undue and/or fraudulent preference payment and is therefore invalid. As
a result, the Company filed the summons in order to seek relief in respect of
the ZCM payment.”
11.
On 27 June 2008, the Supreme Court of The Bahamas gave the liquidator
leave to serve his amended summons on ZCM in Bermuda pursuant to Order 11 rule
8(4) of the Rules of the Supreme Court of The Bahamas (“the RSC”). (All
subsequent references to Orders are to Orders of the RSC and will be abbreviated
to “Ord”.) The liquidator duly served this summons on ZCM on 30 September 2008.
12.
Order 11 rule 8 confers jurisdiction to order the service of certain
documents out of the jurisdiction. It provides:
“8(1) Subject to paragraph 2 and
Order 66, rule 4, service out of the jurisdiction of an originating summons is
permissible with the leave of the court.
(2) Where the proceedings
begun by an originating summons might have been begun by writ, service out of
the jurisdiction of the originating summons is permissible as aforesaid if, but
only if, service of the writ, or notice of the writ, out of the jurisdiction
would be permissible had the proceedings been begun by writ.
(3) Where any proceedings
are authorised by these Rules or (apart from these Rules) by or under any Act
to be begun by originating motion or petition, service out of the jurisdiction
of the notice of motion or of the petition is permissible with the leave of the
court.
(4) Subject to Order 66,
rule 4, service out of the jurisdiction of any summons, notice or order issued,
given or made in any proceedings is permissible with the leave of the court.
(5) Rule 4(1), (2) and (3)
shall, so far as applicable, apply in relation to an application for the grant
of leave under this rule as they apply in relation to an application for the
grant of leave under rule 1 or 2 …”
13.
ZCM wished to apply to set aside the order for service of the
proceedings on it on the grounds of lack of jurisdiction and lack of a good arguable
case on the merits. The Supreme Court of The Bahamas therefore gave ZCM leave
to enter a conditional appearance. Its challenge was successful before the
Supreme Court of The Bahamas (Bain J), but not in the Court of Appeal of The
Bahamas. So, ZCM now appeals to the Board.
Discussion
(1) The jurisdictional gateway
(a) Summary of the available rules and the change of
approach before the Board
14.
Confusingly, there are three sets of rules in The Bahamas to consider in
this case - the Bankruptcy Rules, the Companies (Winding up) Rules 1975 (“WUR”)
and the RSC - and the complete absence of a “custom-made” set of rules. At the
material date, the legislature of The Bahamas had not made any rules
specifically to govern the winding up of an IBC.
15.
The Bankruptcy Rules are invoked because section 160 of the IBCA
vitiates transactions in the winding up of an IBCA by reference to the law of
bankruptcy. As the judge rightly pointed out, rule 2 of the Bankruptcy Rules of
The Bahamas adopted the rules set out in the First Schedule to the Bankruptcy
Act 1914 of England and Wales. Until 1962, there was no power in these rules to
order bankruptcy proceedings to be served out of the jurisdiction in England
and Wales, and thus the Bankruptcy Rules of The Bahamas did not assist the
liquidator. In England and Wales, the position was, however, changed in 1986
following the Report of the Review Committee of the Insolvency Law and Practice
(1982) (Cmnd 8558) (known as “the Cork report”), when Rule 12.12 of the
Insolvency Rules 1986 was adopted giving the courts power to order (among other
matters) the service of process outside the jurisdiction.
16.
The WUR also contain no provision giving the court power to order the
service of proceedings out of the jurisdiction. However, the liquidator relied
on WUR 101, a “gap filling provision” (see Bahamas Commonwealth Bank Ltd (in
liquidation) v Barclays International Ltd 1985 BHS No 40, per Van Sertima
J). This enables the RSC to be used where the WUR make no provision:
“101 In all proceedings
in or before the court, or any Judge, Registrar or Officer thereof, or over
which the court has jurisdiction under the Act and Rules, where no other
provision is made by the Act or Rules, the practice, procedure and regulations
shall, unless the court otherwise in any special case directs, be in accordance
with the Rules and practice of the Supreme Court.”
17.
As noted in para 12 above, the RSC provide for the circumstances in
which the court may give leave for service out of the jurisdiction of a writ,
petition, originating summons, originating motion and a summons.
18.
Both the Supreme Court and the Court of Appeal approached the case
solely through the prism of the available procedural rules. Before the Board
ZCM has emphasised the principle of extraterritoriality, as well as inviting
the Board to accept grounds on which it lost below. The parties’ arguments on
both extraterritoriality and the available rules are next summarised and the
Board’s conclusions follow.
(b) Extraterritoriality:
(i) ZCM’s main point:
presumption against extraterritoriality applies
19.
ZCM’s most fundamental argument is that the well-established presumption
against the extraterritorial effect of legislation applies to section 160 of
the IBCA (set out in para 6 above). The presumption is so well known that it is
unnecessary to cite authority in support of it. Mr Brian Simms QC, for ZCM,
relies on the fact that the Bankruptcy Rules confer no power to serve out of
the jurisdiction. He observes that Dillon LJ held in In re Tucker [1990]
Ch 148, 157 that “eyebrows might be raised” at the assertion that the
Bankruptcy Act had extraterritorial effect. Moreover section 72 of the
Bankruptcy Act 1870 of The Bahamas (para 7 above) says nothing to indicate any
extraterritorial application. The position was originally the same in relation
to the winding up of companies (In re Anglo-African Steamship Co (1886)
32 Ch D 348).
20.
In insolvencies governed by the law of England and Wales, Rule 12.12 of
the Insolvency Rules 1986 (since replaced) gave the court power to order
service to be effected “at such place” as the court determined, and envisaged
that service might be out of the jurisdiction. Even so, Sir Donald Nicholls V-C
in In re Paramount Airways Ltd (in administration) [1993] Ch 223, 235-236
held that it would be extraordinary if section 238 of the IA86 applying in
England and Wales (and conferring power for the court to adjust a
pre-insolvency transaction at an undervalue) applied to any person in the
world, and that it was, therefore, a matter for the court ordering service to
consider whether there was sufficient connection with England and Wales to
justify service out. In any event, insofar as an order for repayment of the
redemption monies is sought, there would, on Mr Simms’ submission, have to be some
separate basis for jurisdiction to serve out, which does not exist in Ord 11
(see the provisional view of Sir Nicholas Browne-Wilkinson V-C in In re
Jogia [1988] 1 WLR 484).
21.
Mr Simms further submits that the expression “any creditor” in section
72 of the Bankruptcy Act 1870 means any creditor within the jurisdiction. There
are some special cases where notices or process can be served out of the
jurisdiction: see, for example, In re Rathbone (1887) BR 270 (notice of
disclaimer of a lease by a trustee); In re Jogia (1962 amendment to the
Bankruptcy Rules in the UK held to give jurisdiction to order service out) and Rousou’s
Trustee v Rousou [1955] 1 WLR 545 (leave given to serve a writ out of the
jurisdiction to pursue a trustee’s claim to repayment of monies wrongly paid
out of the bankrupt’s estate not on the basis of the Bankruptcy Act but on the
basis of a claim in quasi-contract). However, in other cases, the courts
have interpreted the Bankruptcy Act as not having extraterritorial effect: see,
for example, Galbraith v Grimshaw [1910] AC 508
(the relation back principle applies only to property situated in England). So,
on Mr Simms’ submission, there is no reason why section 160 should have
extraterritorial effect.
22.
Mr Simms also relies on an absence of an express power to order service
out as supporting his argument on the presumption against extraterritoriality.
He contends that the deliberate policy of the legislature was that there should
be no possibility of service out of the jurisdiction. Section 160 incorporated
the Bankruptcy Rules, and they contained no provision for service out. The WUR
applied, and they contained no provision for service out.
(ii) AWH: presumption
against extraterritoriality displaced by context
23.
Miss Carolyn Walton, for the respondent, submits that in the case of an
IBC it would make no sense if there was no extraterritorial jurisdiction and
the liquidator could not make claims against foreign creditors. The vehicle is
intended to attract foreign investors.
24.
Miss Walton submits that the foreign creditor who has been fraudulently
preferred is clearly within section 160. Further, Ord 11 is the correct route.
The creditor cannot reap the benefits of the IBC without being subject to its
law. There was, therefore, sufficient connection between ZCM and The Bahamas.
25.
Miss Walton submits that it is settled law that insolvency provisions
can have extraterritorial effect: see, for example, Paramount Airways
(section 238 of the IA86).
(c) Available rules empowering the court to give
leave for service out of the jurisdiction
(i) ZCM’s case: the
various procedural rules do not provide a gateway in this case
26.
Mr Simms submits that the liquidator cannot have recourse to the RSC
because Ord 1 rule 2(2) provides that the RSC shall not have effect in relation
to bankruptcy or winding up. Rule 2 provides:
“2(1) Subject to the following
provisions of this rule, these Rules shall have effect in relation to all proceedings
in the Supreme Court.
(2) These Rules shall not
have effect in relation to proceedings of the kinds specified in the first
column of the following Table (being proceedings in respect of which rules may
be made under enactments specified in the second column of that Table)
TABLE
|
Proceedings
|
Enactments
|
|
Bankruptcy proceedings
|
Bankruptcy Act, section 102
|
|
Proceedings relating to the winding
up of companies
|
Companies Act, Part VII”
|
27.
If the liquidator could successfully invoke the RSC, Mr Simms submits
that Ord 11 rule 8(4) cannot be used to permit service out of the jurisdiction
of a summons unless leave would have been granted in the same circumstances for
service of a writ: In re Aktiebolaget Robertsfors and La Société
Anonyme Des Papeteries de L’AA [1910] 2 KB 727 approved in Masri v
Consolidated Contractors International (UK) Ltd (No 4) [2010] 1 AC 90 at [32] per Lord Mance. Mr Simms
submits that there is no good reason to serve a winding up petition under the
IBCA out of the jurisdiction since an IBC must have a registered office in The
Bahamas, and the Court of Appeal erred in holding that it could be served out
of the jurisdiction. The secondary claim for payment would need to fall under
Ord 11 as well.
28.
Further, submits Mr Simms, the question whether service out of the
jurisdiction should be set aside had to be judged on the basis of the material
before the court when the order for service out was made. It is not open to the
liquidator to come back and choose another basis (Parker v Schuller
(1901) 17 TLR 299).
29.
Moreover, the liquidator should have used some form of originating
process to bring these proceedings which will inevitably involve persons who
are strangers to the liquidation of AWH. Third party proceedings are not
available if proceedings are begun by summons in a liquidation.
30.
In addition, a further reason why Ord 11 rule 8(4) is not applicable in
this case is that, for the liquidator to bring these proceedings within the
liquidation proceedings, under the WUR 4 to 6 (set out in summary in para 58
below) he would have to have started his proceedings by notice of motion and
not a summons. He should not therefore have the benefit of Ord 11 rule 8(4)
which only applied to a summons within proceedings.
31.
These proceedings were in any event irregular as they were commenced by
summons and not by notice of motion in this case (WUR 6(2)). WUR 100 should not
be applied. WUR 100 provided that proceedings should not be invalidated by a
procedural defect:
“100(1) No
proceedings under the Act or the Rules shall be invalidated by any formal
defect or by any irregularity, unless the Court before which an objection is
made to the proceedings is of opinion that substantial injustice has been caused
by the defect or irregularity and that the injustice cannot be remedied by any
order of that court.”
32.
However, Mr Simms submits that WUR 100 should not be interpreted as
authorising that use of the RSC for this purpose because service out of the
jurisdiction was an important matter which could not be brought in by a
provision such as WUR 100. The fact that the company was set up to carry on
business outside The Bahamas did not mean that those who deal with it should
not have safeguards.
33.
Finally, Mr Simms submits that where a liquidator has a fraudulent
preference claim against a person, that person has a contingent claim in the
liquidation of AWH and would be a contingent creditor within section 154 of the
IBCA. ZCM further submits that section 154 operates to subject the claim
against ZCM to the Bankruptcy Rules so that no service out is possible. The
Court of Appeal, when they rejected this argument, applied too narrow a reading
of section 154, which provides:
“154 In the winding up of an
insolvent company the same rules shall prevail and be observed with regard to
the respective rights of secured and unsecured creditors and to debts provable
and to the valuation of annuities and future and contingent liabilities as are
in force for the time being under the law of bankruptcy with respect to the
estates of persons adjudged bankrupt, and all persons who in any case would be
entitled to prove for and receive dividends out of the assets of the company
may come in under the winding up and make such claims against the company as they
are entitled to by virtue of this section.”
(ii) AWH: the RSC provide
the necessary jurisdiction
34.
Miss Walton submits that section 15 of the Supreme Court Act of The
Bahamas (set out in para 65 below) gives the necessary power.
35.
As to the use of a summons, Miss Walton submits that, where an
insolvency procedure has been initiated before the court with respect to a
person, then, as a matter of well-established practice, where the insolvency
officeholder in that procedure wishes to make an application to the court he
does so by summons within the insolvency proceeding. This is, she submits, the
practice in England and Wales and she submits that it is also the practice in
The Bahamas.
36.
Miss Walton took the Board through the various procedural routes in
issue and submitted that Ord 11 rule 8(4) was available. The relevant
insolvency process had been commenced by the petition to wind up AWH and the
summons in issue was a summons issued in those proceedings.
(d) The Board’s conclusions on the jurisdictional
gateway
(i) How the presumption
against extraterritoriality applies in this case
37.
In the judgment of the Board, the wording of section 160 of the IBCA
tends to indicate that it is capable of having extraterritorial effect. In
particular it uses the words “any” in relation to “conveyance” and the word
“creditor” without qualification. The same linguistic points can be made about
section 72 of the Bankruptcy Act. It would make no sense to restrict section
160 to Bahamian dispositions, particularly in the case of an IBC.
38.
To determine whether section 160 is extraterritorial in its effect, it
is necessary to consider that section in its wider context. That wider context
includes not only the historical perspective that the Bankruptcy Act 1870 and
the Bankruptcy Rules, which did not provide for service out, provide. In the
opinion of the Board, it also includes the scheme of the IBCA and the companies
legislation which it mirrors.
39.
As to the scheme of the IBCA, the Board finds that Miss Walton’s submissions
are particularly helpful. Times have moved on since the nineteenth century when
the relevant provisions in bankruptcy were enacted, and it would not be
surprising to find provision now being made for service out. “Trade takes place increasingly on an international basis.
So does fraud.” (per Sir Donald Nicholls in In re Paramount Airways [1993]
Ch 223, 239). Moreover, the IBC was established to create a vehicle for
international investors.
40.
The Board also agrees with Miss Walton that it is now settled law that
insolvency provisions can have extraterritorial effect: see Paramount
Airways (section 238 of the IA86), Bilta (UK) Ltd v Nazir (No 2)
[2016] AC 1 (section 213 of the IA86) (in which the Supreme Court also approved
Paramount Airways) per Lord Sumption at paras 107-110, and per Lord
Toulson and Lord Hodge at paras 213-214 and Orexim Trading Ltd v Mahavir
Port and Terminal Pvt Ltd [2018] 2 BCLC 441 (where the Court of Appeal of
England and Wales held that section 423 of the IA86 (transaction with intent to
defraud creditors) has extraterritorial reach). The Board recalls that, in a
winding up, a liquidator may serve notices on creditors and contributories
outside the jurisdiction under the powers given by the Companies Acts and
without express mention. Such powers are consistent with the fact that winding
up legislation (at least) has extraterritorial effect. “The service of [a notice
placing a foreign shareholder on the list of contributories] is no infringement
of the jurisdiction of the Courts of a foreign country. If notices of this
kind could not be served abroad, it might in many cases be impossible to wind
up a company at all.” (In re Nathan Newman & Co) (1887) 35 Ch D
1, 3, a decision of the Court of Appeal of England and Wales distinguishing In
re Anglo-African Steamship Co, on which Mr Simms relies.
41.
The Board further accepts that, as Sir Donald Nicholls held in Paramount
Airways there needs to be some connection between the jurisdiction of the
court giving leave for service out, in this case the courts of The Bahamas, and
the respondent on whom service is ordered. In this case, the redemptions took
place outside The Bahamas but they related to shares of a Bahamian company. The
natural place for any winding up proceeding would therefore be The Bahamas and,
there being no suggestion that ZCM did not appreciate that it was dealing with
a Bahamian company, the Board considers that a sufficient connection with the
jurisdiction is shown to warrant the presence of a jurisdiction in the courts
of The Bahamas to order service of these proceedings on the respondent out of
the jurisdiction.
42.
Moreover, in circumstances such as these, the absence of a power in
custom-made rules applying to winding up of an IBC cannot be taken as an
indication that the courts could not find an appropriate power elsewhere. On
the contrary, where an IBC is in liquidation in The Bahamas, it is proper for
its courts to rely on other sources of jurisdiction to entertain in appropriate
cases proceedings to enforce a claim vested in the liquidator under section 160
to have a transaction declared void. It is desirable that such claims should be
heard by them in the interests of ensuring that the purposes of the winding up
are fully achieved.
(ii) Effect of the
various sets of rules
43.
The next question is whether any provision in the various sets of
procedural rules is sufficient to confer jurisdiction for this purpose. While the
presumption against extraterritorial effect is important, it cannot override
any sufficient express provision, as the case of Paramount Airways
demonstrates. The Board accepts Miss Walton’s further submission that, while
there is no parallel decision in Bahamian law, given the wide ambit of section 160,
one “would a priori expect procedural rules to exist to enable the court to
exercise those powers” even if the respondent was not in the jurisdiction, as
Lewison LJ held in Orexim at para 32 in relation to a claim under
section 423 of the IA86. The Board considers that the RSC provide the necessary
jurisdiction.
44.
The Board will now consider the various sets of rules in turn.
(a) Bankruptcy Rules
45.
As to the Bankruptcy Rules, the Board considers that rules as to service
are not within those Bankruptcy Rules which were adopted for companies: see
section 154 of the IBCA (set out in para 33 above). Mr Simms seeks to establish
that they do apply by characterising ZCM’s position in consequence of the
present claim as that of a contingent creditor: on that basis, he submits, all
the Bankruptcy Rules are made applicable. However, in the judgment of the
Board, the statutory purpose of section 154 is to incorporate only the
specified Bankruptcy Rules. Here the issue is about the service of the
proceedings and it is not directly concerned with ZCM’s status as a contingent
creditor. Section 154, therefore, does not apply.
(b) WUR
46.
The WUR did not apply to an IBC at the relevant time. According to the
title to the rules, they were rules made under the Companies Act, 1866. The
“Act” is defined as “the Companies Act”. The rule-making power contained in the
Companies Act 1992 (the current consolidation statute) restricts the minister
to making rules to apply to companies to which that Act applies: see section
302 of the Companies Act 1992, which provides that:
“The Minister may make rules and
regulations generally in order to give effect to this Act.”
(c) RSC
47.
The WUR and RSC are intended to have separate operation. Ord 1 rule 2(2)
(set out in para 26 above) is a self-denying ordinance by which the RSC “shall
not have effect in relation to … proceedings relating to the winding up of
companies [under the] Companies Act, Part VII.”
48.
But the Companies Act does not apply to an IBC and so Ord 1 rule 2(2)
does not disapply the RSC in relation to these proceedings. That means that Ord
11 rule 8 (set out in para 12 above) is engaged and that there is no need to
consider WUR 101 (“the gap filling provision” set out in para 16 above).
49.
The next question is this: must the summons, for which leave to serve
out is sought, be issued for some specific purpose? Ord 11 rule 8(4) does not
itself specify any limit on the type of summons that may be issued out of the
jurisdiction. It simply says that the summons must be “issued, given or made in
any proceedings”. The fact that Ord 11 rule 8(4) is not qualified in its
operation is relevant to the Board’s response to the submission next
considered.
50.
ZCM contends that there is an internal limit to be read into Ord 11
rule 8(4) from Ord 11 rule 8(3). Mr Simms submits that AWH has to show that the
winding up petition could have been served out of the jurisdiction before the
court can give permission for the present summons to be served out of the
jurisdiction. This submission was founded on the Robertsfors case (see
para 27 above) and the decision of the House of Lords in Masri where the House held that, where there was no express rule
permitting service out of the jurisdiction of a summons issued in the course of
proceedings for the examination of an officer of a corporate judgment debtor, a
party could only serve such a summons out of the jurisdiction if it could have
obtained leave to serve a writ to obtain the same relief out of the
jurisdiction.
51.
The Board considers that Masri is distinguishable from this case.
In Masri, judgment was given in proceedings brought in England and Wales
against a foreign company which had submitted to the jurisdiction. The
defendant failed to satisfy the judgment. The claimant obtained an order under
Civil Procedure Rule 71 against a director of the defendant, who was resident
in Greece, to attend before the court in England to give evidence as to the
assets of the company outside the jurisdiction to assist the claimant in
enforcing its judgment against those assets. The question was whether there was
jurisdiction to make this order. The House of Lords held that there was no such
jurisdiction. It emphasised that service out of the jurisdiction requires express
authorisation by or under statute. In reaching its conclusion in the case, the
House considered a number of cases in which jurisdiction was conferred by
statute, including In re Tucker (para 19 above). The House held that in
that case it was clear that under the particular provisions of the Bankruptcy
Act 1914 there was no jurisdiction to serve out (see para 19). In In re Seagull
Manufacturing Co Ltd [1993] Ch 345, however, where the liquidator of a
company, which was being wound up in England and Wales, sought leave to serve
out of the jurisdiction an order for the public examination of a director made
under section 133 of the IA 86, the Court of Appeal of England and Wales, whose
decision was cited with approval by the House, held that, the relevant section
not being territorial only in its application, the order could be served out of
the jurisdiction. Masri itself was considered to fall between these two
situations for a number of reasons but particularly because the officer of a
company was separate from the company and because there was no element of
public interest as in Seagull: the litigation was private (paras 20 to
23).
52.
In summary, in Masri, although the English court had jurisdiction
to give judgment against the company (which conferred ancillary jurisdiction to
make other orders in those proceedings both before and after judgment), it had
no jurisdiction to make an ancillary order against a non-party out of the
jurisdiction. The House observed, in a passage on which Mr Simms relies, that
the power to make ancillary orders under the Rules of the Supreme Court could
only have been exercised if service out of a writ was permissible. However, this
was in the context of a further argument on service out which was held to
confirm the conclusion already reached on considering In re Tucker, Seagull
and other cases (Masri, paras 27 and 32).
53.
In the Board’s judgment, the present case is close to Seagull
because, as the Board has already held, section 160 is not territorially
limited in its application (above, paras 37 to 42). As in Seagull, it
would be odd, therefore, if proceedings under that section could not be served
out of the jurisdiction in an appropriate case. Further, a person who
voluntarily enters into a transaction as a result of which he becomes a
creditor of a company must anticipate that, if the company is wound up, the
liquidation may be conducted in the place of its incorporation.
54.
For these reasons, the Board rejects Mr Simms’ submission based on Masri
and summarised in para 50 above. It is not relevant to inquire whether the
petition for winding up AWH could have been served out of the jurisdiction and
the Board is not therefore required to express its opinion on that question.
55.
The real protection for the foreign respondent is that there has to be a
sufficient connection between the respondent and the jurisdiction of the
Supreme Court of The Bahamas before the court has jurisdiction to entertain the
claim for avoidance of the payment of the redemption proceeds under section 160
if the respondent is outside its jurisdiction (see Paramount Airways
above).
56.
It follows that it is unnecessary to identify a jurisdictional gateway
under Ord 11 rule 1 as in Masri and Robertsfor for the liquidator’s
claim that the payment of redemption proceeds to ZCM was a fraudulent
preference. It is also unnecessary to show, for instance, a jurisdictional
gateway for the consequential claim for repayment of monies, as was required in
Rousou’s Trustee v Rousou (above). Unlike the WUR, the Bankruptcy Rules
1914 in force in England and Wales at the time of the action in Rousou
did not contain a “gap filling” provision (ie the Rules of the Supreme Court
applied only if incorporated into the Rules, and rules as to service out of the
jurisdiction were not so incorporated). Accordingly the trustee in bankruptcy
could not use the equivalent of Ord 11 rule 8(4). He had to commence his
proceedings for repayment against the foreign respondent in an action begun by
writ. (By the time In re Jogia (para 21 above) was decided, the
Bankruptcy Rules had been amended to permit service out of the jurisdiction
where permitted by Rules of the Supreme Court 1965, Ord 11.)
57.
There remain a number of issues which the Board answers shortly below.
(iii) Did the liquidator
use the wrong procedure?
58.
On the question whether the liquidator used the wrong procedure. Mr
Simms relies on WUR 4 to 6, which provide:
“Courts and Chambers
4(1) The following matters and
applications in the Supreme Court shall be heard in open court -
(a) petitions;
(b) applications for the
committal of any person to prison for contempt;
(c) such matters and
applications as the judge may from time to time by any general or special order
direct to be heard in open court.
…
(3) Every other matter or
application in the Supreme court under the Act to which the Rules apply may be heard
and determined in Chambers …
6(1) Every application in
Court other than a petition shall be made by motion … (2) Every
application in Chambers shall be made by summons …”
59.
Therefore, if WUR 4 to 6 had applied, the liquidator would have had to
issue a notice of motion. But, the position is, as explained above, that the
WUR do not apply.
60.
Moreover, the Board agrees with Miss Walton that, on the basis that
there were no applicable procedural rules, a summons was a legitimate procedure
to adopt. The Board rejects Mr Simms’ submission that the proceedings in a
liquidation are not ongoing and that the process to initiate proceedings such
as these proceedings for fraudulent preference must therefore be an originating
one. The Board considers that the practice followed by the liquidator of
issuing a summons within the liquidation is correct.
61.
It is helpful to see this point from the perspective of what actually
happened after AWH was wound up. All the applications in this matter have been
issued with the same court file number as the court gave the petition.
Moreover, these proceedings have been intituled “in the matter of AWH Limited
(in compulsory liquidation) and in the matter of the [IBCA].” It is reasonable
to suppose that the same practice would be adopted in relation to any other
application in the winding up.
62.
The origin of this practice in England and Wales appears to be
historical in that, on issue of the winding up petition, proceedings relating
to the petition and (if an order for winding up was made) all proceedings
relating to the winding up were (in common with other like proceedings)
allocated to a particular Chancery judge (see Daniell’s Chancery Practice
8th ed (1914) at pp 1343-1344). However, the practice is also consistent with
principle. Proceedings in a liquidation to collect assets or enforce claims are
some of the various ways in which an order for winding up made by the court is worked
out on the ground. So, the proceedings in a winding up are therefore properly
proceedings under the original order.
63.
So too, in England and Wales, when a company is wound up by the court,
the proceedings are given a single number which is used in the title to all
further proceedings in a winding up. Moreover, a single court file was
maintained. Thus, under the Companies (Winding up) Rules 1948 (SI 1949/330),
there was an express obligation to maintain a continuous file for each
liquidation. While there was no obligation to maintain a continuous file in the
WUR, there are other indications that, once a company enters winding up, there
is one set of proceedings. Thus, creditors and officers are given the right to
inspect “the file” of the proceedings (WUR 13) and WUR 7 provides that every
proceeding shall be instituted in the same way, that is “in the matter of the
company to which it relates and in the matter of the Companies Act.”
64.
Mr Simms also argues that an originating process had to be used because
there would be claims by ZCM against third parties which would be outside the
liquidation. However, it is not always a bar to using a summons in the
liquidation that the court may have to determine third party claims: see for
example In re Shilena Hosiery Co Ltd [1980] Ch 219, per Brightman J.
65.
Miss Walton submits that section 15(1)(b) and (1)(c) of the Supreme
Court Act 1997 reinforces this conclusion. Section 15 provides:
“15. The jurisdiction vested
in the court shall so far as regards procedure and practice, be exercised -
(a) in the manner provided
by this Act or by rules of court;
(b) where no such provision
has been made, in accordance with former practice as near as may be; or
(c) where there is no
former practice, in such manner as seems to the court just and practicable in
the circumstances.”
66.
It is not necessary for the Board to rely on this provision. It is well
established that service out of the jurisdiction requires express authorisation
by statute or in the RSC.
67.
The Court of Appeal also placed reliance on the duty of the liquidator
to collect in assets in section 107 of the IBCA, holding that this duty
extended to the cause of action against ZCM in these proceedings. This provides
in material part:
“107. The … liquidator … shall
take into his custody, or under his control, all the property, effects, and
things in action to which the company is or appears to be entitled …”
68.
The Board likewise does not consider that it is necessary to consider
further the application of this important provision in the present case.
69.
Accordingly, the Board concludes that the Court of Appeal was correct to
hold that the Supreme Court had power to give leave for the service of these
proceedings out of the jurisdiction.
(2) The merits threshold for leave to serve out of
the jurisdiction
(a) The parties’ submissions
70.
Mr Simms submits that ZCM held its AWH shares solely as bare trustee for
AMEX and so it could only act as AMEX instructed it and it accounted to AMEX
for the redemption monies it received. Moreover, ZCM submits that its position
was the same as that of an agent who in good faith hands money received for his
principal’s account to his principal and is not liable to repay it if it turns out
to be a fraudulent preference: see In re Morant [1924] 1 Ch 79. ZCM
should not therefore be the respondent in these proceedings.
71.
ZCM also submits that dominant intention to prefer has to be shown, and
that, when there was no direct evidence of intention, an intent to prefer could
not be inferred (Peat v Gresham Trust Ltd [1934] AC 252).
72.
In the light of Vizcaya Partners Ltd v Picard [2016] 3 All ER 181 at para 73, the choice of
law clause in the subscription agreement could not, on ZCM’s submission, apply to
the liquidator’s present claim.
73.
Miss Walton submits that the liquidator had shown a good arguable case
on the merits. He had to show the court that its discretion should be exercised
in favour of service out: see Ord 11 rule 8(4) and Paramount Airways and
Orexim.
(b) The Board’s conclusion on the merits threshold
(i) The test for
compliance with the merits threshold
74.
Ord 11 rule 4(2), dealing with leave to serve process out of the
jurisdiction, provides:
“(2) No such leave shall be
granted unless it shall be made sufficiently to appear to the court that the
case is a proper one for service out of the jurisdiction under this Order.”
75.
The Board takes the view that this means that, as was held in Altimo
Holdings and Investment Ltd v Kyrgyz Mobil Tel Ltd [2012] 1 WLR 1804, at
para 71 in the context of the rules
applying in the Isle of Man, a claimant for leave to serve out of the
jurisdiction must satisfy three requirements:
“First,
the claimant must satisfy the court that in relation to the foreign defendant
there is a serious issue to be tried on the merits, ie a substantial question
of fact or law, or both. The current practice in England is that this is the
same test as for summary judgment, namely whether there is a real (as opposed
to a fanciful) prospect of success: eg Carvill America Inc v Camperdown UK Ltd [2005] 2 Lloyd’s Rep 457, para 24. Second, the
claimant must satisfy the court that there is a good arguable case that the
claim falls within one or more classes of case in which permission to serve out
may be given. In this context ‘good arguable case’ connotes that one side has a
much better argument than the other: see Canada Trust Co v Stolzenberg (No 2) [1998] 1 WLR 547, 555-557, per Waller LJ affirmed
[2002] 1 AC 1; Bols Distilleries BV v Superior Yacht Services (trading as Bols Royal
Distilleries) [2007] 1 WLR 12, paras
26-28. Third, the claimant must satisfy the court that in all the circumstances
the Isle of Man is clearly or distinctly the appropriate forum for the trial of
the dispute, and that in all the circumstances the court ought to exercise its
discretion to permit service of the proceedings out of the jurisdiction.”
76.
In the recent case of Goldman Sachs International v Novo Banco SA
[2018] 1 WLR 3683 at para 9, the Supreme Court gave further guidance on the
meaning of the “good arguable case” in England and Wales:
“For the purpose of determining an
issue about jurisdiction, the traditional test has been whether the claimant ‘had
the better of the argument’ on the facts going to jurisdiction. In Brownlie
v Four Seasons Holdings Inc [2018] 1 WLR 192, para 7, this court
reformulated the effect of that test as follows: ‘(i) that the claimant must
supply a plausible evidential basis for the application of a relevant
jurisdictional gateway; (ii) that if there is an issue of fact about it, or
some other reason for doubting whether it applies, the court must take a view
on the material available if it can reliably do so; but (iii) the nature of the
issue and the limitations of the material available at the interlocutory stage
may be such that no reliable assessment can be made, in which case there is a
good arguable case for the application of the gateway if there is a plausible
(albeit contested) evidential basis for it.’ It is common ground that the test
must be satisfied on the evidence relating to the position as at the date when
the proceedings were commenced.”
77.
The Board considers that this jurisprudence also applies in The Bahamas
and considers each of the requirements in turn.
(ii) Application of the
good arguable case test to the facts
78.
ZCM’s contention as to lack of a good arguable case concern is based
principally on its submissions that there is a lack of direct evidence as to
intent to prefer and that ZCM’s status was that of an agent.
(a) Lack
of direct evidence showing intent to prefer
79.
The Board rejects the argument that there has to be direct evidence of
this. Intent to prefer can also be inferred from other evidence: see per Lord
Greene MR, with whom Luxmoore and Goddard LJJ agreed, in In re M Kushler Ltd
[1943] Ch 248, 252-253, where he held, disagreeing with the trial judge’s
holding on the basis of observations of Lord Tomlin in Peat v Gresham Trust
above that, if there was no direct evidence from the debtor of intent to
prefer, inferences from other evidence could not be drawn:
“I can see nothing in the language
of the section which justifies the view that the problem which the legislature
sets the court is to be dealt with on any principles different from those
commonly employed in drawing inferences of fact … I do not think Lord Tomlin
could have meant that, in every case where there is no direct evidence of
intention to prefer, the court is bound to say that the onus of proof is not
discharged if any view of the facts not involving an intention to prefer can
possibly be taken.”
80.
Goddard LJ, when agreeing, also added that the law which determined when
inferences could be drawn in relation to fraudulent preferences and that
determining when inferences could be drawn in relation to other matters of fact
were the same (para 254).
81.
At this stage, given the allegations in the petition summarised in para
4 above indicating that ZCM’s request for redemption was more favourably
treated, and the liquidator’s evidence as to insolvency, there must be a
plausible evidential basis for inferring that, when it redeemed the shares
registered in the name of ZCM, AWH knew itself to be insolvent and that it
accordingly had the requisite dominant intent to prefer. On the evidence, ZCM
submits that other requests were made in June after its clients and that they
were redeemed in August. But this evidence would not of itself be sufficient to
negate any intent to prefer. There are plainly contested issues of fact but, at
this stage, the court cannot be satisfied that the final outcome will be in
ZCM’s favour.
(b) ZCM’s
position as an agent and not as a principal
82.
As explained above (paras 8 and 9), a “creditor” for section 72 purposes
is a person who (but for the transaction said to constitute a fraudulent
preference) would have been entitled to prove in the liquidation, and that, if
a fraudulent preference claim succeeds, relief in terms of repayment is given
against the payee, that is, the person who in law is to be treated as the
person who received the payment. There is no doubt that, if AWH had not
satisfied the redemption request, ZCM would have been the person entitled to
prove for the unpaid proceeds. ZCM was the registered holder of the shares, and
when it became a member of AWH it became a party to AWH’s articles of
association. Article 2.06 of AWH’s articles of association provided in the
usual way that the company was entitled to recognise the registered holder as
the sole owner. Those articles mean that ZCM agreed to stand in the
relationship of principal as regards AWH. There was nothing before the Board to
suggest that AWH had agreed that any other person should be treated as the
registered holder. ZCM held the legal chose in action resulting from the
redemption request and it would have been the proper claimant to sue for the
unpaid redemption monies.
83.
The position of ZCM is thus materially different from that of the agent
in Morant (above,
para 70). The principle applied in that case was that a mere agent is no
longer liable to a third party for monies he has received if he has in good
faith and without notice of the third party’s claim paid them to his principal.
The agent was held not to be a trustee for his principal. Moreover, he did not
agree to act as principal. The payer’s trustees in bankruptcy accordingly had
to bring their fraudulent preference proceedings against the principal, and the
principal alone. The agent could not have proved in the liquidation of the payer
in competition with the principal if the monies had not been paid. There may be
a separate question which the Board is not called upon to consider on this
appeal whether an agent, who has not agreed to act as principal (as ZCM has
done) and still holds the monies paid to him by the company when he receives
notice of the liquidator’s claim under section 160, could set up a defence on
the basis of agency alone without any evidence of good faith payment over to
his principal. ZCM did not, however, suggest that such a defence would be
available in those circumstances.
84.
The Board therefore rejects ZCM’s
argument that its position as no more than a bare trustee is analogous to that
of an agent who has in good faith accounted to his principal for payments made
to him by a company prior to the winding up and who is not on the authority of In
re Morant a “creditor” within the meaning of section 72. In support of its
argument, ZCM relied on In re Thirty-Eight Building Ltd (in
liquidation) (No 2), Simms v Saunders [2000] 1 BCLC 201 where Ms Hazel
Williamson QC, sitting as a Judge of the High Court of Justice, Chancery
Division, while rejecting the argument that the beneficiaries under a
discretionary trust could be regarded as “creditors” for the purposes of a
claim to set aside a voidable preference under section 239 of the IA 86 (the
successor with modifications to section 320 of the Companies Act 1948),
considered (obiter) that bare trustees might be in a different position under
that section (p 207). A bare trustee can be in no better position than an agent
in this context.
85.
Therefore, ZCM is the right respondent to this summons. It is always
open to ZCM to pursue any remedy it has against the persons it paid.
(iii) The Board’s
conclusion on the merits threshold
86.
To summarise the Board’s conclusion on the merits threshold, the Board
considers that in the circumstances of this case the evidence showed a sufficiently
arguable case.
Conclusion
87.
The Board will humbly advise Her Majesty that this appeal should be
dismissed.
