Insights and Commentary from Dentons

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The role of government has never been more critical IFI Update - London

October 2007

CONTENTS (a) the contract expressly provides that he may; or In this issue, we examine the following topics: (b) subject to subsection (2), the term purports to confer a benefit on Privity of contract and third party rights 1 him.

Awards of interest on contractual, tortious and restitutionary claims 2 (2) Subsection 1(b) does not apply if on a proper construction of the contract it An arranger’s liability on syndication and appears that the parties did not intend sell-down of a facility 7 the term to be enforceable by the third party. UCP 600 13

Stays of proceedings involving the same (3) The third party must be expressly parties and the same cause of action in identified in the contract by name, as a different EU member states 13 member of a class or as answering a The ISDA Master Agreement and the effect particular description but need not be in of foreign insolvency proceedings concerning existence when the contract is entered a counterparty 17 into.” Applications for administration orders 19 Lindsay J in the High Court has considered the application of S. 1(1)(b). The facts of the case concerned a guarantee of the tenants’ PRIVITY OF CONTRACT AND THIRD obligation to pay rent under a lease of a PARTY RIGHTS building. The tenants were the partners in a The Contracts (Rights of Third Parties) Act foreign law firm (assumed to be a 1999 provided a means of escape from the partnership in the same sense as an severity of the common law rule that only a ordinary partnership under English law). The party to a contract is entitled to enforce it. two guarantors were the former tenants who There were various qualifications to the rule had assigned the lease, with the landlord’s that had been developed at general law but consent, to the partners of the law firm. As a the rule frequently remained as a stumbling condition of the consent, the guarantee had block to attempts by third parties to obtain been given within the licence to assign. the benefits which a contract, to which they Sometime thereafter, the tenants and the were not a party, had wished to confer upon landlord had agreed that the liability of the them. S. 1 of the Act provides as follows: tenants under the lease would be limited to the partnership assets and, in consequence, (1) Subject to the provisions of this Act, that any recovery by the landlord against the a person who is not a party to a contract tenants or “any previous tenant” under the (a “third party”) may in his own right lease would be limited to the assets of the enforce a term of the contract if— partnership. The guarantors were not parties to that agreement.

The tenants failed to pay the rent and the which there might be a chain comprising a landlord sued the guarantors, without regard main contract and a number of sub- to the terms of the subsequent agreement. contracts. The Court quoted with approval The guarantors sought to rely upon it, by from the Law Commission’s Report (No. virtue of S. 1(1)(b) of he Act. His Lordship 242) on the subject of privity of contract, held that the guarantors were entitled to do which preceded the passing of the Act. The so. Report contained a draft of the Act. In relation to what became S.1(2), the Report As a matter of construction, Lindsay J held said (at para. 7.18) that the proper that the clause included both the tenants construction of a contract would include and the guarantors within its scope and that taking into account the surrounding it limited the right of recovery by the circumstances, including the presence of a landlords against both the tenants and the chain of contracts and an industry practice guarantors to the assets of the partnership. that it was not intended that rights would His Lordship declined to decide why the exist otherwise than between the immediate landlords might have agreed to such a parties to a contract so that, in the case of limitation. He then said that the guarantors the construction industry, a party to a were entitled to rely upon the clause contract higher up in the chain could not pursuant to the Act. S.1(1)(b) applied if on a claim against a party lower down in the true construction of the term of the contract chain by relying upon S.1(1)(b). Similarly, in question the sense of the term has the the Report said that a purchaser of defective effect of conferring the intended benefit goods from a retailer would not normally be upon the third party. There is no requirement able to rely upon S.1(1)(b) so as to claim in the sub-section that the conferral of a against the manufacturer under the contract benefit on the third party is the predominant between the retailer and the manufacturer. purpose or intent behind the contractual The purchaser’s only claim would be against term or that the third party can only benefit if the retailer, being its direct contracting party. no one else also receives a benefit under It is, of course, possible to deal with the the term. His Lordship referred to the matter expressly by providing that a third decision of the Court of Appeal in party may or may not rely on the contract. Laemthong International Lines Co. Ltd v. Abdullah Mohammed Fahem & Co. [2005] Prudential Assurance Co. Ltd v. Ayres EWCA Civ, [2005] 1 Lloyd’s Rep 688 in [2007] EWHC 775 (Ch) (Lindsay J support of his view that no such 18/4/2007). requirements limit the effect of S.1(1)(b).

It is interesting to note that in the Laemthong AWARDS OF INTEREST ON case, the Court of Appeal also considered CONTRACTUAL, TORTIOUS AND the effect of S.1(1)(b) and S. 1(2) of the Act RESTITUTIONARY CLAIMS in the context of a situation where there is a The House of Lords (consisting of Lords chain or a series of contracts as, for Hope, Nicholls and Walker in the majority instance, in the construction industry, in and Lords Scott and Mance in the minority

on certain aspects) has changed the rules money paid under a mistake of fact or law or as to the entitlement to interest as a part of for some other benefit mistakenly conferred contractual, tortious and restitutionary on a defendant, as the defendant may find claims. The facts of the case concerned that the claim against it might include a claims that were brought by an English claim for compound interest relevant to the company, which was a subsidiary of a period in which it had the money or for some German group of companies, for interest on other advantage that it received in the amounts of several payments to the consequence of what had occurred. Inland Revenue of advance corporation tax that had been unlawfully demanded under Before the decision in this case, the rules as legislation that had been held to infringe EC to awarding interest, including compound law. At various later dates, the advance interest, were very restrictive and did not payments had been offset against the reflect the everyday world, particularly in company’s liability for mainstream relation to the late payment of debts. In the corporation tax, so the company was not words of Lord Nicholls in this case, reclaiming the payments it had made but, instead, it claimed compound interest with “Legal rules which are not soundly based respect to the periods between the making resemble proverbial bad pennies: they turn of the unnecessary early payments and the up again and again. The unsound rule respective dates on which the offsets returning once more for occurred. The claimant in this case claimed consideration…concerns the negative damages in tort for breach of statutory duty, attitude of English law to awards of as well as a restitutionary claim on two compound interest on claims for debts paid grounds, being for payments made under late…To a significant extent the law remains unlawful demands and for payments made out-of-step with everyday life in the 21st under a mistake of law. A restitutionary century.” claim may now be brought in relation to a mistake of law and not just for a mistake of In summary, the historical position until this fact (Kleinwort Benson Ltd v. Lincoln CC case concerning the powers of the courts to [1999] 2 AC 349). The restitutionary claim in award interest was as follows. As a general this case would benefit from a more rule, interest on the late payment of a debt favourable limitation period than the tortious was not recoverable as damages unless the claim and so could cover matters going back parties had agreed that the debt should over a longer period. carry interest. A loss of interest was presumed to be too remote to fall within the The case is important in a commercial likely type of loss arising from a breach that context. It concerns the entitlement to claim would have been contemplated by the interest on an unpaid debt where there has parties at the time of contracting, under the been no agreement between the parties that rule as to remoteness in Hadley v. the debt should bear interest until payment. Baxendale (1859) 9 Ex 341 (see Page v. It is also important in relation to the Newman (1829) 9 B&C 378, London consequences of a restitutionary claim for Chatham and Dover Ry Co. v. South

Eastern Ry Co. [1893] AC 429, President of It should be noted, however, that the courts India v. La Pintada Compania Navigacion could award compound interest in the SA [1985] 1 AC 104). An exception had equitable jurisdiction against a defaulting been recognised, in conformity with the trustee or fiduciary. second limb of the rule in Hadley v. Baxendale, where it could be shown that a Lord Nicholls gave the leading opinion in the loss had resulted from the late payment and case. He was supported by Lord Hope and, that loss was of a special type that had been except for one small point, by Lord Walker. contemplated by the parties at the time of His Lordship held that there should be no contracting (see Trans Trust SPRL v. special rule which generally denied a Danubian Trading Co. Ltd [1952] 2 QB 297, claimant an entitlement to simple or Wadsworth v. Lydall [1981] 1 WLR 598, compound interest on a contractual claim for President of India v. La Pintada Compania late payment of a debt and, to that extent, Navigacion SA). The position was partly the earlier case law should be overruled. ameliorated by S. 35A of the Supreme Court Such an entitlement was a matter that might Act 1981, which permitted the court to award be contemplated under either the first or the simple interest on the outstanding amount second limb of the rule in Hadley v. provided that the debt had not been repaid Baxendale. It was a matter of common before the proceedings were commenced knowledge that failure to pay a debt on time (see President of India v. La Pintada might lead the creditor to suffer a Compania Navigacion SA). In addition, the compounded interest loss. S. 35A of the Late Payment of Commercial Debts Supreme Court Act 1981 did not detract (Interest) Act 1998 provides for certain types from nor limit the court’s ability to award of commercial debts that remain unpaid to such interest by way of damages. However, carry simple interest. It was generally the court will not presume that the claimant thought that the rules as to tortious claims has suffered such loss; the loss must be followed the contractual rules. In relation to particularlised and proved and, to that extent resititutionary claims which were not in the only, the decision in the London Chatham nature of a proprietary claim, it was and Dover Ry Co. case remained valid. considered that the courts did not have Similarly, the power of the court to award power either at common law or in equity to damages is subject to the other usual rules, award interest on a claim (see Johnson v. such as those concerning the duty to the King [1904] AC 817 and the majority mitigate a loss that has been suffered. (Lords Browne-Wilkinson, Slynn and Lloyd, Lords Goff and Woolf dissenting as to the His Lordship indicated that the scope of the equitable position) in Westdeutsche damages that could be awarded was Landesbank Girozentrale v. Islington LBC potentially quite wide when he said that, [1996] AC 669), although simple interest might be awarded on a restitutionary claim “In the nature of things the proof required to under S. 35A of the Supreme Court Act establish a claimed interest loss will depend 1981 (BP Exploration Co. (Libya) Ltd v. Hunt upon the nature of the loss and the (No 2) [1983] 2 AC 352). circumstances of the case.

The loss may be the cost of borrowing In relation to the restitutionary claim in the money. That cost may include an element of case, Lord Nicholls said that there should be compound interest. Or the loss may be loss a jurisdiction at common law to award of an opportunity to invest the promised compound interest on the claim. He said money. Here again, where the that, technically, the inability to award such circumstances require the investment loss interest at common law had been assumed may need to include a compound element if rather than decided in the Westdeutsche it is to be a fair measure of what the plaintiff Landesbank case, so he did not feel [claimant] lost by the late payment. Or the constrained by that case in coming to his loss flowing from the late payment may take decision. Nor did he feel that his decision some other form. Whatever form the loss was inconsistent with S.35A of the Supreme takes the court will, here as elsewhere, draw Court Act for the same reasons as he had from the proved or admitted facts such previously given concerning tortious and inferences as are appropriate…There are no contractual claims. The claim for interest special rules for the proof of the facts in this (including compound interest) in a area of the law.” restitutionary claim should be seen as reflecting the “use value” or “time value” of For a claim in tort, his Lordship said that the the money in the hands of the defendant, restrictive approach to contractual claims rather than to award compensatory should never have been relevant. Subject to damages for the loss suffered by the the usual general rules concerning the claimant (as would be the case in a tortious award of damages in tort, damages as or contractual claim). The award should interest could be awarded at either a simple reflect a “conventional rate” being the or compounded rate. That point was reasonable cost to the defendant of relevant in this case as one of the claims borrowing the money for the period, as was based in the tort for a breach of opposed to any higher actual value of statutory duty, for which compensatory benefits that the defendant might have damages were claimed. derived, as this was not a proprietary claim; the defendant had become the owner of the Lord Nicholls also indicated that where money it had received. His Lordship went on compound interest was awarded on a to say that the award should, in an contractual or tortious claim, it would be appropriate case, be reduced or not made at calculated at a “conventional rate”. That all where the defendant showed that it had could be a rate that would be charged to a received a lesser value or no value from its substantial company for borrowing the receipt of the money from the defendant. amount in question in the market at the This reflected the concept of “subjective relevant time, compounded in accordance devaluation” of the restitutionary claim. with market practice. Presumably, the approach that would be taken for a smaller In this case, the award should be calculated claimant would reflect the borrowing rate by reference to the cost to the UK appropriate for a company like it. Government of borrowing funds. The claimant had only requested compound

interest for the period between the date it point of departure, which concerned whether had made its advanced tax payment to the a restitutionary award of compound interest Inland Revenue and the date it had been should be available at common law or arise able to set-off that payment against its as part of the court’s equitable jurisdiction. mainstream tax liability. His Lordship would Lord Nicholls had seen it as arising at have been prepared, had it been requested, common law. Lord Walker, on the other to extend the award by permitting the hand, said that he saw the common law as compound interest to run until the date of only having jurisdiction to award simple judgment, because the loss that had been interest and that the power to award suffered had not been recovered prior to that compound interest should be seen as a part date. of the court’s equitable jurisdiction to make good a deficiency in the common law. He By way of comment, it is difficult to said that this would be in line with the understand the approach that Lord Nicholls minority approach taken by Lords Goff and took in formulating the principle under which Woolf in the Westdeutsche Landesbank the restitutionary award should be framed. If case. Being an equitable remedy, it would the award is to reflect the “use” or “time” be discretionary and compound interest value of the money in the hands of the should not be awarded if the facts showed defendant, it would be more appropriate to that the defendant had not earned formulate the award as representing the compound interest on its own use of the actual value derived by the defendant, money. The problem with Lord Walker’s whatever that might be, rather than taking approach, however, is that it appears to an element of presumed objective value (ie. assume that there would be no discretion in the reasonable cost to the defendant of determining if simple interest should be borrowing money) and then devaluing that awarded; it would be awarded as of right at potential amount by taking into account any common law. The defendant would have no lower value that the defendant actually defence available to it against an award of received, but refusing to make a higher simple interest by pleading that it had not award if the defendant had gained more earned the relevant amount of simple than could reasonably have been enjoyed. interest on the money, either because it had Lord Nicholls’s approach also has the effect earned no interest at all or that it had earned of reversing the usual onus of proof, only a lesser amount of interest than the because it begins with an assumption that “conventional” rate of simple interest on the defendant has enjoyed an advantage which the award was based. from the use of the money and throws the burden on to the defendant of showing that it Lord Scott and Lord Mance agreed with Lord did not gain the presumed advantage. Nicholls in relation to the position concerning claims in contract or in tort. They did not As previously mentioned, Lord Hope agreed agree with Lord Nicholls’s approach with the whole of Lord Nicholls’s opinion. concerning restitutionary claims. Instead Lord Walker largely agreed with the opinion Lord Scott said that he was in complete of Lord Nicholls, but there was one small agreement with the approach taken by Lord

Mance, in saying that interest should not Government’s borrowing needs had been normally be awarded as part of the claim, reduced in consequence of the payment it because no benefit should be assumed from had received from the claimant. Accordingly, the mere fact that the defendant had his Lordship was of the view that no received the claimant’s money. A restitutionary award should be made against restitutionary award is not a compensatory the Government. award for the loss suffered by the claimant; it is simply an award to restore the position Lord Mance reiterated the view taken by to the extent of the unjust enrichment of the Lord Scott that a restitutionary award could defendant but no more. An additional benefit not recognise a claim for the “use had of to the defendant over and above merely money had and received”. He felt that there receiving the money cannot be assumed. was no power at common law to award Nonetheless, Lord Scott would allow interest interest as part of a restitutionary award. (or another proved benefit) to the extent that However, he would be prepared to allow an it had actually been earned by the equitable claim, on a discretionary basis, for defendant, but that would be subject to the any actual benefit that it could be proved the usual defences to a restitutionary claim, defendant had received from its use of the such as for a change of position. To the money, relying on the approach of Lords extent that interest (or some other benefit) Goff and Woolf in the Westdeutsche had been received by the defendant and so Landesbank case. That could include a should be awarded to the claimant, Lord claim for compound interest. In this case, he Scott would see the award as based in the was prepared to allow a claim for compound common law rather than being equitable interest against the Government, referable (unlike Lord Mance). He also said that the to any actual benefit the Government had power at common law to make the award received from the early payments. That should not be seen as a discretionary would have to be assessed by a judge, to power, but it could be tempered by the right whom the case should be remitted for of the court to determine the effect of a further determination. change of position defence and, in consequence, to determine where “the Sempra Metals Ltd v. HM Commissioners of equities lay” and so reach a “fair and just Inland Revenue [2007] UKHL 34 result”. It is not clear to an observer of these (18/7/2007). comments just where the difference lies between Lord Scott’s approach and an approach which says that the exercise of the AN ARRANGER’S LIABILITY ON power is truly discretionary. SYNDICATION AND SELL-DOWN OF A FACILITY Lord Scott said that in this case there was In the December 2006 edition of this no evidence that the Government had Update, we commented on the decision of actually derived any benefit from the early Toulson J in the High Court in a case where payment that the defendant had made. a participant, which had acquired its There was no evidence that the participation in a facility on a syndication of

the facility effected by a sell-down of the syndication. Not long after the exposures initially taken by an underwriter, syndication had been completed, it was sought to claim against the arranger of the discovered that the target of the acquisition syndication, which was also the underwriter, had been the victim of a major fraud. for misrepresentation and negligence in relation to the provision of incomplete The accounting information relating to the information concerning the financial position target that had been distributed by the of the target company whose acquisition had arranger to the potential syndicate been financed by use of the facility. Toulson members, as part of a package in a J found against the participant on both “Syndicate Information Memorandum” (the issues. The case has now been heard on “SIM”), had contained the audited accounts appeal by the Court of Appeal, which upheld of the target and some further financial the findings of the judge. Waller, Gage and information. The SIM also referred to two Lawrence Collins LJJ sat on the appeal. reports written by a firm of accountants Waller LJ gave the leading judgment. Gage retained by the issuer of the bonds and LJ delivered a briefer judgment and warrants, which were limited in their Lawrence Collins LJ agreed with both of coverage and as to the dates to which they those judgments. This report will not deal related. Those reports were sent under with a further issue that was raised, which separate cover to the claimant but were concerned a separate agreement that was referred to as being appendices to the SIM. governed by French law. On that issue, it was held that the participant had agreed After the SIM and the two accountants’ with the arranger that the participant would reports had been sent to the claimant, but not to pursue its claims against the arranger before the claimant contracted to acquire its and that it had waived its claims. participation, the arranger received two further reports from the accountants which In more detail, the facility involved a were negative in tone and in which the subscription for bonds and warrants, which accountants said that they had been unable were initially taken up by the underwriter. to make progress in producing any further The amount received by the issuer for the reports that could be sent to the potential subscription was used by it to make a participants because of difficulties in gaining successful bid for the target, which was a access to the necessary information. The listed company. Shortly afterwards, the arranger did not inform the claimant of the syndication of the facility was achieved by existence of those two further reports nor of the underwriter/arranger selling on the the difficulties that the accountants had bonds and warrants to a group of faced or, indeed, that they were still participants, which included the claimant. engaged to produce a further report to be The facility and the subsequent sell-down sent to the potential participants. There was had been organised by the arranger at the evidence that someone in the offices of the behest of the issuer and others associated arranger had thought that these two with the issuer. The claimant acquired €20m additional reports might make syndication of the bonds and warrants at completion of difficult and that the arranger had written to

the accountants saying that the position did reasonableness of any assumption not “sound too rosy” and they were looking contained therein or any other information forward to receiving the accountants’ final made available in connection with the conclusions and any necessary adjustments Facilities (whether in writing or orally) to any to the information and projections that had interested party (or its advisors)…Neither previously been given. the Arranger nor any of its respective directors…shall be liable for any direct, In consequence of the fraud, the issuer got indirect or consequential loss or damage into financial difficulties and the facilities had suffered by any person as a result of relying to be re-structured, with the claimant on any statement contained in this claiming to have suffered loss in Memorandum or any such other consequence. The claimant said that had it information… known of the difficulties encountered by the accountants in carrying further their The Arranger expressly does not undertake investigations, it would not have gone ahead to review the financial condition, status or with the transaction. It sought to recover the affairs of [the issuer or the target] or any of loss it had suffered from the arranger. their affiliates or any obligor in respect of the Facilities, at any time or to advise any The SIM, which was sent to the claimant by potential or actual participant in the Facilities the arranger, contained a notice at its of any information coming to the attention of beginning, which included a number of the Arranger.” disclaimers of responsibility on the part of the arranger. It stated that the information It was noted that provisions along those contained in the SIM was only in summary lines were standard in the world of arranging form and did not purport to be and underwriting syndicated finance and, comprehensive, that there was no obligation indeed, that the participant itself used the on anyone to update the information, that same or very similar terms when it was the information in the SIM had been involved in those activities. obtained by the arranger from various sources, who had approved it and its The claimant sued the arranger for distribution and that it was not to form the misrepresentation pursuant to S. 2(1) of the basis of any contract. The notice further Misrepresentation Act 1967 and in stated that, negligence. As to the claim in misrepresentation, in effect the claimant “The Arranger has not independently verified argued that by sending the SIM to the the information set out in this Memorandum. claimant and in procuring that the two Accordingly, no representation, warranty or accountants’ reports were sent to the undertaking, express or implied, is made claimant, the arranger impliedly represented and no responsibility is accepted by [the to the claimant that the arranger knew Arranger]…as to or in relation to the nothing which showed that the information in accuracy or completeness or otherwise of the SIM or in those reports was or might be this Memorandum or as to the materially incorrect, and that this was a

continuing representation that continued up completeness of that information. It also until completion of the syndication. By failing disclaimed any responsibility to review or to supply the further reports to the update any information that had been participant or at least to alert it to the caution supplied. In light of the notice, it was held expressed therein, the arranger had that the only representation that the arranger misrepresented the position. had given was that it was acting in good faith, the arranger having conceded in S. 2(1) of the Misrepresentation Act 1967 argument that it had given that provides as follows: representation (in other words, that it had not been acting in bad faith or fraudulently). “Where a person has entered into a contract That was a continuing representation. There after a misrepresentation has been made to was no representation that the information him by another party thereto and as a result that had been provided in the SIM, including thereof he has suffered loss, then, if the the two original accountants’ reports, was person making the misrepresentation would accurate. There was no obligation upon the be liable to damages in respect thereof had arranger to review that information, nor did it the misrepresentation been made represent that it had done so. As to the fraudulently, that person shall be so liable continuing representation that it was acting notwithstanding that the misrepresentation in good faith, the arranger was obliged to was not made fraudulently, unless he proves inform the participant if the arranger actually that he had reasonable ground to believe knew that what had previously been and did believe up to the time the contract distributed was misleading and an allegation was made that the facts represented were that it had failed to do so would amount, in true.” effect, to an allegation of dishonesty (see With v. O’Flanagan [1936] Ch 575). Such an The court said that the section only comes allegation had not been made out. The two into effect if, as an initial requirement, there subsequent reports did not make the had been a misrepresentation of fact that arranger actually aware that the earlier was made by the arranger, which had information was misleading. They merely continued up to the date of contracting (ie. gave rise to the possibility that it might be when the participation was granted) and misleading. That was not sufficient to give which was or had by that date become rise to an obligation to correct the earlier inaccurate. The notice in the SIM was information. considered by the court to be very important in defining if the arranger had given any The claims in negligence were put on the representation to the participant, and the basis of a negligent misstatement or that extent of its obligations in that regard. The there had been a breach of a more general notice expressly stated that the arranger had duty of care. The claim based on negligent not independently verified the information misstatement was dismissed on the basis that had been distributed. It also stated that that, for the same reasons as applied to the the arranger did not accept any claim for misrepresentation, there had been responsibility for the accuracy or no misstatement.

The claim alleging a breach of the more have been found to exist on the part of the general duty to take reasonable care arranger towards the claimant. It is towards the claimant was put on the basis submitted, however, that the facts do not that the arranger was obliged to inform the support the existence of such a duty in the claimant if, before the syndication had been first place. The arranger was performing the completed, the arranger became aware that function of putting together the syndicate to the statements made in the SIM or in the buy the relevant debt securities. In doing accountants’ reports were or might be that, it was acting partly on the instructions incorrect in a material way or that the of and as the agent for the issuer (and those opinions expressed in the accountants’ associated with the issuer) and partly on its reports were or might not be reasonable or own behalf as the seller of the securities. It might no longer be considered as did not distribute the information in the SIM reasonable by the accountants themselves. because of any self-standing obligation it That claim was also dismissed. The had towards the claimant. It distributed that arranger had made it clear by the notice in information to further the purposes of the the SIM that it did not accept or assume a issuer and of itself, which the notice in the duty of care and responsibility towards the SIM made clear. In those circumstances, it participant. In light of that, no such duty could not be said, looking at the matter could possibly arise and the outcome of the objectively (see Lord Hoffmann in Customs decision in Hedley Byrne & Co. Ltd v. Heller and Excise Commissioners v. Barclays Bank & Partners Ltd [1964] AC 465 was cited in PLC [2006] UKHL 28, [2007] AC 181, at support of that proposition. In that case, the [25]), that the role of the arranger was such possibility of any duty or acceptance of that, but for the disclaimer of liability in the responsibility arising from the negligent notice, it would have assumed a statement contained in the relevant responsibility towards the claimant as to the communication was expressly disavowed. It accuracy or sufficiency of what was should be noted, however, that the case was contained in the SIM. decided before the passing of the Unfair Contract Terms Act 1977. Be that as it may, if one proceeds on the basis that the arranger would have There are difficulties with the approach that undertaken a duty of care had there been no the court took on the issue concerning the notice, then it would be relevant to consider possible existence of a liability in the position in light of S. 2(2) of the Unfair negligence. Its approach was, essentially, to Contract Terms Act 1977. That section say that in light of the provisions in the provides that a person cannot exclude or notice that was contained within the SIM, no restrict liability for negligence which gives duty of care could have arisen and no rise to loss or damage (not being for death liability could exist for a negligent or personal injury) by the means of a misstatement, because such matters were contract term or a “notice”, except in so far precluded from arising by the terms of that as the term or notice satisfies the notice. This might be taken as an indication requirement of reasonableness, as set out in that, but for the notice, a duty of care might S. 11 of the Act. In other words, if the notice

in the SIM was considered to be an attempt decide whether the attempt to exclude to exclude or restrict the arranger’s liability, it liability for negligence met the requirement would only be effective if it met the of reasonableness as set out in S. 11 of the requirement of reasonableness. A “notice” is Act. It is submitted that, at this point, the defined in S. 14 of the Act to include, “an arranger would be saved. In general the announcement, whether or not in writing, courts are reluctant to intervene and hold and any other communication or pretended unreasonable a provision which purports to communication”. The notice in the SIM exclude or restrict liability in a situation would qualify as such a notice; to the extent where those involved are experienced that it was also incorporated in the contract commercial parties of equal bargaining between the arranger and the participant, it power and adequate resources. The courts would be contract term. have regarded such provisions as representing an agreed allocation of risk in In considering whether a contractual which the courts should not interfere (see provision or a notice has the effect of Chadwick LJ said in Watford Electronics Ltd excluding or restricting liability for v. Sanderson CFL Ltd [2001] EWCA Civ negligence, the court is concerned with its 317, [2001] 1 All ER (Comm) 696, at [63], substance and not just its mere form (see Clarke LJ in National Westminster Bank Stuart-Smith LJ in Johnstone v. Bloomsbury PLC v. Utrecht-America Finance Co. [2001] Health Authority [1992] QB 333, at 346). S. EWCA Civ 658, [2001] 3 All ER 733, at [57] 13(1) of the Act supports this by providing, in to [62] and Tucker LJ in Granville Oil and effect, that S. 2 of the Act catches an Chemicals Ltd v. Davies Turner & Co. Ltd attempt to exclude or restrict liability by the [2003] EWCA Civ 570, [2003] 2 Lloyd’s Rep use of a term or notice which purports to 356, at [31]). In this light, it is unlikely that a exclude or restrict the relevant duty from court would hold to be unreasonable a arising in the first place. This would be protective provision which was aimed at relevant to a contractual provision or a protecting an arranger from liability towards notice, such as that in the SIM, which the syndicate members, whether the purported to preclude a duty or obligation provision was contained in a notice sent out from arising at all as, for instance, by the by the arranger to the participants prior to insertion of a provision which contained a the execution of the relevant agreements or disavowal of responsibility or liability. See in contractual provisions in such an further Lord Griffiths and Lord Jauncey in agreement. Such an approach would also Smith v. Eric S Bush [1990] 1 AC 831, at be consistent with market practice in relation 857 and 873, respectively. In this regard, to syndicated credit, in which it is generally Lord Griffiths referred to a “but for” test, ie. accepted that the arranger should not be that, but for the provision or notice, a liability expected to accept responsibility towards would have arisen. the syndicate members.

On the basis that the notice in the SIM was, IFE Fund SA v. Goldman Sachs in reality, an attempt to exclude liability for International [2007] EWCA Civ 811 negligence, it would then be necessary to (31/7/2007).

UCP 600 documents without further notice is formally The Uniform Customs and Practice for recognised. Documentary Credits (“UCP 600”) came into effect on 1st July, 2007 and will be referred to as “UCP 600 (2007 revision)” and as “ICC STAYS OF PROCEEDINGS INVOLVING Publication No. 600”. It effects a number of THE SAME PARTIES AND THE SAME important changes from the previous version CAUSE OF ACTION IN DIFFERENT EU under UCP 500. MEMBER STATES Art. 27 of the EC Regulation on jurisdiction By way of brief summary, the changes and judgments (EC 44/2001 OJ L12/1 include the following. The structure of the 16/1/2001), which for present purposes UCP has been simplified and it contains new replicates Art. 21 of the Brussels and definitions and interpretation provisions. It is Lugano Conventions, provides as follows: explicitly stated that the new UCP will not apply to revocable credits. References to the “(1) Where proceedings involving the same underlying transaction are expressly cause of action and between the same discouraged. An issuing bank will be liable parties are brought in the courts of different to pay where a fraud becomes apparent Member States, any court other than the first after the assignment of a deferred payment seised shall of its own motion stay its obligation under the credit. There are new proceedings until such time as the provisions concerning advising a credit and jurisdiction of the court first seised is amendments to it and it is also provided that established. amendments to a credit must be the subject of express agreement. There are new (2) Where the jurisdiction of the court first provisions dealing with the effect of seised is established, any court other than nominating a bank. A blanket time of five the court first seised shall decline jurisdiction banking days will be allowed for checking in favour of that court.” documents, in place of the old concept of a “reasonable time” and there are new Aikens J in the High Court has considered provisions concerning compliant that provision in the light of an assignment of presentations. It is provided that documents a cause of action and associated need not be absolutely consistent; they proceedings in England relating to an should merely not be inconsistent and there alleged breach of an English law contract are provisions to prevent reliance on non- and the commencement of further documentary conditions. Where a credit proceedings by the defendants in Cyprus. It merely calls for a document to be tendered may be taken that the courts in each country without describing what its contents should were duly seised of the respective contain, the presentation of the document proceedings before them. will be sufficient, irrespective of its contents. The practice of rejecting documents subject So far as material, the sequence of events to receipt of a waiver and upon such a was that proceedings for breach of contract waiver being received for the release of were commenced in England in July 2006.

The claimants assigned their rights in decide if there was a situation of lis November, 2006 and notices of the pendens. If on that date there were two sets assignment were delivered to the of such proceedings then the subsequent defendants in December, 2006. The substitution of the assignee for the assignors assignment was stated to be governed by as the claimant in the English proceedings English law. In January, 2007, the assignee would not matter. Aikens J said that three applied to the English court to be substituted overall questions had to be answered. First, as the sole claimant in the English as to the principles of EC law in determining proceedings, permission for which was if one legal entity should be regarded as the granted on 16th February, 2007 and the “same party” as another legal entity for the claim form was re-issued on 20th February, purposes of Art. 27; secondly, whether the naming the assignee as the sole claimant. assignee in this case should be regarded as On 14th February, 2007, the defendants in the same party as the assignors for that the English proceedings commenced purpose; and thirdly, whether on the facts proceedings in Cyprus, to which the the English court should be regarded as assignors and the assignee were the being first seised of the same cause of defendants. The relief that was sought in the action as between the same parties as were Cypriot proceedings was a mirror image of involved in the Cypriot proceedings. that which had been sought in the English proceedings as originally commenced. The From the decision of the European Court of claimants in the Cypriot proceedings Justice in The Tatry Case C406/92, [1994] claimed that Art. 27 did not apply to require ECR I-5439, [1999] QB 515 (which involved a stay of their proceedings and that, instead, Art. 21 of the Brussels Convention), his the English proceedings should be stayed. Lordship derived the following propositions: They argued that the proceedings which that the meaning of Art. 27 was to be they had commenced were not between the decided according to EC law, not national same parties as the proceedings that had law; that in deciding if the same parties were been commenced in England in 2006 and involved, the procedural position of each of that, once the assignee had been them was not relevant; that the rules in Art. substituted as the claimant in the English 27 (and in Art. 28) were designed to avoid proceedings, those proceedings should be the possibility of mutually irreconcilable stayed as having effectively been judgments of courts in different states in the commenced after the Cypriot proceedings. same dispute; that Art. 27 requires that the parties to the two actions should be His Lordship said that the key question was “identical”, although the ECJ did not whether, when the Cypriot proceedings were elaborate on what that concept meant in commenced on 14th February, 2007, the practical terms; and that Art. 27 only consequence was that there were then in required a stay of proceedings as between existence two sets of proceedings involving the same parties, so that if the one of the the same cause of action and the same sets of proceedings involved other parties, parties within the meaning of Art. 27. That those proceedings could continue with was the date as at which it was necessary to respect to such other parties even if the

proceedings involving them had been stayed Cover Europe Ltd [2002] EWHC 861 (Ch), to the extent that there was an identity of [2002] BCLC 61, in which it was held that parties with the other proceedings. the question of whether a liquidator and the company in liquidation should be treated as The decision of the ECJ in Druout being the same party for the purposes of Art. Assurances SA v. Consolidated 21 of the Brussels Convention was to be Metallurgical Industries Case C-351/96, decided as a matter of substance, rather [1998] ECR I-3075 involved proceedings in than form. Fine distinctions in English two member states involving a ship owner insolvency law should not apply in on the one hand and a cargo owner and its determining that issue. It was held that they insurer on the other hand. The case before should be treated as the same party (see the ECJ concerned whether the insured and also the approach that was taken, in relation the insurer should be treated as being the to the effect of S. 395 of the Companies Act same party for the purposes of Art. 21 of the 1985, by the House of Lords in Smith Brussels Convention. The court held that, (Administrator of Cosslett (Contractors) Ltd) although they were separate legal entities, v. Bridgend CBC [2001] UKHL 58, [2002] 1 they could be considered to be the same AC 336). party if there was a sufficient degree of identity in their interest in the subject matter His Lordship then went on to hold that the of the dispute. It was a matter for the assignee should be treated as being the national court to determine if the facts led to same party as the assignors, because its the conclusion that their interests were interest should be regarded as being “identical to and indissociable from” each “identical to and indissociable from” that of other. From that judgment, Aikens J drew the assignors. In determining that point, the following conclusions: that two legal Aikens J considered the issues that were entities can be regarded as being the same involved in the two sets of proceedings and party for the purposes of Art. 27 of the EC the effect of the assignment in vesting in the Regulation; that it was a matter which the assignee the causes of action of the national court had to decide on the facts of assignors, so that the interests of the the case, particularly by reference to the assignors and the assignee could be subject matter of the disputes in the two considered as identical. proceedings; that the test was whether the interests of the two legal entities were The “object” or the “end in view” (phrases identical to and indissociable from one that were used in The Tatry) of the another in relation to the subject matter of proceedings in England and Cyprus was the the disputes in the two sets of proceedings; same. Both sets of proceedings involved the and that one method of demonstrating an same facts and legal issues concerning the identity of interest would be if a judgment on alleged breach of contract. The issue the relevant issues against one of the legal concerning the effect of the assignment of entities would have the force of res judicata the assignors’ rights was also implicit in against the other entity. His Lordship also each of the sets of proceedings. Neither of noted the approach that was taken in In re the sets of proceedings concerned an issue

relating to the “burden” of the contracts on been satisfactorily established, on a good the assignors (which could have been an arguable case basis, that the assignment issue had it been argued that the issues was a valid legal assignment under S. 136 faced by the assignors were different to of the Law of Property Act 1925. His those faced by the assignee, as the burden Lordship then turned to consider if the of a contract cannot be assigned under consequence of a legal assignment would English law). be to confer a sufficient identity of interest as between the assignors and the assignee. The proponents of the Cypriot proceedings had argued that the assignment might not, In considering if the “same cause of action” on further examination, be found to be a in the sets of proceedings involved the same valid legal or statutory assignment under S. subject matter, the court should only 136 of the Law of Property Act 1925, but examine the respective claims of the merely an equitable assignment. They did claimants in those proceedings. The court concede, however, that there was, at least, should not consider the defences of the an arguable case that the assignment was respective defendants in those proceedings. within the section. If it was only an equitable This was because the court was concerned assignment they said that it might not have with the position at the outset of the been effective to confer the identity of proceedings and before defences were filed interest in the assignee as had been held by in deciding which court should hear the the assignors (arguing this point on the dispute (Gantner Electronic GmbH v. Basch basis of the decision of the Court of Appeal Exploitatie Maatschappij BV Case C-111/01, in Three Rivers District Council v. Bank of [2003] ECR I-4201). On that basis, Aikens J England [1996] QB 292. It is submitted, with said that the correct approach was to see if respect, that the effect of that decision, the interests of the assignors when the when taken with the decision of the House English proceedings were commenced were of Lords in William Brandt’s Sons & Co. v. the same as the interests of the legal Dunlop Rubber Co. Ltd [1905] AC 454, is assignee as at the time when the Cypriot that an equitable assignment can be proceedings were commenced. His Lordship effective to vest all of the assigned rights in held that the effect of the assignment, being the assignee). His Lordship said that the a legal assignment, was to confer all of the approach that the court should take in rights of the assignors in the contract and determining a jurisdictional matter under the the cause of action in the assignee prior to EC Regulation was to decide if the party that the commencement of the Cypriot wished to establish a particular state of proceedings. The assignee had become the affairs had satisfied the court that it had a outright owner of those rights, with the right “good arguable case” (see Canada Trust to sue in its own name without joining the Co. v. Stolzenberg (No 2) [1998] 1 WLR 547 assignors (see Sargant J in In re Westerton; (affirmed by Lord Steyn at [2002] 1 AC 1, at Public Trustee v. Gray [1919] 2 Ch 104, at 13), Bols Distilleries BV v. Superior Yacht 111 to 113) and the assignors had no further Services Ltd [2006] UKPC 45, [2007] 1 WLR interest in the right of action (see Roskill J in 12). On that basis, Aikens J held that it had Compania Columbiana de Seguros v.

Pacific Steam Navigation Co. [1965] 1 QB of the English courts in relation to disputes. 101, at 121). The conclusion was that all of The principal judgment was delivered by the rights of the assignors had passed to the Thomas LJ, with the concurrence of assignee and that those rights were identical Chadwick and Latham LJJ. to those formerly possessed by the assignors. As such, the interests of the Under each of the agreements, the assignee were identical to and indissociable respective parties had entered into forward from those of the assignors and a judgment freight swaps. The agreements contained involving one would bind the other. the standard provisions by which it was an Therefore the assignee should be regarded event of default in relation to a party if it as being the same party as the assignors failed to make a payment under the within the meaning of Art. 27. agreement or became insolvent and entered into insolvency proceedings. The His Lordship concluded by holding that the agreements also provided that it was a cause of action in the English proceedings condition precedent to a party’s obligation to and the cause of action in the Cypriot perform that an event of default had not proceedings were the same and that the occurred in relation to the other party. One proceedings were between the same parties of the parties to each of the agreements (the for the purposes of Art. 27. The English “defaulting party”) was a Canadian court had been seised of its proceedings at corporation which had defaulted in making the time that the Cypriot proceedings were payments under the swaps and had become commenced and so the English court had the subject of Canadian insolvency been first seised of the same cause of proceedings. The other parties (the “non- action. What happened thereafter in terms of defaulting parties”) had sought to rely on the assignee being substituted as the those events as being events of default claimant in the English proceedings did not which had relieved them of their obligations affect that conclusion. to perform. The defaulting party’s insolvency trustee had sought to affirm the swaps, Kolden Holdings Ltd v. Rodette Commerce because market conditions had moved from Ltd [2007] EWHC 1597 (Comm) (Aikens J being adverse to the defaulting party. The 4/7/2007). trustee had commenced associated insolvency proceedings in Canada (the “trustee’s proceedings”) for a compromise THE ISDA MASTER AGREEMENT AND with creditors and an arrangement of the THE EFFECT OF FOREIGN INSOLVENCY company’s affairs. It also sought PROCEEDINGS CONCERNING A consequential orders in the trustee’s COUNTERPARTY proceedings, to the effect that the swaps The Court of Appeal has considered a case were continuing and that the non-defaulting concerning two identical ISDA Master parties could not refuse to perform them. Agreements (although the versions were not revealed) that were expressed to be subject The non-defaulting parties had brought to English law and the exclusive jurisdiction proceedings in England seeking (1) an anti-

suit injunction to restrain the continuance of might be given effect in England, including the trustee’s proceedings in Canada, on the the consequence of any attempt to give basis that such proceedings offended assistance to the Canadian proceedings against the submission of the parties under under S. 426 of the Insolvency Act 1986. the swap agreements to the exclusive The English courts had not yet been asked jurisdiction of the English courts, and (2) a to consider that matter. declaration that the events of default had occurred and that, in consequence, the non- In relation to the proceedings before the defaulting parties had been relieved of their English courts for a declaration, Thomas LJ obligations to perform the agreements, said that they should be allowed to continue, which outcome was not affected by the so as to determine the effect on the swap trustee’s proceedings. The Court of Appeal contracts of challenges that the trustee had decided that the anti-suit injunction should made to the validity of some of their not be granted but it also decided that the provisions. The trustee had challenged the English proceedings for the declaration contractual effect under the ISDA Master should be allowed to continue. Agreements of the occurrence of the events of default. The trustee contended that the Thomas LJ said that the Canadian provisions of those agreements by which the proceedings, including the trustee’s non-defaulting parties were relieved of their proceedings, were insolvency proceedings obligations were ineffective because of the and the issues that arose under them, whilst consequence of Canadian insolvency admittedly wide in their scope, were principles. The trustee said that the governed by Canadian law. The issues agreements amounted to a fraud upon the before the Canadian court were related to bankruptcy law as a matter of Canadian insolvency matters and could not to be public policy, because the insolvent estate characterised as being contractual in their would be deprived of valuable assets, such nature. It was a matter for the Canadian assets being the benefit to the insolvent court to determine the relief that should be company of the contracts. His Lordship said granted in those proceedings. The defaulting that the ISDA Master Agreements were party was subject to Canadian insolvency widely used and played an important role in jurisdiction, as the defaulting party was a the functioning and stability of the Canadian corporation and carried on its international financial markets. The trustee’s business in Canada. His Lordship noted, contentions were serious and should be however, that it was a different question as determined as soon as possible. The to whether any relief that might be granted in determination by the English court on the the Canadian proceedings would have a contractual effect, under English law, of the contractual effect on the swaps. That was a trustee’s allegations would be helpful to the matter that would have to be determined by Canadian court in deciding upon the orders English law as the law that governed the that it should make in the trustee’s contracts. The English courts, if requested, proceedings and in appreciating the may also have to decide on the extent, if ramifications of its orders in the wider any, to which Canadian insolvency law context of transactions that were made

under the terms of the ISDA documentation. It should be remembered that an The Canadian court would be assisted by administrator may also be appointed out of knowing that the orders which it was asked court by the holder of a qualifying floating to make were either consistent with the charge under Para. 14 of Schedule B1 and contractual position as understood by the by the company or its directors under Para. governing law of the contracts or 22 of that Schedule. Whilst the decision of inconsistent with that position. Warren J concerned an application for a court appointment, it will also be relevant in AWB (Geneva) SA v. North America some respects to those other types of Steamships Ltd [2007] EWCA Civ 739 appointment. The issue concerning a (18/7/2007). reasonable likelihood of achieving the purpose of administration, as provided for in Para. 11 (b), will be relevant to each of APPLICATIONS FOR ADMINISTRATION those other methods of appointment (see ORDERS Paras 18(3)(b) and 29(3)(b), respectively, In the course of a lengthy judgment, Warren under which the proposed administrator J in the High Court has considered the must say that in his opinion the purpose of conditions upon which the court may make administration is reasonably likely to be an administration order against a company achieved). The matter relating to the under Schedule B1 to the Insolvency Act company’s actual or prospective insolvency, 1986 (as amended). Under Para. 12(1) of as provided for in Para. 11(a) will be that Schedule, a “creditor” (amongst others) relevant, in part, to an appointment under may make an application for such an order. Para. 22 (see Para. 27(2)(a)) but the person Para. 11 provides that the court may make who makes the statutory declaration in that the order only if it is satisfied: case must state without qualification that the company is or is likely to become unable to “(a) that the company is or is likely to pay its debts, whereas when the court become unable to pay its debts, and makes its order it must be “satisfied”, which (b) that the administration order is involves a lesser degree of assurance, as reasonably likely to achieve the purpose of discussed below. administration.” Warren J said that Para. 11(b) referred to a The application in this case had been made single purpose of administration, which he by a firm of solicitors, based upon unpaid said was a clear reference to the objectives, fees they claimed were due to them and taken cumulatively, that were set out in further fees they were likely to charge. The Para. 3(1). That paragraph provides that the company said that it had a substantial cross- administrator must perform his functions claim against the firm for alleged negligent with the objectives of: advice. In the course of his judgment, Warren J made various points in relation to “(a) rescuing the company as a going the grounds for making an administration concern, or order.

(b) achieving a better result for the on the “balance sheet” test of insolvency in company’s creditors as a whole than S. 123(2) (ie. “it is proved to the satisfaction would be likely if the company were of the court” that the company’s liabilities wound up (without first being in exceed its assets). Those tests applied, administration), or mutatis mutandis, in determining if the (c) realising property in order to make a company was likely to become unable to distribution to one or more secured or pay its debts. preferential creditors.” In relation to Para. 11(b), his Lordship said His Lordship went on to say that it was not that it would be “reasonably likely” that the necessary to identify in advance with purpose of the administration would be certainty which of those objectives would be achieved if there was a “real prospect” that obtained. It would be sufficient for the the purpose would be achieved. That was administrator to say that there was a real the test that had been applied by Hoffmann prospect of achieving the objective J in Re Harris Simons Construction Leisure described in (a) but, if not, then that in (b) Ltd [1989] 1 WLR 368. Lewison J had taken and, failing either of those objectives, that in a similar approach, without discussing the (c). It is interesting to note that his Lordship point in Re Redman Construction Ltd [2005] did not refer to the definition of “the purpose EWHC 1850 (Ch). In this respect, his of administration” in Para. 111(1), where the Lordship thought that, despite the expression is defined to mean “an objective differences in wording between what used to specified in paragraph 3”, rather than “one be S. 8(1)(b) of the Act (as applied in the or other” of those objectives. Harris Simons case), where the court had to “consider” that it was “likely” that one or In relation to Para. 11(a), Warren J noted more of the requisite purposes would be that, unlike the position concerning winding achieved, and the current wording, where up (where it is necessary to show a present the court had to be “satisfied” that it was inability of the company to pay its debts), it “reasonably likely” that the purpose would is possible, when seeking an administration be achieved, the concept of a “real prospect” order, to show either that the company then (as propounded by Hoffmann J in the Harris is unable to pay its debts or that it is likely to Simons case) remained as the relevant test. become unable to pay its debts. “Likely” meant “more probably than not” (see Re Warren J noted that there was no definition Colt Telecom Group plc [2002] EWHC 2815 of the word “creditor”, that being one of the (Ch), [2003] BPIR 324). The inability of a persons who might apply for an order under company to pay its debts is defined by S. Para. 12(1). The meaning of that word was 123 of the Act. Where there has been no relevant in this case as there was a cross- unsatisfied statutory demand or judgment claim against the applicant and, depending debt, insolvency may be judged upon the upon the view that was taken, the effect of ground in S. 123(1)(e) (ie. “it is proved to the the cross-claim might be that the applicant satisfaction of the court that the company is should not be considered to be a creditor unable to pay its debts as they fall due”) or that was entitled to make the application.

The question arose as to what effect the petitioning creditor had a good arguable cross-claim should have on the application case that he was a creditor and the effect of and whether the cross-claim should be a dismissal of the petition would be to treated as extinguishing the debt, whether it deprive him of a remedy or otherwise cause gave rise to a set-off against the debt or him injustice as, for instance, where the whether it would simply be treated as a petition was presented against a foreign separate obligation which left the debt in company and no other remedy would place. The question was also relevant in realistically be available (see Re Russian relation to the exercise of the court’s and English Bank [1932] 1 Ch 663, Brinda discretion in determining if it should make an Ltd v. Offshore Oil NL [[1986] BCC 916, Re administration order. His Lordship began by Claybridge Shipping Co. SA [1997] 1 BCLC discussing the practice relating to the 572 (a Court of Appeal decision that was presentation and making of winding up decided in 1981) and Alipour v. Ary [1997] 1 orders in cases where the creditor’s debt WLR 534). If the court decides to proceed was disputed or subject to a cross-claim. He with hearing the petition, it must also decide then turned his attention to deciding if that whether it should resolve the dispute in practice should also apply in the making of determining if a winding up order should be administration orders, noting that the issue made or whether the order should be made had not previously been determined. The and the dispute left to be resolved in the following is a summary of his Lordship’s course of the winding up. discussion of those matters. In cases where the creditor’s debt is not In relation to a winding up petition, the court disputed but is subject to a cross-claim has the jurisdiction to hear and determine a which exceeds the debt and which the petition for winding up, notwithstanding that company has been unable to litigate, the the petitioning creditor’s debt may be creditor is clearly a creditor for the purposes disputed or be subject to a cross-claim. of presenting his petition based upon the Where the debt is disputed, the normal debt. The court has jurisdiction to allow the practice of the court is not to hear the petition to proceed and the court is not petition, and so not to make a winding up deprived of that jurisdiction by the existence order, where there is a bona fide and of the cross-claim. It is a matter for the court, substantial dispute concerning the debt, if in the exercise of its discretion, to decide if it the undisputed part of the debt would be should determine the cross-claim or make a insufficient to ground the order. Other than winding up order without determining it. It in exceptional cases, the court will dismiss may also, in its discretion, decide not to the petition, leaving the dispute to be proceed with hearing the petition. However, determined by the ordinary procedures for the exercise of the discretion is not at large; the resolution of disputes. However, the the court should only decide to proceed with court would be prepared to hear the matter the petition if there are special and make a winding up order, even where circumstances which make it inappropriate the creditor’s debt was disputed on bona for the petition to be dismissed or stayed fide and substantial grounds, if the (see Re Portman Provincial Cinemas Ltd

(1964) 108 Sol Jo 581, Re LHF Woods Ltd drew from this the conclusion that the court’s [1970] Ch 27 and Re Bayoil SA [1999] 1 discretion was at large and was not WLR 147). Warren J commented that, in constrained by the more limited practice that practical terms, the judgments of the Privy applied in the case of winding up petitions, Council in Malayan Plant (Pte) Ltd v. although his Lordship also said that the Moscow Narodny Bank Ltd [1980] Malayan administration procedure should not be Law Jo 43 and of the Court of Appeal in the viewed as suitable for the resolution of Bayoil case indicated that there may not be disputes, just as winding up was also very much difference in the practice of the unsuitable as a procedure for the resolution court as between the disputed debt cases of disputes. Subject to that caveat, the facts and the cases concerning cross-claims. may indicate that an administration order might be desirable. There could be no Warren J said that the position was different argument that the applicant was a “creditor” in relation to an application for an for the purposes of Para. 12(1) even where administration order, where the debt due to his debt was subject to a cross-claim and a the applicant was disputed or subject to a person whose debt was disputed could also cross-claim. In reaching his conclusion, his be considered as being a “creditor” provided Lordship drew upon the analysis of Saville that he had a good arguable case that a LJ in Re MTI Trading Systems Ltd [1998] debt of a sufficient amount was owing to BCC 400, which was a case where an him. As his Lordship remarked later in his application had been made to discharge an judgment, the court may be prepared to administration order (which order had been make an administration order in made under S. 8, pursuant to an application circumstances where it might refuse to make under S. 9, before those sections were a winding up order. repealed) on the basis that, at least, there was a serious dispute as to whether the His Lordship went on to say that a decision applicant for the order had the necessary to accept that an applicant for an authority to make the application. In the administration order was a “creditor” for the course of giving judgment refusing to purposes of Para. 12(1) of Schedule 1 to the discharge the order, Saville LJ had Insolvency Act 1986, did not mean that the distinguished between the effect of a creditor’s contested debt (or a debt subject winding up order and an administration to a cross-claim) would qualify to be taken order. In the case of the former, the order into account in determining the extent of the had the effect of bringing the life of the company’s liabilities (ie. if it was unable to company to an end and the court had to be pay its debts or was likely to become unable sure that, save in an exceptional case, the to pay its debts for the purposes of Para. person who had presented the petition had 11(a) of that Schedule). In relation to the the necessary status to do so. In the case of tests of insolvency in Ss 123(1)(e) and the latter, the consequences of making an 123(2) of the Insolvency Act 1986, it had to order were not so drastic; it was an interim be proved to the satisfaction of the court that measure which could lead to the the company was unable to pay its debts as rehabilitation of the company. Warren J they fell due or that its liabilities exceeded its

assets. The court would have to form a view He was satisfied that there was a substantial on the basis of the evidence available to it argument that an undervalue transaction as to whether the debt should be taken into had occurred, in that it appeared that the account. In similar vein, his Lordship company might have provided consideration mentioned the necessity for the court to whose value far exceeded the value it had make a determination as to insolvency at a received. The transaction was clearly relevant time when it had to decide if a between parties who were not at arm’s transaction at an undervalue had occurred length and no advice had been taken as to within S. 238 of the Act. the values involved. Because of that factor, his Lordship had determined that it would be The final point to be noted concerns the appropriate for him to make an approach that was taken by Warren J in administration order, so that the deciding, within the exercise of his administrator could investigate the discretion, if he should make an transaction and make an application under administration order, having already S. 238 within the relevant time limit. determined that the company was unable to Nonetheless, his Lordship said that he was pay its debts and that the applicant was a prepared to defer making the order, so as to creditor which was entitled to make an give the parties to the transaction time to application of an administration order, even undo the transaction and restore the position though he had not decided on the validity of to what it had previously been. He would the cross-claim against the applicant. His hear submissions as to the time that should Lordship said that there was no compelling be allowed in which the transaction could be need to make an order before the validity of reversed. If they succeeded within that time the cross-claim was determined and, whilst then the administration order would not be he was satisfied that the company was made. insolvent, it was not very clearly insolvent. Those factors militated against making an Hammonds v. Pro-fit USA Ltd [2007] EWHC order. However, there was an allegation that 1998 (Ch) (Warren J 17/8/2007). the company had engaged in a transaction at an undervalue within S. 238 of the Act. 1 Salans LLP is a Limited Liability Partnership registered in London with Registration Number OC 316822. Registered Office, Millennium Bridge House, 2 Lambeth Hill, London EC4V 4AJ. Regulated by the Solicitors’ Regulation Authority. A list of members of Salans LLP is available at the above Registered Office.

Prepared by Andrew McKnight

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