ON APPEAL FROM HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
MERCANTILE COURT
HH JUDGE BEHRENS
Royal Courts of Justice
Strand, London, WC2A 2LL
Before :
LORD JUSTICE ETHERTON
LORD JUSTICE GROSS
and
SIR SCOTT BAKER
Between :
Mark Rahman | Appellant |
- and - | |
GMAC Commercial Finance Limited | Respondent |
(Transcript of the Handed Down Judgment of
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Karen Troy (instructed by Fladgate LLP) for the Appellant
Michael James (instructed by DLA Piper UK LLP) for the Respondent
Hearing dates : 12th October 2012
Judgment
Lord Justice Etherton :
This is an appeal from the order dated 31 January 2012 of His Honour Judge Behrens, sitting as a High Court Judge in the Leeds District Registry, by which he dismissed the application of the Appellant, Mark Rahman, for an order that (1) the court has no jurisdiction to try the claims and/or it should not exercise any jurisdiction it may have, and (2) the claim form and its service on the Appellant be set aside or stayed.
The Appellant’s application and this appeal concern the inter-relationship between Council Regulation (EC) No. 1346/2000 on insolvency proceedings (“the Insolvency Regulation”) and Council Regulation (EC) No 44/2001 on jurisdiction and the recognition and enforcement of judgments in civil and commercial cases (“the Judgments Regulation”) and the application of Article 28 of the Judgments Regulation in the present case.
The factual background
The Respondent company specialises in the provision of financial services such as stock finance. By an agreement dated 19 February 2007 (“the Facility Agreement”) the Respondent agreed to extend funding to Hertie GmbH (“HertieG”) and Hertie Warenhandels GmbH (“HWH”), HertieG’s wholly owned subsidiary. Those two German companies were part of the Hertie Group, which operated department stores throughout Germany. Under the Facility Agreement the Respondent agreed to lend the companies up to a limit of €55 million, but with the precise limit on the amounts to be advanced to them from time to time to be calculated by reference to the then values of their inventories, which were to be declared in weekly Inventory Designation Forms. Clause 42.1 of the Facility Agreement was headed “Jurisdiction of English courts” and contained the following provisions, among others:
“The courts of England have exclusive jurisdiction to settle any dispute arising out of or in connection with this Agreement (including a dispute regarding the existence, validity or termination of this Agreement) (a Dispute).
The Parties agree that the courts of England are the most appropriate and convenient courts to settle Disputes and accordingly no Party shall argue to the contrary.”
The Appellant was a director of both HertieG and HWH when the Facility Agreement was negotiated and, with his then co-directors, he entered into a Deed of Warranty with the Respondent dated 19 February 2007 (“the Deed of Warranty”). In particular, the Appellant warranted that he would procure that all inventory included in any schedule prepared by either of those companies and delivered to the Respondent under the Facility Agreement would comprise unencumbered current assets of the company in question. Clause 4 of the Deed of Warranty provided as follows:
“4. This Deed shall be governed by English law. The provisions of clause 42.1 (Jurisdiction of English Courts) of the Facility Agreement shall have effect as if set out in extenso in this Deed, save only that any reference therein contained to the “Parties” shall be read and construed as including a reference to each Director.”
Pursuant to the Facility Agreement HertieG supplied the Respondent from time to time with Inventory Designation Forms setting out inventory. The Respondent says that it lent money to HertieG in reliance on those forms.
Following the financial collapse of the Hertie Group, HertieG was placed in administration. Dr Biner Bahr (“the administrator”) was appointed its administrator. On 28 October 2010 Dr Bahr issued proceedings against the Respondent in the regional court of Essen in Germany (“the German proceedings”) claiming some $7.5 million. In broad terms, the administrator claims that sums paid to the Respondent pursuant to the Facility Agreement out of the proceeds of sale of goods and used by the Respondent to reduce HertieG’s overdraft with the Respondent wrongly prejudiced other creditors, and so the application of such payments in reduction of the overdraft is voidable. One of the assertions made by the administrator in those proceedings is that HWH, and not HertieG, owned the relevant stock until a scintilla of time before each sale was made. The administrator also claims that pledges granted to the Respondent over certain of HertieG’s German bank accounts are void. On 7 February 2011 the Respondent served a defence in the German proceedings, in which it joined issue with the administrator on all material allegations. The German proceedings have not yet been heard and determined.
The claim form in the present proceedings was issued by the Respondent on 10 August 2011. Paragraph 4 of the Particulars of Claim alleges that:
“The Administrator has stated that [HertieG] owned no inventory and these particulars are based on that statement.”
The Particulars of Claim allege that between 20 February 2007 and 29 July 2008 HertieG, acting by or on the authority of the Appellant, supplied the Respondent with Inventory Designation Forms setting out inventory of HertieG and that, in reliance on them, the Respondent made advances to HertieG pursuant to the Facility Agreement, and that €28,553,968.34 remained outstanding in respect of those advances at the date of the administration. It is then alleged that the representations constituted by the statements in the Inventory Designation Forms were false as there was no inventory belonging to HertieG as set out in them. The Respondent claims damages of €27,553,968.34 for breach of the Deed of Warranty, and further or alternatively damages for fraudulent misrepresentation.
On 22 September 2011 the English proceedings were served on the Appellant in Germany. On 21 November 2011 the Appellant issued his application challenging jurisdiction or for a stay.
The Regulations
It is sufficient to mention the following provisions in the Insolvency Regulation and the Judgments Regulation.
Insolvency Regulation
“Article 25
Recognition and enforceability of other judgments
Judgments handed down by a court whose judgment concerning the opening of proceedings is recognised in accordance with Article 16 and which concern the course and closure of insolvency proceedings, and compositions approved by that court shall also be recognised with no further formalities. Such judgments shall be enforced in accordance with Articles 31 to 51, with the exception of Article 34(2),of the Brussels Convention on Jurisdiction and the Enforcements of Judgments in Civil and Commercial Matters, as amended by the Conventions of Accession to this Convention.
The first subparagraph shall also apply to judgments deriving directly from the insolvency proceedings and which are closely linked with them, even if they were handed down by another court.
The first subparagraph shall also apply to judgments relating to preservation measures taken after the request for the opening of insolvency proceedings.
The recognition and enforcement of judgments other than those referred to in paragraph 1 shall be governed by the Convention referred to in paragraph 1, provided that that Convention is applicable.
The Member States shall not be obliged to recognise or enforce a judgment referred to in paragraph 1 which might result in a limitation of personal freedom or postal secrecy.”
Judgments Regulation
“Whereas
…
(7) The scope of this Regulation must cover all the main civil and commercial matters apart from certain well defined matters.
…
(11) The rules of jurisdiction must be highly predictable and founded on the principle that jurisdiction is generally based on the defendant’s domicile and jurisdiction must always be available on this ground save in a few well-defined situations in which the subject-matter of the litigation or the autonomy of the parties warrants a different linking factor. The domicile of a legal person must be defined autonomously so as to make the common rules more transparent and avoid conflicts of jurisdiction.
…
(15) In the interests of the harmonious administration of justice it is necessary to minimise the possibility of concurrent proceedings and to ensure that irreconcilable judgments will not be given in two Member States. There must be a clear and effective mechanism for resolving cases of lis pendens and related actions and for obviating problems flowing from national differences as to the determination of the time when a case is regarded as pending. For the purposes of this Regulation that time should be defined autonomously.”
“Article 1
…
(2) The Regulation shall not apply to:
(a) …
(b) bankruptcy, proceedings relating to the winding-up of insolvent companies or other legal persons, judicial arrangements, compositions and analogous proceedings;
….”
“Article 28
Where related actions are pending in the courts of different Member States, any court other than the court first seised may stay its proceedings.
Where these actions are pending at first instance, any court other than the court first seised may also, on the application of one of the parties, decline jurisdiction if the court first seised has jurisdiction over the actions in question and its law permits the consolidation thereof.
For the purposes of this Article, actions are deemed to be related where they are so closely connected that it is expedient to hear and determine them together to avoid the risk of irreconcilable judgments resulting from separate proceedings.”
The Judge’s judgment
At the hearing before the Judge the Appellant accepted that the English court has jurisdiction. The only question was whether the Judge should grant a stay of the proceedings here.
The Judge held, as is now common ground, that the German proceedings are insolvency proceedings within the Insolvency Regulation. He considered that, for that reason, Article 28 of the Judgments Regulation has no application. He went on to hold that, even if Article 28 could potentially apply, it has no application on the present facts because the German proceedings and the present proceedings are not “related actions” within Article 28. He further held that, even if they were related actions, he would still exercise his discretion against a stay of the present proceedings. His conclusion were set out in paragraphs [24] to [28] of his judgment as follows:
“24. I turn then to address my conclusions. I have already summarised the submissions on either side. I have to say that I was, and still am, attracted by [the Respondent’s counsel’s] first submission. It seems to me that Article 28 is only designed to apply when both of the proceedings are proceedings within Regulation 44/2001. The whole purpose of the stay is to permit the first seised court to deal with both sets of proceedings because it refers expressly to them being decided together. If, as here, the first set of proceedings are insolvency proceedings, I do not quite see how an insolvency court can deal with the second set of proceedings. They are not insolvency proceedings.
25. However, Mr. Hanbury has referred me to the fact that [FKI Engineering Ltd v Stribog Ltd [2001] EWCA Civ 622] appears to involve a situation where at least one of the proceedings were insolvency proceedings. It may be that this point simply was not taken in those proceedings. Certainly there is no discussion of it in the judgment. Equally, the that the stay granted by the Court of Appeal does not seem to have been to enable the insolvency court in that case in Germany to deal with both sets of proceedings.
26. So far as the second issue is concerned, which is whether the actions are related within Article 28, I of course accept that there is some overlap in the issues. However, I agree, again with Mr. James, that the overlap is not large. It may not even arise. If the insolvency proceedings are governed by English law, as Mr. Mortimer suggests, the issue will not arise. Equally, Mr. Rahman has not, at the moment, put forward any positive case about the ownership of the inventory. We simply do not know what he is going to say about it. So, I do not know if there is an issue as to whether there was any stock. To my mind, it is by no means clear that these issues can be heard together by the insolvency court in Germany.
27. In those circumstances I am not satisfied that it is expedient for them to be heard together to avoid conflicting decisions. In my view, therefore, they are not related within Article 28.
28. I equally agree, as a matter of discretion, that it is not appropriate to stay the English proceedings. In my view this would mean that GMAC's case may not get tried. Furthermore, I think there is considerable force in Mr. James' point that where, as here, the parties have agreed that the English court should have exclusive jurisdiction, that is a powerful reason to allow the English proceedings to proceed and, to my mind, overrides, certainly on the facts of this case, any concern I might have about conflicting decisions.
29. It follows that I dismiss the application.”
The appeal
Ms Karen Troy, counsel for Mr Rahman, advanced a number of arguments in support of the appeal in the course of her oral submissions. They may be very briefly summarised as follows. Firstly, she said that Article 1(2)(b) of the Judgments Regulation is concerned with the initial allocation of jurisdiction in insolvency proceedings. She submitted that Article 28 of the Judgments Regulation is not concerned with that issue, but rather with the efficient management of claims where more than one court has jurisdiction and there is a risk of irreconcilable judgments arising from separate proceedings. She said that, in the case of insolvency proceedings, such as the German proceedings in the present case, Article 25 of the Insolvency Regulation gives rise to a particular risk of conflicting judgments since Article 25(1) provides for the judgments opening insolvency proceedings and judgments deriving from those proceedings and closely linked with them, even if by a different court, to be recognised in other Member States without further formalities. Her case is that, having regard to the clear policy articulated in recital (15) of the Judgments Regulation of minimising the possibility of concurrent proceedings and avoiding irreconcilable judgments in two Member States, Article 28 of the Judgments Regulation is to be interpreted as capable of applying to insolvency proceedings already commenced in another Member State. To do otherwise would, she said, leave a lacuna in the Regulations. In that connection she referred to observations of the Advocate General in C-339/07 Seagon v Deko Marty Belgium NV, [2009] 1 WLR 2168, and of Andrew Smith J in Ferrexpo AG v Gilson Investments Ltd [2012] EWHC 721 (Comm), [2012] 1 Lloyd’s Rep.588, at [187] to [198].
Ms Troy submitted, secondly, that the German proceedings and the present proceedings are plainly “related” within Article 28(3) of the Judgments Regulation. She said that, if they both proceed, there is without question a risk of irreconcilable judgments. As she pointed out, the proceedings here are founded on the assertion of the administrator in the German proceedings that HertieG owned no inventory at the relevant time. Whether that assertion is true has to be established as a matter of German law. She said that, if the German court holds against the administrator on that issue and so the administrator’s claim fails in Germany, the proceedings here must also inevitably fail.
Ms Troy submitted, thirdly, that, if her analysis was correct up to this point, then the Judge had exercised his discretion on a false basis. In the light of the clear policy of the Judgments Regulation, the only appropriate course would be to stay the present proceedings until the German proceedings have been decided so as to avoid irreconcilable judgments in two different Member States on the same issue. In that connection, she referred to the judgment of the European Court of Justice (“the ECJ”) in C-406/92 The Maciej Rataj [1999] QB 515 at [49] to [58] and [53], the speech of Lord Saville in Sarrio SA v Kuwait Investment Authority [1999] 1 AC 32 at pp. 39B to 41D, and the judgment of the ECJ in Case C-129/92 Owens Bank Ltd v Bracco [1994] QB 509 at pp. 540G to 542E.
Finally, Ms Troy submitted that, even if Article 28 has no application because, for example, it cannot apply where one set of concurrent proceedings is insolvency proceedings, the court should in the discretionary exercise of its case management powers stay the proceedings here until the German proceedings have been determined. The court, she said, should exercise its case management powers consistently with the policy enshrined in recital 15 of the Judgments Regulation and reflected in Article 28.
A number of further points were made in Ms Troy’s skeleton argument, including, for example, as to the difficulties of trying issues of ownership of stock under German law here and of evidential difficulties that might be encountered in trying the proceedings here in the absence of HertieG and HWH, but it is not necessary to set out those further points in detail here.
Discussion
Despite the forceful and eloquent submissions of Ms Troy, I would dismiss this appeal. It is not necessary, for determining the appeal, to decide the precise inter-relationship between the Judgments Regulation and the Insolvency Regulation either generally or in the specific context of the present case. It is not necessary to decide whether the Judge was correct in his analysis and conclusion in paragraph [24] of his judgment that Article 28 only applies when both sets of proceedings are within the Judgments Regulation and a stay will enable the court first seised to deal with both sets of proceedings. The Judge went on to consider, if he was wrong on those points and Article 28 is capable of applying where the proceedings before the court first seised are insolvency proceedings, a stay should be granted. He concluded, on that hypothesis, that the German proceedings and the present proceedings are, in any event, not “related actions” as defined by Article 28(3). He further concluded that, even if they were related proceedings within Article 28(3), he would not exercise his discretion in favour of a stay. I consider that the Judge was entitled to reach those conclusions for the following reasons.
In the first place, the German court might hold against the administrator in the German proceedings without deciding the point whether the Respondent ever owned any inventory at the relevant time. It could decide that English law, which is the law applicable to the Facility Agreement, applies to the question of wrongful preference. The Respondent has been advised by English lawyers that under English law there was no unlawful preference, irrespective of ownership of stock. The Respondent has alleged in the German proceedings that, even if German law applies, the administrator cannot successfully challenge the repayment of HertieG’s overdraft since the repayment did not prejudice creditors. There are various other routes, which it is not necessary to describe, by which the administrator could lose the German proceedings without the issue of ownership of the stock and the accuracy of the Inventory Designation Forms being determined.
In that event, even though the administrator lost in Germany, the Respondent would still have the same substantial claim against the Appellant under the Deed of Warranty as is currently advanced in these proceedings. The Respondent would not have to pay the administrator the amount of the wrongful preference arising from the reduction in the overdraft, but the Respondent would still have a claim for loss arising from advancing funds to HertieG under the Facility Agreement on the basis of false statements as to HertieG’s inventory.
Secondly, Ms Troy informed us that the German court will not reach any decision until, at the earliest, the middle of 2013, and its decision may then be subject to successive appeals.
Thirdly, a judgment of the German court on the inventory point would, in any event, not be binding on an English court because the parties to the two sets of proceedings are different. I do not suggest that Article 28 can only apply when a decision of the court of another Member State first seised would strictly be binding here as res judicata. The fact that it would not is, however, a relevant consideration: comp. the commentary in Dicey, Morris & Collins on The Conflict of Laws (14th ed) at 12-065.
Fourthly, added weight is given to those considerations by the fact that the Appellant has never indicated whether or not he accepts that HertieG did not own inventory at the relevant time.
Fifthly, in the light of all the above points, it is also relevant that the Deed of Warranty, on which the Respondent’s claim is advanced in these proceedings, expressly provides in clause 4 that it is governed by English law and that the jurisdiction provisions in clause 42.1 of the Facility Agreement are to be treated as incorporated. With adjustment to take account of the different parties to the two documents, the effect of the incorporation into the Deed of Warranty of clause 42.1.1 of the Facility Agreement is that the Appellant agreed that the English courts are to have exclusive jurisdiction to settle any disputes arising out of or in connection with the Deed of Warranty and that the courts of England are the most appropriate and convenient courts to settle such disputes.
In the light of those factors, it is impossible to say that the Judge was wrong to hold that that the proceedings in Germany and here are not related actions as defined in Article 28(3) or that he acted outside the bounds of a proper exercise of judicial discretion in holding that a stay should not be granted. The additional points mentioned in Ms Troy’s skeleton arguments, but which she did not repeat in her oral submissions, do not justify a different conclusion. It is not necessary to cite passages in, or to comment on, the cases mentioned by Ms Troy either in oral submissions or in her skeleton arguments. They do not assist in resolving what, at the end of the day, was a multi-factorial assessment by the Judge of what is expedient and was an exercise of his discretion.
The court has an inherent power to stay proceedings in an appropriate case. Nothing that I have said is intended to bear upon the appropriateness or otherwise of the exercise of that power at some stage in the future if different considerations arise.
Conclusion
For those reasons I would dismiss this appeal.
Lord Justice Gross
I agree.
Sir Scott Baker
I also agree.