Black Swan and Yukos-Common Law Freestanding Freezing

Black Swan and Yukos-Common Law Freestanding Freezing

General Jurisdiction

In September of last year the Eastern Caribbean Court of Appeal gave judgment in Yukos Cis Investments Ltd & Anor. v Yukos Hydrocarbons Investments Limited & Ors. HCVAP 2010/028. This case discussed and developed the judgment of Bannister J in Black Swan Investment ISA v Harvest View Ltd & Anor. BVIHCV 2009/399. Both are cases concerning the circumstances in which a freezing injunction in the BVI will be available to a litigant in aid of foreign proceedings where there is no right to bring any claim against the defendant in the BVI and/or no intention of doing so.  Both are also cases where the respondents to the application for a freezing injunction were not the defendants in the foreign proceedings, but were owned by those defendants.

In Black Swan there was a personal claim against an individual in South Africa. The individual was the owner of two BVI companies. Black Swan sought a freezing injunction against those two companies in support of the South African proceedings, although the companies apparently had nothing to do with the litigation and although Black Swan had no claim against the two companies.

The Respondent companies relied upon The Siskina [1979] AC 210. In this case, which seems to have triggered the passing of s.25 in the UK, it was said by the House of Lords that there was no common law jurisdiction to grant a freezing injunction unless it was in support of a claim in which the court had jurisdiction to make a final judgment. The Respondents said there was no claim against the individual in the BVI (indeed, there was no cause of action under BVI law); and there certainly could be no claim against the Respondents, which were wholly unrelated to the issues in the litigation.

Black Swan submitted that jurisdiction in the Siskina was being used in the territorial sense. It was therefore distinguishable in circumstances where there was jurisdiction in the territorial sense. Authority was cited – in particular the dissenting judgment of Lord Nicholls in Mercedes Benz AG v Leiduck [1996] AC 284 – to the effect that where a respondent is undoubtedly within the court’s territorial jurisdiction, a freestanding injunction may be granted against him where it is appropriate to avoid injustice. In particular, where a court would permit eventual enforcement of a foreign money judgment against a defendant who is within the territorial jurisdiction it should grant a freezing order in aid of the prospective right to the foreign money judgment if it was otherwise a proper exercise of the court’s power.

The Judge considered that whenever the BVI Court is capable of exercising in personam jurisdiction over a defendant, the statutory power to grant an interlocutory injunction "in all cases in which it appears to the Court or Judge to be just and convenient"  gave the court “strict jurisdiction” to grant an order. He further considered, however, that the scope of jurisdictional competence to exercise the statutory discretion is delineated by common law rules of practice and procedure – he referred to this as "jurisdiction in the broad sense".

The judge considered that given the state of the authorities, it was open to him to decide whether or not as a matter of practice and procedure it was right to make the injunction. On the basis that there was no logical distinction between the grant of relief in aid of a prospective domestic judgment and a prospective foreign one (so long as the respondent was within the jurisdiction and the foreign judgment was not such that the domestic courts would decline to enforce it) he found that an order was a proper exercise of the court’s jurisdiction and accordingly granted the application.

The Yukos case, in which Black Swan was extensively discussed, involved a complicated corporate structure. In essence the Claimants were trying indirectly to take control of the Respondents, which were three BVI companies, in proceedings in the Dutch courts. They were doing this by seeking to take control of a Dutch trust vehicle which in turn controlled the Respondents.

Pending a determination of the Dutch proceedings the Claimants sought to freeze the Respondents' assets so as to preserve them until such time as they could (if successful in the Netherlands) indirectly take control of the Respondents. They had not sought a freezing order in the Dutch courts.

Bannister J at first instance refused relief. On appeal Kawaley JA gave a judgment approving the order at first instance, in which Gordon JA concurred. He gave unqualified approval to the reasoning of Bannister J in Black Swan as set out above.

It was made clear in Kawaley JA's judgment that the judgment to be obtained abroad need not necessarily be a money judgment. It was said, however, that an order will not usually be granted unless it is necessary to do so in aid of the foreign judgment. In the case of Yukos, any judgment in the Dutch court would not give the Claimants the right to enforce a money judgment against the Respondents, nor would it establish a proprietary claim against the Respondents' assets. It would simply allow the Claimants to control the Dutch trust vehicle, and only indirectly the shares in the Respondents. The Claimants had been granted interim relief in the Netherlands in respect of the shares in the trust vehicle, but had not applied in respect of the Respondents.

In circumstances where no injunction has been granted by the foreign court, that will be a discretionary factor against the granting of relief in the BVI; it will be an especially strong factor where, as in this case, it appears that the foreign court would be unlikely to grant relief because the relief sought goes beyond the scope of the foreign proceedings. In those circumstances the BVI court may well regard the application as being not in fact in aid of the foreign proceedings, but an unprincipled intrusion on the jurisdiction of the foreign court.

In Black Swan, there were assets in the jurisdiction, in the form of the shares in the BVI companies, against which a South African judgment (against the individual in South Africa) could be enforced. In Yukos, there were no assets in the jurisdiction against which a Dutch judgment giving the Claimant control of the Dutch trust could be enforced: once the Claimant had taken control of the Dutch trust, with or without enforcement in the Netherlands, they would automatically control the three Respondents and there was no likelihood of enforcing the judgment in the BVI.

It remains the case, therefore, that a freestanding injunction is available in the BVI in support of foreign proceedings. If the foreign court, however, has not already granted an injunction in respect of the BVI respondents the BVI court will look closely at why not. If the scope of the injunction sought seems to go beyond the scope of the foreign proceedings the court will be slow to make an order, and if the prospective foreign judgment will not be suitable for enforcement in the BVI in respect of the Respondents relief will almost certainly not be available.

Legal Personalities and Location of Assets

There is one curious aspect to Black Swan which was not discussed in the decision. The foreign judgment was to be against an individual. The freezing injunction application was against two Respondents who had no connection with the foreign proceedings except that they were owned by the defendant. The Judge seems to have taken the view (possibly considering himself bound by a previous Court of Appeal ruling in favour of the injunction, but which did not discuss this point) that freezing the assets of the individual in the BVI was in aid of the foreign proceedings. But the individual was not within the jurisdiction of the BVI and an order could not, therefore, have been made against him personally. Allowing an application to be made against the Respondent companies belonging to the individual seems akin to piercing the corporate veil, although there is no discussion of whether or when it might be done.

The Judge simply said in his conclusion that “There are assets within the jurisdiction in the shape of the shares in the two defendant companies which justify the grant of such an injunction…” But the freezing order was made against the Respondents. The assets frozen, therefore, were not the individual’s shares in the Respondents but the assets of the Respondents themselves.

The Judge went on to comment that there were sound policy reasons why offshore centres such as the BVI should allow injunctions in aid of foreign proceedings. The business of companies registered here is invariably transacted abroad and disputes are often resolved abroad. If those litigants could not have any control over the assets of companies in the BVI without seeking to issue in the BVI it would be highly detrimental to the jurisdiction’s reputation.

The issue of whether or not there are assets within the jurisdiction is worth noting here, because it gives rise to complications in Yukos. In particular, it is worth noting that Bannister J was not saying that the Respondents to the application had assets in the jurisdiction. Indeed, in Black Swan there was also an application to enforce the injunction in the UK, which suggests that if anything the Respondents’ assets were abroad (as one would expect of a BVI company). It was the foreign defendant who had assets in the jurisdiction, namely the shares in the BVI companies.

Bannister J at first instance in Yukos commented that "Black Swan rests upon the willingness of the court, in a case where the defendant to foreign proceedings has assets within its jurisdiction, to act in aid of the claimant's prospective entitlement to a money judgment… It depends upon the assumption that the foreign money judgment will be enforceable… in the court within whose jurisdiction the assets are situated. It is this last feature which founds the jurisdiction."

Bannister J was commenting on the case of a foreign defendant which owns a BVI company. But what of the case where a defendant to foreign proceedings is itself a BVI company, which does not itself have any assets in the BVI? Would the BVI court refuse to grant a freestanding injunction against that defendant because it does not answer to the above formulation? There is nothing to suggest that Bannister J had the intention of making “assets within the jurisdiction” a necessary, as opposed to sufficient, feature of a freestanding injunction application. He simply states that the court will be willing to act in such a case. In fact, enforceability is the “feature which founds the jurisdiction”. However, as will be seen below, his wording was picked up by Kawaley JA in his judgment in Yukos in a somewhat restrictive manner.

For example Kawaley JA stated based on the passage quoted above  that Bannister J had found that the existence of assets within the jurisdiction against which the applicant will be able to enforce his foreign judgment (not necessarily a money judgment) is the foundation of jurisdictional competence to grant the interim relief.

Kawaley JA purports to give Black Swan unqualified approval. This is somewhat qualified, however, by a warning in paragraph 149 of Yukos. In that paragraph Kawaley JA said:

"This conclusion does not rule out altogether the possibility that, in appropriate cases, interim relief might be granted to an applicant in support of a foreign claim against third parties [ie non-parties] to the foreign proceedings who are resident in the BVI… it is difficult to envisage circumstances in which such relief would be available in the absence of the ability of the claimant to either (a) enforce the relevant foreign judgment against the [non-parties'] assets, or (b) assert a local cause of action likely to result in a local judgment against [the non-parties]… A more flexible approach to freezing injunctions would potentially ride a coach and horses through fundamental notions of separate corporate legal personality. It would also potentially justify routine interference with the rights of companies, indirectly connected with shareholder disputes involving their affiliates, to freely control their assets… it is a fundamental principle of British-based company law that a company's management is not only entitled but also legally obliged to operate on the assumption that the duly registered shareholders are the owners of the shares".

This gives rise to two conclusions. First, the willingness of the court to grant injunctions, as was granted in Black Swan, against BVI entities which are non-parties to foreign litigation (but are, for example, wholly owned by the foreign defendant) is likely to be severely curtailed by the comments here about separate corporate legal personality. The court is likely to be cautious even if one of requirements (a) and (b) above is made out. A weighty factor will be the strength of the evidence of likelihood that the assets of the BVI non-party will be dissipated, in order to frustrate enforcement of the foreign judgment once obtained.

Second, it strongly implies (as ought to be the case) that it will be less problematic to obtain an injunction against a BVI entity which is a party to the foreign proceedings. However, as previously mentioned, it is also repeatedly said in the Yukos judgment that the BVI court has jurisdiction to grant a freezing injunction in respect of the local assets of BVI resident companies in aid of foreign proceedings.

Kawaley JA at paragraph 147 summarises the proper question in Black Swan cases as being “whether or not the claimant may obtain a foreign judgment which may be enforceable by whatever means against local assets owned or controlled by the defendant”.

As identified above, a BVI entity which is a defendant in foreign proceedings would not answer to this test if it had no assets in the BVI (which is far from unusual; as observed by Bannister J in Black Swan, most BVI companies conduct their business abroad). This is problematic because principle suggests that, as is implied by Kawaley JA, it should be far easier to obtain an injunction against such a Respondent in aid of foreign proceedings; there is no question of offending the common law principles of separate corporate legal personality. There is little question that where BVI law recognises the cause of action in the foreign proceedings or has an equivalent to it, there is a freezing order in the foreign proceedings, and the defendant in the foreign proceedings is a BVI company, granting a freestanding injunction should be a straightforward exercise of the BVI Court’s jurisdiction .

The only possible answer to this is that, as stated at the beginning of this article, Black Swan and Yukos are both cases with two features:
(a) there are no local proceedings underlying the application, only foreign ones; and
(b) the respondents are not the defendant in the foreign proceedings, but (for example) are owned by the foreign defendant.

As developed by Kawaley JA, a true “Black Swan” injunction is one which has both of these features. When formulating the test necessary for the making of a Black Swan injunction, Kawaley JA did not have in mind a case where only feature (a) was present. He simply picked up the wording of Bannister J (which was not, it seems, intended to have that restrictive effect) and did not turn his mind to the situation now posited.

Kawaley JA does, however, imply that it should be easier to get an injunction where only feature (a) is present (which clearly must be right). To the extent that issue (b) is not present, and in respect of the dicta concerning assets in the jurisdiction, it must be the case that Yukos will simply be distinguishable. The question of where the assets of the Respondent are is not a question which Kawaley JA is being asked to consider and does not form part of the ratio of the case. In a case such as is being posited, the question will be not whether the foreign judgment may be enforceable against local assets owned or controlled by the defendant, but simply whether the foreign judgment may be locally enforceable against the defendant. If the judgment can sensibly be enforced against the defendant in the BVI there is no reason in principle why that should only be possible if the defendant has assets within the jurisdiction; indeed, that would be absurd.

Ogier has recently obtained a freezing injunction in which feature (a) is present but not feature (b).  The injunction was granted by Charles J who accepted, albeit on an ex parte application, that the Court could grant an freezing injunction against a BVI company that was a party to the foreign proceedings (and in respect of which the foreign court had granted a freezing injunction) notwithstanding that the BVI company did not have any assets within the British Virgin Islands.  The injunction has been continued inter partes for a short period by consent, but will be considered further in late February 2012.

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