UK: Court Of Appeal Re-Opens Gateway For Service Of Claims Against Foreign Parties In Respect Of Transactions Defrauding Creditors

Disagreeing with the High Court, the Court of Appeal has ruled that a claim by a creditor under section 423 of the Insolvency Act 1986 falls within the jurisdictional gateway permitting service out of the jurisdiction at common law for claims "under an enactment which allows proceedings to be brought": Orexim Trading Limited v Mahavir Port and Terminal Private Limited [2018] EWCA Civ 1660.

In doing so, the Court of Appeal resolved the conflict of authority at first instance in relation to the court's approach to the "enactment" gateway (paragraph 3.1(20) of CPR PD 6B), holding that it was unnecessary for the enactment in question specifically to contemplate proceedings against foreign defendants. It was sufficient that section 423 was not on its face limited to claims against defendants in England and Wales.

This decision removes the difficulty that creditors may have experienced in making section 423 claims against defendants domiciled outside the EU following the first instance decision. It is no longer necessary to identify an alternative gateway in order to obtain permission to serve out; the "enactment" gateway can be relied upon provided that the creditor can show that its claim has a reasonable prospect of success and that England and Wales is the proper place to bring the claim. This is a useful option where claimants are seeking to recover assets that defendants have tried to put out of the reach of creditors.

Outside the insolvency sphere, the Court of Appeal's approach will likely permit statutory claims to be brought against foreign defendants even where the statute does not expressly contemplate extra-territoriality, provided that the proper construction of the statutory provision permits extra-territoriality (and subject to establishing the other required elements for service out). This is a further example of the court giving a wide interpretation to a common law gateway (see also our post on Eurasia Sports Ltd v Mahchi Aguad [2018] EWCA Civ 1742 here).

The decision in Orexim is unlikely to affect claims against defendants within the EU, where the recast Brussels Regulations applies in place of the jurisdictional gateways, though the status of the Brussels Regulation remains uncertain given the ongoing negotiations between the UK and EU regarding Brexit.

Andrew Cooke, a senior associate in our contentious restructuring, turnaround and insolvency team, considers the decision further below.

Background

The factual background is explained in our note on the High Court decision. Briefly, Orexim, a Maltese company, brought proceedings against defendants incorporated in India and Singapore. As part of these proceedings, Orexim alleged that one of the defendants had sought to puts its assets beyond the reach of its creditors by transferring ownership of a vessel to another defendant, who transferred it to the third defendant. Orexim sought an order under section 423 setting aside the sale of the vessel as a transaction defrauding creditors and a declaration that the transfer was a sham.

Orexim obtained permission on an ex parte basis to serve proceedings out of the jurisdiction. The defendants applied to set aside permission. Orexim had to demonstrate (1) a good arguable case that the pleaded claim fell within a jurisdictional gateway under CPR Practice Direction 6B; (2) the pleaded claim had a real prospect of success; and (3) England was the "proper place" for the claim to be heard (applying the familiar factors established in Spiliada Maritime Corporation v Cansulex Ltd [1987] AC 460, as now reflected in CPR 6.37).

At first instance, the judge found that the "enactment" gateway was unavailable. The court could not, therefore, permit service on the defendants and, as a result, the English courts would not hear the claim. The judge considered himself bound to reach this conclusion following the Court of Appeal's decision in Re Harrods (Buenos Aires) Ltd (No.2) [1992] Ch 72, which held that the "enactment" gateway (or what the judge considered to be a precursor to the "enactment" gateway) was only available where the enactment made clear on its face that it was intended to have extra-territorial effect. Orexim appealed.

Decision

Lewison LJ, giving the leading judgment of the Court of Appeal, found that the time had now come for the courts to recognise that the "enactment" gateway permits service of a claim under section 423 on a defendant outside England and Wales. The judge at first instance had been wrong on this point.

Lewison LJ noted that the rule considered by the Court of Appeal in Harrods was very different from the current "enactment" gateway, rejecting the argument that the current rule was a partial successor to it. The consequences of a claim coming within the gateway were also radically different; the rule considered in Harrods allowed service out of the jurisdiction as of right, whereas under the "enactment" gateway the court has a discretion whether to grant permission, which it can exercise only if England and Wales is the "proper place" to bring the claim. With this additional protection, the court can give a broader construction to the gateway in the knowledge that it then has discretion to refuse permission to serve out on the basis that England and Wales is not the "proper place" to hear the claim. It is also relevant that the courts are less cautious than they used to be in contemplating service out of the jurisdiction.

Lewison LJ noted that it is rare for a statute expressly to authorise proceedings to be brought against defendants outside the jurisdiction. He did not accept that there is a significant difference between a statute which explicitly permits this and one which on its true construction does so. Provided that, on its true construction, the statute contemplates proceedings against defendants outside the jurisdiction, this is sufficient.

Having departed from the judge's reasoning, the Court of Appeal went on to consider whether to exercise the discretion to permit service out. Like the judge, the Court of Appeal was satisfied that the claim had a reasonable prospect of success. However, it found that there was not a sufficient connection between the claim and England and Wales – England was not the "proper place" to hear the claim.

Because section 423 is very broad in scope, permitting a claim to be made in respect of any transaction (including a lawful transaction) made with an intention to put assets out of reach of creditors, the court must be scrupulous in its consideration of the connection between the claim and England and Wales.

In this case:

• None of the parties were incorporated, carried on business or had assets in England and Wales.
• The vessel which was the subject of the proceedings had never been flagged in England and there was no evidence that she had ever entered English waters.
• All of the transfers which the claimant sought to set aside took place abroad, between foreign entities, and were governed by Singaporean law. The only connection to England was an English law settlement agreement but the transactions predated this agreement.
• None of the witnesses were in England.
• There was no evidence that documents to be disclosed were in England.
• India had a closer connection to the claim because that was the place of incorporation of the principal defendants. Singapore also had a closer connection given that Singapore law governed the transfers.

The Court of Appeal therefore upheld the judge's order and refused permission to serve proceedings on the defendants outside the jurisdiction.

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