Offshore Case Notes – Unscrambling Broad Idea and Black Swan

Offshore Case Notes

William Hare and Alistair Abbott
19 June 2020

Unscrambling Broad Idea and Black Swan

The recent decision of the Eastern Caribbean Court of Appeal (29 May 2020) in Broad Idea International Ltd v Convoy Collateral Ltd (BVIHCMAP2019/0026) has been hailed as an “overturning” of Black Swan Investment ISA v Harvest View Ltd (BVIHCV 2009/0399) and has prompted calls for emergency legislation by the BVI Government. We urge caution. We intend no discourtesy to the tribunals in either case in saying that we consider that neither Broad Idea nor Black Swan are solid in their reasoning.

Brief Summary

Properly analysed, we suggest:

• Black Swan went too far. Black Swan was always a problematic decision because it was never framed in the context of the Chabra relief that some have suggested it purported to support (rather unfortunately, the facts are not fully set out in the Black Swan judgment itself, but they are referred to in the decision in Osetinskaya v Usilett (BVIHC(COM) 37 of 2013)). Unless, however, the assets of the non-cause of action defendant (NCAD) can be shown to be owned beneficially by the cause of action defendant (CAD) – or there is proper basis of a Chabra claim for recourse against those assets – there can be no enforcement of any foreign judgment holding the CAD liable against the assets of the NCAD, as opposed to the CAD’s shares in the NCAD. Accordingly, the grant of a freezing injunction against the NCAD in respect of the NCAD’s own assets cannot be reconciled with fundamental principles of company law, for the reasons set out by Kawaley JA in Yukos CIS Investments Ltd v Yukos Hydrocarbons Investments Ltd (HCVAP2010/028, 26 September 2011) (quoted at paragraph 65 of the Court of Appeal’s judgment in Broad Idea).

• Broad Idea also goes too far. The conclusion of the Court of Appeal that there was no power to grant an interlocutory injunction (or other interim relief) in support of foreign proceedings (in the absence of a specific statutory provision) is incorrect. It is also incorrect to suggest that there is no common law basis for the grant of such injunctions.

• The Norwich Pharmacal jurisdiction is unaffected. The decision in Broad Idea has given rise to concern in some quarters that the court’s jurisdiction in relation to Norwich Pharmacal orders might have been removed. These concerns are misplaced. The Court of Appeal in Broad Idea was clearly dealing only with interim injunctions. The foundation of the jurisdiction to grant Norwich Pharmacal relief, however, lies in the old bills of discovery granted by the Court of Chancery prior to the Judicature Act.

• It is not easy to reconcile Broad Idea with Chabra relief. We tentatively consider that the solution may lie in the restricted way the Chabra jurisdiction is described in Broad Idea (in paragraph 55): there have to be substantive proceedings in the BVI, to which the NCAD is then joined as a defendant so as to “perfect” the court’s jurisdiction over it, but the separate corporate personality of the proposed NCAD will be observed. In other words, the side-issue of whether it is an agent/nominee for the CAD (or has some other relationship with the CAD falling within the Chabra jurisdiction) can be determined; however what is important is that the substantive claim against the CAD is one that can be determined by the BVI court. In reality, however, establishing jurisdiction over the foreign CAD may often be difficult.

Introduction
Claims against defendants for debts or damages are generally only worthwhile if any resulting judgment can be enforced. One of the challenges sometimes faced in litigation involving offshore companies is the need to obtain interlocutory relief in one country (such as an offshore domicile used by defendant either for its incorporation or as a location of assets) while main proceedings are intended to take place elsewhere. Users of offshore corporate domiciles have been known to structure their affairs in such a way that they may have few assets registered in their own names, assets instead being held via companies or trusts, which may themselves be held through, or operated by, nominees or other third parties. In the case of companies, if the shares in the company are registered in the name of the defendant, then at least the shares may be amenable to enforcement. However that may be of little value if the business and/or assets of the company have been dissipated prior to judgment.

In the case of BVI business companies, both the ultimate beneficial owner and the assets of the company will typically be geographically located elsewhere, and any substantive proceedings against that owner will quite often be in the courts or tribunals of another jurisdiction. A claimant may well be concerned to take steps to ensure that any value in the BVI company owned by the defendant is preserved pending judgment. Following an innovative decision of the BVI Commercial Court in 2010, BVI case law appeared to offer a means of achieving such preservation, even though there were no substantive proceedings in the BVI – and indeed quite possibly no substantive proceedings against the company anywhere. The Eastern Caribbean Court of Appeal has now reviewed that case law, however, and decided that it was not correctly decided. Legislative intervention may follow but pending such intervention, and in any event, the ramifications of the Court of Appeal’s decision merit careful consideration.

The former position: Black Swan
In Black Swan Investment ISA v Harvest View Ltd (BVIHCV 2009/0399), the claimant company (Black Swan) made a claim in South Africa against a Mr Rautenbach. It also applied to the BVI court for a freezing order against two BVI companies said to be owned or controlled by Mr Rautenbach, in aid of the South African proceedings. There were no substantive proceedings against the two BVI companies. The case had a curious procedural history, in that the judge had previously rejected the application for freezing relief on the ground of delay, but the Court of Appeal had reversed that decision and granted the relief. The application then came back before the judge and the question of jurisdiction was addressed.

The judge considered that the question of whether an interlocutory injunction could be obtained, in support of foreign proceedings, against a respondent who was subject to the personal jurisdiction of the court (albeit one against whom no substantive claim was made) had been left open by certain English case law (considered below). Relying on a dissenting judgment in one of those English decisions, and having regard to policy reasons he considered favoured the availability of a power, he held that the court did have power to grant such an interlocutory injunction in aid of foreign proceedings against a respondent company incorporated in the BVI.

The Court of Appeal decision: Broad Idea
The decision in Black Swan was followed at first instance in Broad Idea International Ltd v Convoy Collateral Ltd (BVIHCMAP2019/0026). Broad Idea was owned by a Dr Cho (50.1%) and a Mr Choi (49.9%). Convoy was bringing a claim against Dr Cho in Hong Kong. Convoy applied for a freezing injunction against Broad Idea and Dr Cho. The freezing order was granted at the ex parte stage. The order was subsequently set aside as against Dr Cho. As regards Broad Idea, Convoy applied to continue the ex parte order but also applied for another freezing order against Broad Idea in support of the Hong Kong proceedings against Dr Cho. At first instance, the BVI High Court maintained the freezing order relief.

Broad Idea appealed to the Court of Appeal. The main point considered by the Court of Appeal was whether the court had jurisdiction to grant a freezing order in circumstances where Convoy had no substantive claim in the BVI, and no substantive claim against Broad Idea anywhere in the world. The Court of Appeal ruled that there was no such jurisdiction, and that a freezing order could only be granted where the applicant had a cause of action against the respondent. The Court of Appeal considered itself bound by the Privy Council’s decision in Mercedes-Benz AG v Leiduck [1996] AC 284, [1995] 3 All ER 929, to the effect that there was (as the Court of Appeal interpreted that decision) a need for substantive proceedings in the BVI before a freezing order (or any other interim injunction) could properly be granted.

The Court of Appeal noted that the BVI High Court had personal jurisdiction over Broad Idea because it was incorporated in the BVI. As to whether it had subject matter jurisdiction, the starting point was section 24(1) of the Eastern Caribbean Supreme Court (Virgin Islands) Act, which conferred the power to grant interlocutory injunctions: the source of the power was therefore (in the Court of Appeal’s view) statutory, not common law. The Court also considered that English case law regarding a similar statutory provision in England clearly established that the power to grant an interlocutory injunction depended on there being a pre-existing cause of action against the defendant, who is amenable to the jurisdiction of the court (The Siskina [1979] AC 210(1), a decision of the House of Lords). An interlocutory injunction could only be granted to protect a legal or equitable right that the court could enforce by final judgment.
(1) Applied by the Privy Council in Mercedes-Benz.

Convoy had no cause of action against Broad Idea and had not sought to commence substantive proceedings against Broad Idea anywhere. The Court of Appeal considered, in the light of The Siskina line of case law, that the absence of any cause of action against Broad Idea was therefore fatal to the possibility of obtaining any interlocutory injunction against it.

In considering Black Swan, the Court of Appeal concluded that the judge in that case had been wrong to rely on the dissenting judgment of Lord Nicholls in Mercedes-Benz and should have followed the majority in Mercedes-Benz to conclude that he had no power to grant an interim injunction in support of foreign proceedings in the absence of an express statutory power to do so.

Despite noting that Black Swan had been hailed by the common law world as a welcome development, that decision was therefore overruled. The first instance judge in Broad Idea had, the Court of Appeal decided, therefore erred in relying on Black Swan.

Accordingly, the Court of Appeal held that, in the absence of legislative intervention, BVI courts cannot grant interim injunctions in support of foreign substantive proceedings. Blenman JA at paragraph 106 of the judgment strongly encouraged the BVI legislature to enact a provision enabling BVI courts to grant injunctions in support of foreign proceedings.(2)
(2) At the time of writing this article, drafts of proposed legislation have been circulated in the BVI for comment which, if enacted, might do that.

Analysis of the decision
As so much reliance was placed on them in the Court of Appeal’s judgment, it is important to assess what exactly was decided by the Siskina and the Mercedes-Benz cases.

The first point to note is that both these cases were concerned with leave to serve a defendant outside the jurisdiction, and not with a defendant who was within the territorial jurisdiction of the court.

In Siskina, what was decided was that, in order to come within what was then RSC Ord 11 r 1(1)(i) (enabling service out of claims for injunctions), the injunction sought in the action had to be the substantive relief to which the plaintiff’s cause of action entitled him. The injunction actually sought was only interlocutory and so the leave to serve the writ outside the jurisdiction was set aside (all other relief claimed in the writ having by then fallen away).

Lord Diplock stated as follows:

“A right to obtain an interlocutory injunction is not a cause of action. It cannot stand on its own. It is dependent upon there being a pre-existing cause of action against the defendant arising out of an invasion, actual or threatened by him, of a legal or equitable right of the plaintiff for the enforcement of which the defendant is amenable to the jurisdiction of the court. The right to obtain an interlocutory injunction is merely ancillary and incidental to the pre-existing cause of action. It is granted to preserve the status quo pending the ascertainment by the court of the rights of the parties and the grant to the plaintiff of the relief to which his cause of action entitles him, which may or may not include a final injunction.”

However, it is important to consider that passage in the light of the subsequent decision of the House of Lords in Channel Tunnel Group Ltd v Balfour Beatty Construction Ltd [1993] AC 334. In that case the House of Lords held that an application for an interlocutory injunction (under section 37 of the English Supreme Court Act 1981) was incidental to and dependent on the enforcement of a substantive right (usually a cause of action) but that it was not a necessary condition that the substantive claim should be for relief to be granted by an English court. In the particular circumstances of the case the grant of an injunction would have pre-empted the decision to be made by the arbitral tribunal in Brussels (the forum in which the substantive claim would be determined) and so it was held that it would be inappropriate to grant an interlocutory injunction.

Lord Browne-Wilkinson (with whom Lords Goff and Keith agreed), started his judgment with the following observation:

“I add a few words of my own on the submission that the decision of this House in Siskina (Owners of cargo lately laden on board) v. Distos Compania Naviera S.A. [1979] A.C. 210 would preclude the grant of any injunction under section 37(1) of the Supreme Court Act 1981, even if such injunction were otherwise appropriate. If correct, that submission would have the effect of severely curtailing the powers of the English courts to act in aid, not only of foreign arbitrations, but also of foreign courts. Given the international character of much contemporary litigation and the need to promote mutual assistance between the courts of the various jurisdictions which such litigation straddles, it would be a serious matter if the English courts were unable to grant interlocutory relief in cases where the substantive trial and the ultimate decision of the case might ultimately take place in a court outside England.”

Lord Browne-Wilkinson then referred (at 341) to the passage in Lord Diplock’s speech quoted above, and said this (at 342):

“This passage, read in isolation, suggests that there are only two limits on the general power conferred by section 37 viz. (1) that the court must have personal jurisdiction over the defendants in the sense that they can be duly served either personally or under Order 11 (other than sub-rule (i)); and (2) that the plaintiffs have a cause of action under English law. However it was submitted for the respondents that two other passages in Lord Diplock’s speech impose a third requirement, viz. (3) that the interlocutory injunction must be ancillary to a claim for substantive relief to be granted in this country by an order of the English court.”

He had little hesitation in rejecting the supposed third requirement. What mattered was whether the English court had power to grant the substantive relief, and not whether it would in fact be the tribunal that would do so. Clearly, where the court had personal jurisdiction over the defendant, it would have power to do so, even though the order for substantive relief might end up being granted in a different jurisdiction, for example if the defendant had agreed to an exclusive jurisdiction clause in favour of another court. There was therefore no requirement that the substantive relief was to be granted by an English court.

Lord Browne-Wilkinson then stated the following:

“Even applying the test laid down by the Siskina the court has power to grant interlocutory relief based on a cause of action recognised by English law against a defendant duly served where such relief is ancillary to a final order whether to be granted by the English court or by some other court or arbitral body.” [emphasis added]

That passage was quoted at paragraphs 19 and 38 of the Court of Appeal’s judgment, where in both instances the words underlined above were either omitted (paragraph 19) or (seemingly) overlooked (paragraph 38). With all respect to the Court of Appeal, far from stipulating that an interlocutory injunction could only be granted against a defendant where the substantive action was in England, Lord Browne-Wilkinson obviously contemplated and was making clear that the substantive determination of the plaintiff’s rights might well take place elsewhere, either in a foreign court or in an arbitration. Further, there was no relevant express statutory power to grant interim relief in support of foreign proceedings: the House decided that there was no such power in relation to foreign arbitrations under the arbitration legislation and the 1982 Act did not apply to arbitrations (see at 363-364 in Lord Mustill’s judgment). The source of the power to grant interim injunctions was therefore the general power to grant injunctive relief conferred by section 37 of the English Supreme Court Act (an analogue of the power conferred by section 24(1) of the Eastern Caribbean Supreme Court (Virgin Islands) Act), and the decision of the House of Lords was clearly to the effect that the English court could grant an interim injunction in support of foreign proceedings, as long as the respondent was amenable to the court’s jurisdiction. What is right, however, is that (as stated in paragraph 38 of the Court of Appeal’s judgment in Broad Idea) the injunction sought in Channel Tunnel was sought against the parties against whom the cause of action arose, not against third parties who were not the subject of any substantive claim for relief.

And so to Mercedes-Benz. In that case, the claimant had sued a defendant in Monaco. The defendant owned shares in a Hong Kong company, and the claimant sought a freezing injunction in Hong Kong against both the defendant and the Hong Kong company. The proceedings against the Hong Kong company were subsequently discontinued. The majority of the Privy Council considered that there was no power to permit service outside the jurisdiction on the defendant of a writ seeking only freezing (Mareva) relief (all other relief having fallen away by that point). The ratio decidendi of the Privy Council was confined to the issue decided by the majority, which concerned the position where the respondent to the freezing order application was not subject to the personal jurisdiction of the Hong Kong court.

Lord Mustill, who delivered the decision of the majority, identified two questions (at 297):

“The first is concerned with territorial jurisdiction. The foreigner is outside the jurisdiction. The claim against him has no connection with the home territory. No action against him in respect of that claim is brought, or properly could be brought, before the local court. But he has assets within the territory. Assume for this purpose that Mareva proceedings could have been commenced by writ or other originating process, and assume also that such relief could properly be given: i.e., that notwithstanding The Siskina [1979] A.C. 210 Mareva relief in support of foreign proceedings is permissible. Does the statutory enlargement of its territorial jurisdiction created by Ord. 11, r. 1(1) entitle the court to permit the service of a writ or other originating process claiming such relief on the foreigner out of the jurisdiction, thus compelling him to choose between suffering a judgment in default or appearing before a court which has no other jurisdiction over him to argue that his assets should not be detained? The second question is concerned with a different kind of jurisdiction; or, more accurately, a power. Assume for this purpose that the foreign defendant is someone who can be brought before the English court to answer a claim for a Mareva injunction, either because he is present here or because (contrary to the first defendant’s contentions on the first issue) Ord. 11, r. 1(1)(b) is wide enough to cover all kinds of injunction. Assume also that the matters in dispute have no connection with the English court, and that the plaintiff neither can, nor as in the present case intends to, bring them before that court. Does the court have power to restrain the free disposition of the defendant’s assets in England and Wales, to await the conclusion of proceedings brought against that person in a foreign jurisdiction?” [emphasis added]

What is critical for present purposes is that the majority only decided the first question, holding that the court could not permit the service of originating process out of the jurisdiction where the only relief claimed was Mareva relief. On that basis, the second question did not arise for decision, and the majority declined to express any conclusion on it. It was in that context that Lord Mustill said:

“It may well be that in some future case where there is undoubted personal jurisdiction over the defendant but no substantive proceedings are brought against him in the court, be it in Hong Kong or England, possessing such jurisdiction, an attempt will be made to obtain Mareva relief in support of a claim pursued in a foreign court. If the considerations fully explored in the dissenting judgment of Lord Nicholls of Birkenhead were then to prevail a situation would exist in which the availability of relief otherwise considered permissible and expedient would depend upon the susceptibility of the defendant to personal service.”

It is therefore clear that the ratio decidendi did not extend to the situation where the court had personal jurisdiction over a defendant but there were no substantive proceedings brought in that court. The ratio decidendi (regarding service out of the jurisdiction) was not relevant to the issues before the BVI High Court in Black Swan. Therefore, although decisions of the Privy Council are in general binding on the BVI High Court, contrary
to the view of the Court of Appeal in Broad Idea, the decision in Mercedes-Benz did not create a binding precedent for purposes relevant to the issues in Black Swan (where no question of service out arose), and the judge in Black Swan was quite right so to find. (What the Mercedes-Benz ratio is relevant to is the decision by a differently constituted Court of Appeal in the first Broad Idea appeal, in which judgment was given on 30 March 2020: it was held that there was no power to authorise service on a foreigner outside the jurisdiction under CPR 7.3(2)(b) where there was no substantive claim against that foreigner in the BVI court. That decision was a straightforward application of Siskina and Mercedes-Benz.)

It is right that the majority in Mercedes-Benz doubted that a writ could be issued at all claiming only Mareva relief (at 298-299) (in contrast to Lord Nicholls – see his judgment at 310), even against a defendant present within the jurisdiction, but it is also clear from that passage that the majority did not decide the point. The judge in Black Swan was therefore free to consider the dissenting judgment of Lord Nicholls, and indeed even the majority in Mercedes-Benz left open the possibility of Lord Nicholls’ reasoning prevailing in a situation where a court had personal jurisdiction over the defendant (see the extract quoted above). However, whether or not the dissenting view of Lord Nicholls was actually apposite to the facts in Black Swan is another matter entirely, and is considered further below.

The other key decision cited by the Court of Appeal in Broad Idea was Fourie v Le Roux [2007] UKHL 1. That decision post-dated the introduction of the English Civil Jurisdiction and Judgments Act 1982 and was decided having regard to section 25 of that Act. However, in relying upon paragraphs 30 and 31 of Lord Scott’s judgment, the Court of Appeal in Broad Idea (at paragraph 40) appears to have taken those paragraphs out of context. First, the quotation of paragraphs 30 and 31 of Lord Scott’s speech omitted the opening lines of paragraph 30, which stated:

“My Lords, these authorities show, in my opinion, that, provided the court has in personam jurisdiction over the person against whom an injunction, whether interlocutory or final, is sought, the court has jurisdiction, in the strict sense, to grant it. The practice regarding the grant of injunctions, as established by judicial precedent and rules of court, has not stood still since The Siskina was decided and is unrecognisable from the practice to which Cotton LJ was referring in North London Railway Co v The Great Northern Railway Co (1883) 11 QBD 30 at 39–40 and to which Lord Diplock referred in The Siskina at 256. Mareva injunctions could not have been developed and become established if Cotton LJ’s proposition still held good.”

Indeed, Lord Scott had discussed the developments in the case law since The Siskina culminating in Channel Tunnel. Where he stated (in paragraph 30 of his judgment) that the courts in 1977 might have agreed that Mareva injunctions could only be granted in support of substantive proceedings in England, he was clearly not suggesting that the English courts had no jurisdiction to grant relief in support of foreign proceedings prior to the 1982 Act, because the Channel Tunnel decision had by then already clarified that the substantive relief did not have to be granted by the English court (see above). In paragraph 43 of its judgment in Broad Idea, the Court of Appeal therefore misconstrued Lord Scott’s observations in Fourie, and also failed to take account of the decision in Channel Tunnel.

Similarly, although Lord Bingham (at paragraph 3 of the Fourie judgment) stated that the claimant needed to be able to identify the prospective judgment whose enforcement is at issue, he did not state that it had to be a judgment of the English court.

Paragraph 40 of the Court of Appeal’s judgment in Broad Idea therefore goes too far in stating that “the ineluctable inference from Lord Scott’s statement is that the English High Court had no jurisdiction to grant such relief prior to the enactment of the Civil Jurisdiction And Judgments Act 1982”. That is not the position.

In addition, the mere fact that the legislature has expressly conferred a power (e.g. the BVI Arbitration Act) does not mean that the power did not already exist at common law (contrary to paragraph 42 of the Court of Appeal’s judgment). Indeed, the inclusion of an express power to grant relief in support of foreign arbitrations obviously has its etymology in the UNCITRAL Model Law that gave rise to the BVI Arbitration Act, which contemplated courts having powers to grant interim relief in support of foreign arbitrations (albeit in the case of the Arbitration Act the BVI legislature used different wording from that supplied in the Model Law).

Finally, although the Court of Appeal in Broad Idea considered that interim injunctions were a purely statutory creation (see paragraph 15 of the judgment), that is a questionable conclusion and inconsistent with what was said by Lord Scott in Fourie (see paragraph 25 of his judgment):

“The power of a judge sitting in the High Court to grant an injunction against a party to proceedings properly served is confirmed by, but does not derive from, section 37 of the Supreme Court Act 1981 and its statutory predecessors. It derives from the pre Judicature Act 1873 powers of the Chancery courts, and other courts, to grant injunctions (see s.16 of the 1873 Act and s.19(2)(b) of the 1981 Act).”

and also inconsistent with what Lord Mustill said in Mercedes-Benz (see at 299):

“After only a few years the development of a settled rationale [for the availability of Mareva relief] was truncated by the enactment of section 37(3) of the Supreme Court Act 1981. This did not, as is sometime said, turn the common law Mareva injunction into a statutory remedy, but it assumed that the remedy existed, and tacitly endorsed its validity.”

The conclusion of the Court of Appeal (in paragraphs 43 and 44 of its judgment) that there was no power to grant an interlocutory injunction (or other interim relief) in support of foreign proceedings (in the absence of a specific statutory provision) therefore goes too far and is inconsistent with the House of Lords’ decision in Channel Tunnel. Similarly, the suggestion that there was no common law basis for the grant of such injunctions was also incorrect, for the same reason.

However, even if the Court of Appeal’s decision in Broad Idea went too far, that does not necessarily mean that Black Swan was rightly decided.

The problem with Black Swan

As the Court of Appeal indicated (at paragraph 36), it appears that in Mercedes-Benz, Lord Mustill’s caveat at the end of his judgment (regarding the situation where a court had undoubted personal jurisdiction over the defendant) was contemplating a situation where the freezing relief was being sought against the very defendant against whom the foreign substantive proceedings were being pursued. Lord Nicholls’ dissenting judgment also focused on whether Mareva relief could be available against the substantive defendant (and so Blenman JA’s observation in paragraph 102 that Lord Nicholls did not go as far as the judge in Black Swan is quite right).

Similarly, in Channel Tunnel, the freezing order sought was against the party that was the defendant to the substantive foreign proceedings (in that case, arbitration proceedings).

Accordingly, although Channel Tunnel indicates that an interim injunction may be granted against X in support of foreign substantive proceedings against X (at least where the English court would recognise the substantive cause of action and would in principle have had jurisdiction to grant relief upon it because X is subject to the jurisdiction of the English court), it does not go so far as to support interim injunctive relief against X in support of substantive foreign proceedings against Y, particularly where there are no substantive proceedings anywhere against X. Black Swan is an example of the latter situation, and so went much further than the decisions it relied on.

Of course, there is a recognised jurisdiction to grant injunctive relief against an entity against which there is no substantive cause of action: the Chabra jurisdiction (TSB Private Bank International SA v Chabra [1992] 2 All ER 245). Under that jurisdiction, a court may grant an injunction against a non cause of action defendant (“NCAD”) provided that the claim for the injunction is ancillary and incidental to the cause of action against another defendant before the court, the cause of action defendant (“CAD”), against whom freezing relief is also granted, and that there is a good arguable case that there are assets of the NCAD that are beneficially owned by the CAD, or that the CAD has a substantive right against the NCAD such that the NCAD might through some enforceable means be required to contribute funds to the CAD to enable a judgment debt to be satisfied (Commissioners of Revenue & Customs v Egleton [2006] EWHC 2313 (Ch)).

However, the judge in Chabra considered (following the Siskina) that there was no jurisdiction to grant freezing relief sought solely against the NCAD, in proceedings in which there was no CAD. The Court of Appeal in Broad Idea rejected Chabra relief on the same basis in paragraph 56 of its judgment. The same would have applied in Black Swan – just as in Broad Idea (in which initially the CAD was joined in Broad Idea, but for which leave to serve out was set aside), the only respondents were NCADs.

It is notable that the judge in Black Swan made no reference to Chabra and the decision does not purport to have been an exercise of the Chabra jurisdiction. The basis for the Black Swan decision appears to have been simply that the CAD (who was being sued only in foreign proceedings) had – or arguably had – assets in the BVI in the form of shares in the respondent companies. However, the injunction was not made against the CAD, but purely against the NCAD, and prohibited the NCAD from disposing of its own assets (this point does not emerge from the Black Swan judgment itself but is revealed in the decision in Osetinskaya v Usilett (BVIHC(COM) 37 of 2013)).

Unless, however, the assets of the NCAD are beneficially owned by the CAD or there is some enforcement process by which the claimant can obtain recourse to the assets held by the NCAD (as contemplated by the Chabra jurisdiction), there can be no enforcement of any foreign judgment holding the CAD liable against the assets of the NCAD, as opposed to the CAD’s shares in the NCAD. Accordingly, the grant of a freezing injunction against the NCAD in respect of the NCAD’s own assets is hard to reconcile with fundamental principles of company law, for the reasons set out by Kawaley JA in Yukos CIS Investments Ltd v Yukos Hydrocarbons Investments Ltd (HCVAP2010/028, 26 September 2011) (quoted at paragraph 65 of the Court of Appeal’s judgment in Broad Idea).

The ground for the Court of Appeal’s decision set out in paragraphs 56 and 66 of the Broad Idea judgment is therefore preferable to the (incorrect) notion that there was no jurisdiction to grant interim injunctions in support of foreign proceedings where the respondent was amenable to the jurisdiction of the BVI court.

However, even in relation to this ground, the Court of Appeal may have overlooked just how broad the Chabra jurisdiction has become in the light of decisions such as Egleton. In paragraph 64 of its judgment, the Court of Appeal in Broad Idea considered that a money judgment against the CAD would not give the claimant an enforceable right against the NCAD. However, Egleton is authority for the proposition that, in principle, Chabra relief may be available against a mere debtor of the CAD (see paragraph 29 of the Egleton judgment), subject to establishing the other criteria for obtaining freezing relief. If the CAD owns either 100% of the NCAD – or even a sufficient percentage to be able to control its affairs – then if the claimant were (through a charging order and sale) to acquire the CAD’s shares, it would not be limited to petitioning for winding up as a shareholder: it would be able to procure a voluntary winding up of the NCAD such that the NCAD’s (net) assets became available towards the CAD’s debt, and so would likely fall within Chabra as extended by Egleton. A similar conclusion was reached by the Cayman Islands Court of Appeal in Algosaibi v Saad Investments Co Ltd [2011] 1 CILR 178 at paragraph 33 per Sir John Chadwick P: although mere control by the CAD over the NCAD is insufficient, if the claimant can through some process of enforcement obtain recourse to the assets held by the NCAD, that suffices to trigger the jurisdiction.

The Chabra point in Broad Idea: does Chabra survive Broad Idea?

The judge at first instance in Broad Idea had also relied on the Chabra jurisdiction. The Court of Appeal dealt swiftly with this aspect of the decision, holding that the Chabra jurisdiction had been unavailable because there was no substantive claim against a CAD in the BVI (there being no substantive claim against Dr Cho there). There was also held to be no sufficient basis for the judge’s conclusion that Broad Idea was holding its assets as a nominee for Dr Cho (effectively being a money box for him), with him being the true beneficial owner, and so it could not be said that Broad Idea’s assets were amenable to enforcement in respect of any judgment against Dr Cho (though see above, regarding the breadth of the Chabra jurisdiction).

The Court of Appeal’s reasoning regarding the need for a substantive cause of action at first sight appears to indicate that there can never be interim injunctive relief against an NCAD, because the injunction can only be granted against the substantive defendant, and paragraph 1 of the headnote appears to adopt that interpretation of the decision. However, other passages in the judgment (for example, paragraph 14) focus on the issue of injunctive relief in support of foreign proceedings, and the passage at paragraphs 51 to 56 appears to assume that the Chabra jurisdiction exists in BVI and remains available.

These statements are not easy to reconcile, but the answer – at least for the time being – may lie in the restricted way the Chabra jurisdiction is described in paragraph 55: there have to be substantive proceedings in the BVI against the CAD, to which the NCAD is then joined as a defendant so as to “perfect” the court’s jurisdiction over it, but the separate corporate personality of the proposed NCAD will be observed (so Broad Idea could not have been joined on this basis, because there were no substantive proceedings in the BVI).

The approach of the Commercial Court in Elvaston Place

This appears to have been the approach adopted by the High Court in Commercial Bank of Dubai v 18 Elvaston Place Ltd & another (BVIHC (COM) 2020/0070). In that case an ex parte “Black Swan” injunction had been granted but the matter had been brought back to the Court following the decision in Broad Idea. An application was made to join an “anchor” defendant (the CAD) against whom a substantive cause of action law, to provide the foundation for a Chabra injunction. The judge considered that the Court of Appeal in Broad Idea had not questioned the Chabra jurisdiction. The judge also noted that CPR 19.3 provided a mechanism for joining parties where it was desirable so that the court could resolve all matters in dispute or where there was an issue involving the new party that was connected to the matters in dispute in the proceedings and it was desirable to join the party so that the court could resolve that issue.

However, the question then arose of what was the cause of action against the CAD. There were already substantive proceedings against the CAD in Dubai. The applicant relied on a prospective right to enforce a future Dubai judgment and sought permission to serve outside the jurisdiction. The judge had little difficulty in rejecting that argument, on the ground that there was no existing judgment and so no present right to enforce anything. Permission to serve the CAD outside the jurisdiction was therefore not available.

The judge himself postulated that the underlying claim against the CAD (i.e. the same claim that was being litigated in Dubai) might provide a basis for joinder, albeit that the substantive claim against the CAD would immediately be stayed pending the outcome of the Dubai proceedings. Although that claim had no connection to the BVI and was already being litigated in Dubai, the judge considered that those factors went only to forum conveniens, and not to the power to join the CAD to the BVI proceedings, because the CAD was a necessary party to the claim for Chabra relief. With respect, however, that resembles a bootstraps argument: the power to grant Chabra relief against the NCAD is conventionally regarded as being parasitic on there being a CAD amenable to the jurisdiction.

Further, the CAD was not present within the jurisdiction and so could not be served personally within the BVI. The judge considered that this hurdle might have been overcome by the court granting permission for alternative service (referred to as “service by a specified method” in the CPR), with the method specified being service on the BVI registered agent for the NCAD, i.e. enabling service to take place within the jurisdiction. The judge considered that the trend in the English authorities towards alternative service was becoming more pragmatic, focusing on whether the method of service was likely to bring the claim form to the defendant’s attention. There do, however, appear to be problems with this approach:

1. Where a defendant is not within the jurisdiction and cannot be personally served, it is not permissible to avoid the requirements and safeguards involved in the regime governing service outside the jurisdiction by manufacturing a process whereby service occurs within the jurisdiction.

2. It appears that the judge assumed that service on the NCAD’s registered agent in the BVI was likely to result in the claim being brought to the (foreign) CAD’s attention. Where the NCAD is little more than an alter ego for the CAD, that may be correct. However, the Black Swan jurisdiction went a lot further than alter ego cases, and enabled injunctive relief as long as the CAD owned shares in a BVI NCAD. The mere fact that the CAD is a shareholder in the NCAD would seem unlikely to justify an assumption that proceedings would necessarily come to the attention of the CAD in a timely manner.

3. Insofar as the NCAD might be argued to be a nominee or agent for the CAD, again, such an argument would not be available in all Black Swan-type cases. Further, CPR 5.17 already provides for service on a BVI agent of a foreign principal, but the agent must still maintain business relations with the defendant or retain authority to represent the defendant, and the contract to which the claim relates must have been made in the BVI with or through the agent, conditions that may well not be satisfied (and in the more egregious cases are most unlikely to be satisfied) in many Black Swan-type cases. Absent legislative intervention, we are sceptical that it is permissible (or possible) to create a new ground on which agents of foreign principals can be served.

Norwich Pharmacal Orders

The decision in Broad Idea has given rise to concern in some quarters that the court’s jurisdiction in relation to Norwich Pharmacal orders might have been removed. We do not share those concerns. The Court of Appeal in Broad Idea was clearly dealing only with interim injunctions. The foundation of the jurisdiction to grant Norwich Pharmacal relief, however, lies in the old bills of discovery granted by the Court of Chancery prior to the Judicature Act, as explained in the decision of the House of Lords in Norwich Pharmacal itself (Norwich Pharmacal Co. & Others v Customs and Excise Commissioners [1974] AC 133) Nothing in the Court of Appeal’s judgment in Broad Idea indicates that the Court of Appeal was seeking to have any effect on that jurisdiction, still less abolish it.

What now

Broad Idea represents the law in the British Virgin Islands and is binding on the lower courts (including the BVI Commercial Court). It is presumably open to the losers in Broad Idea to seek to appeal their case to the Judicial Committee of the Privy Council, should their clients wish to do so and should leave be granted. The Court of Appeal is plainly of the view that the matter is one of public interest (hence the suggestion of legislation); however they may also be persuadable of the possibility that may have missed the mark in this decision and – rather than causing a rushed legislative response – the interests of the courts might be best served by staying the decision (or at least part of it) pending further judicial consideration.

Failing that, legislative intervention may now be needed in order to correct what appears to be an erroneous course taken by the Court of Appeal in apparently ruling out in all situations interim relief in support of foreign substantive proceedings. For the reasons explained above, we believe that the jurisdiction to make such orders does exist, and its existence was confirmed by Channel Tunnel where the respondent was amenable to the court’s jurisdiction.

However, as regards the former “Black Swan jurisdiction”, we consider that the legislature should resist any temptation simply to restore the full ambit of that purported jurisdiction without full consideration of the issues involved. As we hope we have shown, the foundations of Black Swan were never particularly robust and, in permitting injunctive relief against parties who were not the subject of any substantive claim, merely on the ground that they were owned – or arguably owned – by a defendant to a foreign claim, Black Swan went far further than the decisions it purportedly relied on. Whilst the BVI courts have an admirable record of providing robust assistance in appropriate cases to litigants who seek its assistance, any desire to assist the enforcement of foreign judgments must be tempered by the need to respect fundamental principles of company law and provide adequate safeguards in circumstances where the BVI courts will necessarily not be considering the merits of the substantive case, which may be decided under a legal system whose approach to questions of BVI company law may well differ markedly from the approach that the BVI Commercial Court would take to the same questions, with correspondingly differing results.

Permitting the foreign substantive defendant’s shares in a BVI company to be frozen is easier to justify, though. In addition to primary legislation enabling such relief to be granted there would also need to be an amendment to the Civil Procedure Rules to permit service out of the jurisdiction on the substantive defendant, who will typically not otherwise be amenable to BVI jurisdiction.

In the meantime, pending legislative intervention and/or judicial illumination of a path out of this bog, we would expect to see:

(i) attempts to join BVI companies that are said to be assets of foreign substantive defendants into the relevant foreign proceedings, in order that interim relief can be sought against them in the foreign court;

(ii) in the case of Chabra claims, there will have to be substantive proceedings against the CAD in the BVI to which the NCAD will be joined as a defendant for the purposes of the relief sought (to “perfect” the court’s jurisdiction over it, but respecting the separate corporate personality of the proposed NCAD).

 

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Contacts

William Hare
william.hare@forbeshare.com
William is a litigation partner in Forbes Hare’s BVI office

Alistair Abbott
alistair.abbott@forbeshare.com
Alistair is a litigation partner in Forbes Hare’s Cayman Islands office, also admitted to practise in the BVI

Please do feel free to contact either William or Alistair if you have any comments or questions.

The opinions in these notes are William’s and Alistair’s and are offered subject to the usual caveat that they are not to be relied on in any particular circumstances, nor are they to be relied on without our permission.