Advocate Bailhache for the 5 th and 6 th Defendants criticised the judgment of the Royal Court in various respects. His principal arguments may be summarised as follows:
(1) First he submitted that this Court could interfere because it was not clear that the Plaintiffs were making any proprietary claims at all. He submitted that all the Plaintiffs were in reality doing were seeking pure Mareva injunctions from the Jersey Court, or, in other words, personal remedies, in support of their claims in the US proceedings for damages. If that were so, then the invariable practice on granting Mareva injunctions was to make provision for payment of the Defendants’ reasonable legal fees, without the need to do any balancing exercise between the possible injustice to a plaintiff of permitting the use of what might turn out to be a Plaintiff’s funds for costs, against the possible injustice to a Defendant of denying him the opportunity of advancing what may turn out to be a successful defence. He contended that the Royal Court had failed to recognise that the Plaintiffs’ claim in the Jersey proceedings to an injunction was not in fact a proprietary claim.
In my judgment this argument is misconceived. It is clear in my view that in both the Jersey and the US proceedings the Plaintiffs are making proprietary constructive trust claims to assets held by the 5 th and 6 th Defendants and allegedly derived from the $42 million transferred by the Plaintiffs to CIHSL, and that the injunctions which the Plaintiffs seek in the Jersey proceedings are to protect not only their personal claims to damages but also their proprietary claims to have the assets which they allege the Defendants hold upon constructive trust for the Plaintiffs transferred to the latter; see e.g. paras 35 and 36 of, and the prayer in, the amended Order of Justice, and para 188 of, and para c of the prayer in, the complaint in the US proceedings. In my judgment the Royal Court cannot be criticised for regarding the Plaintiffs’ claim as a proprietary claim.
(2) Advocate Bailhache’s second argument was that the Royal Court failed to appreciate that it was clear that on the Plaintiffs’ case not all of the assets of the 5 th and 6 th Defendants could be treated as being subject to the Plaintiffs’ proprietary claim. This was because, he submitted: (1) the Plaintiffs recognised that to arrange the sale of the North Atlantic Group some of them had to make funds available to meet liabilities; (2) there is no allegation that the 5 th Defendant’s only assets are those which have derived from the 6 th Defendant; and (3) there is an implied admission in the Order of Justice by the Plaintiffs that some of the assets injected into the 6 th Defendant were required to meet the liabilities of the North Atlantic Group. In my opinion this criticism is also without foundation. All the Royal Court said was that the Plaintiffs “ on the face of it, have a proprietary claim to a substantial sum of money” (page 3 of the transcript). Upon the assumptions stated above, that was correct. I do not think that the exercise of the Royal Court’s discretion was in any way dependant upon, or influenced by, a belief on the Royal Court’s part that the Plaintiffs were making a proprietary claim to all the assets of the 4 th and 5 th Defendants, as opposed to (possibly) merely some substantial proportion thereof. In any event, the extent of the Plaintiffs’ proprietary claims, if any, to the assets presently held by the 5 th and 6 th Defendants, will no doubt be a matter that will be in dispute in the proceedings.
Advocate Bailhache’s third criticism is that the Royal Court did not give any cogent, or indeed any, reasons for its decision not to allow the 5 th and 6 th Defendants’ funding for legal costs and disbursements in respect of the then possible application to discharge or vary the injunctions or otherwise in connection with the Jersey proceedings. He submits that the Royal Court may have taken the view that no legal fees and disbursements would be incurred in Jersey (other than to comply with the interim disclosure orders), and that, in reality, the Royal Court simply did not address its mind to whether or not it should allow the 5 th and 6 th Defendants monies for costs incurred in connection with the Jersey proceedings. He points to the statement by the Royal Court that the fact that an application might be made to discharge the injunctions was “ not a matter that can concern us today”. He also points out that the Royal Court may have formed the view from the Plaintiffs’ statements that the injunctions were sought in aid of the US proceedings, and that those were to be the substantive proceedings, that no other costs would be incurred in Jersey other than the costs of compliance with the disclosure orders.
In response to this point, Advocate Martin for the Plaintiffs, submitted that it was not surprising that the Royal Court had made a limited order, because the prime focus of the argument of Advocate Lewis, who appeared for the 5 th and 6 th Defendants in the Royal Court, was the funding of legal costs to enable compliance with the disclosure Orders. She accepted that application was expressly made for liberty to use the enjoined funds for the wider purposes of the Jersey proceedings, including a possible application to discharge the injunctions. She also said that, when asked by the Royal Court who was funding the 5 th and 6 th Defendants’ representation before that Court, Advocate Lewis had declined to give an answer, saying that such matters were privileged.
In my judgment there is substance in Advocate Bailhache’s criticisms in this respect. The Royal Court gives no reason for its decision not to allow the 5 th and 6 th Defendants to use the enjoined funds for the purposes of legal fees and disbursements in connection with the Jersey proceedings generally. It is clear from the Royal Court’s own Judgment that they were told that the 5 th and 6 th Defendants wished their lawyers to give consideration as to whether an application should be made to discharge the injunctions, and that, subject thereto, it might well be that an application to discharge would be made. It is also clear that the Royal Court were told that the application before them included an application for legal fees and disbursements “ for considering the discharge of the injunctions now in place” and indeed the summons itself was in general terms, simply referring to a variation “ to permit the payment of the Defendants’ legal fees.” In my judgment the fact that the Defendants had not made up their minds whether or not to apply to discharge the injunctions was no reason to refuse the variation requested, if indeed that was the, or a, reason for the Royal Court’s decision. It was or should have been clear that costs had to be found immediately for the purposes of considering the matter. In the absence of any stated reasons for their decision not to allow funding for legal costs and disbursements, beyond that required for compliance with the disclosure Order, I can only infer that the Royal Court exercised its discretion wrongly taking into account the fact that, as at that date, no application to discharge had been issued, or failing to take account of relevant matters that should have guided its discretion, such as, for example, the need to ensure that it was not depriving the 5 th an 6 th Defendants of access to the judgment seat as to which see below. In the circumstances in my judgment this Court is entitled to exercise its discretion de novo in this matter, and accordingly I would grant leave to appeal to enable it to do so.
(4) Advocate Bailhache also submitted that the fact that there are now two applications actually pending before the Royal Court involving the 5 th and 6 th Defendants (i.e. their application to discharge the injunctions and the Plaintiffs’ application to stay the Jersey proceedings), which were not actually pending at the time of the hearing before the Royal Court (albeit reasonably capable of contemplation at that time) is a change of circumstances which also justifies this Court’s intervention.
Advocate Martin conceded that the issue of these applications did indeed constitute a change of circumstance, but argued that the correct course in the circumstances was for the 5 th and 6 th Defendants to reapply to the Royal Court. She attempted to reinforce this argument by a submission that the time requirements stipulated in Rules 9(2) and (4) of the Court of Appeal (Civil) (Jersey) Rules 1964 had not been complied with by the 5 th and 6 th Defendants, and that, as a result, the Plaintiffs had not had the time which the Rules allowed them to lodge their case nor had had the period of notice of the proposed appeal which the Rules afford a respondent. However she candidly admitted that she and her clients were adequately prepared to deal with the application for leave and the appeal, were not embarrassed in any way, and were not asking for an adjournment. She also conceded that this Court had power to abridge time in cases of urgency.
In my judgment, and given the Plaintiffs’ concession that the issue of the new applications did indeed constitute a change of circumstance, I take the view that this is another reason which justifies this Court’s intervention in the matter, and I would grant leave to appeal on this ground also.
(5) Advocate Bailhache also submitted that the Royal Court had wrongly approached the matter on the basis that the case was one of those “exceptional cases” where, after review of the merits, the Court could be satisfied: “that the proprietary claim was so strong that it could be demonstrated that such proprietary claim was well founded at an interlocutory stage” and that accordingly the “Defendant should not be free to draw on enjoined funds”; see United Mizrahi Bank v Doherty (supra). In support of this contention he relied upon the Royal Court’s statement on the first page of its judgment that
“ We need only to note that the first sentence of the American substantive action begins with these words: “This action concerns an international financial fraud of immense proportions”.” (Emphasis supplied).
He inferred from the word “only” that the Royal Court were, wrongly in his submission, regarding the case as undisputedly well-founded at that stage and he went on to argue that they accordingly did not apply the right test as to whether monies such be released from the enjoined funds for the payment of costs. In my judgment this criticism is not justified as it is clear from later passages in the Judgment that the Royal Court appreciated that on the affidavit evidence before them the fraud allegations were disputed. As I said earlier in this Judgment, it would appear (although the matter is not clear) that the Royal Court proceeded on the basis that this is not an exceptional case and that the Court should assume that there is a triable issue on the allegation of fraud.
I turn now to consider how this court should exercise its discretion in the circumstances that now prevail.
By the time the argument had reached the stage of Advocate Bailhache’s reply there was little, if no, dispute as to the relevant principles that govern the exercise of the Court’s discretion to allow payment of a defendant’s legal costs out of enjoined funds, in circumstances where a plaintiff is asserting a proprietary claim. For present purposes they may shortly be stated as follows, although I emphasize that this is not an exhaustive list of the very many different factors that may affect a court’s discretion in such circumstances:
Only in an exceptional case, “ where the merits could be gone into for the purpose of satisfying a Court that the proprietary claim was so strong that it could be demonstrated that such a proprietary claim was well founded at an interlocutory stage” .... [should] a Defendant .... not be free to draw on enjoined funds to finance his defence”; see the passage from United Mizrahi Bank -v- Doherty [1998] 2 All ER 230 at 234, already cited above, citing Lord Bingham MR in Sundt Wrigley & Co -v- Wrigley [1993] Unreported Judgment of the Court of Appeal of England.
In non-exceptional cases where a proprietary claim is made a “ careful and anxious judgment has to be made....as to whether the injustice of permitting the use of the funds by the defendant is outweighed by the possible injustice to the defendant if he is denied the opportunity of advancing what may turn out to be a successful defence”; see per Lord Bingham MR in Sundt Wrigley & Co -v- Wrigley (supra).
A defendant should not be allowed to draw on a fund which may belong to a plaintiff for the purpose of paying the defendant’s legal costs unless and until he has shown that there are no funds of his own upon which he can draw for that purpose; see Fitzgerald -v- Williams [1996] QB 657 at 669G-H. The burden of proof is upon the defendant to do so; see A -v- C (No. 2) [1981] 2 All ER 126 at 127h-128c.
The Court looks at the reality of what is likely to occur if no order were made. If the costs would, in practice, be funded by a third party, then the Court will take this into account; see Gee on Mareva Injunctions and Anton Piller Relief (4 th Ed’n) page 319.
The Court will not normally concern itself with the quantum of individual items of costs, although it may well fix a limit to the overall amount to be allowed for this purpose pending further application to the Court; it will not act as a form of provisional taxing body for the purposes of scrutinising the defendant’s legal fees; see Cala Cristal SA -v- Emran Al-Borno (6th May, 1994) “The Times”.
The Court may impose safeguards such as, for example, an undertaking by the defendant that he will make good, out of funds to which the plaintiffs have no proprietary claims, any sums which are spent on costs which at the end of the day are found to have come out of property to which the plaintiffs have a good proprietary claim; see Cala Cristal SA -v- Emran Al-Borno (supra), (although one might have thought that this would follow in any event, since all the Court is authorising is an act that would otherwise be in breach of an injunction, and is not in any way altering the beneficial interest in the funds, which, on the stated hypothesis, would at all times have remained subject to the plaintiffs’ equitable proprietary claim).
I now turn to consider the application of those principles to the facts of this case. As his submissions developed, and under some pressure from the Court, Advocate Bailhache formulated his application as one for liberty to use a sum not exceeding £50,000 in connection with legal costs and disbursements of the proposed application to discharge (or vary) the injunctions in the Jersey proceedings and in connection with the Plaintiffs’ application for a stay and generally in connection with jurisdictional issues relating to those proceedings.
Advocate Martin made three principal submissions in this context.
First she submitted that the policy underlying equitable proprietary and Mareva injunctions (namely to prevent dissipation of a defendants’ assets) would be frustrated if funding were permitted out of the enjoined assets. She relied on the fact that, according to the evidence in the recently signed statement of the 4 th Defendant, Mr Atkins, the 1 st to 4 th Defendants, as part of the alleged secret agreement, had specifically agreed to leave a $1 million in Wingfield as a “fighting fund”. She contended that it would wholly wrong if the Defendants were to have access to that “fighting fund”, since that would, in effect, be giving effect to their fraudulent intention to dissipate the Plaintiffs’ assets. In my judgment this submission is of no assistance to Advocate Martin. These allegations are disputed, and the point takes her case no further than the basic contention by the Plaintiffs that they maintain a proprietary claim to all the enjoined assets.
Second, and relying in particular on principles three and four above, she contends that the 5 th and 6 th Defendants have not discharged the burden on them of showing that they do not have their own free funds available to fund this litigation. She criticised the first affidavit of Mr Stinson on the grounds that it did not clearly state the position (if such be the case) that the 5 th and 6 th Defendants do not have available assets out of the jurisdiction with which to fund their legal representation in connection with the Jersey proceedings. She made the point that the affidavit does not mention a chose in action vested in CISHL which Advocate Bailhache mentioned in opening (and of which the Plaintiffs appear to be aware). Finally under this head she asked the Court to infer that, as a matter of reality, funding would be available to the 5 th and 6 th Defendants, even if the Court were not to vary the injunctions. In support of this submission she relied upon the fact that the 5 th and 6 th Defendants had indeed been represented on at least two occasions before the Royal Court, and for the purposes of the application, and proposed appeal, to this Court and that, when the Royal Court had asked Advocate Lewis, who was paying for the legal fees to date, as I have already said, he had declined to give an answer on the grounds that the information was privileged.
In my judgment, although some criticisms can be made of Mr Stinson’s first affidavit (which Advocate Bailhache informed us was prepared in something of a hurry), it does, (with one exception) in paragraph eight, adequately set out the evidence upon which they rely to the effect (i) that all their assets are within the jurisdiction; (ii) that all such assets are currently subject to the terms of the injunctions; and (iii) that, in the absence of a variation, they will have no assets with which to fund their representation in the Jersey proceedings. The one exception is the chose in action represented by a claim which CISHL has against a Jersey company, Landau Limited, arising out of arrangements concluded with the provisional liquidators of certain of the Insurance Subsidiaries, which chose may, on one construction of the injunctions, not be subject to their terms. However, as Advocate Bailhache informed the Court in opening on instructions, and as has now been confirmed in a fourth affidavit sworn by Mr Stinson on 22 nd September 1998, (pursuant to the Court’s direction that what it had been so informed on instructions should be formally put in evidence), the chose has no presently realisable value such that it could be used in payment of legal costs. Moreover, even if not subject to the injunctions on their strict wording, it is likely to be subject to the Plaintiffs’ alleged proprietary claims, if such claims are well-founded. Further if there was any ambiguity about what the 5 th and 6 th Defendants had stated in Mr Stinson’s first affidavit is their asset position, that has likewise been clarified or confirmed in what Advocate Bailhache told the Court on instructions, and what has been said in Mr Stinson’s latest affidavit. Accordingly, in my judgment, the 5 th and 6 th Defendants have discharged the onus upon them of showing that they do not have available free assets with which to fund their legal costs.
Likewise, in the light of what Advocate Bailhache told the Court on instructions, as apparently confirmed in Mr Stinson’s latest affidavit, I do not accede to Advocate Martin’s submission that the Court should infer that, even if no variation is granted, the 5 th and 6 th Defendants will be able to obtain funding for legal representation from a third party. The interim funding has been explained, and, prima facie at least, it seems unlikely that any of the 1 st to 3 rd Defendants will be prepared to, or will be in a position to, fund the costs of the 5 th and 6 th Defendants in the Jersey proceedings. Nor does Mr Stinson have any expectation that the provisional liquidators of the two Insurance Subsidiaries will make any further monies available to the 6 th Defendant for legal costs in connection with the Jersey proceedings.
Third, in this context Advocate Martin submitted that it was appropriate to pierce the corporate veil and look through to the shareholders behind the 5 th and 6 th Defendants, and to treat their assets as available to the 5 th and 6 th Defendants for the purposes of funding their costs. I do not consider that it is appropriate to pierce the corporate veil in the present circumstances, and it seems to me that this was not, in any event, a doctrine which Advocate Martin needed to invoke, given the fourth principle set out above. Since the shareholders appear to be the 1 st to 3 rd Defendants, from a factual point of view the argument leads nowhere, since as I have already said, Mr Stinson’s latest affidavit indicates that it is unlikely that any of the 1 st to 3 rd Defendants will be prepared, or will be in a position, to fund the costs of the 5 th and 6 th Defendants in the Jersey proceedings.
Accordingly, in my judgment, and on the basis of the evidence before the Court, I take the view that there is a real risk that, unless the injunctions are varied, and the 5 th and 6 th Defendants are permitted to draw some monies for legal costs and disbursements, there is no real prospect of their being in a position to pursue their applications to discharge or to vary the injunctions, or otherwise to take advice in relation to jurisdictional issues, or appear, if appropriate, on the Plaintiffs’ application for a stay. It has not been suggested by Advocate Martin in argument that such applications are doomed to failure or cannot properly be made. In my judgment the risk of injustice to the Plaintiffs in having what they allege to be their funds used in the payment of the 5 th and 6 th Defendants’ legal costs, is outweighed by the possible injustice to the 5 th and 6 th Defendants if they are precluded from pursuing their applications to discharge or to vary the injunctions, or otherwise to take advice in relation to jurisdictional issues, or appear, if appropriate, on the Plaintiffs’ application for a stay . In conducting this balancing exercise, I bear in mind among other things and in addition to the matters to which I have already referred:
(1) that, in relative terms, the sum of £50,000 is modest when compared to the amount of the plaintiffs’ claim and the likely overall costs of the worldwide litigation to date and in the future;
(2) that one of the grounds upon which the 5 th and 6 th Defendants intend to rely to set aside the injunctions is non-disclosure;
(3) that, according to Mr Stinson’s evidence, the 1 st Plaintiff is a major United States Corporation with no difficulty in paying its legal fees;
(4) that one of the purposes of the application to discharge and/or vary the injunctions is to obtain funding for the US proceedings, and thus, enable the 5 th and 6 th Defendants to defend the substantive proceedings in the United States.
Accordingly, in my judgment, the appeal should be allowed, and the relevant injunctions should be varied so as to permit payment from the 5 th and/or the 6 th Defendants’ assets, subject to the injunctions, in a sum or sums not exceeding in total £50,000, of the 5 th and/or 6 th Defendants’ reasonable legal costs and disbursements (to include foreign lawyers if appropriate) in connection with their proposed application to discharge and/or vary the injunctions and/or in connection with their defence or conduct of the Jersey proceedings generally, subject to the following provisions:
(a) an undertaking by the 5 th and 6 th Defendants to be incorporated in the Order that they will respectively make good, out of funds to which the Plaintiffs have no proprietary claims, any sums which are spent pursuant to this Order on costs which by judgment or compromise shall subsequently be found or agreed to have come out of property to which the Plaintiffs have a good proprietary claim;
(b) that the issue of reasonableness if relevant is determined after judgment or compromise on the Plaintiffs’ proprietary claims, and in the meantime the 5 th and 6 th Defendants are to maintain records of the costs and disbursements paid pursuant to this order so as to be able to show for what purposes such costs have been paid;
(c) that all parties are to be at liberty to apply to the Royal Court generally.
Finally I should like to thank both counsel for their lucid and helpful submissions which enabled this case to be concluded within the day.
CALCUTT JA: I agree.
BELOFF JA: I also agree.
Authorities .
Abdel Rahman -v- Chase Bank (CI) Trust Co Ltd [1984] JJ 127.
A & Anor -v- C & Ors (No. 2) [1981] 2 All ER.
Fitzgerald & Ors -v- Williams & Ors [1996] QB 657 CA.
United Mizrahi Bank Ltd -v- Doherty & Ors [1998] 2 All ER 230.
Sundt Wrigley & Co -v- -v- Wrigley [1993] Unreported Judgment of the Court of Appeal of England.
Cala Cristal SA -v- Emran Al-Borno (6 th May, 1994) “The Times”.
The Abidin Daver [1984] 1 All ER 470.
Hadmoor Productions Ltd -v- Hamilton [1983] 1 AC 191.
Newhart Developments Ltd -v- Co-op Commercial Bank [1978] 2 All ER 896 CA.
Re Emmadart Ltd [1979] 1 All ER 599.
Tudor Grange Holdings Ltd -v- Citibank NA [1991] 4 All ER 1.
Court of Appeal (Civil) (Jersey) Rules, 1964: Rule 9(1).
Gee: Mareva Injunctions and Anton Piller Relief (4 th Ed’n): pp.318-326.
Atlas Maritime Co SA -v- Avalon Maritime Ltd (The Coral Rose) (20 th February, 1990) TLR 132.
[1] The injunctions had originally been granted on 6 th August 1998 by the Deputy Bailiff in an Order of Justice of that date, but on 13 th August 1998 the Plaintiffs obtained an amended Order of Justice signed by the Bailiff which, amongst other matters, changed certain of the Parties Cited.
[2] Including assets alleged to be held upon constructive trust for the Plaintiffs.
[3] It was accepted by counsel for the Plaintiffs that, despite some ambiguity in the wording of the order of justice, the injunctions only operated to prevent dispositions within the jurisdiction.
[4] See paragraph 44 of the first affidavit of Brian Cooper sworn on behalf of the Plaintiffs in the Jersey Proceedings.