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You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> The Deposit Guarantee Fund for Individuals v Bank Frick & Co AG & Anor [2021] EWHC 3226 (Ch) (01 December 2021) URL: https://www.bailii.org/ew/cases/EWHC/Ch/2021/3226.html Cite as: [2021] EWHC 3226 (Ch) |
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BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
BUSINESS LIST (ChD)
Fetter Lane, London, EC4A 1NL |
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B e f o r e :
____________________
| THE DEPOSIT GUARANTEE FUND FOR INDIVIDUALS (as liquidator of National Credit Bank PJSC) |
Claimants |
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- and - |
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(1) BANK FRICK & CO AG(a company incorporated in Liechtenstein) (2) EASTMOND SALES LLP |
Defendant |
____________________
Andreas Gledhill QC and Luka Krsljanin (instructed by Mishcon de Reya LLP) for the Defendants
Hearing date: 3 November 2021
____________________
Crown Copyright ©
Master Clark:
Application
Bank
Frick
& Co A.G. ("
Frick"),
dated 13 October 2021 ("the second application"), which seeks a declaration and directions as to the disposal of its application dated 26 July 2021 ("the first application").
Parties and the claim
Bank
("the
Bank"),
a Ukrainian company.
Frick
is a company incorporated in Liechtenstein, which, unsurprisingly, trades as a
bank.
Frick
in 2013-2014 ("the pledge agreements"), under which the
Bank
pledged funds as security for various loans made under agreements between 3 entities incorporated in the UK ("the debtors"), including the second defendant, Eastmond Sales LLP.
Frick
enforced the pledge agreements, and thereby obtained US$25.8 million held by the
Bank
in its
Frick
account.
Bank,
for the purpose of extracting assets from and putting them beyond the reach of the
Bank's
creditors.
"423 Transactions defrauding creditors.
(1) This section relates to transactions entered into at an undervalue; and a person enters into such a transaction with another person if—
…
(c) he enters into a transaction with the other for a consideration the value of which, in money or money's worth, is significantly less than the value, in money or money's worth, of the consideration provided by himself.
…
(3) In the case of a person entering into such a transaction, an order shall only be made if the court is satisfied that it was entered into by him for the purpose—
(a) of putting assets beyond the reach of a person who is making, or may at some time make, a claim against him, or
(b) of otherwise prejudicing the interests of such a person in relation to the claim which he is making or may make.
424.— Those who may apply for an order under s. 423.
(1) An application for an order under section 423 shall not be made in relation to a transaction except—
(a) in a case where the debtor …is a body corporate which is being wound up or is in administration, by the official receiver, … or the liquidator or administrator of the body corporate or (with the leave of the court) by a victim of the transaction"
Bank's
assets resulting from
Frick's
enforcement of the pledge agreements led to insolvency proceedings, in which, in February 2016, the claimant was appointed liquidator under the relevant Ukrainian legislation.
Frick
acknowledged service on 28 June 2021, stating its intention to contest jurisdiction. The second defendant has not responded to the claim.
Frick
issued the first application notice. This seeks orders:
(1) staying the claim in favour of arbitration pursuant to s.9 Arbitration Act 1996 (alternatively, the court's inherent jurisdiction), and the arbitration clauses in each of the pledge agreements ("the Stay Application");
alternatively, and "only in the event that the Stay Application is unsuccessful",
(2) striking out the claim under CPR 3.4(2)(a) (no reasonable grounds), or for summary judgment ("the SJ Application"); as to this, the application notice states:
"In advancing this conditional application in the alternative and only in the event of the Stay Application not succeeding, the First Defendant does not (and does not intend to) take any substantive step in the proceedings which would affect the Stay Application."
(emphasis added)
(3) for a directions hearing in respect of both applications.
"This application is not intended as and should not be construed as a substantive step in the proceedings as it is made solely in the alternative to the s.9 application for a stay of proceedings in favour of arbitration."
"9.— Stay of legal proceedings.
(1) A party to an arbitration agreement against whom legal proceedings are brought (whether by way of claim or counterclaim) in respect of a matter which under the agreement is to be referred to arbitration may (upon notice to the other parties to the proceedings) apply to the court in which the proceedings have been brought to stay the proceedings so far as they concern that matter.
…
(3) An application may not be made by a person before taking the appropriate procedural step (if any) to acknowledge the legal proceedings against him or after he has taken any step in those proceedings to answer the substantive claim."
(emphasis added)
Frick
asked the claimant to agree that:
(1) the hearing (and determination) of the SJ Application did not constitute a substantive step in the proceedings, and therefore a submission to the jurisdiction;
(2) on that basis, the SJ Application be listed for a hearing before the Stay Application.
Frick
therefore issued its second application notice. This seeks (so far as relevant)
(1) a declaration that, in seeking case management directions for the determination of the SJ Application before the Stay Application,
Frick
shall not be deemed to have taken a step in the proceedings, or accordingly to have lost its right to apply for a stay;
(2) if a declaration is made, an order for the listing of the SJ Application.
Frick's
counsel submitted that it has made it "crystal clear" that the SJ Application seeks only a conditional order, its position has not been consistent.
"[Alternatively: the claim is struck out pursuant to CPR 3.4(2)(a)/summary judgment be entered in favour ofBank
![]()
Frick
and the claim dismissed]"
Frick's
favour it would bring the proceedings to an end.
Frick's
counsel submitted, and I accept, the SJ Application itself seeks only a conditional order. If, therefore,
Frick
succeeded, the resultant order would have to be expressed as taking effect only if the Stay Application was unsuccessful. It might be the case that this would have the practical effect of bringing the claim to an end:
Frick
would no longer have any interest in pursuing the Stay Application, and the claimant no longer have any interest in resisting it. If, however, the claimant wished to appeal the result of the SJ Application, it might seek the determination of the Stay Application.
Issues in the application
(1) whether by pursuing the determination of the SJ Application before the determination of the Stay Application,
Frick
is taking a step in the proceedings to answer the substantive claim;
(2) if not, whether as a matter of case management the SJ Application should be listed before the Stay Application.
"Step in the proceedings"
"The [defendant] has applied … for a stay in the proceedings against it on the ground that the issues in the claim against it are governed by an arbitration agreement and it wishes those issues to be determined by arbitration in Sweden. In the event that its application for a stay is unsuccessful, the [defendant] applies for summary judgment …"
(emphasis added)
This application was also based on Swedish law: that it governed the claim, and that Swedish law gives immunity to a company (as opposed to directors or others) for misstatements in connection with an issue of its shares.
(1) In order to deprive a defendant of his recourse to arbitration a "step in the proceedings" must be one which impliedly affirms the correctness of the proceedings and the willingness of the defendant to go along with a determination by the Courts of law instead of arbitration: Eagle Star Insurance Co Ltd v Yuval Insurance Co Ltd [l9781 1 Lloyd's Rep 357: [56];
(2) Two requirements must be satisfied. First, the conduct of the applicant [for a stay] must be such as to demonstrate an election to abandon his right to stay, in favour of allowing the action to proceed. Second, the act in question must have the effect of invoking the jurisdiction of the court: Mustill & Boyd, Commercial Arbitration (2nd edn, 1989): [57];
(3) An act which would otherwise be regarded as a step in the proceedings will not be treated as such if the applicant has specifically stated that they intend to seek a stay: Merkin, Arbitration Law: [57].
(1) the defendant did not take a step in the proceedings when it made its application for summary judgment on the expressly conditional basis;
(2) it did not do so at the hearing of the application, which was on the same conditional basis;
(3) that position did not change when the parties asked the master to deliver a judgment on the summary judgment application, because they only did so in case an appeal against the stay succeeded i.e. if the stay was refused and the proceedings continued.
(1) an application for strike out or summary judgment which is made expressly conditionally on a Stay Application not succeeding;
(2) seeking a hearing and making of submissions at the hearing of such an application.
Frick
making its submissions on a conditional basis, but the court's determination of the application by delivering judgment (on the same conditional basis) would result in submission to the jurisdiction. This is a distinction with a theological flavour, which in my judgment cannot be justified in principle.
Frick
would not, in my judgment, be taking a step in the proceedings for the purpose of s.3 of the 1996 Act.
Case management
(1) If the Stay Application is heard first and fails, then whether those costs have been unnecessarily incurred will depend on the outcome of the SJ Application: if the SJ Application succeeds, then the costs of the Stay Application will have been unnecessarily incurred; if the SJ Application fails, those costs will not have been unnecessarily incurred;
(2) If the SJ Application is heard first and fails, then if the Stay Application succeeds, then, those costs will have been unnecessarily incurred (but not if the Stay Application fails);
On the other hand,
(3) If the Stay Application is heard first and succeeds, it will not be necessary to hear the SJ Application;
(4) If the SJ Application is heard first and succeeds, then it may not be necessary to hear the Stay Application.
Complexity and length of SJ Application
Frick's
counsel submitted that the SJ Application will be a significantly simpler application than the Stay Application. In doing so, he put the merits of the SJ Application at the forefront of his submissions, making an unspoken invitation to conclude that the SJ Application was bound to succeed. This confidence in its merits does not however extend to abandoning the Stay Application.
Frick's
counsel made the following points about the claim, all of which he submitted could be determined shortly, and were issues of English law. As will be seen, the latter is not correct.
Bank
entered into the pledge agreements with
Frick
for the purpose (in broad summary) of putting assets beyond the reach of its (the
Bank's)
creditors, or prejudicing their claims against the
Bank:
see s.423(3). The particulars of claim allege that:
(1) the
Bank
effected the pledge agreements "under the direction and control" of the Employees (§51);
(2) the Employees so directed the
Bank
"for the sole or substantial purpose of putting assets beyond the reach of the
Bank's
customers and creditors" (§56); and
(3) the Employees' "acts and state of mind fall to be attributed to the
Bank
for this purpose" (§51).
bank
they controlled, by causing it to make payments (via
Frick)
to shell companies that were mere fronts for them. It was, he submitted, incoherent to suggest that the officers of a company who steal from it do so for the principal purpose of frustrating the claims of its creditors: they do so for the purpose of lining their own pockets.
Bank.
Its purpose was, therefore, he submitted, to prejudice the claims of customers/creditors by stealing their money.
Frick
that the point appears to be a relatively short one.
Frick's
counsel submitted that the claimant's suggestion that the Employees' alleged "purpose" falls to be "attributed to the
Bank"
contradicts the position it took in the recent Zhevago case[1], where this issue also arose. He referred to the Chancellor's summary of the evidence of the claimant's Ukrainian law expert (Professor Kuznetsova) at §42:
"if the management of a corporate entity are acting wrongfully and contrary to its interest, the knowledge of the individuals in question will not be attributed to the corporate entity. To attribute to theBank
the knowledge of the officials who had defrauded the
Bank
would be an unjust result that a Ukrainian court could not reach".
Frick's
counsel submitted that if (as the claimant told the Chancellor) that is so, then its case on attribution in this claim is "false".
bank
were time-barred, and the issue as to attribution arose in that materially different context: whether for limitation purposes the knowledge of fraudulent actors was to be attributed to a company. Under English law, whether or not the knowledge of any individual is to be attributed to a corporate entity depends on the purpose of the attribution: Bilta v Nazir [2015] UKSC 23 [2016] AC 1 at [39] –[41], following Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500.
Frick
appear to assert, the relevant law is Ukrainian law, it will need to set out and adduce evidence of Ukrainian law, and this may be a substantial undertaking. I cannot conclude that this will be a short point.
Frick's
counsel relied upon the principle (which was common ground) that an English court only grants relief in respect of a claim under IA86 s.423 if there is "a sufficient connection" between the claim and this jurisdiction: see generally Orexim Trading Ltd. v. Mahavir Port & Terminal Pte Ltd [2018] 1 WLR 4847 (C.A.), at [55]-[60].
(1) the pledge agreements were transactions between parties in Ukraine and Liechtenstein, and were governed by Liechtenstein law;
(2) the pledges contain a Swiss arbitration clause, in the following terms: "any dispute, controversy or claim which may arise under or in connection with this Pledge Agreement … shall be settled by the Swiss Chambers' Court of Arbitration and Mediation";
(3) even on the claimant's own case, Eastmond was a pure conduit: "the monies … were immediately paid out to accounts in Latvia" (§46.3 of the PoC).
"Thus in considering whether there is a sufficient connection with this country the court will look at all the circumstances, including the residence and place of business of the defendant, his connection with the insolvent, the nature and purpose of the transaction being impugned, the nature and locality of the property involved, the circumstances in which the defendant became involved in the transaction or received a benefit from it or acquired the property in question, whether the defendant acted in good faith, and whether under any relevant foreign law the defendant acquired an unimpeachable title free from any claims even if the insolvent had been adjudgedbankrupt
or wound up locally. The importance to be attached to these factors will vary from case to case. By taking into account and weighing these and any other relevant circumstances, the court will ensure that it does not seek to exercise oppressively or unreasonably the very wide jurisdiction conferred by the sections."
Complexity and length of Stay Application
Frick's
counsel submitted that the issues in the Stay Application were of greater difficulty and complexity, making it a longer and more costly application. Those issues would, he said, be:
(1) whether the fact that the claimant was not a party to arbitration agreements means that the claim is outside them;
(2) whether the arbitration agreements cover claims under s.423, as a matter of construction i.e. is a s.423 claim a "dispute, controversy or claim … under or in connection with this Pledge Agreement"?;
(3) whether the subject matter of the dispute is arbitrable at all, as a matter of public policy, given that IA86 s.423 is a statutory remedy for the protection of creditors.
Bank
of St. Petersburg [2020] EWHC 2483 (Comm) [51]-[54].
Frick's
counsel said, both issues of Swiss law, as both the governing law of the arbitration agreements, and the seat of the arbitration. If the parties disagree about Swiss law, or about how it falls to be applied to those issues, the court will then have to determine whether to give directions to enable that dispute to be tried (e.g. for Swiss law evidence, and cross-examination), or to stay the proceedings, to enable the arbitral tribunal to decide it for itself: see CPR rule 62.8(3).
Frick
has not served any evidence of Swiss law and in its application notice, does not identify any principles of Swiss law on which it relies. Furthermore,
Frick's
position at the hearing was that it was not going to serve any evidence in support of the Stay Application. In those circumstances, the court may be able to proceed on the assumption that the foreign law was the same as English law[2]. In addition, if evidence of Swiss law is adduced, I cannot assume at this stage that the parties will be unable to agree the relevant principles.
Conclusion
Note 1 PJSC Note 2 See Brownlie v FS Cairo (Nile Plaza) LLC [2021] 3 WLR 1011 [Back]
Bank Finance & Credit v Zhevago [2021] EWHC 2522 (Ch) [Back]