Byers & Ors (Liquidators of Madoff Securities International Ltd) v Yacht Bull Corporation & Anor (Rev 1)

On 5th June 2007 a Leopard 23m sport yacht called the Bull (“the Bull”) was registered in the Cayman Islands in the register of British shipping in the name of the first respondent Yacht Bull Corporation (“YBC”) under number 740064. YBC is a company incorporated in the Cayman Islands formerly owned or controlled by Mrs Ruth Madoff, the wife of Mr Bernard Madoff. The Bull had been acquired with money, some $7m, emanating from Madoff Securities International Ltd (“MSIL”), a company incorporated in England then owned and controlled by Mr Bernard Madoff (“BM”). BM also owned and controlled Bernard Madoff Investment Securities LLC (“BMIS”), a company incorporated in New York. On 11th December 2008 BM admitted to having carried on a ‘Ponzi’ scheme, primarily through BMIS, whereunder some 5,000 investors were defrauded of $65bn. On 12th December 2008 the US Securities and Exchange Commission (“SEC”) obtained a temporary restraining order from the US District Court for the Southern District of New York against BM and BMIS of which it gave notice to the banks with which MSIL dealt. On 15th December 2008 the UK Financial Services Authority served notice on MSIL restricting the use to which it could put its assets. On 16th December BM and his sons resigned as directors of MSIL.

On 19th December 2008 the remaining directors of MSIL presented a petition to the High Court in England seeking an order to wind up MSIL on the ground that it was just and equitable to do so. On the same day they applied for and obtained an order for the appointment of the applicants Messrs Byers, Hosking and Akers as joint provisional liquidators of MSIL. The petition was amended on 8th December 2009 to seek a winding up order on the additional ground that MSIL was insolvent. An order for the compulsory winding up of MSIL was made on 15th December 2009 and the joint provisional liquidators were appointed joint liquidators (“the JLs”). In the liquidation of MSIL there is a deficiency with regard to creditors of some £185m. The largest creditor is BMIS in the sum of £201m alleged to be due under the preference provisions of the US Bankruptcy Code.

The second respondent, Financière Meerschaert SA (“FM”), is company incorporated and domiciled in France. By 31st October 2008 it had subscribed on behalf of its clients some €10m for shares in a mutual fund in Luxembourg run by UBS called SICAV Luxalpha. The fund invested substantial sums with BMIS. When the existence of the Ponzi scheme run by BM came to light FM compensated its clients for their losses and took over their shares in SICAV Luxalpha. On 30th April 2009 FM instituted proceedings in the Commercial Court in Antibes against YBC and Mrs Madoff for compensation for the harm caused to FM through Luxalpha by their participation in the Ponzi scheme.

At all material times the Bull has been moored at Antibes. On 3rd April 2009 FM procured an order from the Commercial Court in Antibes for the arrest of the Bull in support of its alleged claim. That arrest was set aside by the Aix en Provence Court of Appeal on 10th December 2009. Five hours after the arrest by FM the JLs procured an order from the Commercial Court in Antibes for the arrest of the Bull so as to preserve it for the benefit of all unsecured creditors of MSIL. On 18th January 2010 FM applied to the Commercial Court in Antibes to set aside the latter order. That application has not yet been determined.

On 28th April 2009 MSIL, through the JLs, instituted proceedings in the Grand Court of the Cayman Islands against YBC for a declaration that it was the sole beneficial owner of the Bull and entitled to be registered as the legal owner of the same. They remain undetermined. On 28th May 2009 FM intervened in the proceedings pending in the Cayman Islands and sought an order to stay them on the ground that the Court should decline jurisdiction so that the question of beneficial ownership might be determined in France. On 5th October 2009 the Grand Court of the Cayman Islands adjourned the proceedings commenced by MSIL generally.

On 3rd July 2009 MSIL, through the JLs, applied to the Commercial Court in Antibes for an order lifting the arrest of the Bull procured by FM on 3rd April 2009 on the ground that MSIL was the beneficial owner of the Bull and that the Bull formed part of the insolvent estate of MSIL.

On 8th July 2009 the JLs applied to the Companies Court in England under ss.112 and 234 Insolvency Act 1986 for a declaration that MSIL is the sole beneficial owner of the Bull, an order that YBC do co-operate with the applicants and a declaration that FM was precluded by s.130(2) Insolvency Act 1986 and Articles 4, 16 and 17 of EC Regulation 1346/2000 (“the Insolvency Regulation”) from commencing or continuing proceedings against it. The respondents were and are YBC and FM. On the same day Registrar Baister gave permission, pursuant to Insolvency Rule 12.12, to serve the application (“the Ownership Application”) on FM out of the jurisdiction.

On 31st July 2009 FM issued the application now before me (“the Jurisdiction Application”) seeking a declaration that this court has no jurisdiction over FM or an order declining such jurisdiction as it might have and an order setting aside the purported service of the Ownership application. The Jurisdiction Application as subsequently amended relies on 9 grounds to which I shall refer in due course. Before I do so I should refer to some further aspects of the subsequent course of the various proceedings I have mentioned.

The application of MSIL to the Commercial Court in Antibes issued on 3rd July 2009 (“MSIL’s French Claim”) to set aside the arrest of the Bull made on the application of FM on 3rd April 2009 was dismissed by the Commercial Court of Antibes on 7th September 2009 on the ground that as MSIL had not established its ownership of the Bull it had no standing to make its application. This order was set aside by the Court of Appeal in Aix en Provence on 10th December 2009 on the grounds that the claim of FM was not a maritime claim and that MSIL had standing to challenge the arrest as a person interested. On 16th December 2009 FM procured a further order for the arrest of the Bull from the Commercial Court in Antibes. The JLs applied to set aside that order. On 18th January 2010 the Commercial Court in Antibes heard but reserved judgment on that application.

I summarise the chronology of the relevant events as at the time of the commencement of the hearing before me as follows:

At the commencement of the hearing the JLs applied for permission to amend their Ownership Application so as to allege alternative causes of action under ss.238 and 423 Insolvency Act 1986 to the effect that if the Bull is not beneficially owned by MSIL then the payments made by MSIL to or for the benefit of YBC in respect of its purchase were transactions at an undervalue for which the appropriate remedy is an order that YBC do transfer the Bull to MSIL. The application was not opposed by counsel for FM on the basis that they could not immediately deal with the merits of such alternative claims or any jurisdictional challenge which might arise in relation to them. On that basis I gave permission to amend on the usual terms as to costs.

As I have indicated the amended jurisdiction application specifies 9 grounds on which FM contends that it is entitled to either a declaration that the court has no jurisdiction over FM or should decline any such jurisdiction as it may have or the purported service of the Ownership Application should be set aside. The first three depend on the application of the Judgments Regulation EC 44/2001. The seventh depends on the application of the Service Regulation EC 1393/2007. The remainder appear to me to depend to a greater or lesser extent on the application and terms of either or both the Insolvency Regulation and the Judgments Regulation. I have not heard full argument on the application of the Service Regulation and will expect further argument on that issue if and to the extent that it is still material in the light of my conclusions on the Judgments Regulation and the Insolvency Regulation. I will deal with the Judgments Regulation first.

The Judgments Regulation was promulgated on 22nd December 2000 and came into force on 1st March 2002. It has direct effect and is incorporated into the law of England and Wales by the Civil Jurisdiction and Judgments Act 1982 as amended. With respect to member states of the European Union it supersedes the Brussels Convention 1968. Article 1 is, so far as relevant, in the following terms:

If the Judgments Regulation applies, then by Article 2 persons domiciled in a member state must be sued in the courts of that member state. By Article 27 if proceedings involving the same cause of action between the same parties are brought in the courts of different member states then any court other than the court first seised must stay its proceedings until the jurisdiction of the court first seised is established and, when it is, decline its jurisdiction in favour of that court.

Counsel for FM contends that the Judgments Regulation does apply with the consequence that proceedings against it must be brought in France as provided by Article 2. In addition she submits that the Commercial Court in Antibes was first seised of the issue of the ownership of the Bull when MSIL made its application on 3rd July 2009 so that this court is obliged by Article 27 to decline jurisdiction. I did not understand counsel for the JLs to dispute either consequence if the Judgments Regulation applies. He submitted that it did not because of the exclusion of “proceedings relating to the winding-up of insolvent companies” prescribed by Article 1(2)(b).

The scope of that exception has been the subject matter of a number of decided cases both in the European Court of Justice and in England. Those in the European Court of Justice to which I was referred are Gourdain v Nadler [1979] 3 CMLR 180; Seagon v Deko Marty Belgium NV [2009] 1 WLR 2168 and German Graphics Graphische Maschinen GmbH v Alice van der Schee (as the liquidator of Holland Binding BV) Case C-292/08 10th September 2009. The cases in England on which one or other of the parties relied are Re Hayward [1997] Ch 45 and Pollard v Ashurst [2001] Ch 595. It is convenient to consider those five cases in chronological order. I did not understand there to be any substantial difference between counsel as to the principles to be derived therefrom, only their proper application.

Gourdain v Nadler [1979] 3 CMLR 180 concerned the identical provisions in the Brussels Convention. In that case a court in France had made an order under its domestic bankruptcy legislation requiring the German manager, Herr Nadler, of an insolvent French subsidiary of a German company to contribute to its assets for distribution to the company’s creditors. M.Gourdain, the liquidator of the French subsidiary sought to enforce that order in Germany under the Brussels Convention. Herr Nadler contended that the liquidator was not entitled to do so because the claim fell within the exception for “proceedings for the winding-up of insolvent companies”. That submission was upheld. In paragraph 4 of its judgment the European Court of Justice stated:

In Re Hayward [1997] Ch 45 the court in England was concerned with the purchase in joint names of a villa in Minorca. One of the joint purchasers was made bankrupt and then died intestate. His widow, claiming to be entitled to his estate, transferred his half share in the villa to his co-owner in satisfaction of a debt due by her to the co-owner. The trustee in bankruptcy commenced proceedings in England against the co-owner, who had by then become the sole registered proprietor of the villa in Portugal, for an order entitling him to the deceased bankrupt co-owner’s share in the villa and a declaration that it formed part of his bankruptcy estate. The claim was struck out on the ground that the court in England had no jurisdiction in relation to disputes as to the ownership of land in Spain. The trustee’s appeal was dismissed by Rattee J. He held [p.54]:

Ashurst v Pollard [2001] Ch 595 was a similar case. A husband and wife domiciled in England were joint owners of a villa in Portugal registered in their joint names. The husband went bankrupt and his trustee in bankruptcy obtained an order from the county court in England for the sale of the villa. On appeal the judge of the High Court, following Gourdain v Nadler, concluded that the proceedings were not bankruptcy proceedings with the consequence that the Brussels Convention applied to the claim. The Court of Appeal agreed. At paragraph [30] Jonathan Parker LJ, with whom Kennedy and Potter LJJ agreed, said:

Seagon v Deko Marty Belgium NV [2009] 1 WLR 2168 was concerned not with the proper interpretation of Article 1(2)(b) of the Judgments Regulation but with the scope and application of Articles 1 and 3 of the Insolvency Regulation. So far as relevant those articles provide:

In Seagon a company established in Germany paid money into a bank account in the name of a company established in Belgium. The German company was then wound up and its liquidator sought to recover from the Belgian company the amount of the payment. He brought proceedings for that purpose in Germany in reliance on the terms of Article 3 of the Insolvency Regulation. The Belgian company contended that the German court had no jurisdiction in the matter. The matter was referred to the European Court of Justice. In paragraphs 16 and 17 of its judgment the Court noted that:

In German Graphics Graphische Maschinen GmbH v Alice van der Schee (as the liquidator of Holland Binding BV) Case C-292/08 10th September 2009 the European Court of Justice was concerned with both the Judgments Regulation and the Insolvency Regulation. In that case a German company had supplied machinery to a Dutch company subject to a reservation of title clause in its favour. The Dutch company went into compulsory liquidation. A month later a German court granted protective measures to the German company based on the reservation of title clause. The issue was whether those measures were enforceable in Holland. The Court concluded that the principles established in Gourdain in relation to the Brussels Convention were equally applicable to the Judgments Regulation and continued:

At the time the Ownership Application was issued on 8th July 2009 the relief sought was that summarised in paragraph 7 above. On 19th January 2010 I gave permission to add the two causes of action I have summarised in paragraph 11 above. I do not doubt that the cause of action under s.238 falls within the exception for “proceedings relating to the winding-up of insolvent companies” contained in Article 1(2)(b) of the Judgments Regulation. (I express no view with regard to that arising under s.423.) It is not available to MSIL before winding up but can only be pursued by a liquidator or other comparable office-holder. The cause of action is purely statutory in that the conditions for liability are laid down in the relevant provisions of the Insolvency Act 1986. That statute deals generally with insolvency whether personal or corporate. Further the fruits of success enure for the benefit of the company’s creditors, not the company itself. But, as the form of amendment shows, both claims are alternative to the original ownership claim and cannot arise unless and until the ownership claim has been determined in favour of FM. If they do arise neither of them can confer any beneficial interest in the Bull before judgment on those claims and the grant of relief to the JLs in the form they seek.

Counsel for the JLs contends that the original ownership claim is within the exception from the Judgments Regulation for “proceedings relating to the winding-up of insolvent companies”. He submits that the issue as to the beneficial ownership of the Bull lies between the JLs and YBC alone and that although the JLs will have to prove their case the claim will not be opposed by YBC. He accepts that FM is a necessary party because it has obtained an order for the arrest of the Bull and is a proper respondent to what he described as the JLs principal claim namely that the various attempts of FM to obtain a right over or in respect of the Bull are precluded by s.130(2) Insolvency Act 1986. He contends that the claim in paragraph 1 of the ownership application for a declaration as to the beneficial ownership of the Bull is properly to be regarded as incidental to the claim for an order or declaration that the provisions of s.130(2) preclude the arrests obtained by FM. He invited me to have regard to the application as a whole, including, by inference, the additional claims arising from the amendment.

I do not accept these submissions. First, I do not accept that the application must be considered as a whole in the sense that dependent or alternative claims falling within the exception can change the nature of the claim on or to which they are dependent or alternative. In my view the submission of counsel for the JLs is contrary to the true analysis of the amended claim in this case. The principal claim is the declaration as to beneficial ownership, the other claims are either dependent, namely the application of s.130(2) to actions or proceedings against MSIL “or its property”, or alternative, namely the application of ss.238 and 423 Insolvency Act if the declaration of ownership is not made. It is necessary to consider whether the principal claim is within the exception, cf Re Hayward at p.54C.

Accordingly the relevant question is whether the claim for ownership is within the exception. In my judgment it is not. The claim is made by the JLs but the claim to ownership arises under the general law and, if well made, had accrued to MSIL before it was wound up. The link with either the Insolvency Act or the winding up of MSIL is neither direct nor close. I see no sensible distinction between this case and Re Hayward, Ashurst v Pollard or German Graphics. In my judgment, the exception contained in Article 1(2)(b) does not apply so as to exclude the application of the Judgments Regulation as a whole.

Accordingly, Article 2 applies to that claim. It is necessarily made against both YBC and FM. YBC is not domiciled in another Member State but FM is domiciled in France and is entitled to be sued there in accordance with Article 2. In those circumstances I consider that I should, as asked by counsel for FM, declare that this court has no jurisdiction over FM in relation to the claim made in paragraphs 1 and 2 of the Ownership Application. This conclusion renders further consideration of grounds (c) to (f) set out in the amended Jurisdiction Application unnecessary. But what orders I should make in relation to paragraphs 3 to 5 may depend on whether the Insolvency Regulation applies to them. Accordingly I will defer my decision on what order to make in relation to those paragraphs until I have considered the issues raised by counsel for FM in relation to the application of that regulation.

Although I have set out some provisions of this Regulation in paragraph 20 above it is convenient now to set out all those relevant to the arguments on this part of the case. They are the following:

The issue in relation to the application of the Insolvency Regulation is whether MSIL comes within that part of Article 1(2) as excludes “investment undertakings which provide services involving the holding of funds or securities for third parties”. Counsel for FM contends that it does and submits that in the absence of substantial disclosure I am not entitled to conclude that it does not.

Counsel for FM submits that MSIL was an investment firm within the meaning of the Markets in Financial Instruments Directive 2004/39/EC (“MiFID”) and is therefore an investment undertaking within the exception if it provides investment services to third parties. She goes on to submit, by reference to MiFID, that third parties include in relation to the undertaking its directors and shareholders. She points to passages in various documents which indicate that MSIL may well have traded for BM, members of his family and his lawyer and co-shareholder, Mr Koenigsberg. She seeks disclosure from the JLs under the following heads (1) customer statements, records of trade and other documents identifying clients; (2) information concerning the facts, source and purpose of funds paid to MSIL and (3) information concerning payments to third parties.

The requests for disclosure were first made in a letter from the solicitors for FM dated 3rd December 2009 which set out in detail and at length what FM sought. In their response dated 10th December 2009 the solicitors for the JLs indicated that they considered the documents requested to be irrelevant, that as FM was not a creditor it was not entitled to examine them and that under Insolvency Rule 12.13(1) the JLs were entitled to withhold production. Nevertheless they responded to the individual requests and supplied certain documents notwithstanding their general objections. On 22nd December 2009 the solicitors for FM wrote again inviting the solicitors for the JLs to reconsider their decision to refuse production of further documents. On 23rd December 2009 the solicitors for the JLs refused to do so. On 30th December 2009 the solicitors for FM tried again and were met on 4th January 2010 with a further refusal. There, so far as disclosure is concerned, matters rested until the hearing before me. No formal application for disclosure was issued before the commencement of the hearing because, as counsel for FM candidly admitted, FM was not prepared to do so lest it thereby submitted to the jurisdiction of the court. Instead of that she produced at the hearing a draft of the disclosure order she sought.

Whilst, counsel for the JLs does not admit the validity of the various stages in the argument of counsel for FM, the principal point made by the JLs is that the exception is not in relation to investment undertakings as a whole, nor even to investment undertakings providing services to third parties but only to investment undertakings providing “services involving the holding of funds or securities for third parties” at the time of the opening of the insolvency proceedings. They rely on the first witness statement of Mr Slater and the fifth witness statement of Mr Verrill, both made on 12th January 2010, as conclusively demonstrating that MSIL did not provide such services at the time of the opening of the insolvency proceedings.

Mr Slater is an associate director of Grant Thornton UK LLP, the firm from which the JLs come, with particular responsibility for the Forensic and Investigations Services Department. In paragraphs 7 to 12 he describes his role in the JLs investigation into the affairs of MSIL such that he has examined in detail the vast store of information obtained by the JLs, including the books and records of MSIL, and interviews with, amongst others, seven traders formerly employed by MSIL. In paragraphs 13 to 26 he considers in detail the nature of the business of MSIL at the time the JLs were appointed as joint provisional liquidators, namely 19th December 2008. He concludes in paragraph 26 that:

In paragraphs 27 to 31 Mr Slater considered whether at the time of the appointment of the joint provisional liquidators MSIL provided services involving the holding of funds or securities for third parties. He concluded, having considered both the source of the funds used by MSIL to trade and the payments made by MSIL to others, that they did not. He averred in paragraph 36 that:

In his fifth witness statement Mr Verrill, a partner in the firm of solicitors acting for the JLs, dealt with a number of matters. In paragraph 42 he referred to the second witness statement of Mr Rooney in paragraphs 42 and 43 of which he challenged Mr Verrill’s statements in his first witness statement to the effect that MSIL traded only on its own account and did not hold any third party funds. In paragraph 44 Mr Verrill affirmed that:

Counsel for FM did not ask for any order for the cross-examination of either Mr Slater or of Mr Verrill. In response to the observations of counsel for the JLs in that respect she admitted that FM’s principal concern was not to run any risk of a submission to the jurisdiction of this court. In addition she suggested that in the absence of the disclosure sought there would be little point in seeking such an order as she would have no material on which to cross-examine either Mr Slater or Mr Verrill. This admission recognises, as in my view is the case, that none of the documentary material to which she had referred me indicates that MSIL had provided services of the relevant description, namely, “services involving the holding of funds or securities for third parties”.

In these circumstances I draw the following conclusions. First, the exception in Article 1(2) does not relate to investment undertakings generally, nor to investment undertakings providing any services to third parties but only to those investment undertakings which provide services to third parties of the relevant description, namely “services involving the holding of funds or securities for third parties”. Any other conclusion would ignore the express words of the Article. Second, the disclosure requested should be refused on the ground that the material sought is irrelevant to the real issue and, having regard to the evidence of Mr Slater and Mr Verrill, would be disproportionate and give rise to unreasonable expense. Third, there is no material which would entitle me to reject the clear evidence of Mr Verrill and Mr Slater.

In these circumstances, I conclude, as did Sir John Lindsay when appointing the joint provisional liquidators on 19th December 2008 and Sales J when making the winding up order on 15th December 2009, that the Insolvency Regulation applies to the proceedings opened by each of those orders. It follows from this conclusion that, depending on the decision of the French court on the issue of the beneficial ownership of the Bull, the claims made by the JLs against FM in relation to ss.130(2), 238 and 423 may have been properly brought in this jurisdiction under those provisions of the Insolvency Act 1986, see Articles 3 and 4(2). Accordingly, the appropriate order in relation to paragraphs 3 to 5 of the Ownership Application is to stay all further proceedings in respect of them until such time as the issues raised in paragraphs 1 and 2 have been finally decided by the courts in France, compromised or abandoned.

Two issues remain. The first relates to the contention of FM to the effect that its interest in the Bull arising from the order for its arrest that it obtained on 16th December 2009 constitutes a right in rem within the meaning of that expression as used in Article 5 of the Insolvency Regulation. Article 5(1) provides:

I express no view as to whether the right of FM under the arrest it obtained on 16th December 2009 is such a right. Prima facie it came too late anyway as the winding up order had been made by Sales J the day before. Further the issue does not arise unless and until the issue as to ownership of the Bull has been agreed or determined by the courts in France in favour of the JLs. In the meantime, the application of the JLs to the court in France to set aside the order of the Commercial Court in Antibes granting that arrest has not been heard. Unless and until those two matters have been finally determined the issue as to the application or effect of Article 5 of the Insolvency Regulation is of academic interest only. As no relief is sought in respect of the Article 5 claim it is unnecessary to stay anything. Accordingly I need say no more about it.

The remaining issue is that relating to the Service Regulation. As counsel for the JLs observed one could spend all day arguing about its meaning and effect. I declined to do so unless it was clear from my findings on the remaining issues that it was necessary to do so. In my view it is not. I have concluded that paragraphs 1 and 2 of the Ownership Application are not within the jurisdiction of this court. I have decided that in all the circumstances I should stay all further proceedings in relation to paragraphs 3 to 5. At the conclusion of the hearing counsel for the JLs indicated that his clients were considering re-service of the Ownership Application so as to avoid the issues. I do not know whether they have done so. As far as I can see the issues as to service can only arise as and when the issue of ownership of the Bull has been determined by the French court in the JLs favour and they seek an order lifting the stay on further proceedings in relation to the relief sought under paragraphs 3 to 5. Accordingly the issues do not arise now and will only ever arise if the JLs fail properly to re-serve the Ownership Application. In those circumstances it is unnecessary for me to say any more on the points relating to the Service Regulation.

For all these reasons I will: