Finurba Corporate Finance Ltd v Sipp SA & Anor

This is an application for permission to appeal brought by Finurba Corporate Finance Limited (“Finurba”) against a decision of Mr James Goudie QC, sitting as a Deputy Judge of the Queen’s Bench Division, in which he (i) refused to continue freezing injunctions against Sipp SA (“Sipp”), a Luxembourg company, and Imaved Investimentos Imobiliarios SA (“Imaved”), a Portuguese company, and (ii) struck out Finurba’s claim against Sipp and Imaved (“the Companies”).

The basic facts are as follows. Joao Antonia de Arjujo Vale E Azevedo (“Mr Azevedo”) and his wife, Filippa de Matos Lencastre Cabral Azevedo (“Mrs Azevedo”) were made bankrupt on 5 February 2009, and Mr Andrew Fender was appointed their trustee in bankruptcy. Mr Fender is also the liquidator of a company called V & A Capital (“V&A”) which was wound up by the court on 22 April 2009, and had been used by Mr Azevedo as a vehicle for fraud. Mr Fender effectively assigned all the assets in the bankrupt estates of Mr and Mrs Azevedo and all the assets of V & A to Finurba, in return for Finurba agreeing to account to Mr Fender for 50% of all recoveries it made.

Finurba then began proceedings against twenty-two defendants, including Mr and Mrs Azevedo, and the Companies. The first question on this appeal is whether Finurba has a pleaded, or a properly pleadable, cause of action against either of the Companies. The Judge held that it did not, and accordingly he struck out the claim against them.

After the issue of the proceedings, Finurba applied ex parte for a freezing order against each of the Companies and against four other defendants, and that order was granted by Mackay J. Although Mr Goudie (“the Judge”) continued the freezing order against the other four defendants, he discharged it as against the Companies for a number of reasons. The second question is whether he was right to do so.

On considering Finurba’s application for permission to appeal on the papers, Rix LJ ordered that the application be heard by a full court, with the appeal to follow immediately if permission was given. He was concerned that the Judge may have taken too strict or technical a view of the legal position “where a fraudster has used companies which he controls to hide or moneylaunder the proceeds of fraud”, particularly given that “the various companies are all parties to the action”.

It is important to bear in mind that, in these proceedings, Finurba is suing as the assignee of Mr and Mrs Azevedo’s trustee in bankruptcy. Accordingly, for present purposes it stands in the shoes of the trustee, save that it would obviously be wrong to assume that it has all his statutory powers or rights, as opposed to his property or quasi-contractual rights. .

Finurba’s case, as I understand it, in the light of what I have to say were the opaque submissions of Mr Mendus Edwards on its behalf, is that:

It should be entitled to pierce the veil of incorporation so far as the Companies are concerned, so that their assets should be treated as the assets of the beneficial owners of both companies, namely Mr and/or Mrs Azevedo (“the Azevedos”), and/or

Quite apart from that, the assets, or at least some of the assets, apparently held by or in the name of the Companies were in reality, or beneficially, the property of the Azevedos.

In its evidence before the Judge, Finurba exhibited a judgment (“the Portuguese judgment”) given by the fourth section of the Supreme Court of Justice of Portugal in an unsuccessful appeal brought by Mr Azevedo against the sentence of imprisonment imposed on him following his conviction in Portugal for fraud. It is said on behalf of Finurba that it was the release of this judgment in May 2010 which prompted the present proceedings. Finurba relied on the Portuguese judgment not merely to establish that Mr Azevedo had been sentenced to a substantial term of imprisonment for extensive fraud, but also to support a number of more specific allegations.

In his submissions on behalf of the Companies, Mr Adair took the point that this judgment was inadmissible as a matter of English law. That raises an interesting point which it is unnecessary to decide. I am prepared to assume that the Portuguese judgment would be inadmissible at a final hearing in these proceedings, although there is a real argument to the contrary as evidenced by Tugendhat J’s analysis in Assets Recovery Agency v Virtosu [2008] EWHC 149 (QB). However, even on that assumption, I am satisfied that it is perfectly proper for Finurba to rely on the judgment at an interlocutory stage, as evidence of the findings it makes or refers to, at least for the purpose of supporting the application for a freezing order. In that connection, I agree with the reasoning and conclusion of Phillips J in Deutsche Ruckversicherung AG v Walbrook Insurance Co [1995] 1 WLR 1017, 1025.

It is Finurba’s case that the Azevedos beneficially own the shares in two Panamanian companies, Global Services Overseas Inc (“GSO”) and International Business Services Inc (“IBS”), who are two of the other defendants in these proceedings. Finurba also contend that GSO and IBS own all (or virtually all) the shares in Sipp, which in turn owns all (or virtually all) the shares in Imaved.

Finurba further rely on the apparent fact that GSO and IBS appear to own all (or virtually all) the shares in another Luxembourg company called Sipor SA (“Sipor”), formerly known as Sojifa Luxembourg, which owned all (or virtually all) the shares in V & A.

The Judge pointed out that there was no evidence that the Azevedos owned GSO and IBS, and it does seem that there is little or no evidence to support that contention. Another difficulty for Finurba, as the Judge pointed out, is that GSO has been dissolved. Further, while the Companies agree that Sipp owns all the shares in Imaved, they deny the contention that the Azevedos beneficially own the shares in Sipp, and, even if they do, they deny that this would give Finurba any claim against Sipp, let alone against Imaved, on the simple basis that a claim against a shareholder in a company does not give rise to a claim against the company itself.

The first item of evidence relied on by Finurba is contained in two passages in the Portuguese judgment. The Portuguese court said that “I . . . I . . Imobiliarios Lda was established in 13/10/97 between the [Azevedos] and . . . [a company]”. A little later the Portuguese court referred to the fact that “I . . . Investimentos Imobiliarios SA” although now managed by his brother, was “previously managed by [Mr Azevedo]. The first quotation is of no assistance at least on the face of it, because it refers to a different company, “I…. I … Lda” (emphasis added) not “I … I … SA”. If the second quotation refers to Imaved, which seems likely, it merely suggests that Mr Azevedo had previously managed Imaved, not that he had owned it, let alone that he presently owns it, let alone its assets. .

Secondly, Finurba relies on the fact that in November 2004, Mr Azevedo was “in a position to issue and invoice and receipt on Imaved’s behalf”. I do not quite understand what this contention means. The evidence relied on is contained in a letter of 2 November 2004, in which, in order to support an application to open a bank account for himself and another for V & A, Mr Azevedo sent certain documents, including a “copy invoice and receipt issued by Imaved . . . in the name of [Mr] Azevedo”. That certainly suggests some sort of connection between Mr Azevedo and Imaved, but I do not see how it begins to establish any sort of ownership.

Thirdly, Finurba points to a Portuguese petition issued by a Mr Da Cunha, on 6 June 2008, in which it is specifically alleged that Mr Azevedo “owns 75% of the social participation” in two companies, one of which is Imaved. The fact that the petition succeeded is said to support this contention. At the moment, that evidence seems to me to amount to little more than suggesting that Mr Da Cunha had that belief, but it is only fair to say that the evidential value of that document is slightly supported by the fact that the petition resulted in a court in Portugal granting a restriction pendente lite.

Fourthly, it appears that, in a discussion with solicitors on 4 December 2008, Mr Azevedo referred to the fact that he and his wife owned furniture, paintings and other goods (“the items”) which were being stored by Cadogan Tate in north London, whereas it appeared that there is cogent evidence that these items were Imaved’s. Because of the dispute between Imaved and the Azevedos as to the ownership of the items, there are interpleader proceedings on foot. This point does suggest the possibility of there being some sort of connection between Mr Azevedo and Imaved.

Fifthly, it appears that the Azevedos’ son and his girlfriend, and possibly Mrs Azevedo herself, are directors of Imaved. That again suggests a connection between the Azevedo family and Imaved, but there is a big gap between a person’s relations being directors of a company, and that person owning the company, let alone the assets of the company.

So far as Sipp is concerned, Finurba relies on the fact that the present directors of Sipp have refused to divulge who owns the shares in Sipp, but that one of the directors, a Mr Faber, has stated in a witness statement that the Azevedos were not “beneficial owners or shareholders of . . . Sipp on or after [the dates of their bankruptcies]” and that “the present shareholders” who have been “registered as such since 2006” do not include the Azevedos. I am at a loss to see how that evidence can assist Finurba’s case that the Azevedos are beneficial owners of the shares of Sipp, a point reinforced by the fact that Mr Mendus Edwards appeared to suggest that he was not challenging the honesty of Mr Faber.

Finurba relies upon a slightly more convincing, if rather indirect, point. Sipp and Sipor both appear to be owned by GSO and IBS, and they also both appear to have had the same directors. In November 2004, Mr Azevedo was described by his own solicitors as being “the beneficial owner of the entire issue in share capital of Sipor” and Mr Azevedo has made an admission that he had a beneficial interest in Sipor. This is said to suggest that Mr Azevedo had a beneficial interest in Sipp. I accept there is something in that point, at least in so far as suggesting that Mr Azevedo may have an interest in Sipp.

What is not mentioned in Mr Mendus Edwards’s skeleton argument, but may well also have some force in this connection, is that Sipp, as well as having some sort of entertainment business, owns some real property in Portugal, which includes a house in which members of the Azevedo family live.

More generally, invoking the observations of Rix LJ cited in para 5 above, Finurba rely upon the fact that Mr Azevedo has a long history of fraudulent activity, and contends that the Portuguese judgment shows that Mr Azevedo laundered money he had fraudulently obtained through various companies including Sipor. Finurba also contends that the only reason for the existence of the Companies and the fact that they hold assets is to mask the Azevedos’ ownership of those assets and to shield the assets from Mr Azevedo’s creditors. Finurba points to the fact that, in the Portuguese judgment, the court described as “characteristic” of exercises carried out by Mr Azevedo an arrangement (not of itself of direct relevance to these proceedings) used by Mr Azevedo whereby “the legal ownership on behalf of third parties, usually designated directors or administrators, is intended to disguise the real beneficiaries”.

As I have mentioned, there are two separate issues. The first is whether the Judge was right to strike out Finurba’s claim against the Companies on the grounds that it disclosed no cause of action. The second is whether the Judge was right to discharge the freezing order which Mackay J had granted in favour of Finurba against the Companies. The two issues are to some extent connected, but they do not stand or fall together.

So far as the first issue is concerned, I have no doubt that the Judge was right to conclude that, at least on the basis of the contents of Finurba’s statement of case, its claims against Sipp and Imaved were unmaintainable. The Judge was also right in my view to reach that conclusion on the basis of a proposed amended statement of case which was put before him. It is unnecessary to analyse Finurba’s pleading or amended pleading in this connection, because, once one accepts that the Companies are, at least on the face of it, separate entities from the Azevedos, there is simply no basis upon which a claim can be maintained against Sipp or Imaved by Finurba, at least in the absence of special facts which would justify one of the conclusions set out in para 7 above, and such facts are simply not alleged in Finurba’s currently pleaded case. Nor indeed are they in its proposed amended statement of case put before the Judge.

Mr Mendus Edwards offered to amend Finurba’s statement of case in any way the court required in order to enable his client to maintain his claim against Sipp and Imaved. It is not for the court to tell an advocate or a party how to plead its case. However, it seems to me that there may well be a case which could be properly pleaded against the Companies to support a case of the sort described in para 7 above, based on the matters discussed in paras 10 to 21 above. A defendant, even if a convicted fraudster or an associate of the fraudster, is entitled to be absolved from defending an inadequately pleaded case. On the other hand, especially where a defendant is associated with a convicted fraudster with a history of concealing his assets, it would be unsurprising if the case against it is based on slight evidence or allegations. What constitutes sufficient material for pleading or establishing a claim must depend on all the circumstances of the particular case.

In this case at this stage, it would be wrong to predetermine the question of whether a properly pleaded case against the Companies should be permitted to proceed, as it could well depend on the precise terms of the proposed amended statement of case. However, although such a case might well be pretty speculative and thin, it could well be right also to have in mind that Mr Azevedo appears to be a canny fraudster who would be likely to seek to hide his assets.

In these circumstances, while I agree with the grounds for the Judge’s decision to strike out the claim against the Companies, I would give Finurba 21 days (or such other period as we may be persuaded by counsel) from the handing down of this judgment to amend their claim against the Companies. If the amendments are accepted by the Companies, or, failing that, approved by the court, then the claim against the Companies can proceed on the basis of the amended statement of case. If the amendment is not made or is rejected by the court, then the claim against the Companies will be struck out.

Even if it had been properly pleaded, the Judge considered that there were a number of problems with Finurba’s claim against the Companies. First, there was no evidence that the Azevedos owned the shares in GSO and IBS. Secondly, the dissolution of GSO seemed to result in “the chain of ownership [being] broken” – [2010] EWHC 1946 (QB), paras 9 and 15. Thirdly, he thought that, particularly in the case of Sipp, there was no basis for the corporate veil being lifted.

Over and above this, particularly in relation to Imaved, the Judge took the view that Finurba’s case on the risk of dissipation of assets was weak. Ultimately, it simply seems to me to rest on the fact that Mr Azevedo was a fraudster, who had a history of hiding his assets. As the Judge pointed out, however, what I have referred to as the items are and were protected by the refusal of Cadogan Tate to release them pending the interpleader proceedings, and, in so far as the items and at least some of real property in Portugal is concerned, they appear to be subject to the restriction pendente lite to which I have made reference in para 15 above.

In addition to the weakness of the claim and the lack of evidence of risk of dissipation, there are two other points. First, the value of Finurba’s cross-undertaking in damages seems to me to be very slight: at least according to its most recent accounts, it has a negative asset value. While it is only fair to say that there is no direct evidence of any damage to either of the Companies as a result of the injunction, I note that Sipp is said to have an entertainment business, and the injunction, if adhered to, must have interfered with that. Although we were told that the point was mentioned to Mackay J, there was no offer of any security to support the cross-undertaking before him or before Mr Goudie, and, despite the time that has been available to put forward some proposal in this connection, no security has been offered in this court. It is true that Mr Mendus Edwards did say that security would be provided if the court required it, but he did not begin to explain what it might consist of, when it would be available, or how much it would be worth.

I also have concerns arising from the terms of injunction granted by Mackay J, in that (even after it was amended in circumstances which were not discussed before us) it did not appear to permit either of the Companies to trade in the ordinary course of their respective businesses, which was potentially serious for Imaved. The note of the ex parte hearing appears to be defective, or else Mackay J was not told of the departure from the standard form of order. It is very important that advocates applying for freezing orders ex parte draw to the court’s attention any departures from the standard form, and ensure that the fact that the court’s attention was drawn to each such departure is recorded in the note of the hearing. If that is not done, it is only proper for the court at a subsequent hearing to take that omission into account as a factor against continuing the injunction, or, in an egregious case, as a reason for not continuing the injunction.

I respectfully agree with, and endorse, what was stated in the interlocutory written observations (cited in para 5 above) of Rix LJ, who has unrivalled experience in this field. In the light of the increasing sophistication of fraudsters, and their extensive use of companies and other entities to mask their activities and assets, the courts should adopt a robust and realistic approach to technical points of substantive law or evidence raised against the grant of a freezing order, in cases where there is good reason to believe that fraud has occurred. Having said that, a freezing order can have very serious adverse effect often over a long period, sometimes even financial ruin, for the individual or company against whom it is made. The court should be satisfied not only that there is a properly arguable case against the defendant and a risk of dissipation or hiding of assets, but also as to the proportionality of the order, and it should be especially concerned about making the order when there seems to be little real value in the cross-undertaking.

In the present instance, it seems to me that, although his reasoning was somewhat more limited in nature (because Finurba apparently did not base its claim on piercing the corporate veil, as it does now), the Judge was right to conclude that the freezing order made against the Companies should be discharged. While I accept that it is conceivable that Finurba may have a claim to some, or even all, of the assets of the Companies, it may well not do so. Finurba has had plenty of time to formulate and plead a proper claim, if there is one, as it is now nearly a year since the Portuguese judgment was made available, but it still has not done so. Further, as the Judge concluded, the risk of the Companies dissipating or concealing assets appears slight at least for the time being. Additionally, I am concerned about the apparent valuelessness of Finurba’s proposed cross-undertaking, and at the absence of any specific proposal for underpinning it. While only a preliminary view, it does also look as if there were infringements of the rules at the ex parte stage.

In these circumstances, I would dismiss Finurba’s application for permission to appeal, on terms that the Judge’s order is varied so as to give Finurba a last chance to plead its case against the Companies. It may be argued that we cannot dismiss the application and include such a term. Finurba can scarcely object, as it is an arguable indulgence. If the Companies take the point, I would instead propose that Finurba have permission to appeal against the striking out, and that we then allow the appeal on the very limited basis I have indicated. No doubt the parties can deal with this in their written submissions on consequential matters.

I agree.