Case Comment: SerVaas Incorporated v Rafidian Bank & Ors

28 08 2012

SerVaas Incorporated v Rafidian Bank & Ors [2012] UKSC 40. SerVaas (S), the appellant US judgment creditor (incorporated in Indiana) appealed against the Court of Appeal’s decision that monies due to the Republic of Iraq under a scheme of arrangement for distribution of assets relating to Rafidian (R), the Iraqi respondent bank, were immune from execution by reason of section 13 of the State Immunity Act 1978. S had entered into an agreement for supplying equipment and machinery to the Iraqi Ministry of Industry a couple of years prior to Saddam Hussein’s 2 August 1990 invasion of Kuwait. (R’s UK assets were frozen under the sanctions that followed in the wake of the invasion.)

In the two decades since (1) this case has been litigated in the Paris Commercial Court – which found in S’s favour for US$14,152,800; (2) the Netherlands subsequently recognised that judgment and S recovered US$966,515 against Iraq’s assets there; and (3) US$6,736,285 was paid to S by the UN claims commission for loss suffered due to the Gulf War. In a complicated series of developments from 2003 until 2008 involving a debt cancellation agreement and debt restructuring under the Iraqi Debt Reconciliation Office, a scheme of arrangement for the distribution of assets held by the Provisional Liquidators to R’s creditors was ultimately sanctioned. Claims in the sum of US$253.8 million were admitted in the scheme (“the Admitted Claims”).

The original commercial debts constituting the Admitted Claims were acquired by Iraq by way of assignment from R’s existing creditors. In 2010 Iraq’s US lawyers responded to a request from the Scheme Administrators by stating that the dividend payment on the Admitted Claims should be paid to the account in the name of the Development Fund for Iraq with the Federal Reserve Bank in New York. As at November 2010, the debt due in respect of the Judgment was thought to have amounted to US$34,481,200.49.

After getting the default judgment against the Republic of Iraq, S had it registered in the UK under the Civil Jurisdiction and Judgments Act 1982. The order registering the judgment was served on Iraq R, an Iraqi state-controlled bank in liquidation, with a branch in London was, under its scheme of arrangement, due to make a distribution to Iraq in respect of claims (referred to as “the Admitted Claims” in the judgment) which had been acquired by Iraq  in the restructuring of the debts accumulated under Saddam Hussein’s regime.

In October 2010 Mann J granted an application by S lifting the stay on proceedings against R and made an order preventing R, the Provisional Liquidators and the Scheme Administrators from making any payment to Iraq under the Scheme in respect of the Admitted Claims or recognising or giving effect to any assignment or transfer of the Admitted Claimant to a third party which would have the effect of reducing the amount payable to Iraq to an amount less than the Judgment debt. Subsequently, S issued an application for a Third Party Debt Order (TPDO) that the debts payable to Iraq by R as dividends pursuant to the Scheme be paid to S instead in satisfaction of the judgment.

Iraq wanted the distribution to be made directly to the Development Fund for Iraq (established under UNSCR 1483). Moreover, the head of the Iraqi diplomatic mission certified (referred to as “the Certificate” in the judgment) that the claims had neither been used, nor were intended to be used, for commercial purposes.

In the High Court, S applied (without success) for a third party debt order against R under the distribution. Arnold J found that the funds were immune from execution under section 13 of the 1978 Act because they were not property which was for the time being in use or intended for use for commercial purposes.

The Court of Appeal upheld the High Court’s decision and S appealed to the Supreme Court. S argued that the transactions brought on R’s indebtedness were commercial and that, in order to make a profit rather than exercising sovereign authority, Iraq purchased the debts as a commercial venture.

The Supreme Court

The Court (Lady Hale, Lords Phillips, Clarke, Sumption and Reed) unanimously affirmed the lower courts’ decisions that it was right to dismiss an application for a third party debt order in respect of monies due to the Republic of Iraq under a scheme of arrangement. The monies were immune from execution because they were not in use, or intended for use, for commercial purposes.

Giving the judgment and dismissing the appeal, Lord Clarke held that:

  • It was common ground that the monies payable under the scheme were a debt and a chose in action and that they were, therefore, property within the meaning of section 13(2)(b) of the State Immunity Act 1978.
  • The onus lay on S to rebut the statutory presumption created by the certificate that the property was to be used for sovereign and not commercial purposes.
  • Applying Alcom v Columbia [1984] A.C. 580 at para 15 in the instant case, his Lordship clarified that the origin of the debts was not relevant to the decision whether the property was in use for commercial purposes.
  • The expression “in use for commercial purposes” was to be given its ordinary and natural meaning having regard to its context, and it would not be an ordinary use of language to say that a debt arising from a transaction was “in use” for that transaction. Parliament had not intended a retrospective analysis of all the circumstances which gave rise to property, but an assessment of the use to which the state had chosen to put it: para 16.
  • Property was only subject to enforcement where it was currently “in use, or intended for use”, for a commercial transaction. It was not sufficient that it related to, or was connected with, a commercial transaction and that was consistent with the different treatment of the two categories of immunity in the Act: para 17.
  • Applying Alcom at 603H-604E, the essential distinction was between the origin of the funds on the one hand, and the use of them on the other. The Court also considered AIC Ltd v Nigeria [2003] EWHC 1357 (QB), AIG Capital Partners Inc v Kazakhstan [2005] EWHC 2239 (Comm) and Orascom Telecom Holding SAE v Chad [2008] EWHC 1841 (Comm).
  • Several decisions of US state Courts of Appeal, in particular Connecticut Bank of Commerce v Republic of Congo, 309 F 3d 240 (US Court of Appeals, 5th Cir, Texas, 2002) and the Hong Kong Court of Appeal decision FG Hemisphere Associates LLC v Democratic Republic of Congo [2010] HKCA 19 provided strong persuasive authority to support the above analysis: paras 20-28.

Lord Clarke held that S had failed to show that the debt was in use or intended for use for commercial purposes. His Lordship explained:

32. For my part, I would not accept that analysis. It elides the historical origins of the Admitted Claims with their current and future use. The determinative feature, in my view, is the absence of any current or future commercial activity on the part of the state of Iraq. It is common ground that any dividends received from the administrators of Rafidain Bank will be paid to and used by the DFI, which is manifestly not a commercial purpose. The Admitted Claims are simply the means to the end of the dividends. They are nothing more than a legal mechanism by which Iraq’s entitlement to receive dividend payments is secured and given effect to. In these circumstances, it is artificial and highly technical to seek to distinguish the Admitted Claims from the dividends that they secure. Neither is connected to, or destined for use in, any mercantile or profit-making activity by Iraq. It follows that neither can sensibly be described as “for the time being in use or intended for use for commercial purposes”.

33. It was suggested on behalf of SerVaas that, even if it cannot succeed in relation to the entirety of the Admitted Claims, in so far as the Claims were acquired with bonds, they were in use for a commercial transaction within section 3(3)(b) of the Act, namely a “transaction for the provision of finance”. The Court of Appeal unanimously rejected this part of SerVaas’ submissions. As Rix LJ put it at para 81, it was mere background. Assuming the expression “in use or intended for use” in section 13(4) is given the meaning discussed above, I cannot see any basis for reaching a different conclusion in respect of the Admitted Claims acquired with bonds.

The Court’s Judgment is available below


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