Case No:HC05 C03744
Royal Courts of Justice
Strand
London WC2A 2LL
December 21, 2006
Before
MR JUSTICE LAWRENCE COLLINS
Between
TASARRUFF MEVDUATI SIGORTA FONU
Claimant
and
YAHYA MURAT DEMIREL
MERRILL LYNCH INTERNATIONAL BANK LIMITED
Defendants
Mr Stephen Moverley Smith QC and Mr Alexander Pelling (instructed by Berwin Leighton Paisner) for the Claimant
Mr Edward Cohen (instructed by Cartier & Co) for the First Defendant
Hearing: December 5 and 6, 2006
JUDGMENT
Mr Justice Lawrence Collins:
I Background
In these proceedings, the claimant is Tasarruf Mevduati Sigorta Fonu (the Savings Deposit Insurance Fund, to which I shall refer as “TMSF”). TMSF is a Turkish public legal entity established under the Bank Law 4389 of June 18, 1999 with authority to restructure and administer banks and banking institutions in Turkey whose banking licences have been revoked (normally due to their insolvency). Under Turkish law, all banks in Turkey are required to have savings deposit insurance to safeguard depositors and once the licence of the bank is revoked, TMSF repays depositors and acquires the bank’s assets.
TMSF was originally an arm of BDDK (the Banking Regulation and Supervision Agency), an independent public legal entity established in 1999 under the Bank Law to supervise and regulate the Turkish banking sector. Its role and functions are broadly similar to those of the Financial Services Authority in the United Kingdom. TMSF was an arm of the BDDK until December 2003 when it became independent.
Under a law of December 2003 TMSF is entitled to receive proceeds of all proceedings issued against third parties to recover losses or properties sustained by banks whose shareholding rights have been transferred to TMSF. Under Article 3 of the Provisional Articles etc of the Bank Law 5020 of December 12, 2003, TMSF is entitled to receive the proceeds notwithstanding that the proceedings were commenced prior to the formation of TMSF.
The action in England was brought to enforce at common law three judgments entered in favour of TMSF by the Turkish courts on November 20, 2001 (2001/1461), November 26, 2001 (2001/1300) and June 11, 2002 (2002/551). The judgments were obtained in civil actions in the civil courts in Turkey against the first defendant, Yahya Murat Demirel (“Mr Demirel”). Those actions were commenced in the wake of the collapse of three Turkish banks, Bank Ekspres AS, Sümerbank AS and Egebank AS, which were taken over by TMSF.
Mr Demirel was the controller of a group of companies which owned Egebank AS. TMSF’s case is that at the time of its demise Egebank AS had accumulated losses of over US$1.2 billion, that investigations subsequently revealed that some US$490 million had been misappropriated from Egebank by Mr Demirel, his family and associates, and approximately US$336 million had been misappropriated from the other banks.
On December 22, 1999, the management and supervision of Egebank AS was transferred to TMSF. Its banking licence was revoked on February 18, 2001. The operations of, and most of the shares in, Bank Ekspres AS were transferred to TMSF in 1998, and TMSF assumed management from December 12, 1998. TMSF assumed the management and operations of Sümerbank AS from December 22, 1999.
The second defendant is Merrill Lynch International Bank Ltd (“MLIB”), which was joined in order to obtain disclosure of information, which was obtained, and MLIB is no longer an effective party.
Judgment 2001/1461 in a Turkish lira sum equivalent to US$30 million (“the $30 million judgment”) was in respect of a right of action of Bank Ekspres AS against Mr Demirel for damage caused by allegedly fraudulent loan transactions.
Judgment 2001/1300 in the sum of about US$2 million was in respect of certain loan agreements made between Sümerbank AS and Egebank where Mr Demirel was joint debtor and surety. Judgment 2002/551 in a Turkish lira sum equivalent to some US$2.5 million relates to further loan agreements entered into between Sümerbank AS as lender and Mr Demirel as surety. In her witness statement in answer dated September 12, 2006, Ms Dogan conceded that as at the date of commencement of this action these two judgments had not been “finalised” because they had not been properly served on Mr Demirel’s lawyers. At the hearing of this application, TMSF accepted that the present action in respect of those judgments was not properly constituted. Because all of the evidence refers to all three judgments, I shall generally refer to the judgments collectively, although the proceedings are now live only as regards the $30 million judgment.
This is the hearing of an application to set aside the grant of permission to serve Mr Demirel outside the jurisdiction in relation to the claim and in relation to a worldwide freezing injunction granted in support of proceedings against him abroad.
II Application for service out of the jurisdiction
On December 6, 2005 I gave permission to TMSF to serve Mr Demirel with the proceedings out of the jurisdiction, and granted a worldwide freezing injunction against Mr Demirel, which was continued as amended on December 16, 2005 by Patten J.
The grounds of jurisdiction relied upon were: (a) CPR 6.20(9), that a claim was made to enforce a judgment; and (b) CPR 6.20(4), that a claim was made for an interim remedy under section 25(1) of the Civil Jurisdiction and Judgments Act 1982.
In the affidavit of Ms Dogan (TMSF’s in-house lawyer) sworn on November 29, 2005 in support of the applications, she said that (a) the freezing injunction was sought to prevent assets held by MLIB being dissipated pending judgment in the action; (b) the declaration of assets made by Mr Demirel in the Turkish proceedings made no mention of assets which were placed with MLIB on his behalf, which suggested that he was seeking to hide his assets; and (c) there had been reports in the Turkish press of what were said to be details of Mr Demirel’s assets held by Merrill Lynch, in the Cayman Islands.
She said that TMSF had left it until then to enforce the judgments in England because it was only in September 2005 that it had received evidence that Mr Demirel had assets in England; and that it appeared that Mr Demirel personally held cash accounts at Merrill Lynch, including one in London. She exhibited documents indicating that the claimant had identified a number of accounts of Mr Demirel and associated companies with Merrill Lynch, including one in London, and two accounts with Merrill Lynch, Pierce Fenner & Smith Inc in New Jersey. She exhibited documents, including a draft trust deed, an executed deed of amendment indicating that Mr Demirel had created a trust under Cayman Islands law with Merrill Lynch Bank and Trust Company (Cayman) Ltd as trustee in 1997, and some bank statements. These contained a reference to account M002-12207, showing a balance of about US$150,000 and stating that the account was conducted through MLIB. On the basis of these documents Ms Dogan stated that it appeared that Merrill Lynch was holding assets belonging to Mr Demirel over which TMSF would be entitled to execute its judgment once obtained in England.
III Application to set aside
By a notice of application dated March 9, 2006 Mr Demirel applied pursuant to CPR Part 11 for: (a) a declaration that the court has no jurisdiction to try the claim against Mr Demirel or should not exercise any such jurisdiction; (b) an order that the claim form be set aside and/or that service of the claim form be set aside; (c) discharge of the order granting permission to serve Mr Demirel out of the jurisdiction; (d) discharge of freezing injunctions obtained by TMSF against Mr Demirel; (e) an inquiry on the cross-undertaking in damages; and (f) costs.
The grounds set out in the application are: (a) Mr Demirel has no assets within the jurisdiction, so that no judgment obtained against him in Turkey can be enforced against him within the jurisdiction; (b) it is in all the circumstances inexpedient for the court to grant any interim relief against Mr Demirel in England in aid of any judgment obtained against him in Turkey; (c) TMSF has failed to discharge the burden of proof resting upon it to show that England is clearly the proper place in which to bring a claim against Mr Demirel; and (d) in these proceedings TMSF is seeking to enforce directly or indirectly a public law or laws of Turkey.
Mr Demirel relied in particular on these matters in his evidence in support of the application: (a) he is a Turkish national and resident of Turkey and does not live and has never lived in the United Kingdom; (b) he does not have, and has at no relevant time had, any assets in England and Merrill Lynch has confirmed that it holds no assets on his behalf or on behalf of trusts of his in England and that none of the accounts identified in Ms Dogan’s witness statement are English accounts.
IV The arguments
Mr Demirel
Mr Edward Cohen, for Mr Demirel, argues that it is a pre-condition of the existence of jurisdiction under CPR 6.20(9) that there be assets within the jurisdiction, and since there are no assets of Mr Demirel in England, the court has no jurisdiction. The onus is on TMSF to satisfy the court that it has a good arguable case that Mr Demirel has assets in the jurisdiction against which the judgments can be enforced.
In the light of TMSF’s present case and the evidence, TMSF has shown neither a serious issue to be tried nor a good arguable case that Mr Demirel has assets within the jurisdiction. On the contrary, Mr Demirel has much the better of the argument on the material available and the court cannot be satisfied on the material available that there are assets belonging to Mr Demirel within the jurisdiction against which the judgments can be enforced.
The case put forward by TMSF in persuading the court to accept jurisdiction, to order a freezing injunction and to grant permission to serve out of the jurisdiction was the existence of assets belonging to Mr Demirel within the jurisdiction, namely monies in accounts with MLIB in London.
Mr Demirel’s very clear evidence was that: (i) he does not have and at no relevant time had any assets within the jurisdiction; (ii) Merrill Lynch has unequivocally confirmed that it holds no assets on his behalf or on behalf of trusts of his in England and the account which was asserted to be an account held in England was in fact an account held in Delaware.
In answer, TMSF has not sought to dispute the fact that the whole basis upon which jurisdiction was accepted in the first place, monies of Mr Demirel in an account in London with MLIB, has been shown to be misconceived. TMSF seeks to suggest the vague possibility of assets within the jurisdiction now or in the future, but there is no evidence to support this speculative assertion, and Mr Demirel’s evidence is to the contrary.
If, contrary to that submission, the court does have a discretion to entertain the claim, the discretion should be exercised against the acceptance of jurisdiction. The court cannot be satisfied that England is the proper place in which to bring the claim.
The evidence in support of the application for permission included important matters which have been shown to be erroneous or misleading. In addition to the erroneous reference to two of the judgments being final and to monies being held in an account in London by MLIB belonging to Mr Demirel, Ms Dogan referred to a criminal conviction against Mr Demirel on July 4, 2005 and said that he might appeal that decision; but she failed to point out that the effect of an appeal was that there was no effective conviction: and in her second witness statement she did not point out that the appeal had been successful, so that what she had originally said with regard to the conviction was no longer the case.
On the merits of the claim, Mr Demirel maintains that he would have a good substantive defence to the present proceedings on the merits even if, contrary to his case, this court had jurisdiction to entertain the claim. In particular, he will argue that the enforcement of the judgments would be contrary to public policy and/or the proceedings in which the judgments were obtained were opposed to natural and substantial justice and inconsistent with the European Convention on Human Rights (and he has applied to the European Court of Human Rights in respect thereof). In any event, the judgments may be set aside if he is acquitted in the criminal proceedings relating to the same matters. After giving credit for all recoveries already made, there is no balance outstanding under the judgments, and the fact that there are other alleged claims by TMSF is not to the point since they are all disputed and have not resulted in any judgments.
Since there are no assets within the jurisdiction, it was inexpedient for the court to grant interim relief under section 25(1) of the 1982 Act.
TMSF
Although TMSF originally argued that the debt owed by MLIB to Mr Demirel was situate in the jurisdiction, that was not pursued in the light of the evidence. But on its behalf Mr Stephen Moverley Smith QC argued that the suggestion that TMSF must identify assets within the jurisdiction in order to issue proceedings to enforce a judgment was without foundation. There is no requirement in relation to litigation generally that the defendant must have presently identifiable assets. There is equally no such requirement in relation to an action at common law to enforce a judgment, which is simply put as a claim for the amount of the judgment debt and costs: Halsbury’s Laws of England, 4th ed Re-issue, vol. 8(3), para 159.
The absence of any requirement to identify assets in a common law action is mirrored in the registration process under CPR 74, which applies in relation to a variety of countries, although not Turkey. CPR 74.12, which identifies what the evidence in support must contain, does not require the claimant to identify assets within the jurisdiction which might be attached. Proceedings to enforce a foreign judgment at common law are nothing more than an ordinary money claim, albeit that they usually take a summary form.
The claim brought by TMSF is to enforce in England the judgments it has already obtained in Turkey. No question arises as to the most appropriate forum for the trial of the action underlying it, which has already taken place.
Because the action is concerned with enforcement in this jurisdiction the only issue which arises is whether, as a matter of English law, the requirements for enforcement of a foreign judgment in England are satisfied. That being the case, it is impossible to see in what other jurisdiction this issue could be tried or what other jurisdiction could be more appropriate.
At the time the worldwide freezing injunction was granted there were good grounds for believing that Mr Demirel held cash at MLIB in London, which plainly justified the relief that was obtained. Mr Demirel subsequently provided the information required in an affidavit sworn on December 23, 2005. Accordingly the only interim relief outstanding is the injunction. The injunction continues to serve a purpose in that it covers the assets of Mr Demirel worldwide and, in the ordinary way, affects any person within the jurisdiction. It was originally argued that MLIB was such a person, and that the injunction was accordingly effective to freeze the account in Delaware, but that point is no longer sustainable in view of the evidence.
V Public law point
Mr Demirel
This is a claim which falls within the rule that the court has no jurisdiction to enforce foreign public law: Dicey, Morris and Collins, Conflict of Laws, 14th ed. 2006 (“Dicey”), Rule 3. The expert evidence is that receivables taken over by TMSF become public receivables, even though they may have originated from private law relations, and so proceedings to recover them become public law claims. If they are public receivables, the claim to recover them by enforcement of the judgments in England is an attempt at direct enforcement of a foreign public law, since the right of TMSF to take over those receivables and to recover them as public receivables relies upon the relevant Turkish law provisions. At the very least it is an attempt at indirect enforcement since it is designed to give the provisions rendering the receivables taken over as public receivables extra-territorial effect in England.
TMSF is a public entity and its property is categorised as state property: Bank Law 4389, Art. 15 and Bank Law 5411, Art 111. Bank Law 4389, Art. 15(3) expressly provides that receivables transferred to TMSF constitute public receivables as of the date they are taken over by TMSF. The replacement of Bank Law 4389 by Bank Law 5411 does not affect the position since Article 11 of Bank Law 5411 expressly provides that the relevant provisions of Bank Law 4389 would remain applicable to receivables taken over before it notification of the new Law. Therefore it was not necessary for there to be further explicit provision in Bank Law 5411 to the effect that receivables which had become public receivables would remain public receivables.
Under Bank Law 4389, public receivables taken over by TMSF can be recovered using the procedures for recovery of public receivables under Bank Law 6183, but TMSF may continue using ordinary procedures in relation to actions commenced prior to takeover by TMSF.
The expert evidence on this issue adduced on behalf of Mr Demirel is far more cogent than that adduced on behalf of TMSF and the court should therefore prefer the expert evidence on behalf of Mr Demirel. TMSF has not made out a good arguable case on the public law point. Therefore insofar as it is necessary to do so, the court is invited to conclude that it lacks jurisdiction by reason of this further public law point as well.
TMSF
The substance of the claim is to enforce private law rights. These rights have previously been vindicated in the Turkish civil courts in ordinary civil proceedings.
The judgments were therefore not obtained through the exercise of sovereign authority or through the peculiar powers of prerogative. They are examples of the type of foreign judgment that, although obtained by a foreign state, is nonetheless enforceable because it arises from the pursuit of a right that by its nature could equally well belong to an individual.
Mr Demirel’s case is an invitation to the court to ignore the substance of the judgments and their origins and to focus on what Mr Demirel says is their accidental legal character by virtue of the fact that they belong to TMSF. The most that is said on behalf of Mr Demirel is that by reason of their status as public receivables their enforcement in Turkey under Turkish law can be effected differently from that of private receivables. But even if true, it is irrelevant. The substance of the matter is that, as Mr Demirel accepts, the judgments result from ordinary private law remedies. The possibility that they might have been enforced in Turkey in some other way is irrelevant.
VI Conclusions
Principles
As regards the merits of the claim, the claimant’s application must show that the claim has “a reasonable prospect of success” (CPR 6.21(1)(b)), and it has been confirmed by the Court of Appeal that this threshold is the same as if the claimant were resisting an application by the defendant for summary judgment, i.e. “the claimant has no real prospect of succeeding on the claim” (CPR 24.2): Carvill America Inc v Camperdown U.K. Ltd [2005] EWCA 645, [2005] 2 Lloyd’s Rep 457; cf the test for the purposes of RSC Ord. 11, r 1(1) of “a serious issue to be tried” in Seaconsar Far East Ltd v Bank Markazi Iran [1994] 1 AC 438.
The standard to be applied in considering whether the jurisdiction of the court has been sufficiently established on the facts is that of good arguable case: Seaconsar Far East Ltd v Bank Markazi Iran [1994] 1 AC 438, 454. The expression good arguable case reflects that one side has a much better argument on the material available so that the Court must be satisfied or as satisfied as it can be having regard to the limitations which an interlocutory process imposes that factors exist which allow the Court to take jurisdiction: see Waller L.J. in Canada Trust Co. v Stolzenberg (No. 2) [1998] 1 WLR 547 at p.555, approved [2002] 1 AC 1, 13, per Lord Steyn.
CPR 6.21(2A) provides that the court will not give permission to serve out unless satisfied that England and Wales is the proper place in which to bring the claim. In cases of service outside the jurisdiction (by contrast with applications for a stay of English proceedings) the burden is on the claimant to show that England is clearly the appropriate forum for the trial of the action, namely the forum where the case may most suitably be tried for the interests of all parties and the ends of justice: Spiliada Maritime Corporation v Cansulex Ltd [1987] AC 460, 481.
Jurisdiction: the assets point
This is an action for enforcement of foreign judgments at common law, since Turkey is not a country to which any of the statutory methods of enforcement and registration applies, i.e. the Administration of Justice Act 1920, the Foreign Judgments (Reciprocal Enforcement) Act 1933, Council Regulation (EC) 44/2001 as implemented by the Civil Jurisdiction and Judgments Order 2001 (SI 2001/3929), and the Civil Jurisdiction and Judgments Act 1982, Part I. Under the statutory methods enforcement is by registration (and in some cases can only be by registration), and the procedure for enforcement is in CPR Part 74.
Since none of the statutory registration procedures applied, and Mr Demirel was outside the jurisdiction, it was necessary for TMSF to obtain permission to serve the claim form outside the jurisdiction. The ground of jurisdiction relied upon by TMSF was CPR 6.20(9) which gives jurisdiction if “a claim is made to enforce any judgment ...”
For Mr Demirel it is argued that it is a pre-condition of the existence of jurisdiction under CPR 6.20(9) that there be assets within the jurisdiction, and since there are no assets of Mr Demirel in England, the court has no jurisdiction. Mr Edward Cohen, for Mr Demirel, relies on the decision in Soc. Eram Shipping Co Ltd v Cie Internationale de Navigation [2004] 1 AC 260 for the proposition that, especially in international cases, it may be necessary to imply limitations (in that case in relation to third party debt or garnishee orders) into the express rules of CPR Part 72.
If it were necessary for TMSF to establish the presence of assets in England, on the evidence it would fail. Following service of the orders on him, Mr Demirel swore a disclosure affidavit, in which he deposed that he had approximately US$186,000 in his account with “M.L. Bank”, and that he had asked it to establish a trust in 1997 in the Cayman Islands, but that it had not informed him what assets were held in the trust.
In a letter to Mr Demirel’s solicitors dated December 5, 2005 MLIB’s solicitors, Herbert Smith, confirmed that the entirety of Mr Demirel’s personal funds (originally about $186,000) but reduced by a payment of costs to his solicitors (now about £71,500) was held in a U.S. dollar account in Delaware by Merrill Lynch Pierce, Fenner & Smith Inc, and that the assets and liabilities of MLIB had, with effect from September 2006, been assumed by Merrill Lynch International Bank Ltd, formally known as Merrill Lynch Capital Markets Bank Ltd, an Irish company, which has a branch in the United Kingdom. Herbert Smith also wrote to TMSF’s solicitors on December 22, 2005 to say that MLIB did not hold assets or funds within England on behalf of Mr Demirel.
In his witness statement made on March 8, 2006 in support of his application to set aside service, Mr Demirel confirmed that he had approximately US$186,000 in his account with MLIB, but that (as confirmed by Herbert Smith on behalf of MLIB) it was in an account held in Delaware with Merrill Lynch Pierce, Fenner & Smith Inc. He said that he did not have, and had at no relevant time had, any assets in England. He also said that in 1997 he had asked Merrill Lynch International to establish a trust for him in the Cayman Islands, which was managed by Merrill Lynch International for and on his behalf, but Merrill Lynch International had not provided any information to him regarding the assets in question for a considerable time. It had been many years since he had any contact with Merrill Lynch International, some four and a half years before June 2005. When he then attempted to obtain information from Merrill Lynch International, it declined to provide the information because of the allegations being made against him by TMSF. The trusts were operated through Cayman companies and not through any English companies, and no trust assets were or had been at any relevant time held in England.
TMSF’s solicitors suggested in a letter of March 24, 2006 that Mr Demirel’s confirmation that he did not have and had “at no relevant time” any assets in England might have meant that he had, at sometime or other, assets in the jurisdiction, and his solicitors responded on April 6, 2006 that to the best of his knowledge he had never had any assets in the jurisdiction. This was treated in Ms Dogan’s witness statement of September 12, 2006 as an apparent concession that he may have had, and might therefore still have, assets in the jurisdiction of which he was not aware.
Ms Dogan responded by saying that, even if Mr Demirel did not currently have assets in England of which MLIB was aware, there was still reason for TMSF to seek to obtain an English judgment, since it might well be that assets belonging to Mr Demirel were subsequently located in England, or he might subsequently transfer assets into the jurisdiction, or there might already be assets within the jurisdiction of which he was either not aware or which had been secreted and subsequently come to light, and there was reason to suppose that he might not be telling the truth as to the location of assets. She relied on what was said to be an incomplete asset disclosure statement in relation to Turkish proceedings. Mr Demirel responded in his third witness statement on November 23, 2006 by saying that there was simply no basis for the assertion that he might subsequently transfer assets into England or that there were already assets there of which he was not aware or which had been secreted. His asset disclosure statement in the Turkish proceedings was not purporting to disclose all his assets, but only property with a value equivalent to the debt in question.
On December 7, 2006 Herbert Smith wrote to the court to say that MLIB had never held any bank account or assets in the name of Mr Demirel, whether in England or abroad, although the Merrill Lynch relationship contact with Mr Demirel did operate out of MLIB’s offices in London.
TMSF no longer maintains that there is a debt from MLIB situate in England.
But I am satisfied that the presence of assets is not a pre-condition to the exercise of jurisdiction under CPR 6.20(9). It was added as a ground for jurisdiction in 1983 (as RSC Ord. 11, r 1(1)(m)) to fill a gap revealed in cases where judgment creditors sought to enforce at common law judgments emanating from countries whose judgments were not capable of registration in England. Prior to the amendment, where the judgment creditor wished to proceed against assets in England, and the judgment debtor was not present or domiciled in England, there was no basis for service out of the jurisdiction even though the judgment debtor had assets in England which could be attached to satisfy the judgment: Perry v. Zissis [1977] 1 Lloyd’s Rep. 607.
I see no reason for applying a requirement that there be assets within the jurisdiction. There is nothing in the CPR Part 74 procedure for registration which requires the presence of assets within the jurisdiction, and it would be odd if CPR 6.20(9) were so interpreted. It is true that it uses the expression “to enforce” (which, Mr Cohen suggests, presupposes assets within the jurisdiction) but CPR Part 74 itself is headed “Enforcement of Judgments in Different Jurisdictions”. There is nothing, in my judgment, in the Soc. Eram Shipping case which suggests or requires a different conclusion. The essence of that decision is that a territorial limitation should be read into the provisions for third party debt orders in order to prevent a conflict of jurisdiction and the risk of double payment.
Discretion
I do not consider that there is anything in the discretion points taken on behalf of Mr Demirel. I accept that the existence or non-existence of assets within the jurisdiction could possibly be a forum conveniens factor, for example if there were related issues being fought, or to be fought, in another jurisdiction.
An appeal against the $30 million judgment has been dismissed by the Turkish Court of Appeal because it was out of time. An application to have this decision reversed was refused. Mr Demirel made an application to the European Court of Human Rights in December 2005. The expert evidence filed on his behalf is to the effect that if the application is successful there will need to be a retrial in Turkey, and also that the judgment may be overridden if he is acquitted in the criminal proceedings on grounds relating to the matters on which the judgment is based.
In my judgment, England is clearly the appropriate forum for enforcement in England, and it is not suggested that there is any other forum which is suitable for determining the defences to enforcement of foreign judgments which Mr Demirel says he has: namely, that enforcement would be contrary to public policy, or that the judgments were obtained contrary to natural justice, or that the judgments were effectively satisfied if credit is given for other recoveries. It was faintly suggested by Mr Cohen that the Cayman Islands would be an appropriate forum, but there is no basis for that suggestion.
In the course of his evidence (repeated in the skeleton argument for this hearing) Mr Demirel complained that the evidence in support of the application for permission included important matters which have been shown to be erroneous or misleading, in particular about the lack of final nature of the two smaller judgments, about the existence of accounts in London, and about the effect of, and the result of, Mr Demirel’s appeal in criminal proceedings in Turkey. I do not consider that (except for the point on the two judgments) these were capable of affecting the exercise of discretion, and in any event they were not signalled in the application, and TMSF has not had a proper opportunity of responding.
Public law
Mr Demirel says that the present claim to enforce the judgments is an attempt to enforce foreign public law.
In President of the State of Equatorial Guinea v. Logo Ltd [2006] EWCA Civ 1370, para [51], the Court of Appeal approved as an accurate statement of the law Rule 3 of Dicey (para 5R-019) to the effect that “English courts have no jurisdiction to entertain an action: … for the enforcement, either directly or indirectly, of a penal, revenue or other public law of a foreign state.”
In Attorney General of New Zealand v Ortiz [1984] 1 AC 1, at 21, Lord Denning MR suggested that the first thing in such case was to determine what was the relevant act, and then to decide whether it was of a sovereign character or a non-sovereign character, and finally to ask whether it was exercised within the territory of the sovereign state, which was legitimate, or beyond it, which was illegitimate. See also Re State of Norway’s Application (Nos 1 and 2) [1990] 1 AC 723, 807-808.
Although Rule 3 is framed in terms of lack of jurisdiction, it was suggested in the eleventh edition of Dicey that it was the foreign state which had no international jurisdiction to enforce its law abroad, and the English court would not exercise its own jurisdiction in aid of an excess of jurisdiction by the foreign state. In the current edition (14th ed. 2006, para 5-021) it is stated that the substance of this view was adopted in Re State of Norway’s Application (Nos 1 and 2) at 808, where Lord Goff said that he agreed with Lord Keith of Avonholm’s expression of opinion that what was illegitimate was an assertion of sovereign authority by one state within the territory of another: Government of India v Taylor [1955] AC 491, at 511. Lord Goff accepted that the rule did not go to the jurisdiction of the English court. What the English court did was simply to decline in such cases to exercise its jurisdiction, and on that basis the relevant proceedings would either be struck out or dismissed.
The practical point which arises on whether it is characterised as a rule relating to jurisdiction is that Mr Edward Cohen argues that because it is a rule of jurisdiction TMSF must show a good arguable case on the point, i.e. must show that it has the better of the argument on the point. I am satisfied that the whole trend of authority supports the view expressed in Dicey and by Lord Goff that it is a point which goes to the justiciability or admissibility of the claim, and that it is normally dealt with on a striking-out application, as in President of the State of Equatorial Guinea v. Logo Ltd. If that is right, then on an application of this kind, to set aside service out of the jurisdiction, the test should be whether TMSF has a real prospect of succeeding (or there is a serious issue to be tried) on the claim. There may be very clear cases where a foreign state, or a state entity (or a private individual in the case of indirect enforcement) is bound to fail on the public law point.
President of the State of Equatorial Guinea v. Logo Ltd makes it clear that Rule 3 is concerned with an action which amounts to the exercise of sovereign authority by a foreign state in the forum, and that the courts will not lend their aid to the assertion of such sovereign authority (paras 27, 41). Where the foreign State pursues a right that by its nature could equally well belong to an individual, no question of a prerogative claim arises and the State’s access to the courts is unrestricted, but a foreign State cannot enforce in England such rights as are founded upon its peculiar powers of prerogative: para 42, quoting and approving F.A. Mann, Prerogative Rights of Foreign States and the Conflict of Laws, in Studies in International Law (1973), 492, at 501
The Court of Appeal concluded (para 50):
“The critical question is whether in bringing a claim, a claimant is doing an act which is of a sovereign character or which is done by virtue of sovereign authority; and whether the claim involves the exercise or assertion of a sovereign right. If so, then the court will not determine or enforce the claim. On the other hand, if in bringing the claim the claimant is not doing an act which is of a sovereign character or by virtue of sovereign authority and the claim does not involve the exercise or assertion of a sovereign right and the claim does not seek to vindicate a sovereign act or acts, then the court will both determine and enforce it.”
Whether a foreign law falls within the categories of those laws which an English court will not enforce is a matter of English law. Thus, whether the foreign law regards the law in question as a penal law, or a revenue law, or a public law is irrelevant: Huntington v. Attrill [1893] AC 150, at 155. “In deciding how to characterise a claim, the court must, of course, examine its substance, and not be misled by appearances:” Equatorial Guinea case, para 50.
Turkish Law
Article 15, (1), (8) of Bank Law 4389 provides:
“Savings deposits at banks shall be insured by the “Savings Deposits Insurance Fund” which has been established as a public legal entity.
…
All monies, documents and all kinds of properties of the entity are deemed as state property.”
By Article 15(3):
“ …provisions of the Law No. 6183 on Procedures for Recovery of Public Receivables shall apply to the Fund’s resources and its all receivables and prosecution and recovery of receivables from any shareholder of a bank, whose shares have been transferred to the Fund in whole or in part, who manages and controls the bank directly or indirectly, whether individually or together with others, and from any company or associated undertaking, which such shareholder manages and controls directly or indirectly, whether individually or together with others, and from directors .., and receivables of any bank, whose shares have been transferred to the Fund, from any of the foregoing …. The Fund shall institute legal proceedings to recover any accumulated receivables consisting of the sum of principal, all types of interest, fees and other expenditures as shown in the bank’s books, records and documents as at the day when such receivables were taken over. Such receivables shall be deemed to constitute a public receivable as of the date they were taken over by the Fund and a default interest at a rate defined in Article 51 of the Law No. 6183 on Procedure for Recovery of Public Receivables shall be calculated for the accrued receivable. However, the Fund may, at its sole discretion, proceed with any legal proceedings, which have been instituted against the debtor in accordance with provisions of the Enforcement and Bankruptcy Act No. 2004 in connection with its any receivables and those it has taken over or waive proceeding with such legal proceedings and/or action and decide to prosecute and recover the receivables it has taken over in accordance with provisions of the Law No. 6183 on Procedures for Recovery of Public Receivables …. For the purposes of application of the Law No. 6183 on Procedures for Recovery of Public Receivables the Fund shall exercise authorities vested by the said Law in the Ministry of Finance, collection offices and other authorities and committees… If the debtor or the receivables of the debtor are in another location, Fund can exercise the powers the provisions of the Law No. 6183 on Procedures for Recovery of Public Receivables through its own collection office as well as through the collection offices of the Ministry of Finance in that location when there is no collection office...”
Article 1(1) of Law 6183 on Procedures for Recovery of Public Receivables provides:
“This law is applicable to the main public receivables such as tax, duty, charge, legal costs for penal investigations and executions, tax penalty, fines and supplementary public receivables or the same such as default fine and interest of the State, Special Provincial Administrations and municipalities, the other receivables of the same which arise from execution of public services excluding the ones arisen from contracts, torts and unjust enrichment and to execution costs of the foregoing.”
The Enforcement and Bankruptcy Law 2004 provides a method of enforcement which can be used by both public and private entities. According to the expert evidence, differences between the Law 6183 procedure and the Enforcement and Bankruptcy Act No. 2004 include these: (a) under Law 6183, the public body itself commences the procedure, i.e. sends a payment demand to the debtor, whereas under Law 2004, the creditor has to apply to the court bailiff to serve the payment demand; (b) attachments of the debtor’s property under the Law 6183 procedure take priority over Law 2004 attachments; and (c) Law 6183 contains a special default interest rate.
Bank Law 4389 was replaced in 2005 by Bank Law 5411, Article 111 of which provides:
“(1) The Savings Deposit Insurance Fund, which is a public legal entity and which has administrative and financial autonomy has been established to insure deposits in order to protect the rights and interests of depositors and to ensure confidence and stability in financial markets; insure deposits and contribution funds; manage the banks with the Fund; strengthen and restructure their financial standing; transfer, merge, sell or liquidate such banks; execute and conclude the follow-up and collection transactions of the receivables of the Fund, manage the Fund’s assets and resources and perform other duties assigned thereto by the Law, within the framework of the powers given by this Law and other applicable legislation.
...
(5) The properties of the Fund shall be deemed as state property. The properties, rights and receivables of the Fund shall not be seized or pledged.”
But Bank Law 4389, Article 15, continues to apply to claims in relation to banks whose dissolution was commenced before publication of Bank Law 5411.
Both parties have produced expert opinions from distinguished professors of Turkish law. For Mr Demirel, Professor Dr Ozay’s opinion (supported by Professor Atalay) is that:
(1) The receivables which TMSF took over from the banks it seized when Bank Law 4389 was in effect and the receivables it took over from the banks it seized according to Bank Law 5411 which is currently in effect became state property and were transformed into public receivables.
(2) The receivables which are the subject of the judgments are not private law receivables, because the banks transferred to TMSF no longer exist and all the receivables of those banks were transferred to TMSF and were transformed into public receivables automatically as required by Article 15(3) of Bank Law 4389.
(3) The receivables taken over by TMSF are not categorised as public receivables simply because they are prosecuted according to Law 6183. The law explicitly provides that the receivables transferred to TMSF are deemed public receivables independent of the procedure for recovery or the area of law (public or civil) from which they originate.
(4) Consequently:
(a) although the judgments which TMSF is seeking to enforce in England for the receivables of a bank which have been transferred to TMSF originated from the private law area, they automatically became “public receivables” upon their transfer to TMSF as provided by Article 15(3) of Bank Law 4389;
(b) the absence of an explicit provision which provides that the receivables taken over by TMSF will be transformed into public receivables in the new Bank Law 5411 regulating banking activities does not cause any change in the nature of the receivables taken over by TMSF; and
(c) the receivables which are the subject of the judgments TMSF is seeking to enforce in England are public receivables in nature.
For TMSF, Professor Yilmaz’s opinion is that:
(1) Article 15 of Bank Law 4389 provided that, for the purposes of the collection procedure under Law 6183, TMSF’s receivables were classed as public receivables.
(2) The Turkish proceedings were not brought using the Law 6183 procedure, but were brought under the normal civil procedure in the civil courts.
(3) Under Turkish law a claim is a private law claim if it derives from private law civil relationships. The receivables derive from private law and were subject to the Turkish law of obligations.
(4) Although TMSF is a public legal entity, in seeking to enforce the three judgments it is not seeking to enforce any public law of Turkey. The judgments are civil judgments which have been obtained through civil actions in the civil court. The right to bring those actions lay with Bank Ekspres and Sümerbank, and once TMSF had taken over the banks and their receivables, the right to bring the actions passed to TMSF. Those causes of action did not turn into public law causes of action simply because TMSF is a public entity.
(5) Bank Law 5411 does not categorise TMSF’s receivables as public receivables, and the law had been amended because it was thought that the Turkish legislature had exceeded its powers in treating the receivables as public receivables in Bank Law 4389, but it continues to allow the use of the procedure for collection under Law 6183 to make it easier for TMSF to collect receivables.
The experts on both sides agree that, at least before proceedings were commenced, TMSF could transfer or assign receivables to new asset management companies. Those receivables, it is agreed, would be private receivables in the hands of the transferees.
Professor Atalay says:
“A receivable for which Law no. 6183 applies, if transferred to third persons before prosecution is started according to Law no. 6183 then it can be claimed that this transfer is valid, and that the receivable will be subject to the provisions of Execution and Bankruptcy Law from then on. But, if the receivable has been transformed into a public receivable – upon transfer to the Fund some of the receivables of the bank transferred to the Fund – it can be said that the Fund is not authorised transform the receivable into private receivable by transferring the public receivable to third parties. In connection with a receivable transformed into a public law, if the Fund has started a prosecution or another legal proceeding in accordance with the provisions of Execution and Bankruptcy Law before the amendment in the subparagraph 3, it is authorised to prosecute and start an action in the capacity of plaintiff.”
It is also accepted by Professor Atalay that it is:
“very clear that the receivables which are the subject of the judgments are the receivables of a bank taken over by TMSF and became public receivable only as of the date of transfer of the receivables to the Fund as the judgments delivered by the courts are private law courts and the judgments are related to receivables arising from private laws. However, the important point from the dispute perspective is not which area of law these receivables arise from but that these receivables arising from private law area have automatically changed nature on the date they are taken over by TMSF as ruled by the clear provision of Banks Law.”
The overall effect of the evidence is that the claims were originally private law claims of the banks, and were vested in TMSF. Until TMSF commenced proceedings they could have been transferred to new asset management companies, in which event they would have continued to be private claims. Once TMSF commenced proceedings, it could have made, but did not make, use of the Law 6183 procedures for the collection of debts. There is a conflict of evidence which cannot be resolved on an application of this kind as to whether the claims thereby became public receivables or were simply deemed to be such for the purposes of the possible application of the Law 6183 procedures.
At the very least TMSF has a real prospect of success in obtaining judgment in England on the only one of the three judgments which it now presses. Even on the evidence of Turkish law it has a strongly arguable case that the claims remained private law claims. If the principles expressed in President of the State of Equatorial Guinea v. Logo Ltd are applied it is highly likely that TMSF would succeed on this issue. The claim was pursued to judgment in Turkey as a private law claim in the civil courts, and not as a public law claim in the administrative courts.
The only act of a sovereign character which may be involved is the assumption by TMSF of bank assets, but that took place in Turkey and there is no question of the Turkish state entity exercising sovereign authority outside Turkey simply because it sues on a claim so transferred to it. There is no assertion of sovereign authority in England by the Turkish state entity in seeking to enforce a Turkish judgment based on such a claim, which could have been asserted by the bank concerned. This is not the assertion of a sovereign right, and the fact that the claim may be labelled as a public receivable in Turkey (and so equated, according to the evidence for Mr Demirel, with taxes) does not in English eyes make it a claim comparable to a claim for taxes or penalties.
If it were necessary and legitimate to decide this point now on the available material, I would decide it in favour of TMSF, but if my analysis of the nature of the rule and my conclusion on the appropriate approach are correct, then Mr Demirel may raise the issue again if he acknowledges service indicating an intention to defend the action.
Injunction
In my order of December 8, 2005 I gave permission for TMSF to serve the proceedings and the freezing order out of the jurisdiction on Mr Demirel in Turkey. The freezing order was subsequently continued by Patten J. on December 16, 2005.
I also granted permission to serve out and made worldwide freezing orders in what was then described as an action ancillary to TMSF’s proceedings in the Cayman Islands. The defendants in the ancillary action were trust companies administering trusts in which Mr Demirel was said to have an interest, Merrill Lynch Bank and Trust Company (Cayman) Ltd, and Mr Demirel’s solicitors.
In the present proceedings Ms Dogan’s affidavit in support of the application for permission to serve out of the jurisdiction and for the worldwide freezing order and disclosure order stated (para 61) that TMSF was “seeking to enforce a series of final judgments obtained in Turkey (thus satisfying the requirements of CPR 6.20(9) and an interim remedy in support of those proceedings (see CPR 6.20(4)).”
CPR 6.20(4) gives the court power to authorise service out of the jurisdiction where a claim is made for an interim remedy under section 25(1) of the Civil Jurisdiction and Judgments Act 1982. Section 25(1) provides that the court has power to grant interim relief in cases where the substantive proceedings have been or are to be commenced in a State to which the Brussels Convention, the Lugano Convention or the Judgments Regulation applies and where the proceedings are within the scope of those instruments, but it can be (and has been: S.I. 1997 No 302) extended to other countries.
Section 25(2) of the Act provides that on any application for interim relief under section 25(1), the court may refuse to grant that relief if, in the opinion of the court, the fact that the court has no jurisdiction apart from the section in relation to the subject-matter of the proceedings in question makes it inexpedient for the court to grant it.
Despite the reference to CPR 6.20(4) in Ms Dogan’s affidavit in these proceedings it does not seem that there was any need in these proceedings (which were not in aid of proceedings abroad) for an application under 6.20(4), and the worldwide freezing order in these proceedings was not made under section 25 at all. I have looked at Mr Pelling’s skeleton argument for the hearing of the without notice application, and it does not seem that he was relying on section 25 for these proceedings, but only in relation to the ancillary proceedings. Although Mr Demirel’s witness statement in support of the application to set aside says (para 17) that it was inexpedient for the relief to be granted, neither he nor Ms Dogan suggest that the proceedings are in aid of the Cayman proceedings.
This point was not taken at the hearing of this application and my view is that section 25 has no application to these proceedings and it is therefore not necessary to consider the question arising under section 25(2) as to whether it is inexpedient for the court to grant relief.
In all the circumstances, I consider that the injunction was rightly granted, but that there is no point in its continuance, since the disclosures have been made, there are no assets here, and the effectiveness of the injunction as regards foreign assets is doubtful.
The result is that the proceedings will stand as regards the $30 million judgment, the order granting permission to serve out of the jurisdiction will be set aside in relation to the other judgments, and the freezing injunction will be discharged.
Postscript
When this judgment was handed down, I was shown for the first time the judgment of the Court of Appeal of the Cayman Islands given on April 27, 2006. It had been supplied to Mr Cohen in the period between argument and the handing down of judgment and Mr Cohen supplied it to Mr Moverley Smith QC. Mr Cohen had not drawn it to my attention because, he said, it was only of marginal relevance to the point which I had to decide.
In August 2003 TMSF obtained an order of the Turkish criminal court restraining disposal of assets of the defendants in criminal proceedings, including two Cayman-registered motor yachts said to have a value of more than US$23 million each. In March 2004 TMSF seized the vessels in Turkish waters, and the vessels were then offered for sale by auction. TMSF then learned that a Mr Al-Ayed had sought to register mortgages on the vessels in the Cayman Registry of Shipping. In December 2004 TMSF obtained an order from the Grand Court of the Cayman Islands restraining completion of registration of mortgages on the vessels, and also restraining all further dealings with them. When the registered owners took the point that the order prevented TMSF itself from proceeding with the auction, TMSF sought to have the order varied. When the court refused to vary the order, TMSF decided to go ahead with the auction in Istanbul.
As a result TMSF was found to be in contempt of the Cayman court. The judgment of the Court of Appeal was on appeal from orders refusing TMSF’s application to vary and/or discharge thee original order. On appeal TMSF took for the first time the point that the court lacked jurisdiction to enjoin it from performing its official functions under Turkish law by reason of its entitlement to state immunity under the State Immunity Act 1978 (which applies in the Cayman Islands). Because TMSF is a separate entity the issue was whether the proceedings related to anything done by TMSF “in the exercise of sovereign authority” and whether the circumstances were such that a State would have been so immune: State Immunity Act 1978, section 14(2), i.e. whether the actions of TMSF were acts jure imperii or acts jure gestionis: Kuwait Airways Corp. v. Iraqi Airways Co. [1995] 1 WLR 1147, 1160 (H.L.).
It was held that the proceedings related to acts done in the exercise of sovereign authority. TMSF functioned not only as an arm established by the state for the benefit of the Turkish public, but as an arm of a governmental agency responsible for licensing and regulating Turkish banks, and it exercised governmental authority over banking institutions and persons involved in their ownership and managements and their assets. The functions performed by it as part of a banking regulatory system were governmental in nature, functions by which the state exercised authority over persons and property within its jurisdiction. On the second issue, it was held that the circumstances were such that a State would be immune, since the proceedings did not relate to a transaction or activity entered into otherwise than in the exercise of sovereign authority so as to be a commercial transaction within the meaning of section 3(3)(c) of the 1978 Act. TMSF had no apparent trading or profit-making function, and its functions involved the exercise of governmental powers for the protection of bank depositors and the maintenance of public confidence in the banking system.
It was rightly not suggested that the reasoning in this decision was of any direct assistance in the determination of the public law issue in the present case. The decision of the Court of Appeal is simply that the court has no jurisdiction to restrain the activities of a foreign State entity in its own country in the exercise of its public functions.