Factual and Procedural Background
Over approximately twenty years until December 2008, the Defendant perpetrated a substantial multi-billion dollar fraud through an elaborate Ponzi scheme involving his New York company, Company A. This company had three divisions, including an investment advisory business that purported to generate impressive returns for high net worth individuals and corporate investment funds. In reality, the investment advisory division made no material investments; client funds were pooled and used to pay returns to other clients, funded by new investor money. The scheme collapsed in December 2008 when redemption requests exceeded new investments, resulting in losses of about US$19.5 billion to clients.
The first claimant, Company B, was an English-registered company controlled predominantly by the Defendant and his brother, with several directors domiciled in England and abroad. Company B's ostensible purpose was to hold a seat on a financial exchange in The City, but its primary function was to facilitate concealment and distribution of the fraud proceeds, including laundering stolen money.
The ninth defendant, an individual domiciled in Austria, along with her corporate vehicles (collectively "the Kohn defendants"), introduced investors to the Defendant's scheme, receiving tens of millions of dollars in payments over the years. Although serious allegations were made against the Kohn defendants, it was not pleaded that they were parties to or aware of the fraud.
The claimants allege that payments made to the Kohn defendants were secret kickbacks disguised by sham invoices for research and consulting services. The directors of Company B and the Kohn defendants dispute these characterizations, asserting legitimacy of the payments and services rendered. The court proceeded on the basis that the claimants have an arguable case that the payments were disguised and illegitimate.
The present applications before the court include a jurisdiction challenge by the Kohn defendants and an application by Company B for freezing and proprietary injunctions against the Kohn defendants.
Legal Issues Presented
- Whether the English court has jurisdiction over the claims brought by the second claimant on behalf of Company A against the Kohn defendants under Article 6(1) of Council Regulation (EC) 44/2001.
- Whether the payments made to the Kohn defendants constituted knowing receipt and breach of fiduciary duty by the directors of Company B.
- Whether the claimants are entitled to proprietary and freezing injunctions against the Kohn defendants.
- The appropriate standard of proof and threshold for establishing jurisdiction under Article 6(1) of the Regulation.
- The applicability and scope of exceptions to the general principle that shareholder ratification precludes claims against directors for breach of fiduciary duty.
Arguments of the Parties
Kohn Defendants' Arguments
- They accept jurisdiction over the claim by Company B but dispute jurisdiction over the claim brought by the second claimant on behalf of Company A, asserting that payments from Company A were made outside the jurisdiction and thus Article 6(1) does not apply.
- They argue that Article 6(1) applies only where the same claimant sues both the anchor defendant (domiciled in the jurisdiction) and the non-domiciled defendant, and not where different claimants bring separate claims.
- They contend that the payments to the Kohn defendants were legitimate commissions for introductions and that the invoices for research were not sham documents.
- They submit that Company B has not suffered loss because payments made were subventions from Company A and that the directors' actions were ratified by the sole shareholder, the Defendant, thus no breach of fiduciary duty occurred.
- They argue there is no serious issue to be tried against the anchor defendants and that the court lacks jurisdiction over the second claimant's claim.
- They challenge the risk of dissipation, noting cooperation with authorities and disputing allegations of asset concealment or dissipation.
Claimants' Arguments
- They assert that the court does have jurisdiction under Article 6(1) because the claims against the Kohn defendants and the English domiciled directors are closely connected and should be heard together to avoid irreconcilable judgments.
- The payments to the Kohn defendants were illegitimate secret kickbacks disguised by sham invoices and constituted knowing receipt of proceeds of breach of fiduciary duty.
- They contend that the directors of Company B breached their fiduciary duties by authorising payments for useless research and that the payments were made pursuant to instructions from the Defendant who controlled Company B.
- They argue that the ratification defence does not apply because the transactions were dishonest and constituted a fraud on the company, thus public policy precludes ratification.
- The claimants submit that there is a serious issue to be tried against the anchor defendants and the Kohn defendants.
- They seek proprietary and freezing injunctions to prevent dissipation of assets and to preserve the ability to enforce any judgment, relying on the history of sham invoices, evasive conduct by the Kohn defendants, and lack of voluntary asset disclosure.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Gomez v Encarnacion Gomez-Monche [2008] EWCA Civ 1065 |
Restrictive interpretation of Articles 5 and 6 of the Judgments Regulation regarding jurisdiction. |
Supported restrictive approach to jurisdiction under Article 6(1). |
| Kalfelis v Bankhaus Schroeder Munchmeyer Hengst & Co [1988] ECR 5565 |
Requirement of connection between claims for Article 6(1) jurisdiction; avoiding irreconcilable judgments. |
Applied the "Kalfelis test" to assess connection between claims for jurisdiction. |
| Barclays Bank Plc v Glasgow City Council [1993] QB 429 |
Article 6(1) applies where same claimant sues anchor and non-domiciled defendants. |
Supported interpretation that Article 6(1) jurisdiction requires same claimant. |
| Reunion Europeenne SA v Spiethoff's Bevrachtingskantoor BV [2000] QB 690 |
Clarification of the connection test under Article 6(1) and irreconcilable judgments. |
Reinforced need for connection to avoid irreconcilable judgments. |
| Freeport plc v Arnoldsson [2008] QB 634 |
Article 6(1) jurisdiction may apply even if claims have different legal bases. |
Considered in submissions; court noted that different legal systems do not preclude irreconcilable judgments. |
| Gard Marine & Energy Ltd v Glacier Reinsurance AG [2010] EWCA Civ 1052 |
Consideration of risk of irreconcilable judgments and proper law of contracts in Article 6(1) jurisdiction. |
Used to analyze effect of different governing laws on jurisdiction and irreconcilability. |
| Masri v Consolidated Contractors International (UK) Ltd [2006] 1 WLR 830 |
Article 6(1) applies even where claims are in separate proceedings by same claimant. |
Discussed in submissions on scope of Article 6(1); distinguished from present case. |
| Gascoine v Pyrah [1994] 1 L Pr 82 |
Potential conflicting findings of fact are relevant for Article 6(1) jurisdiction. |
Supported broad, common sense approach to connection of claims. |
| FKI Engineering v De Wind [2008] EWCA Civ 316 |
Standard for considering seriousness of issue to be tried for jurisdiction purposes. |
Supported test of serious issue or real prospect of success against anchor defendant. |
| ET Plus SA v Welter [2005] EWHC 2115 (Comm) |
Approach to Article 6(1) jurisdiction; serious issue to be tried standard; broad common sense test. |
Adopted by court as appropriate approach to jurisdiction and merits threshold. |
| Bols Distilleries v Superior Yacht Services Ltd [2006] UKPC 45 |
Good arguable case standard for establishing jurisdiction under the Regulation. |
Applied to jurisdictional threshold under Article 6(1). |
| American Cyanamid Co v Ethicon Ltd [1975] AC 396 |
Test for granting interlocutory injunctions including proprietary injunctions. |
Used as basis for assessing injunction applications. |
| Polly Peck International v Nadir (No. 2) [1992] 4 All ER 767 |
Distinction between proprietary and freezing injunctions; basis for granting proprietary injunctions. |
Guided court on different standards for injunction types. |
| Republic of Haiti v Duvalier [1990] 1 QB 202 |
Proprietary claims justify more readily granted interim remedies including injunctions and disclosure. |
Supported granting of proprietary injunction in this case. |
| National Commercial Bank Jamaica v Olint Corporation [2009] 1 WLR 1405 |
Application of American Cyanamid test; balancing irremediable prejudice in injunction decisions. |
Informed court's assessment of balance of convenience and discretion. |
| Ninemia Maritime Corporation v Trave Schiffahrtsgesellschaft GmbH ("The Niedersachsen") [1983] 2 Lloyd's Rep 600 |
Definition of good arguable case for freezing injunctions. |
Applied standard for freezing injunction threshold. |
| Fiona Trust v Privalov [2007] EWHC 1217 (Comm) |
Impact of delay on freezing injunction applications; risk of dissipation considerations. |
Guided court's approach to delay and risk of dissipation. |
| Antonio Gramsci Shipping Corporation v Recoletos Limited [2011] EWHC 2242 (Comm) |
Delay in freezing injunction applications; court's discretion to grant despite delay. |
Applied to assess delay and risk of dissipation. |
| The Nicholas M [2008] 2 Lloyd's Rep 602 |
Risk of dissipation test for freezing injunctions. |
Applied to assess risk of dissipation in present case. |
| Thane Investments v Tomlinson [2003] EWCA Civ 1272 |
Caution in inferring risk of dissipation solely from allegations of dishonesty. |
Considered in assessing risk of dissipation. |
| Norwich Union v Eden (1996, unreported) |
Risk of dissipation may be inferred from fraud allegations for freezing injunctions. |
Supported claimants' submission on risk of dissipation. |
| Grupo Torras SA v Al Sabah [1997] WL 1105536 |
Risk of dissipation justified by allegations of fraud and sophisticated misconduct. |
Applied in submissions on risk of dissipation. |
| Jarvis Field Press v Chelton [2003] EWHC 2674 (Ch) |
Assessment of risk of dissipation requires careful scrutiny of dishonest conduct alleged. |
Adopted by court in assessing risk of dissipation. |
| Multinational Gas v Multinational Services [1983] Ch 258 |
Principle that shareholder ratification binds company unless exceptions apply. |
Applied in analysis of breach of fiduciary duty and ratification. |
| Bowthorpe Holdings v Hills [2003] 1 BCLC 226 |
Exceptions to shareholder ratification where transaction is dishonest or prejudicial to creditors. |
Supported claimants' submissions on exceptions to ratification defense. |
| Kinsela v Russell Kinsela (1986) 4 NSWLR 722 |
Extension of directors' duty to creditors in insolvency context; limits ratification. |
Referenced in public policy exception analysis. |
| West Mercia v Dodd [1988] BCLC 250 |
Shareholders' interests equate to company in solvent companies; insolvency changes duty landscape. |
Considered in fiduciary duty and ratification context. |
| Belmont Finance v Williams Furniture [1979] 1 Ch 250 |
Fraudulent transactions cannot be ratified by shareholders. |
Applied in assessing ratification defense. |
| Cox v Cox [2006] EWHC 1077 (Ch) |
Recognition of exceptions to ratification including bona fide and solvency considerations. |
Supported claimants' position on exceptions to ratification. |
| Architects of Wine v Barclays Bank [2007] 1 Lloyd's Rep 55 |
Application of exceptions to ratification in context of fraud and solvency. |
Considered in evaluating ratification and breach of duty. |
Court's Reasoning and Analysis
The court began by outlining the factual background of the fraud perpetrated by the Defendant and the roles of Company A, Company B, and the Kohn defendants. It accepted that there was an arguable case that payments to the Kohn defendants were disguised secret kickbacks and that sham invoices were used to conceal their true nature.
On the jurisdictional issue under Article 6(1) of the Judgments Regulation, the court carefully analysed whether the Regulation's exception to the general rule of jurisdiction based on domicile could apply where one claimant (Company B) had claims against anchor defendants domiciled in the jurisdiction and another claimant (the second claimant on behalf of Company A) had claims against a non-domiciled defendant but no claim against the anchor defendants. It concluded that Article 6(1) applies only where the same claimant sues both the anchor and non-domiciled defendants. The court rejected the claimants' broader submission that the Article could apply where different claimants bring related claims, holding that such an interpretation would undermine the restrictive nature of the jurisdictional exception and conflict with established case law.
The court then addressed the threshold for establishing jurisdiction under Article 6(1), adopting the view that a serious issue to be tried against the anchor defendants suffices rather than a higher "good arguable case" standard. It found that the claimants had shown a serious issue to be tried against the directors of Company B, rejecting the Kohn defendants' arguments that no loss was suffered or that ratification by the Defendant shielded the directors from liability.
In analysing the ratification defense, the court reviewed the general principle that shareholder approval binds the company but recognised exceptions where the transaction is dishonest, constitutes a fraud on the company, or prejudices creditors. It accepted the claimants' submission that a wider exception based on public policy applies, especially given the allegations of the Defendant using Company B to launder fraud proceeds. Thus, the ratification defense did not negate the serious issue to be tried.
Regarding the proprietary injunction, the court applied the American Cyanamid principles, finding that Company B had demonstrated a serious issue to be tried, that the balance of convenience favoured granting the injunction due to the risk of irreparable harm if assets were dissipated, and that it was just and convenient to grant the injunction. The court noted the absence of voluntary asset disclosure by the Kohn defendants and the difficulty of enforcing any judgment without such relief.
For the freezing injunction, the court held that Company B had shown a good arguable case on the merits, that the delay in making the application did not preclude relief, and that there was a real risk of dissipation of assets. The court considered the nature of the alleged misconduct, evasive conduct by the Kohn defendants, and lack of disclosure as evidence supporting the risk of dissipation. It emphasised that the rationale for freezing injunctions is to prevent judgments from becoming unenforceable due to dissipation or concealment of assets.
In conclusion, the court granted the proprietary and freezing injunctions against the Kohn defendants but held that it lacked jurisdiction over the claim brought by the second claimant on behalf of Company A under Article 6(1).
Holding and Implications
The court's final decision was as follows:
- The court does not have jurisdiction under Article 6(1) of the Judgments Regulation over the claim brought by the second claimant on behalf of Company A against the Kohn defendants.
- The first claimant, Company B, is entitled in principle to proprietary injunctions and related relief against the Kohn defendants.
- Company B is also entitled to freezing injunctions and related relief (including disclosure orders) against the Kohn defendants.
The direct effect is that Company B may proceed with its claims against the Kohn defendants in the English courts and obtain injunctive relief to preserve assets, while the claim by the second claimant on behalf of Company A must be pursued elsewhere, as the court lacks jurisdiction. No new precedent was established beyond the application and interpretation of Article 6(1) jurisdiction in this context.