Cross Border Restructuring and Insolvency Update - March 2015

Plaza BV v The Law Debenture Trust Corporation

The High Court has held that it has power to stay proceedings against an English domiciled defendant in favour of the courts of Western Australia, as the dispute came with an exclusive jurisdiction clause in favour of those courts.

This case followed longstanding litigation in Australia as a result of the insolvency of an Australian group of companies, the Bell Group, in the early 1990s. In 2013, a Settlement Deed was signed, conferring exclusive jurisdiction on the Western Australian court over any proceedings in connection with the Settlement Deed.

Notwithstanding they were a party to the Settlement Deed, the claimant, Plaza, brought proceedings in England to restrain the corporation from acting in breach of trust under the English law trust deed (which contained a non-exclusive English jurisdiction clause) and the defendant applied to stay these proceedings.

Plaza relied on Article 2 of the Judgment Regulation which states that persons domiciled in a Member State should be sued in the courts of that Member State. Given the corporation was incorporated and domiciled in England, that was the appropriate forum for proceedings, regardless of the exclusive jurisdiction clause.

They also relied on Owusu, where the ECJ decided that where a defendant is sued in the Member State in which he is domiciled, the court of that Member State cannot stay its proceedings in favour of a non-Member State on the grounds that it would be more appropriate for that court to hear the case.

The Corporation sought to stay the action and apply the exceptions in Articles 23 and 28 of the Judgment Regulation by analogy, given that it couldn’t have direct effect as Australia is not a Member State.

Article 23 provides an exception to Article 2 where the parties have agreed that another court ought to have jurisdiction to settle the dispute and Article 28 provides an exception where an action is pending in another court, then the court that is first seised may stay proceedings.

Proudman J held that Owusu did not prevent the English court from enforcing the exclusive jurisdiction clause and that it did not bar applying Article 23 by analogy.

Proudman J also considered whether the English court had a discretion to stay its proceedings, by applying Article 28 by analogy, where a dispute was first seised in a non-EU court and was so closely connected that there was a risk of irreconcilable judgments resulting from separate proceedings. Proudman J did not rule on this point, and there is conflicting caselaw, but she indicated she would be inclined to rule that it is possible to stay proceedings on this basis.

Finally, Proudman J found that had she not granted a stay through reflexive application of the exemptions to the Judgment Regulation, she would nonetheless have granted a stay on case management grounds. She pointed out that if the claimant failed in the English proceedings, it would simply re-litigate in Australia.

The High Court has handed down judgment which highlights the importance of observing the formalities set by the Articles of Association when placing a foreign company into Administration

Melodious was incorporated in the British Virgin Isles but was used to buy various properties in England. The shareholders were Miss Chan ("C"), the Applicant, and Mr Leung ("L"), the First Respondent, who were in a personal relationship. The relationship between C and L broke down in 1998 and C and her mother, Madam Ho ("H"), were appointed as directors of Melodious in 1998.

There followed a series of proceedings in which L sought the appointment of a provisional Liquidator of Melodious and C sought a declaration that Melodious held a property, Hill House, on a bare trust for herself and L. L contended Hill House was owned beneficially by Melodious. C was successful in her application obtaining a declaration that she held a 51% share and L a 49% share. An account was also ordered to determine how much of those proceeds, if any, ought to be paid or distributed by Melodious to its creditors and contributories.

L was subsequently made bankrupt in Hong Kong in 2002 and was discharged in 2006. In 2007, C went to an Insolvency Practitioner, Mr Paterson ("P"), for advice about how to sell Hill House. P advised to place the Company into Administration. The Articles for Melodious stated that where there were only two directors, a quorum was two.

At a meeting on 29 October 2009, C met P at his London office. Minutes of the meeting were prepared by P stating that the Company was unable to pay its debts, and the board of directors would seek an Administration Order out of Court, pursuant to para. 22(2) of Schedule B1 Insolvency Act 1986. The minutes recorded C as being the only director in attendance and she signed the minutes as Chairman. Ultimately P was appointed as Administrator but towards the one year anniversary, Hill House had not been sold. P therefore submitted forms to convert the Administration to Liquidation. What followed was disputed, but it was alleged that the Administration was converted into a Liquidation after the Administration had automatically expired. Therefore P had been invalidly appointed as Liquidator.

C applied to Court, contending that Melodious was never placed into Administration as P was never validly appointed due to a lack of quorum. P argued that he was validly appointed. He also contended that H had been present at the directors meeting and the minutes had been based on a standard template which was incorrectly amended. He also relied on evidence that he had a copy of H's passport which he contended he had taken personally at the meeting, and said that C had informed him that she was entitled to vote on the resolution alone.

The Judge found that H had not attended the meeting on the basis of H and C's evidence. H was resident in Hong Kong, did not speak English and had only a basic education, and despite evidence to demonstrate that H was in London at the time of the meeting, the Judge accepted C's evidence that the purpose of her visit was to attend to a family crisis.
The Judge held that the meeting was inquorate and that the resolution to appoint an Administrator was invalid. Unsurprisingly, given the raft of case law on the point, he rejected a submission from Counsel for P that the resolution was saved by Rule 7.55 of the Insolvency Rules 1986.

The Judge held that as the meeting was inquorate, the appointment was invalid and consequently the Company had never been placed into Administration.

This case serves as a useful reminder as to the critical importance of observing a Company's Articles to ensure that they contain the appropriate quorum, and this applies equally to Companies which are incorporated outside of the jurisdiction. A court will not be forgiving where an oversight leads to incorrect procedure being followed, even where, as in this case, it is likely that the second director required to be in attendance would have consented to the company being placed into Administration.

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