I have already written extensively about the case of Compson v FSC & Weal V FSC involving an appeal against certain decisions of the Gibraltar Financial Services Commission ("FSC") , unreported, 29th April 2015, and therefore for the purposes of this briefing note, I will assume that the background is known to readers.
Suffice it to say that related litigation continues, with a number of judgments recently handed down by the Supreme Court of Gibraltar and an appeal to the Court of Appeal. These arose out of an ex parte application for a freezing injunction by the Administrator of Advalorem Value Asset Fund Limited against certain named defendants (including Mr and Mrs Compson). The claimant's Administrator made allegations of fraud whereby monies from United Kingdom pension schemes were allegedly used to purchase land in Scotland at a grossly excessive price. The allegations are set out in the Judgement handed down by Mr Justice Jack on 4th September 2015.
The Judge noted that when he set out the facts in his Judgment, he was making no determination of the facts, as that would only happen after trial (or possibly a summary judgment application) and that since the claimant made the application ex parte, he had not heard from the defendants and had an open mind as to what their case might be and as to the evidence in general. The Court's sole task in the injunction application was to determine whether the requirements for a freezing order (and in relation to one of the defendants for service out of the jurisdiction) were established. The application for a freezing order was refused against one defendant (Mr Weal), but granted against the other defendants (it is important to stress that there were other named defendants in this case, not just Compson and Weal). The application to serve AAML outside the jurisdiction was also granted. I do not propose to review the Judgment in detail (particularly as it arose from an ex parte application). There is, however, one dicta (the Judge did not decide the point) which I consider to be potentially important in the context of the Gibraltar finance sector, and which I will come to later.
Of course, the fact that an interim injunction is obtained is no reflection on the merits of any case or the liability of any defendant. That can only be a matter for trial. A freezing injunction is only meant to safeguard the position of a claimant should he be able to later prove his allegations. It should also be noted that at the ex-parte application stage when none of the defendants were present or represented, Mr Justice Jack held that the claimant had failed to show a good arguable case against Mr Weal in fraud or in negligence or breach of statutory duty. Accordingly, he refused to grant an injunction against Mr Weal.
Interestingly, following the ex parte application three further judgments were handed down in short succession. The first was a Judgment dated 18th September 2015. It transpired, as far as one of the named defendants against whom the freezing order was granted, that the wrong man living in Gibraltar had been identified and served. In fact, the person that should have been the intended defendant in these proceedings is not a Gibraltar resident. The claimant acknowledged the error, the banks and other financial institutions were informed and moved quickly to try and rectify matters. They therefore brought the matter back to Court where the claimant unconditionally apologised for the error and the freezing order was amended to remove the wrong man. Payment of damages was also agreed between the parties.
A few days later (23rd September 2015) another Judgment was handed down by Mr Justice Jack, following the return date on the freezing order and submission of arguments by counsel on behalf of Mr and Mrs Compson and AAML. Other defendants did not appear and were not represented. Following consideration of full submissions on behalf of Mr and Mrs Compson and AAML, the Judge refused to extend the freezing order against these parties. The Judge heard arguments on the existence of D&O Insurance and found it very significant in considering whether to continue the freezing order or not that the Compsons appeared to have insurance to defend themselves against the current litigation (something that was subsequently put in issue by the Administrator following the handing down of the written Judgment itself). Per the Judge "Insurers are notoriously unsentimental", although it is of note that this was held by the Court of Appeal to be an uncertain basis for the Judge's decision. The Judge further held in determining for the purposes of the continuation of the freezing order, that he considered the Compsons had shown a sufficient basis for there to be a potentially viable third party claim by them against a certain firm of overseas solicitors for an indemnity or contribution (again, subsequently put in issue by the Administrator). Thirdly, the Judge considered it a "striking fact that no criminal investigation has been begun against Mr and Mrs Compson, despite them expressly raising this as an issue with the FSC" (apparently as long before as March 2013). On this point the Court of Appeal held that it was not clear what significance the Judge attached to the point.
The final Supreme Court judgement was handed down on the 24th September 2015. This followed the handing down of the Judgment of 23rd September 2015, following which counsel for the Administrator made an oral application to the Judge for him to revise substantially the Judgment he had just handed down. He sought a continuation of the freezing order against AAML and the Compsons. The first point made was that there was a misunderstanding of the true position as to whether the D&O insurers were paying the legal costs of Mr and Mrs Compson. Apparently the insurers had not yet made a decision whether to fund the current litigation. The misunderstanding may have arisen from the fact that the insurers were apparently paying the costs of Mrs Compson's appeal against the decision in the FSC case. The second point raised was in relation to certain comments in the written Judgment whereby counsel for the Administrator did not recall saying that the Claimant itself was considering a claim against the firm of overseas solicitors. The last point raised was based on a fresh document, not previously adduced into evidence, namely a letter from the said solicitors to Mrs Compson, which the Judge accepted were it admissible did weaken the Compson's third party claim somewhat but not nearly sufficiently for him to change his view on whether a good arguable case had been established (with the Court of Appeal deciding on this point that it could see no error in the Judge's reasoned conclusion). After considering all the points made, the Judge held that none altered the substantive result recorded in his Judgment of 23rd September 2015 and the decision therefore stood. He also ordered that the claimant pay the costs of Mr and Mrs Compson and AAML.
These Supreme Court Judgements are highly readable. All Judgements are available from the Gibraltar Court Service website. It is often said that litigation is unpredictable. It is certainly never boring. It has also emerged from these proceedings that the FSC decision is being appealed by Mrs Compson and Mr Weal to the Court of Appeal. Finally, I mentioned at the beginning of this article that there was a dicta in the Judgment of the 4th September 2015 (following the ex parte application) which I consider to be potentially important in the context of the Gibraltar finance sector if the Judge is right here. This is found at paragraph 64 and is reproduced in full below:
"64. The case against Mr and Mrs Compson is complicated by the fact that at the time they are alleged to have been de facto directors of Advalorem, they were acting as directors of AAML, which was a de jure director of Advalorem. A question of law arises as to whether that is sufficient to prevent them being de facto directors of Advalorem. This is a point argued by Mr Winter QC on Mrs Compson's behalf in her appeal against the FSC, but I did not decide the point in that case, because I considered that the key question was whether Mrs Compson was a fit person to be a director. It is a difficult question of law. A possible solution might be to say that, since Mr and Mrs Compson owed fiduciary duties to AAML which exactly matched the fiduciary duties owed by AAML to Advalorem, the back-to-back fiduciary duties can be considered to be concertina'd into a fiduciary duty owed by the Compsons to Advalorem directly. With some diffidence, I consider the claimant has shown a good arguable case on breach of fiduciary duty against Mr and Mrs Compson."
This dicta might affect the operations of companies in Gibraltar and corporate behaviour in future. This is because hundreds of Gibraltar companies are managed through corporate entities. That is to say, instead of individuals being appointed as directors, often corporate entities discharge that role. When faced with litigation for breach of fiduciary duties (especially in insolvency), those that control the corporate director could be expected to argue that they cannot be held personally liable as the proper party to any litigation is the corporate director itself (not the individual directors behind that entity). My own personal view is that the Judge was right to raise this as a question for determination by a future Court, if only because those who control entities that discharge fiduciary duties need to know where the ultimate responsibility lies. Further, the corporate world is very different to what it was, say, 20 years ago and today the expectation of regulators and tax authorities alike is that the actions of directors must be underpinned by transparency and accountability. Of course, the only comfort for such directors is D&O Insurance as it should no longer be assumed that the corporate form will provide full-proof protection where breach of fiduciary duties can be established. In this case, D&O insurance was in place and indeed this was a requirement for the establishment of the EIF Fund.
Insolvency related litigation is notoriously unpleasant and combative. In this latest court saga the Administrator brought proceedings against a background involving allegations of impropriety. This included proceedings against Mrs Compson and Mr Weal (the claimants in the original FSC court case). What litigants have to be careful when advancing a claim for alleged fraud is that not all defendants might be viewed in the same way by the courts even where a fraud has been committed and a judge has to unravel the facts. Here the claim against Mr Weal was dismissed in the ex-parte application. The Compsons themselves obtained a hard-fought 'round 2' court victory in a decision which, as far as they were concerned, was probably not surprising on the facts given the Judge's findings. There are those within the Gibraltar financial sector who believe that the pendulum swung too far in the FSC case arising from certain dicta (i.e. that if the Judge's observation that the Court should be reluctant to interfere with regulatory sanctions is followed in the future, few, if any, cases will ever be successfully appealed). Whether or not this is so still has to be decided by the Court of Appeal following Mrs Compson's appeal against the FSC decision. Clarification and further judicial guidance would certainly be welcome by directors of Gibraltar companies, especially as the corporate environment in Gibraltar is likely to become more litigious if there is an increase in the number of liquidations in the future.
The final episode in the saga took place in the Court of Appeal, with the Judgment dated 10 December 2015. The Administrator appealed the decision of Mr Justice Jack in his Judgments dated 23 September 2015 and 24 September 2015 respectively.
In a very lengthy Judgment which reviewed all the evidence and decision of the lower Court, the Court of Appeal found that the Supreme Court Judge had erred on certain aspects of his decision but not on others. The Judgment was delivered by Potter, JA, with whom the other Court of Appeal Judges agreed.
The Court of Appeal held, inter alias "[...] when considering the question of "good arguable case", in my view the Judge was wrong in the decision he reached based on the various considerations I have enumerated."
However, the Court of Appeal further held that this is not the end of the matter for the purposes of the injunctive relief sought and that Mr Justice Jack had to give separate consideration to the Risk of Dissipation, which he did. Here the Court of Appeal held that the Judge followed the correct approach in cases of this kind. The appeal was therefore dismissed.
It is not reported in these Judgments what cost liability the Administrator faces. However, Mr Justice Jack awarded costs to the Compsons when he discharged the freezing order, whilst the matter of costs in the Court of Appeal is to be heard at the next session of that Court, and there being also a pending application by the Compsons for damages pursuant to the undertaking.
I think what these cases highlight is that questions of knowledge and intent (especially when made against a background of allegations of impropriety) are fact-specific and will depend very much on a judge's view of the evidence before him.
Finally, by way of general comment:
First, the predicament that Mr and Mrs Compson find themselves in is most unfortunate, with their personal financial affairs now very precarious, as evidenced in the Court's assessment of the risk of dissipation of assets. The FSC investigations and decisions concerning their fitness and propriety, the allegations of fraud and related litigation, have impacted significantly on their ability to seek employment in the financial sector in the future, and in the case of Mr Compson the Court of Appeal observed "he is currently unable to work through ill-health. He has retired and it is not clear when, if at all, he will be able to resume work, even if he wished to do so." It is important for all Gibraltar EIF Directors to be aware of this potential occupational hazard.
Second, whilst these Court cases continue to provide little comfort to EIF Directors, in my view they equally send a message to liquidators that judges will consider the evidence carefully and that different inferences can be drawn depending on the evidence, such that matters tend never to be clear cut when litigating. In this case the Administrator lost the appeal to the Court of Appeal, notwithstanding certain findings in his favour. In my view these proceedings therefore strengthen the argument for the future that insolvency related litigation, generally, should try to be settled out of Court given the uncertain nature of litigation.
Third, if any lessons come out of this for EIF Directors, arguably, it must be that they should not delegate dealing with due diligence by a professional services provider to a third party where he has no formal appointment or role with the company, and also that professional valuations based on "fantasy assumptions" will be looked at unfavourably by the Courts. It is of note, however, that in his Judgment in the regulatory appeal, Mr Justice Jack asked for the matter to be reported to the relevant valuers' professional body the Royal Institution of Chartered Surveyors for investigation (paragraph 16, 78 et seq and particularly 84, Compson v FSC & Weal v FSC).
Fourth, directors that do not have adequate D&O cover, the financial means or professional support to defend any future allegations/claims against them, take on the responsibilities and duties of Directors at their peril. In this case, as already stated, there was such D&O cover. A wider question for discussion might be, given the spate of litigation, should directors generally enjoy protection beyond standard D&O insurance cover; for example, statutes that limit the liability of directors, in certain circumstances, by agreement in the bylaws (articles). Of course, this would be a matter for the legislature.
Fifth, in countries around the world liquidators sometimes face criticism about the costs of insolvent liquidations, which costs are paid out of the estate. Unsuccessful litigation can significantly drive up the costs of any liquidation.
Sixth, these new cases come against a background of growing debate within the local financial sector about the role of the EIF regime and of regulation more generally.
Separately, on the 7 September 2015 the FSC published a Policy Statement and accompanying paper setting out its approach to the thematic review of EIF Directors. The Statement sets out the FSC's expectations of the approach Directors of EIFs should take to their role and responsibilities as Directors. The Paper also explains what directors can expect from the thematic review and the broader outcomes the FSC aims to have achieved at the conclusion of the review. In her speech at GACO's Risk Awareness Week (held on the 7 September 2015), the FSC's CEO, talked about the risks that poor standards can pose to consumers, the financial services sector and to the jurisdiction if EIF Directors do not carry out their duties properly. The CEO also explained how the FSC's work will focus on making sure that all directors conduct the role effectively and competently, supporting a well-controlled environment for EIFs activities. She also noted referring to the Compson case: "It is clear that this action, upheld when appealed to the Gibraltar Supreme Court, has had an impact in Gibraltar. In particular, I have welcomed the subsequent focus on the need for directors of licensees to consider carefully whether they are properly discharging their duties. This is important, not just to give confidence that there is a credible deterrent against wrong doing in Gibraltar, but also to enhance the reputation of Gibraltar as a safe jurisdiction for investors and reputable players to do business."
My own view is that nothing which the FSC has said could have come as a surprise. The industry is currently working collaboratively with the regulator for the mutual benefit of all Gibraltar stakeholders. Because of its relative size and high involvement of local professional firms, however, the Gibraltar financial sector is extremely sensitive to regulatory changes as these can have a disproportionate impact on the overall economy. It is therefore always important to maintain a proper balance between good regulation and over-regulation, especially in order not to stifle innovation and growth.
For further information, please contact Nigel Feetham at email@example.com
Nigel Feetham is a partner at Hassans (a Gibraltar law firm) and Visiting Professor at Nottingham Law School, Nottingham Trent University. Nigel is also the author and co-author of a number of books.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.