Investors — beware how you handle corporate structures

Most serious investors in everything from ships to real estate to businesses act through the medium of ‘tame’ companies. They do this for very good reasons. However, the Supreme Court gave a salutary warning this morning that even the simplest structures of this kind can provide pitfalls for the unwary.

Slightly simplified, in Lowick Rose LLP (in liquidation) v Swynson Ltd [2017] UKSC 32 what happened was this. A wealthy investor H used a wholly-owned special purpose vehicle S Ltd to make a loan of £15 million to EMS Ltd to enable EMS to buy MIA Inc. Due diligence, or rather a lack of it, was provided by accountants HMT, who failed to notice glaring problems with MIA. The trouble quickly surfaced. As a damage limitation exercise H caused S to lend a further £1.75m to EMSL in 2007 and £3m in 2008, H at the same time obtaining a large holding in EMS. Things went from bad to worse, and in 2008 more refinancing was necessary. H personally lent EMS some £19 million, most of which went to pay off EMS’s borrowings from S, with the rest being new money. To no avail: MIA collapsed, and with it the whole house of cards.

H and S sued HMT for losses of some £16 million. At this point an awkwardness arose. HMT was held on the facts to have owed no duty to H. As regards S it admitted negligence, but argued that in so far as S’s loans to EMS had been paid off (by H) the loss was H’s and not S’s. Reversing the Court of Appeal, the Supreme Court decided for HMT. S had indeed suffered no loss. The loan by H to EMS to pay off S was not an unconnected benefit, so as to be regarded as res inter alios acta. Nor could S invoke transferred loss and the rule in Dunlop v Lambert (1839) 2 Cl & F 626; nor yet could H use the doctrine of subrogation to keep the loan from S to EMS alive and claim in the name of S.

A nice windfall for HMT’s professional indemnity insurers, and an unnecessary one. Had H lent the money to S for S to use to refinance EMS, there would have been no problem; H, through S, would have been £16 million to the good. But he hadn’t done that, and that was an end of the matter. As we said above, when using corporate structures any failure to take care to guard your back can be very costly.

Solicitors also note: you are now on notice. Since this decision, unless you take great care in advising on refinancing deals, the SIF is likely to have some less-than-kind words for you too.

Message from the Supreme Court: do your due diligence

Yesterday’s Supreme Court decision in BPE Solicitors v Hughes-Holland [2017] UKSC 21 looks like a dry-as-dust decision on the measure of damages in professional negligence cases. It is more important than that, however.

A financier, G, was negligently misinformed by his solicitor about a project he was thinking of financing. To cut a long story short, G was led to believe he was bankrolling the carrying out of a property development, while in fact he was merely refinancing the property owner’s own crippling indebtedness, leaving no assets left over to actually do the work. Having taken the loan the borrower went bust; the property was sold for a song, and G lost his hard-earned cash.

Pretty obviously, had G not been misled he would have run a mile and invested his funds elsewhere, where they would still have been available to him. There was however a complication: quite apart from any misinformation by his lawyers, the project he invested in was a complete dud from beginning to end. In other words, even if what his solicitors told him had been entirely true and he had been financing the actual works, he would still have been pouring his money down the drain, and he would still have lost out.

Upholding the Court of Appeal, Lord Sumption (speaking for the court) decided that G recovered nothing. Even though he would not have made the disastrous investment he did but for his solicitors’ blunder, his solicitors’ duty did not extend to protecting him from garden variety commercial misfortune. It followed that (contrary to a number of earlier authorities) the so-called SAAMCO cap (see South Australia Asset Management Corpn v York Montague Ltd [1997] AC 191) applied to reduce recovery to nil.

The significance of this decision to businesses generally, from lenders of money to buyers of ships or businesses, is that it removes what was once quite a comforting safety-net. Prior to BPE, if professional advisers negligently failed to tell a client facts indicating that some investment he was seeking to make was entirely unacceptable or unviable, the client could recover his entire (foreseeable) loss, even if other commercial conditions indicated that the deal was a disaster and he would have lost out anyway regardless of the facts he was not told about. Quite rightly, the Supreme Court has now closed off this means of palming off one’s own financial misjudgment on somebody else’s professional indemnity insurers. As the title says: do your due diligence. If you don’t, from now on you’re on your own.

Trustees, beneficiaries and purchasers — good news all round

Good news from the Supreme Court last week for commerce: in particular, those purchasing assets from trustees. In Akers v Samba Financial Group [2017] UKSC 6 ASa Saudi businessman, held shares on trust for a company, SICLA: he disposed of the shares to Samba in satisfaction of a debt. Assuming Samba were in good faith, you might have thought there was no problem: they would take free of the trust. But SICLA was insolvent: and the liquidator sought an end-run round the rule of equity’s darling by invoking s.127 of the Insolvency Act 1986. This prohibits disposition of the assets of an insolvent company (including beneficial interests in trust property), and allows their claw-back, with only a judicial discretion to protect the alienee and no general good-faith purchaser protection. The Supremes refused to allow this attempted circumvention. Dispositions within s.127 implied dispositions by the company, not dispositions of the company’s (equitable) property by a trustee purporting to vest it in a third party. Result: purchasers, provided they are in good faith and without notice, can happily thumb their noses at alleged trust beneficiaries, even insolvent ones. Quite right too.

But there was also good news for beneficiaries. In the present case the trust was a Cayman trust; however, the shares, being shares in Saudi companies registered in Saudi Arabia, were situated in Saudi Arabia. Now, Saudi law doesn’t accept the existence of trusts. Nevertheless their Lordships made it clear that under the Hague Convention embodied in the Recognition of Trusts Act 1987, the English courts would recognise the trust (although under Art.11(d) of the Convention the question whether a purchaser of the shares took free of it would fall to be decided by the lex situs, Saudi law). We all thought that was probably the case anyway; but it’s nice to have confirmation of one’s prejudices, especially if (as here) they are sensible ones.

Assignment without recourse and anti-assignment clauses

What happens if you purport to assign a debt for ready cash without recourse, but agree to reimburse the assignee in the event that the assignment turns out to have been invalid? One would have thought that the answer was clear. And indeed it is; but only after oil major BP, with a cool $68 million at stake, chose unsuccessfully to take the matter to the Commercial Court on a pettifogger’s technicality in National Bank of Abu Dhabi PJSC v BP Oil International Ltd [2016] EWHC 2892 (Comm).

BP sold a parcel of oil on credit to Samir, a Moroccan refiner, and then assigned 95% of the debt to the NBAD for cash. The assignment was explicitly without recourse, but BP warranted that there was no legal impediment to the debt being assigned and agreed that if there was it would reimburse NBAD $68 million-odd. Samir went into insolvency leaving NBAD unpaid. It then transpired that the supposedly assigned debt was indeed unassignable without consent (ironically as a result of a provision in BP’s own boilerplate). NBAD sued BP on its warranty claiming its $68 million. BP argued that nothing was owing because even if the clause made the debt unassignable, the purported assignment had given NBAD rights that were just as good as an assignment, namely an equitable right to any proceeds in BP’s hands.

Carr J had no difficulty in rejecting BP’s argument. The debt was clearly unassignable; BP was in breach of warranty; the clause meant what it said; the amount recoverable under it was not in issue; and the result was therefore clear. The fact that the breach of warranty might be regarded as technical was beside the point.

This seems logical. Essentially what BP were trying to do was to argue that even if they had been in breach of warranty NBAD had suffered no loss as a result of their breach. But while this might have been relevant if NBAD’s claim had been a garden variety claim in damages, it was clearly irrelevant if, as here, the contract itself laid down the measure of recovery. Quite rightly, her Ladyship declined to subvert this result by holding that an express warranty to provide a valid assignment can be satisfied by providing the next best thing, however good a substitute others might think it was.

Note: this particular issue will become moot as regards debts governed by English law as and when the Government overcomes its lethargy and gets around to implementing subordinate legislation under s.1 of the Small Business, Enterprise and Employment Act 2015 (useful details here) to outlaw blanket anti-assignment clauses of this kind.

The not-so-long arm of the law

Time for a revamp of the powers of the English courts? It is difficult, it seems, to get Norwich Pharmacal relief against people abroad. A Bangladeshi bank had an English claim in respect of the fraudulent abstraction of a cool $20 million from an account in a Dubai bank in which it had an interest. It sought relief against the bank to find out where the money had gone. The bank resisted, no doubt partly because UAE law took a poor view of breaches of bank secrecy. Teare J in AB Bank Ltd, Off-Shore Banking Unit (OBU) v Abu Dhabi Commercial Bank PJSC [2016] EWHC 2082 (Comm) decided that there was no proper gateway under CPR 6 for service out on the bank. It wasn’t an interim proceeding under s.25 CJJA 1982; the bank wasn’t a necessary and proper party; and because it didn’t matter to the claimant where it received the information it wasn’t a request for an order to do an act within the jurisdiction.

In this case not much harm was done: among other things even if it had been a possible case for service out there were insuperable objections to having the English courts tell foreign organisations abroad to break their own laws. But there is an arguable case for at least providing for the possibility of Norwich Pharmacal-style relief abroad. Those in charge of keeping the CPR up to date might care to make a note about this somewhere.

IX European Colloquium of Maritime Law Research 2016

This is a free conference taking place in Bilbao, Spain on 14-15 September, at the Bizkaia Aretoa. The theme is maritime liens, mortgages and forced sales. Details here. A large number of excellent speakers, including Profs Erik Røsæg and Paul Myburgh. Two IISTL stalwarts will be speaking, Prof Andrew Tettenborn and Prof Rhidian Thomas.  For information contact Olga Fotinopoulos,, Tel + 00 34 945 01 3417.

More from the OWB bunker saga. Agency and conversion.

In The Cosco Felixstowe Shipowners ordered bunkers from D2, a bunker trader in Singapore who had contracted with OWBS to supply the bunkers. OWBS had in turn contracted with OWBC who had contracted with the plaintiff who physically supplied the bunkers to the vessel. Leave was granted pursuant to serve a writ out of the jurisdiction on D2 and OWBC under Order 11 rule 1(1)(f) of the Rules of the High Court that D2 had committed a tort (ie the tort of conversion) within the jurisdiction, and/or under rule 1(1)(d) on the basis that it was arguable that OWBC had entered the contract with P as agent for D2.

The Hong Kong Court of First Instance (Deputy High Court Judge Le Pichon) [2016] HKCFI 492 – 18 March 2016, has now denied D2’s application to set aside the grant of leave. It was arguable that there was a material difference between the terms of OWB’s contract in The Res Cogitans and P’s standard terms in the present case in that the latter provided no unambiguous authorisation to consume the bunkers for propulsion purposes prior to payment. The conversion would be constituted by OWBS’ contractual obligation to procure use of the bunkers before payment had been made. A clause in P’s contract that the buyer and the vessel owner would only use the bunkers for the operation of the vessel did not amount to consent by P to immediate consumption of the bunkers.

It was also arguable that there was an agency chain running from D2 to OWBC who contracted with the physical supplier, in which case there would be a contract with P made by an agent within the jurisdiction.


Receivables Financing

LLM Credit and security students might care to note s.1 of the Small Business, Enterprise and Employment Act 2015. This gives the right to pass regulations disallowing anti-assignment clauses where the interests of receivables financiers are concerned. This effectively reversing Helstan v Herts CC [1978] 3 All ER 262.

Andrew Tettenborn