Dispute Resolution round-up - October 2022

The Supreme Court has handed down its long-awaited judgment in the Sequana case, the first occasion on which the Supreme Court (or the House of Lords) has addressed the question of whether company directors owe a duty to consider the interest of creditors when a company is at risk of insolvency, and the point at which that duty is triggered.

In May 2009, when the company was unquestionably balance sheet and cash-flow solvent, AWA distributed a dividend of €135 million to its only shareholder, Sequana SA.  There was no question that the dividend was lawful in the sense that it complied with Part 23 Companies Act 2006.  However, AWA had long-term contingent liabilities relating to pollution, which gave rise to a real risk – falling short of a probability – that AWA might become insolvent at some (not imminent) date in the future.  In the event, AWA went into insolvent administration in October 2018.  BTI, as assignee of AWA's claims, sought to recover an amount equal to the Sequana dividend from the AWA directors on the basis that the decision to distribute breached the duty to creditors.  It was also alleged, by AWA's main creditor, that the dividend was a transaction at an undervalue intended to prejudice creditors as defined in s423 Insolvency Act 1986.

The s423 claim succeeded at first instance, though Sequana became insolvent and so did not repay the dividend.  BTI's claim against the directors failed both at first instance and in the Court of Appeal, which found for the directors on the basis that the "creditor duty" had not become engaged by May 2009; while there had been a "real risk" of insolvency by that date, insolvency was neither imminent or probable.  The Court of Appeal's view was that the creditor duty did not arise until the company was actually insolvent, on the brink of insolvency or probably headed for insolvency; a future risk of insolvency did not trigger the creditor duty unless the risk was sufficiently high to amount to a probability of insolvency.

Before the Supreme Court, BTI argued that a "real risk" of insolvency was sufficient to engage the creditor duty.  The directors did not agree that the creditor duty existed at all; if it did, they said it could not apply to the payment of a lawful (i.e. compliant with Part 23  Companies Act) dividend, and it could not be engaged until insolvency was actual or imminent.

The Supreme Court found that the "creditor duty" does exist, although characterised it as a facet of the directors' duty to act in the best interests of the company, on the basis that there are circumstances when the interests of the company include the interests of the creditor body as a whole (for example, when insolvency means that the creditors, rather than the shareholders, have the economic interest in the company).  The "creditor duty" can apply to the payment of a lawful dividend, but a "real risk of insolvency" was not sufficient to trigger the duty, and so BTI's appeal was dismissed. 

The majority – Lords Briggs, Kitchin and Hodge – considered the trigger to be either imminent insolvency (i.e. insolvency which the directors know or ought to know is imminently going to happen) or the probability of an insolvent liquidation/administration about which the directors know or ought to know.  Such an eventuality required the directors to take into account and give appropriate weight to the interests of the company's creditors as a body, and to balance them against shareholders' interests in the event of conflict between the two.  Lord Reed was less certain of the requirement that the directors "know or ought to know" of the prospective insolvency (on the basis that they have a duty to keep themselves informed of the company's affairs), but did not express a concluded view.  The court recognised that cases would be fact-specific, and the directors' reasonable assessment of the likelihood that a particular course of action would lead the company away from insolvency (i.e. the question of "how bright is the light at the end of the tunnel?") would be relevant to the weight given to the respective rights of creditors and shareholders. If there was no prospect of avoiding insolvency, the creditors' interest would become paramount; Lady Arden expressed this as being the point at which the company becomes irreversibly insolvent – that is, a test not dependent on the directors' opinion of the position.

Directors will welcome the fact that the trigger point for the "creditor duty" has been more clearly defined to be closer to the point of insolvency, and that the court recognised the necessity for a "sliding scale" so that the closer the company gets to insolvency, the greater the weight to be given to creditors' interests, but several questions were left expressly unanswered, including the scope of the liability and the relief obtainable. The likelihood is that this issue will return to the Supreme Court in a bid for clearer definition at some point in the not too distant future.

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In this decision, the Court of Appeal granted permission for around 200,000 Brazilian claimants to pursue in the English courts their group claim for damages arising from the collapse of the Fundão Dam in Brazil, overcoming various procedural and jurisdictional challenges raised by the defendants. The High Court had held previously that the claims should be struck out as an abuse of process, finding that the English proceedings would be unmanageable and would give rise to an acute risk of irreconcilable decisions from the English and Brazilian courts, and that there were existing routes of redress in Brazil. The Court of Appeal disagreed, concluding that the High Court had erred in its abuse of process analysis, and that the English proceedings might well yield a legitimate advantage for the claimants such as to outweigh their expense and public resource disadvantages.

In the new climate of corporate governance and accountability, the decision is important in signalling the English courts' willingness to hear complex multi-jurisdictional group claims even where there are parallel proceedings on foot abroad and other potential routes of redress.  However, the decision related to early procedural applications only and questions of substantive liability are yet to be considered fully.

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In this case, the High Court made the unprecedented decision to grant an order permitting service of proceedings on persons unknown via a non-fungible token ("NFT") on a blockchain.  The High Court also recognised that there is a good arguable case that crypto exchanges hold stolen crypto-assets as constructive trustees for the benefit of victims of crypto-asset fraud.

The claimant, Mr Fabrizio D'Aloia, alleged that he had been the victim of a scam to induce him to transfer certain of his crypto-assets to accounts controlled by persons unknown who were operating behind a website designed to imitate a well-known brokerage (TD Ameritrade).  Mr D'Aloia advanced claims in fraudulent misrepresentation and deceit, unlawful means conspiracy and unjust enrichment against the operators of the website, who were persons unknown; and proprietary claims against six other companies as constructive trustees, who he alleged were the controllers or operators of the crypto exchanges into which it was possible to trace the relevant crypto-assets.

Mr D'Aloia applied to the High Court for an interim freezing injunction to prevent the defendants from disposing of his crypto-assets, as well as a Banker’s Trust disclosure order against the exchanges to compel them to provide him with documents that would help him trace the crypto-assets.  There was clear evidence that all of the exchange defendants, with the exception of the third defendant, were located outside the jurisdiction.  The location of the fraudsters was unknown, but there was some evidence to suggest that they may be domiciled in Hong Kong. Mr D'Aloia therefore applied for permission to serve out of the jurisdiction on all of the defendants (with the exception of the third defendant), and permission to serve the persons unknown by an alternative means; namely, email and an NFT (which the Judge described as a "form of airdrop" into the accounts into which Mr D'Aloia made his transfers). 

The High Court granted Mr D'Aloia's applications for an interim freezing injunction and Banker's Trust disclosure order, as well as his applications for permission to serve out of the jurisdiction and by alternative means.  This is the first instance of an English court allowing service by means of distributed ledger technology and paves the way for victims of crypto-asset fraud to use novel technology to bring claims against persons unknown.  The ruling also demonstrates that the English courts are open to entertaining constructive trust claims concerning crypto-assets, not only against the fraudsters themselves, but also against third-party exchanges.

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This decision by the Supreme Court reinstated the Competition Appeal Tribunal's ("CAT's") decision to award Pfizer and Flynn costs arising from their successful appeal against a Competition and Markets Authority ("CMA") decision that had found they had abused their dominant position in relation to the supply of epilepsy medication.

The Supreme Court held that there is no generally applicable principle that public bodies should have protected status in circumstances where they lose a case brought or defended in the exercise of their public functions in the public interest.  In doing so, it overturned the Court of Appeal's decision that no order for costs should be made against a public body that is unsuccessful in defending proceedings in the exercise of its statutory functions provided that it has acted reasonably.  Rather, the Supreme Court noted that it was important that a court or tribunal considers whether there is a risk of a "chilling effect" on the conduct of the public body if costs orders are routinely made against it for such conduct even when the body has acted reasonably.

When considering the CMA, the Supreme Court held that the prospect of adverse costs orders in competition law infringement appeals had no real risk of "chilling" the CMA's enforcement activities, given that the CMA can offset a costs order against income received from fines from competition law infringements.  It also considered that adverse costs orders imposed an important discipline on the CMA's activities. The Supreme Court also upheld the CAT's long-standing practice in competition law infringement appeals of applying "costs follow the event" as a starting point.

The possibility of recovering costs that relate to a successful point of appeal will be welcome news for those wishing to challenge a decision of the CMA or other public body. However, the wide discretion of the CAT to award costs in such appeals on an issue-by-issue basis does lead to uncertainty as to whether appellants that raise similar arguments in other regulatory, merger or market appeals will be awarded their costs in the same way.

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In this decision, the Court of Appeal had to consider whether the claimants' follow-on damages claim, which was based on a finding by the European Commission of breaches of competition law by manufacturers of smart card chips, was time barred under the Limitation Act 1980 (the "Limitation Act").  The Limitation Act applied because the claimant's cause of action accrued prior to 9 March 2017; for causes of action of this nature accruing on or after that date, different limitation rules, set out in the Competition Act 1998, will apply.

Section 2 of the Limitation Act provides that, in ordinary circumstances, tort claims become time-barred six years from the date on which the relevant cause of action accrued.  However, section 32(1)(b) of the Limitation Act provides that, in circumstances where there is "deliberate concealment" of facts relevant to the cause of action (which is frequently alleged in follow-on damages claims of this nature and indeed was not in issue between the parties here), the limitation clock only starts to run from the time a claimant discovered, or could with reasonable diligence have discovered, the relevant facts. 

The question for the Court of Appeal – which may be relevant to other cases of this nature – was whether the limitation period should start to run from the time of the announcement of a Statement of Objections by the European Commission in relation to the relevant breaches of competition law - the argument being that from that point onwards, the claimants could, in combination with other materials available to them at the time, have identified the minimum details relevant to their cause of action. 

The Court of Appeal answered that question in the affirmative, giving defendants (those for whom the relevant cause of action arose before 9 March 2017) some cause for optimism when considering the limitation arguments that may be available to them in competition follow-on damages claims.  Although the point at which the limitation clock begins in any given case (where deliberate concealment of relevant facts is established) will turn on its own facts, confirmation that Commission press releases regarding Statements of Objection may give claimants adequate information to plead a claim, and can in principle be relied on for the purposes of bringing that claim, serves as a warning to claimants that they cannot assume that the limitation clock will only start to run once the Commission has publicised its final finding of an infringement.  This is perhaps unsurprising when viewed against the very high-level way in which competition follow-on damages are initially pleaded by claimants in many cases.

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In this decision, the Supreme Court has re-stated the principles to be applied where, following a change in circumstances, a judge is asked to reconsider a judgment or final order before it has been sealed by the court.

AIC obtained an order from the English High Court to enforce a Nigerian arbitration award against the Federal Airports Authority of Nigeria ("FAAN"), following FAAN's failure, by the time of the enforcement hearing, to provide a bank guarantee as security.  However, later the same day, before the enforcement order was sealed by the court, FAAN obtained and provided the bank guarantee required, leading it to ask the court to reconsider the enforcement order.

The Supreme Court held that a judge exercising the court's inherent power to reopen an unsealed judgment or order should do so in accordance with the overriding objective of the Civil Procedure Rules (having the courts deal with cases justly and at proportionate cost, including enforcing compliance with rules, practice directions and orders).  In applying this principle in practice, the key starting point is the strong public interest in having finality in litigation, and any factors causing a judge to reopen a judgment or order must be sufficiently strong to outweigh the heavy weight of this principle of finality.  Here, although FAAN's failure to provide security as ordered by the court weighed heavily against reopening the enforcement order, the fact that it had been provided shortly after the enforcement order had been made (and had been immediately called upon by AIC) was an important change in circumstances which justified adjournment of the enforcement order.

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In this decision, the court considered whether the identity of the individuals who are authorised to give instructions to solicitors on behalf of a corporate client in ongoing litigation is a matter covered by litigation privilege.  The court held that the answer to that question would depend on whether two requirements were met: (i) whether the specific communication passing between the instructing individuals and the solicitors was privileged; and (ii) if it was, whether that privilege would be undermined by disclosing the identity of those instructing individuals.  Here, revealing the identity of those giving instructions to the solicitors would not reveal anything of the contents of privileged instructions, and so the identity of the instruction givers was not held to be protected by litigation privilege.

The decision also confirms that litigation advice privilege and legal advice privilege are not mutually exclusive: both can attach to the same communication in appropriate circumstances.

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This decision of the CAT relates to the application of without prejudice privilege ("WPP") to the contents of an email that was disclosed inadvertently.  The disclosing party sought an order that the document be replaced with a redacted copy; the opposing party sought the CAT's permission to rely on the document as disclosed.

The CAT considered two key questions.  The first question was: Was the email protected by WPP given that it covered commercial issues as well as the settlement of a dispute?  The opposing party argued that the disputed issue was so subsidiary to other commercial matters discussed that WPP did not arise.  The CAT rejected this position, holding that a communication is protected by WPP where its aim is the settlement of a dispute, even if it also covers other commercial matters.  In doing so, the CAT endorsed the courts' broad approach to the application of WPP.

The second question was: If the aim of the email was to reach an agreed position on the dispute, had that issue matured sufficiently to establish WPP?  The CAT indicated that the threshold at which litigation is in contemplation for WPP to arise may be lower than that for litigation privilege (which is whether litigation is in "reasonable contemplation").  Rather, WPP has a distinct test where the question is whether the parties had contemplated, or might reasonably have contemplated, litigation in the event they did not reach an agreement.  Applying this test, the CAT held that held that the email was protected by WPP.

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This decision concerns the courts' discretion to award costs against litigation funders.  After the High Court found claims brought by ECU against HSBC to be time-barred, it ordered ECU to pay US$11.6 million in legal costs on an indemnity basis.  ECU paid that sum, with the exception of US$1 million, which it was unable to pay.  HSBC therefore applied to the court for an order requiring Therium, one of ECU's litigation funders, to pay the outstanding amount.  While Therium accepted it should pay some amount towards this sum, it argued that: (a) it should not have to pay anything in respect of costs incurred prior to the signing of the Litigation Funding Agreement ("LFA") between itself and ECU, and (b) it should only have to contribute an amount corresponding to its contribution to the total funding ECU had received from the 27 separate parties (which Therium submitted was 64%).

The court rejected both of these arguments.  As to the first, while the court noted that a litigation funder would not ordinarily be liable for costs incurred prior to signing an LFA, in this case Therium had agreed to reimburse ECU for costs incurred prior to signing the LFA, and therefore applied its contingency fee to those costs as well.  Therium could not have the potential upside of the contingency fee without also accepting the potential downside of liability for those costs.  The court also rejected the argument that Therium should only be liable for a percentage corresponding to its total funding contribution. Therium had "far and away" the dominant financial interest in the outcome of the proceedings, and HSBC should not have to pursue numerous individuals and entities in order to recover its costs. Therium was therefore held jointly and severally liable with ECU for the costs of the proceedings, from the date from which it had agreed to reimburse ECU.

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This Court of Appeal decision provides a clear articulation of the principles that the courts will apply in determining whether an individual is personally liable for having assisted a tortious act committed by the company of which they are a director.  Whilst this is an inherently fact sensitive area, the court's application of those principles to the facts of this case, and wariness about an overly expansive approach to accessory liability, will likely be considered carefully in comparable cases.

The key issue for the Court of Appeal to resolve, in relation to the claimants' cross-appeal, was whether a director of the defendant (Mr. Ioannou) was personally liable as an accessory to the negligent advice provided by his company (APP) in connection with the marketing of properties to unsophisticated investors; specifically, the failure to advise of the currency risks associated with the mortgage product offered as part of the package.  The court held that this should be determined through the application of a two-stage test: first, whether the individual defendant's participation in the tortious conduct was sufficient to render them liable as a joint tortfeasor (together with the company), and secondly, whether the individual defendant's status as a director of the primary tortfeasor afforded them a defence.  In order for the first stage to be surmounted, the three conditions articulated by Lord Neuberger in Fish & Fish v Sea Shepherd UK [2015] UKSC 10 [2015] AC 1229 had to be satisfied; the defendant must have assisted the commission of an act by the primary tortfeasor, the assistance must have been pursuant to a common design on the part of the defendant and the primary tortfeasor that the act be committed, and the act must have constituted a tort as against the claimant.

The Court of Appeal concluded that Mr. Ioannou was not liable as an accessory to the tort committed by APP.  The conditions outlined by Lord Neuberger were not discharged; as such, the cross-appeal failed at the first hurdle.  There was no "common design" between Mr. Ioannou and APP to commit the tort in question; namely, the negligent failure to warn of the currency risks associated with the mortgage product.  There was no conscious decision to omit such a warning. The court considered whether there was a common design between Mr. Ioannou and APP to market the properties in the manner they were marketed, which included a failure to advise of the currency risks, but dismissed such an interpretation as overly broad, holding that if this was sufficient to establish personal liability it would result in "an unduly wide view of the personal liability of directors and senior managers in such cases", and risk "driv[ing] a coach and horses though the concept of a limited liability company".

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This decision centred on the construction of a force majeure clause contained in a contract for the sale of a vessel and provides a useful illustration of how the courts will go about interpreting force majeure clauses.  The decision is clear that Covid-19 restrictions can constitute or give rise to a force majeure event, however the court noted that this depends on whether any inability to perform the contract materially undermines the "commercial adventure".  In this case, as the Covid-19 restrictions were only temporary in nature, they did not result in the contract becoming something radically different from what was agreed between the parties and so did not give rise to a force majeure event.

The case serves as a reminder that terminating a contract on the basis of a force majeure clause is by no means straightforward and that parties should carefully consider the particular terms of any force majeure clause they might wish to include in a contract.  The decision is important in signalling to parties to contracts that they cannot assume Covid-19 restrictions will allow them to walk away from their obligations.

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