Busting Trusts and Lifting the Corporate Veil

1. Busting Trusts and Lifting the Corporate Veil

2. Busting Trusts and Lifting the Corporate Veil Clive Freedman QC 06 October 2010

3. “…the court will on appropriate occasions, take drastic action and will not allow its orders to be evaded by the manipulation of shadowy offshore trusts and companies formed in jurisdictions where secrecy is highly prized and official regulation is at a low level." Robert Walker J in International Credit and Investment Co Ltd v Adnam [1998] BCC 134 at 136.

4. LIFTING THE VEIL • Woolfson v Strathclyde[1978] SC (HL) 90 “Special circumstances (must) exist indicating that (the company) is a mere façade concealing the true facts”: • Trustor AB v Smallbone [2001] 1 WLR 1177 cannot pierce the corporate veil because of interests of justice or impropriety unless company or trust shown to be a facade or a sham. • Kensington International v Republic of Congo [2006] 2 BCLC 296 – corporate veil lifted in relation to state oil owned companies against which had no real separate personality from Republic of Congo.

5. BUSTING TRUSTS • The Snook test [1967] 2 QB 786 Form of entity is a deception intended by all parties to it to conceal the reality. • Sham will fail if professional trustees not parties to fraud irrespective of fraud of settlor and beneficiaries e.g. Grupo Torras v Al Sabah 2003 JLR 188; [2004[] WTLR 1; Shalson v Russo[2005] Ch 281; Av A [2007] EWHC 99 – family case: trust not a sham because not proven that the original trustees had been party to the sham.

6. ALTERNATIVES TO PIERCING THE VEIL – THE TORT ROUTE • Liability of director or beneficiary as joint tortfeasor • Where person is committing the deceit or directing or procuring it through another: seeC. Evans & Sons Ltd. v Spritebrand Ltd.[1983] Q.B. 310 • Drouzhba v Wiseman [2007] EWCA 1201 where the director had liability for his own fraud (applying Standard Chartered Bank v Punjab National Bank [2003] 1 AC 959. • Or party to common design to deceive even if another makes the statement: see Dadourian v Simms [2006] EWHC 2973 (Ch), upheld in CA [2009] EWCA Civ 169,

7. SETTING ASIDE TRANSACTIONS - INSOLVENCY ACT 1986 SS423-425 • What transactions? Transactions at an undervalue • For what purpose? Purpose of “putting assets beyond the reach of a person who is making or may at some time make, a claim against him” • Or purpose of “otherwise of prejudicing the interests of such a person in relation to the claim which he is making, or may make”:

8. ADVANTAGES OF S.423-425 • Victim can be a creditor, not confined to liquidations or bankruptcies. • Even where transaction pre-dates the incurring of the debt • Direct action against transferee • Either with main action or after success of main action: Anglo−Eastern Trust Ltd v Kermanshahchior 4 Eng v Harper et al? • Freezing injunction against transferee.

9. THE CHABRA PRINCIPLE - (TSB v Chabra [1992] 1 WLR 245) • Third party holding assets which in truth belong to the company: see Dadourian v Azuri Ltd., [2005] EWHC 1768e.g third party is device of fraudster to shelter his asset. • Jurisdiction not limited to beneficial ownership of third party – could extend to circumstances where process available to potential judgment creditor where third party obliged to assist e.g. liquidation: see Yukos v Rosneft [2010] EWHC 784 applying Cardile v LED Building Properties [1999] HCA 18.

10. DETERMINATION OF CASE AGAINST THIRD PARTY • Sufficient if “good reason to suppose” that third party so acting: see SCF Finance Co. Ltd. v Masri (No.2) (1985) 1 WLR 876 • Time for decision whether so held – at time of injunction or trial on issue or after main trial? See Masri

11. SEQUEL TO BUSTING TRUSTS • Sometimes persistence rewarded, but expensive to get to truth • Elaborate structure not operated as such. – Dadourian para. 430 [2006] EWHC 2973 (Ch), upheld in CA [2009] EWCA Civ 169 • Where trust never operated according to tenor, evidencing intention of all concerned that control should be by beneficiary and not trustee.

12. Who knows what? Attribution & Imputation of Knowledge

13. Who knows what? Attribution & Imputation of Knowledge Andrew Stafford QC 06 October 2010

14. The Problem With Companies Whilst easy to identify the knowledge of a one-man company, most companies are made up of numerous people And, in relation to any given transaction, several such people might be involved

15. Whose Knowledge Counts? “…there would be little sense in deeming [a company] to exist unless there were also rules to tell one what acts were to count as acts of the company. It is therefore a necessary part of corporate personality that there should be rules by which acts are attributed to the company” Per Lord Hoffman, Meridian Global Funds Management Asia v Securities Commission [1995] 2 AC 500 at 506 B-C

16. Route Map Attribution (Meridian) Aggregation (Armstrong v Strain) Imputation (El Ajou) Fraud Exception (Hampshire Land)

17. Attribution Lennard’s Carrying Co v Asiatic Petroleum [1915] AC 705 – “directing will & mind” BUT a phrase apt to cause problems Hence, identify rule for the purpose of which the question is being asked AND identify whose knowledge is relevant to the fulfilment of that rule (Meridian) Wrong to assume that one person’s acts or state of mind will always count as that of the company The confusion generated by Lennard’s Carrying Co is because it led to elaborations – “brains” or “nerve centre” implying that there was always one person

18. Aggregation of Knowledge & Acts If A makes a representation at a time when B knows falsifying facts, is company C liable for deceit? Ingredients of the tort are divided Issue is one of the inference of dishonesty If B knows A is (innocently) going to make the statement, no problem – Cornfoot v Fowke (1860) M&W 358 at p370 BUT if B is himself innocent, no inference can be drawn “you cannot add an innocent state of mind to an innocent state of mind and get as a result a dishonest state of mind” Per Devlin J, Armstrong v Strain [1951] 1 TLR 856

19. Imputation of KnowledgeAgency Theory Different from attribution and not confined to companies Best exposition in El Ajou v Dollar Holdings [1994] 2 All ER 685 (Hoffman LJ again)

20. El Ajou - Facts A claim of knowing receipt Corrupt manager invests Mr. E’s funds in a fraudulent share sale scheme Proceeds of that scheme then paid to development project DLH (a company) involved in development project Mr. E sues DLH Mr. E sought to rely on the knowledge of Mr. F because Mr. F was an agent of the original share fraudsters & in this capacity had knowledge of the fraud Mr. F was also chairman of DLH

21. Hoffman LJ’s Analysis of Agency Theory in El Ajou There are four categories, two of which will be covered Agent’s authority to receive communications (#3) Agent’s duty to report to his principal (#4) [Agent’s duty to investigate (#2)] [Agent’s knowledge affecting authorised contract (#1)]

22. #3 Authority to Receive Communications (1) A principal can authorise an agent to enter a contract on his behalf, and the principal will be bound by that contract A principal may give an agent authority to receive information on his behalf from a third party What is communicated to the agent cannot subsequently be disavowed by the principal e.g Strover v Harrington 1988] 1 Ch 390. If it were not so, a vendor would have to communicate directly with the purchaser and could not rely upon communications with the purchaser’s solicitor “…the parties impliedly give actual authority to those solicitors to receive on their behalf all relevant information from the other party…”

23. #3 Authority to Receive Communications (2) Authority to negotiate will probably involve authority to listen to the counterparty A duty to investigate will often carry authority to receive communications BUT 3P cannot rely upon this where he knows the communication will not be passed on. See Sharpe v Foy (1868) LR 4 Ch App 35 & Blackley v National Mutual Life [1972] NZLR 1038

24. #4 Agent’s Duty to Report Tempting, but not supported by principal or authority Mr. F held to have had no authority from DLH to receive communications Mr. F did have a duty to report to DLH but Hoffman LJ held that was irrelevant What counted was whether he had authority to receive communications There is no disavowal by principal of agent’s authority where agent has duty to report but no duty to receive communications

25. The Fraud Exception You cheated the company No I didn’t - the company knew How did it know? Because I knew But you are the fraudster Nevertheless, my knowledge is that of the company

26. In Re Hampshire Land[1896] 2 Ch 743 A borrowed money from B A’s company secretary was C, who was also company secretary of B A lacked capacity to borrow money A contends that C’s knowledge should be imputed to B Contention rejected

27. In Re Hampshire Land (2) “…it would be impossible to infer that the duty, either of giving or receiving notice, will be fulfilled where the common agent is guilty of fraud.” “I do not know…whether he was guilty of actual fraud; but whether…fraud or breach of duty, I decline to hold that his knowledge of his own fraud or breach of duty is…the knowledge of the company Hence, exception may extend beyond actual fraud to other breaches of duty

28. Belmont Finance Corporation v Williams Furniture [1979] 1 Ch 250 Ayco buys shares at an inflated price from Beco. Beco uses proceeds to buy shares in Ayco Net result? Ayco has been using its own assets to buy its own shares – very wrong Directors of Ayco (et al) sued for conspiracy Directors contend that Ayco had knowledge because their knowledge was its knowledge Contention rejected

29. Belmont Finance Corporation v Williams Furniture (2) “…it is a well-recognised exception from the general rule that a principal is affected by notice received by his agent that, if the agent is acting in fraud of his principal and the matter of which he has notice is relevant to the fraud, that knowledge is not to be imputed to the principal.”

30. Making the Fraudster Pay – Obtaining Interim Relief Against the Fraudster in Support of Foreign Proceedings

31. MAKING THE FRAUDSTER PAY – Obtaining Interim Relief Against the Fraudster in Support of Foreign Proceedings Rupert D’Cruz 06 October 2010

32. LITIGATIONS.25 of the Civil Jurisdiction and Judgments Act 1982:(1) The High Court has the power to grant interim relief in aid of proceedings that have been or are to be commenced in any foreign jurisdiction.(2) Relief may be refused if the fact that the court has no jurisdiction over proceedings makes it inexpedient to grant it.

33. - Applies to normal civil and commercial proceedings except insolvency- Available post-judgment in aid of enforcement

34. Available relief:Any kind available in domestic proceedings except: (i) warrant for the arrest of property; and (ii) provision for obtaining evidence (s.25(7))CPR r.25.1(1): Freezing injunction, search and seizure, delivery, detention, preservation of property, inspection of property, sample of property, experiment on property, payment of income from property.Not limited to relief available in the primary jurisdictionCredit Suisse Fides Trust v Cuoghi [1998] QB 818

35. Exercising the s.25 discretion (in the context of Freezing Injunctions):2 stage test: (1) would a Freezing Injunction be granted in English proceedings? (2) does the fact that the English court does not have jurisdiction make it inexpedient to grant an injunction?

36. General principles: • Are the principles for granting relief/freezing injunction under English law satisfied? • good arguable case • real risk of dissipation • undertaking in damages • Caution – particularly re freezing injunction. • Without primary jurisdiction the court will be less fully appraised of the facts. • (Ryan v Friction Dynamics [2001] C.P. Rep. 75)

37. - Comity + need to combat international fraud mean the court will not be timid if good grounds exist (Ryan) • - Relief/freezing injunction will be declined if a judgment in favour of C in substantive proceedings is not enforceable in E&W (Motorola Credit) • - C must show good arguable case of enforceability

38. Expediency test under s.25(2):Real connecting link with E&W?Interference with case management?Disharmony? Potential Jurisdiction challenge?Enforceability?

39. Real connecting link:- Domicile in E&W- Assets in E&W- Other connecting factor with E&WRepublic of Haiti v Duvalier [1990] 1QB 202(solicitors within the jurisdiction)

40. Interference with case management:- Inconsistent or overlapping orders/freezing injunctions? - overlapping injunction appropriate if cogent reasons for/practical benefit to be gained from it - D domiciled in E&W - assets here

41. Disharmony: • Attitude of the primary court? • helpful assistance or interference with jurisdiction? • has the primary court refused to grant similar relief – if so, why? • assets out of the jurisdiction? • D not domiciled in the jurisdiction? • Higher threshold that C failed to meet? • Refco Inc v Eastern Trading [1999] 1 Lloyd’s Rep. 159

42. Potential challenge to jurisdiction: • Challenge to jurisdiction = a factor against granting relief • Enforceability: • Is D likely to disobey a court order? • If so, will the court be able to enforce it? • Motorola Credit Corp v Cem Cengiz Uzan [2004] 1 WLR 113

43. ARBITRATION s.44(1) of the Arbitration Act 1996 (“AA”):“Unless otherwise agreed by the parties, the court has for the purposes of and in relation to arbitral proceedings the same power of making orders about [the preservation of evidence, the making of property related orders, the sale of goods and granting of an interim injunction and the appointment of an interim receiver] as it has for the purposes of and in relation to legal proceedings.” s.2(3) of the AA:“The powers conferred by [section 44] applies even if the seat of the arbitration is outside England and Wales but the court may refuse to exercise any such power if …the fact that the seat of the arbitration is outside England and Wales … makes it inappropriate to do so.”

44. - Interim relief - available prior to the commencement of an arbitration and in support of a final award (CPR r.25.2(1)(a)))- If urgent the court may order preservation of assets or evidence on the application of a party/proposed party to the arbitration (s.44(3)) - If not urgent – only with the permission of the Tribunal or written agreement of the parties (s.44(4))

45. Relief is available only to the extent that the Tribunal does not have the power or is unable for the time being to act effectively (s.44(5)) (e.g. the Tribunal is yet to be constituted)

46. Further restrictions: (i) an agreement that the English court is not entitled to exercise the power to grant interim relief (s.44(1), AA);(ii) if the seat being outside England makes it inappropriate to do so (s.2(3), AA)- is there a good reason why the court of the seat cannot make the appropriate order? Tate & Lyle v Cia Usina Bulhoes and Cargill Inc [1997] 1 Lloyd’s Rep 355