Phoenix Group Foundation v Harbour Fund II LP & Ors

Factual and Procedural Background

This appeal arises from an order dated 11 June 2021 made by Judge Foxton following a lengthy trial and a judgment handed down on 18 May 2021. The appellant, Phoenix Group Foundation ("Phoenix"), a foundation established under the laws of Panama, appeals one aspect of the order concerning the validity of an equitable assignment of future property. The order declared that future distributions payable to SMA Investment Holdings Limited ("SMA"), a Marshall Islands company and sole shareholder of a group of BVI and Isle of Man companies (the "Arena Companies"), would be held by SMA on trust according to the terms of the "Harbour Trust".

The Harbour Trust was created pursuant to an investment agreement dated 10 July 2013, under which a litigation funder, Harbour Fund II LP ("Harbour"), provided funding for Commercial Court proceedings brought by a company known as Orb a.r.l. ("Orb") and associated parties (the "Orb Claimants"). The Harbour Trust applied to proceeds recovered by the Orb Claimants or their affiliates, including SMA, with beneficiaries including the Orb Claimants and Harbour.

Phoenix contended that the Judge erred in holding that future distributions from the liquidations of the Arena Holdcos were held on trust by SMA under the Harbour Trust. Phoenix argued that these distributions were subject to a valid equitable assignment by SMA to Phoenix pursuant to the "Liquidation Inter-Creditor Settlement Agreement" ("LICSA") dated 29 April 2016, which settled disputes between various parties including those related to the Commercial Court proceedings. Phoenix asserted that any right to distributions acquired by SMA would automatically be held on trust for Phoenix as assignee.

The respondents, including Harbour, contended that any rights Phoenix obtained via the LICSA did not take priority over the Harbour Trust claims. They raised issues concerning whether a trust beneficiary’s interest is unique and carved out of the trust asset ("disability" model) or whether competing equitable interests are prioritized according to principles ("priority" model), and whether Phoenix should be denied rights due to the equitable doctrine of "no clean hands".

Due to complexity, the court heard the appeal issues first and reserved judgment on the Respondent’s Notice issues. This judgment deals solely with the appeal.

The factual background involves complex disputes over shares in the Arena Companies and related assets, involving two central figures: Dr. Smith, formerly chief executive of Orb, and Mr. Ruhan, a businessman with property interests. Dr. Smith and his associates, including SMA (nominee shareholder held by Dr. Smith’s ex-wife, Dr. Cochrane), were involved in litigation and enforcement related to confiscation orders following criminal convictions.

Mr. Ruhan had acquired properties from Orb in 2003, which were transferred into an Isle of Man discretionary trust ("Arena Settlement"). Following various litigation steps, including the 2012 Commercial Court proceedings initiated by the Orb Claimants against Mr. Ruhan, a series of settlements were reached, including the 2013 investment agreement with Harbour and the 2013-2014 IOM Settlement whereby certain assets were transferred to SMA for the Orb Claimants’ benefit.

Subsequently, in April 2016, the Geneva Settlement was executed, releasing competing claims in return for obligations including a £73.75 million unsecured loan note from Dr. Cochrane to Phoenix and the LICSA involving SMA, Dr. Cochrane, Phoenix, and its subsidiary Minardi. The LICSA set out arrangements for winding up the Arena Estate and distributing assets, including provisions for payments to be made to Phoenix from distributions received by SMA or related parties.

The Joint Liquidators continued realising assets of the Arena Holdcos, with possible future distributions to SMA under section 207(3) of the BVI Insolvency Act 2003. Phoenix claimed an equitable assignment of SMA’s future distribution rights under the LICSA to secure priority over the Harbour Trust interests.

Legal Issues Presented

1. Whether the provisions of the LICSA constituted a valid equitable assignment by SMA of its future rights to distributions from the liquidations of the Arena Holdcos to Phoenix.
2. Whether SMA demonstrated an immediate and irrevocable intention to assign such future rights to Phoenix.
3. The interpretation of the LICSA clauses, particularly clauses 2.3, 2.4, and 2.6, in the context of equitable assignment principles.
4. Whether the assignment failed for uncertainty of subject matter given the indeterminate nature of future distributions and outstanding loan amounts.
5. Whether the equitable assignment, if any, took priority over the Harbour Trust interests.
6. Whether Phoenix should be denied equitable assignment rights based on equitable doctrines such as "no clean hands".

Arguments of the Parties

Appellant's Arguments

• The LICSA clauses 2.3, 2.4, and 2.6, when read together, evidenced an immediate and irrevocable equitable assignment by SMA of its future distribution rights to Phoenix, up to the outstanding amount under the Loan Note.
• The Judge erred in holding that such an assignment failed for uncertainty; the outstanding Loan Note amount could be quantified at the time distributions were made.
• The parties contemplated that the surplus from the liquidations would be less than the Loan Note amount, explaining the use of "prepayment" language and absence of security provisions or reassignment clauses.
• The Judge’s interpretation defeated the commercial bargain struck in the Geneva Settlement, allowing the Orb Claimants and associates to retain the Transferred Assets free of Mr. Ruhan’s claims, while Phoenix received no payments under the Loan Note.
• Suggested the LICSA could be interpreted as a security, contain a proviso for reassignment, or require assignment only of distributions necessary to satisfy the Loan Note balance.

Respondents' Arguments

• The Judge was correct in interpreting the LICSA as not constituting an immediate equitable assignment but rather an agreement that SMA would assign future rights only if and when Dr. Cochrane procured such assignment pursuant to her procurement obligation.
• The Notice sent to the Joint Liquidators was merely informative and did not amount to a payment direction or transfer of rights by SMA.
• Any assignment limited to part of SMA’s future rights up to the Loan Note amount would fail for uncertainty, as held by the Judge.
• In the event the LICSA was an assignment by way of security, Phoenix’s agreement under a Tomlin Order not to pursue Dr. Cochrane individually would operate to discharge that security.

Table of Precedents Cited

Court's Reasoning and Analysis

The court began by acknowledging that SMA held no existing right to distributions at the time of the Geneva Settlement, only mere expectancies under section 207(3) of the BVI Insolvency Act 2003. Such future property cannot be legally assigned but may be subject to equitable assignment if certain conditions are met: a clear, immediate, and irrevocable intention to assign; sufficiently certain description of the subject matter; and value given.

The court examined the LICSA clauses 2.3, 2.4, and 2.6 and found no clear expression of intention by SMA to immediately and irrevocably assign its future rights to Phoenix. Clause 2.4 imposed only a personal obligation on Dr. Cochrane to procure payments to Phoenix but did not impose any direct obligation on SMA or indicate SMA’s intention to divest itself of rights. Clauses 2.3 and 2.6 contained undertakings by SMA but lacked language evidencing an assignment or transfer of rights.

The Notice sent to the Joint Liquidators was purely informative, lacking any clear direction to pay Phoenix or details necessary for payment. This was inconsistent with an immediate equitable assignment, which typically requires clear notice to the debtor to pay the assignee.

The court noted the uncertainties surrounding the timing and amount of future distributions and the outstanding Loan Note balance at the time of the Geneva Settlement. The risk of overpayment was real, and if an immediate assignment had been intended, it would likely have been structured as a security with provisions for reassignment and accounting for any surplus. However, the Loan Note was expressly unsecured and contained a negative pledge rather than security provisions.

The court distinguished the precedent in Tailby, which concerned an assignment by way of security of future debts, a context not applicable here due to the absence of security language in the LICSA. The court emphasized that the certainty required for assignment of future property is assessed at the time the property comes into existence, but the LICSA lacked the necessary language to constitute an immediate assignment.

Consequently, the court agreed with the Judge’s conclusion that the LICSA did not constitute an immediate equitable assignment but rather contemplated a future assignment triggered by Dr. Cochrane’s procurement obligation. This interpretation also avoided uncertainty regarding the amount of distributions and the outstanding Loan Note balance.

Finally, the court rejected Phoenix’s argument that the Judge’s interpretation defeated the commercial bargain struck in the Geneva Settlement, emphasizing that the parties settled disputed claims with obligations whose legal effect was to be determined by proper construction of the agreements. The court upheld the contractual structure under which Phoenix took an unsecured personal covenant from Dr. Cochrane and did not obtain security over future distributions.

Holding and Implications

The court DISMISSED THE APPEAL, upholding the Judge’s finding that the LICSA did not amount to a valid equitable assignment by SMA of its future rights to distributions from the Arena Holdcos to Phoenix.

The direct effect of this decision is that Phoenix does not hold proprietary rights over SMA's future distribution rights and therefore has no priority over the Harbour Trust interests in respect of those distributions. The ruling maintains the contractual and equitable framework established by the Geneva Settlement and related agreements without creating new precedents. The issues raised by the Respondent's Notice were reserved and not decided in this judgment.