Supreme Court: Equity’s Darling and Guidance on Enforceability of Trusts where the Institution is Unknown

Akers & Ors (Respondents) v Samba Financial Group (Appellant) [2017] UKSC 6 (1 February 2017)

In this appeal, Lords Neuberger, Mance, Sumption, Toulson and Collins unanimously held that a trust could be created, exist and be enforceable in relation to assets located in a jurisdiction where the law did not recognise trusts in any form. Many of the issues in earlier proceedings fell away. But nonetheless, because of the shifting focus of submissions, Lord Mance prefaced his lead judgment by describing the issues as “novel and difficult”. Proceedings were brought against Samba Financial Group (Samba) by Saad Investments Co Ltd (SICL) and its Joint Official Liquidators (the liquidators) who were appointed in winding up proceedings in the Cayman Islands which were subsequently recognised in England as a foreign main insolvency proceeding under the Cross-Border Insolvency Regulations 2006. Samba sought to stay the claim on the ground that rather than England “there exists another forum [i.e. Saudi Arabia] which is clearly and distinctly more appropriate”. Over the course of time, the ground morphed into the argument that SICL’s claim had no prospect of success and the case proceeded in the Supreme Court on that basis. Similarly, the appeal was presented to the justices on certain assumed facts. Shares valued at approximately $318m in various Saudi Arabian banks were held by Mr Al-Sanea (AS) on trust for SICL which went into liquidation by virtue of which Mr Stephen John Akers came to be one of its liquidators.

AS was the registered owner of the shares in the Saudi Arabian Securities Depositary Centre and SICL claimed that he had agreed to hold these Saudi Arabian shares at all material times on trust. Six weeks after the liquidation, in a series of six transactions, the shares were transferred by AS to Samba to discharge personal liabilities he owed them. Two other assumptions were made. Firstly, that Cayman Islands law governed the trusts. And secondly that the law of Saudi Arabia, the “lex situs” of the shares, does not recognise the institution of trust or a division between legal and proprietary interests. Saudi Arabian law does, however, recognise the institution of amaana – a kind of bailment construable as a trust – but its precise effects remained unexplored in evidence. Relying on section 127 (avoidance of property dispositions, etc) of the Insolvency Act 1986, SICL and the liquidators argued that the transfers of shares were and are void as a result of the “disposition of the company’s property … made after the commencement of the winding up”. The English law doctrine of “equity’s darling” is missing from other jurisdictions where a transfer to a third party might override beneficiaries’ rights, possibly overlooking any equitable interest at all.

Barclays Fined £38m for Failing to Safeguard Client Assets

In the highest fine ever imposed for client assets breaches, pursuant to the Financial Services and Markets Act 2000, the Financial Conduct Authority (FCA) has fined Barclays £37,745,000 because of the bank’s failure to properly protect clients’ custody assets worth £16.5 billion. The majority of these belonged to the bank’s Affiliates (£13.5 billion) and its Affiliates’ clients (£2.7 billion) – read Final Notice here. Had Barclays come to be plagued by the onset of insolvency, its clients ran the risk of incurring extra costs, lengthy delays or losing their assets. The bank’s breaches arose from significant weaknesses in its systems and controls and a historical focus on business lines and products traded, rather than giving adequate consideration to which legal entity was conducting the relevant business.

For David Lawton, FCA director of markets, “Barclays lack of focus on the rules was unacceptable” because the FCA’s “on-going scrutiny of firms’ compliance reflects the importance of the regime, which protects custody assets worth £10 trillion held in the UK.”

Tracey McDermott, the FCA’s director of enforcement and financial crime, considered that:

Barclays … exposed its clients to unnecessary risk.

And she remarked further that:

All firms should be clear after Lehman that there is no excuse for failing to safeguard client assets.

UK Supreme Court: Case Preview: Securitisation and the Balance Sheet Test

BNY Corporate Trustee Services Limited and others (Respondents) v Neuberger Berman Europe Ltd (on behalf of Sealink Funding Ltd) and others (Appellants) UKSC 2011/0086 and BNY Corporate Trustee Services Limited and others (Respondents) v Eurosail-UK 2007-3BL PLC (Appellant) UKSC 2011/0199 shall be heard by the UK Supreme Court on 25 and 26 February 2013. Lord Hope of Craighead DPSC and Lord Walker of Gestingthorpe, Lord Mance of Frognal, Lord Sumption and Lord Carnwath of Notting Hill JJSC will hear these appeals. This hearing can be viewed online during Court hours here.

Facts

Interest-bearing Notes were issued by a special purpose vehicle, Eurosail-UK 2007-3BL PLC (“the Issuer”), formed to hold income-producing assets, namely mortgage loans. Due to the insolvency of Lehman Brothers (see the earlier case decided by the UK Supreme Court involving Lehman Brothers here), with whom the Issuer had entered into swap agreements, the Issuer suffered a significant deficiency in its net asset position. The terms governing the issue of the notes provided that on specified Events of Default an enforcement notice could be served, the effects of which included altering the respective priorities of the Noteholders for repayment of capital and interest. One such Event of Default involved the issuer being unable to pay its debts within the meaning of section 123(2) – definition of inability to pay debts; “a company is also deemed unable to pay its debts if it is proved to the satisfaction of the court that the value of the company’s assets is less than the amount of its liabilities, taking into account its contingent and prospective liabilities” – of the Insolvency Act 1986. The trustee of the Noteholders’ rights, BNY Corporate Trustee Services Ltd, commenced the current proceedings seeking a determination of whether that event of default had occurred.

Rubin and New Cap: Massive UK Supreme Court Ruling on International Insolvency, Enforcement and Jurisdiction

Rubin & Anor (Joint Receivers and Managers of the Consumers Trust) v Eurofinance SA & Ors [2010] EWCA Civ 895 and New Cap Reinsurance Corporation Ltd & Anor v Grant & Ors [2011] EWCA Civ 971 were interesting cases and threw up important issues in international insolvency law. The UK Supreme Court has decided these cases as Rubin & Anor v Eurofinance SA & Ors [2012] UKSC 46. Broadly, the court’s judgment shed much needed light whether a foreign court’s order or judgment to set aside anterior transactions such as preferences or transactions at an undervalue (or avoidance proceedings) were (1) recognisable and enforceable in England and Wales and (2) enforceable through the international assistance provision of the UN Convention on International Trade Law (“UNCITRAL”) Model Law – which is implemented through the generally applicable Cross-Border Insolvency Regulations 2006 (“CBIR”) – or the assistance provisions of section 426 of the Insolvency Act 1986 (“IA86”) which applied to a limited number of countries including Australia. The Supreme Court held that the Dicey Rule, set out below at the end of this post, which arises from the operation of common law and  Foreign Judgments (Reciprocal Enforcement) Act 1933  (“the 1933 Act”), applied to foreign judgments in avoidance proceedings in insolvency.

Background in the Court of Appeal

I. Rubin & Anor (Joint Receivers and Managers of the Consumers Trust) v Eurofinance SA & Ors [2010] EWCA Civ 895

Rubin and others, the appellants (A), were receivers who appealed against Nicholas Strauss QC’s [2009] EWHC 2129 (Ch) decision to dismiss their application for enforcement of a New York judgment against Eurofinance and others, the respondents (R) who cross-appealed against the recognition of the New York proceedings as foreign main proceedings and the recognition of the appointment therein of A as foreign representatives. R had created a trust, operating under English law, and conducted a sales promotion scheme in Canada and the US. Money from the scheme received by the trust was distributed to R and others.

Re Globespan Airways: Administration, Liquidation and Registration

Re Globespan Airways Ltd (In Liquidation) also called Cartwright & Anor v The Registrar of Companies [2012] EWCA Civ 1159 (24 August 2012), read judgment.

The Court of Appeal (Lord Neuberger MR, Arden and Moses LJJ) has unanimously held that it was not possible for an administrator of a company to convert administration into a creditors’ voluntary liquidation (CVL) by simply giving a conversion notice to the Registrar of Companies  (“the registrar”) because conversion only occurred once the registrar had registered a notice on the company’s file at Companies House.

In taking the above approach, the Court of Appeal has reversed Briggs J’s earlier decision that where a notice of movement from administration to CVL under Schedule B1 (“administration”) paragraph 83 of the Insolvency Act 1986 (“the IA 86”) was received by the registrar before the termination of the administration, paragraph 83(4) was to be interpreted as meaning that the date of receipt of the notice was the effective date of registration, regardless of whether the administrative steps necessary for registration had been completed.