Smellie CJ
IN CHAMBERS
IN THE GRAND COURT OF THE CAYMAN ISLANDS
HOLDEN AT GEORGE TOWN, GRAND CAYMAN
CAUSE NO. 577 OF 2002
IN THE MATTER OF THE FOREIGN ARBITRAL AWARDS ENFORCEMENT LAW (1997 REVISION)
BETWEEN:
(1) WALKER INTERNATIONAL HOLDINGS LTD.
(2) AF-CAP, INC
Plaintiffs
AND
(1) OLEARIUS, LTD
(2) SOCIETE NATIONALE DES PETROLES DU CONGO
(3) CAISSE CONGOLAISE D'AMORTISSEMENT
(4) REPUBLIC OF CONGO
Defendants
AND
STANDARD CHARTERED BANK
Intervener
Appearances:
Jeremy Walton of Hunter & Hunter for the Plaintiffs
Mr. Mac Imrie of Maples & Calder for the First Defendant
Mr. Michael Todd Q.C. instructed by Mr. David McGrath of Quin & Hampson for the Intervener.
(2nd, 3rd and 4th defendant not appearing).
Before: Hon. Chief Justice Anthony Smellie
Heard on the 15th, 16th and 17th of July 2003.
REASONS FOR SUMMARY JUDGMENT
On the 17th day of July 2003, I granted the Plaintiffs' application for summary judgment against the Second Defendant and made ancillary orders involving the First Defendant. These are the reasons.
The Plaintiffs brought this enforcement action as judgment creditors respectively in the amounts of 30 million Euros and US$10 million against the Fourth Defendant, the Republic of Congo ("ROC"), its debt management agency Caisse Congelaise D'Amortissement ("CCA") and the state owned oil company, Societe Nationale Des Petroles Du Congo ("SNPC"), the Second and Third Defendants respectively (hereinafter together "the Congolese defendants).
The judgments obtained in Paris, France to be enforced arise respectively out of an arbitral award and a judgment on a writ action taken in London, England. The Plaintiffs sue upon those judgment debts.
BACKGROUND
The Plaintiffs as judgment creditors, have been pursuing the Second to Fourth Defendants in a number of jurisdictions around the world seeking the seizure of assets against which to enforce and satisfy their judgment debts. A number of these proceedings have involved SNPC which is a state-
owned company and which markets oil on behalf of the ROC. The ROC's chief national asset is said to be oil.
Proceedings were brought in Paris, France, by the First Plaintiff against bank accounts held by SNPC at certain banks there. The First Plaintiff was successful before the Paris Court of first instance on the 29th January 2002 in its claim that it had a right to seize SNPC's assets in satisfaction of ROC's debts on the basis that SNPC was an emanation d'Etat of ROC. The Defendants appealed.
While the matter was in the French Court of Appeal, the existence of an arrangement involving this jurisdiction came to light. This is an arrangement involving the Second and Fourth Defendants established for the express purpose of providing a commercial loan to the First Defendant, Olearius Ltd. ("Olearius"). In May of 2002, a US$210 million loan facility was granted to Olearius, a Special Purpose Vehicle ("SPV"), incorporated in the Cayman Islands. This was a four-year Pre-Payment Facility (the "Facility") and by the Summary Terms and Conditions of the Facility Olearius is said to be "the vehicle through which funds are made available to SNPC". The loan was repayable out of the proceeds of forward oil sales by SNPC as agent for Olearius. By the arrangement, ROC had assigned all its oil rights to Olearius.
The Plaintiffs brought an action before this Court in July 2002 seeking injunctive relief against Olearius. On 13th August 2002 this Court granted an injunction the effect of which was to restrain Olearius from passing back to SNPC any funds generated from the oil sales in excess of that required to service the loan. It was found that "prima facie there are assets in the jurisdiction which can be attached in satisfaction of the two judgments", per Graham J., ruling delivered on 13th August 2002. These two judgments referred to by Graham J are those already described as giving rise to the debt owed to the Plaintiffs and are further described below.
On the 23rd January 2003, the Court of Appeal in Paris delivered its judgment, concluding that SNPC is indeed an emanation of ROC such that its assets should be treated as those of ROC and upheld the attachment order against those assets known to be within the French jurisdiction.
The First Plaintiff now seeks leave to enforce the final award ("the Award") made in France by the ICC International Court of Arbitration (Case 10030/AC/DB) against the Third and Fourth Defendants. Without delving unnecessarily into the details, this award is said to arise from loans advanced to those defendants to fund their oil production business which were not repaid.
The Award has also become the subject of a judgment enforcing it in the English High Court. The Award/judgment sum is in excess of 30 million Euros plus interest.
Thus the First Plaintiff sues in this jurisdiction upon the Award and the judgment both as a matter of statute - The Foreign Arbitral Awards Enforcement Law (1997 Revision) - and at common law.
The Second Plaintiff obtained an English judgment (1996 Folio No. 1309) on the 15th November 1996, in the amount of US$10 million plus interest and costs. It sues upon that judgment at common law seeking its enforcement.
THE PRESENT APPLICATIONS BY THE PLAINTIFFS.
The Plaintiffs seek summary judgment against the Second, Third and Fourth Defendants. They seek a declaration that the Second Defendant (SNPC) is the alter ego of the Fourth Defendant. Alternatively, that the Second Defendant is a mere sham and façade, alternatively a bare trustee or agent, holding assets for the benefit of the Fourth Defendant; in the further alternative, that the assets of the Second Defendant are to be regarded as assets of the Fourth Defendant and that assets held by the Second Defendant
are available for execution in satisfaction of judgments obtained against the Fourth Defendant. The Plaintiffs argue that the Paris Court of Appeal having ruled definitively on the issue that SNPC is as a matter of fact the alter ego of ROC, that this creates a res judicata and an issue estoppel against SNPC and invites the Court to uphold that ruling and apply it here.
As regards the First Defendant, the Plaintiffs seek a declaration against it in the same terms as that against the Second Defendant. Having obtained enforcement of their judgments against the Congolese defendants, the Plaintiffs’ next step will be to seek to get an injunction.
In so doing, it is also their intention to argue that Olearius is the alter ego of the Congolese defendants.
In addition to post-judgment injunctive relief, the Plaintiffs seek relief by way of the appointment of a receiver over the assets of the Second to Fourth Defendants. The Mareva injunction is sought in order to prevent the Second to Fourth Defendants from circumventing the whole Olearius financing structure, while the receiver is intended to recover any sums due solely in respect of Olearius and the Forward Purchase Agreement explained below.
The Plaintiffs ask that the injunction granted pre-judgment is continued post-judgment, except that the Plaintiffs be released from any cross-undertakings in damages and those already in place be discharged.
Standard Chartered Bank ("SCB"), as Intervener, became concerned that the orders being sought by the Plaintiffs would, if granted, have a serious damaging effect on the syndicated Lenders of which it is one, and also upon Third parties. Effectively, any injunction against Olearius would freeze the mechanism by which the Lenders are repaid through Olearius.
For reasons explained below, I find that this is the proper forum for the presentation of the Plaintiffs' claims against the Defendants and that the proper form of relief is that which I will give.
THE COURT'S JURISDICTION AT COMMON LAW
According to Dicey and Morris on the Conflict of Laws, 13th Edition, Page 474 Rule 35(1) & (2) dealing with enforcement and recognition of judgments at common law:
"Rule 35-(1) Subject to the Exceptions hereinafter mentioned and to Rule 55 (international conventions), a foreign judgment in personam given by the court of a foreign country with jurisdiction to give that judgment in accordance with the principles set out in Rules 36 to 39, and which is not impeachable under any of Rules 42 to 45, may be enforced by a claim or counter claim for the amount due under it if the judgment is
(a) for a debt, or definite sum of money (not being a sum payable in respect of taxes or other charges of a like nature or in respect of a fine or other penalty); and
(b) final and conclusive but not otherwise.
Provided that a foreign judgment may be final and conclusive, though it is subject to an appeal, and though an appeal against it is actually pending in the foreign country where it was given.
(2) A foreign judgment given by the court of a foreign country with jurisdiction to give that judgment in accordance with the principles set out in Rules 36 to 39, which is not impeachable under any of Rules 42 to 45 and which is final and conclusive on the merits, is entitled to recognition at common law and may be relied on in proceedings in England."
The First and Second Plaintiffs are by virtue of these principles of Private International Law and judicial comity, entitled to enforce the judgments at common law as the judgments are for debts or definite sums of money and are final and conclusive, albeit that they are default judgments.
THE ARBITRAL AWARD
The Award, was made pursuant to an Arbitration Agreement in Paris, France, which is a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (1958). As such, it qualifies for enforcement under section 5 of the Foreign Arbitral Awards Enforcement Law (1997 Revision) and section 22 of the Arbitration Law (2001 Revision).
Section 5 Foreign Arbitral Awards Enforcement Law (1997 Revision) provides:
"A Convention award shall, subject to this Law, be enforceable in the Grand Court in the same manner as an award under section 22 of the Arbitration Law (1996 Revision) and shall be treated as binding for all purposes on the persons between whom it was made and may accordingly be relied upon by any of those persons by way of defence, set off or otherwise in any legal proceedings in the Islands and any reference in this Law to enforcing a Convention award shall be construed as including references to relying upon such award."
Section 22 of the Arbitration Law (2001 Revision) provides:
"An award on an arbitration agreement may, by leave of the Court, be enforced in the same manner as a judgment or order to the same effect, and where leave is so given, judgment may be entered in terms of the award."
It is therefore clear that the Grand Court has jurisdiction to enforce the Award against the Third and Fourth Defendants.
Having established that the Court has jurisdiction at common law and by statute to enforce the Award and judgments, the question remains whether the First and Second Defendants may be labelled "alter-egos" of the ROC such that the Plaintiffs may recover against them.
I have is mind of course that at this stage that enforcement is sought against the Second Defendant only, with the declaratory relief against the First Defendant Olearius to be sought later. Nonetheless, having regard to the general applicability of the principles of law to which I will refer below, I intend to reflect also upon the proposed basis for pursuing Olearius Ltd.
THE FIRST DEFENDANT/ SPV SCHEME
The First Defendant, Olearius, was according to the Summary Terms and Condition Sheet (Term Sheet), expressly created as "the vehicle through which funds are made available to SNPC". Certain banks namely, KBC Bank NV, RMB International (Dublin) Ltd., Standard Chartered Bank and The Original Lenders have made the amount of US$210 million available to Olearius. It is to purchase and sell crude oil and enter into financing arrangements in connection therewith, pursuant to the terms of the Facility Agreement, the Forward Purchase Agreement and the other Facility Documents.
On or about 31st May 2002, US$150 million was drawn down by Olearius at the request of SNPC to, inter alia, fund the SPV Scheme and to discharge some of the liabilities of SNPC. A further US$60 million remains to be drawn down.
In summary, the SPV Scheme operates as follows. The Banks first make the funds available to Olearius. These funds are used to buy oil from SNPC under the Forward Purchase Agreement. Some of the oil that Olearius purchases is for on sale to Vitol S.A. and other Buyers. The oil sold by SNPC to Olearius is the property of ROC. Cash proceeds of the sales under the Forward Purchase Agreement are credited directly to the Collection
Account from which payment on the loan facility is made to the Lenders by Olearius. Excess proceeds in that account are passed by Olearius on to or to the order of SNPC. SNPC is also responsible for the repayment of bridge financing, facility fees, expenses, hedge premise and the funding of the Debt Service Reserve Account (DSRA). An additional element of the Scheme is that ROC has guaranteed the loan on behalf of Olearius and has also assigned rights to Olearius to receive oil. The entire arrangement is known as the Hedged Crude Oil Prepayment Facility.
The Plaintiffs argue that any distinction between ROC, SNPC and Olearius is a complete sham. They would argue that Olearius entered into the SPV scheme, executed the Facility Documents, and has enjoyed the benefit of the Facility, as an alter ego, alternatively as a mere sham and façade, alternatively as a bare trustee or agent of SNPC and/or ROC. Under Section 2 of the Facility Agreement, the stated Purpose of the loan is as follows:
"The borrowings made hereunder shall be applied:
3.1.1 first, to pay in full all outstanding amounts under the USD 50 million Bridge Finance Facility Agreement dated 18th December 2001 (as amended and restated as of 25 January 2002 and (if such further amendment shall occur) further amended on or after the date of this Agreement to address arrangements to permit SNPC to have access to the proceeds of the first cargo delivered under the crude oil contract referred to in such Bridge Finance Facility Agreement) between RMB International (Dublin) Limited and SNPC;
3.1.2 second, to fund the Required Balance of the Debt Service Reserve Account;
3.1.3 third, to finance interest fees, expenses and other amounts due under any Finance Document;
3.1.4 fourth, to finance any premium payable under the terms of any Hedging Agreement;
3.1.5 fifth, to finance (i) expenses payable in respect of the corporate administration of the Borrower, (ii) amounts payable under the Corporate Administration Documents, (iii) legal fees payable by the Borrower in connection with the establishment of the Borrower and its entry into the Relevant Documents to which it is a party;
3.1.6 sixth, in the case of the Primary Syndication Lender Utilisations, to pay an amount equal to the amount set out in paragraph numbered 1 of the Syndication Notice to the credit of the Charged Account (which amount shall not be in excess of USD 60,000,000) less the amounts set forth in paragraphs 1(b) and 3 (b) of the Fee Letter to the extent such amounts are deducted by the Agent from the first Primary Syndication Lender Utilisation in accordance with the terms thereof; and
3.1.7 seventh, to fund all payments to be made to SNPC under the Forward Purchase Agreement, including without limitation, the Forward Purchase Price due under clause 8 thereof."
In the First Affidavit of Donald S. Schwarzkoph, paragraph 23, filed on behalf of the Plaintiffs and describing the relationship between ROC, SNPC and Olearius he stated as follows:
a) "All borrowings disbursed to Olearius but for the ultimate benefit of SNPC, are unconditionally guaranteed by the ROC.
b) If funds in Olearius are inadequate to repay the borrowings, SNPC must deliver sufficient additional oil, which belongs to the ROC, to do so.
c) SNPC is the exclusive marketing agent for Olearius, as well as the ROC.
d) Amounts already disbursed under the facility, which rightly belong to the ROC for the sale of its oil under the Forward Purchase Agreement, have largely been used by the SNPC for "General corporate purposes". There are no provisions in the Term Sheet for payment to ROC for the sale of oil.
e) The additional amount to be raised in general syndication will be provided to and used by either SNPC, ROC or Olearius, without distinguishing which entity actually owns the funds.
f) Olearius must obtain the approval of SNPC to make any early reimbursements of the facility.
g) "Breakage costs" incurred by Olearius are the responsibility of SNPC.
h) Earnings by Olearius in excess of the debt service may not be retained, but rather must be paid to SNPC.
i) ROC must assign to Olearius, for no apparent consideration, its rights to receive crude oil under production-sharing and concession agreements, which in fact represent ROC'S primary source of commercial income.
j) The amount of up to US$60 million to be raised under the facility is to be used to cover potential litigation debts of SNPC/ROC."
The Plaintiffs further argue that the fundamental reason for having such an elaborate legal structure for these financings is to cloak them in a legal veil of legitimacy. They say that in reality, the oil pre-financing transactions represent a sophisticated effort to shelter the proceeds of ROC financings
from legitimate creditors of ROC (Paragraph 24, Schwarzkopf’s First Affidavit). The Plaintiffs believe that they should be granted leave to execute the Award and judgment directly upon Olearius, as an alter ego and nominee of ROC, particularly in view of:
"(a) the unambiguous assignment of the primary income-producing commercial assets of ROC to Olearius; and
(b) the central role of Olearius in selling and receiving payments for such assets under the unmistakable control and direction of ROC and SNPC." (Paragraph 28 Schwarzkopf’s First Affidavit).
In the First Affidavit of Mr. Akeem Khan of SCB filed on behalf of the First Defendant, he states that the allegations of sham are entirely inaccurate. At paragraph 5(i) he says that:
"The central allegations made by Mr. Schwarzkopf (on behalf of the Plaintiffs) appears to be that Olearius is an alter-ego of the Republic of Congo ("ROC"), and indeed that the whole structure of the financing is a sham representing "a sophisticated effort to shelter the proceeds of ROC financings from legitimate creditors of ROC" (paragraph 24). These allegations are entirely inaccurate. The structure of the financing is described in more detail below but, in summary, the reality is that Olearius was incorporated as a Cayman Islands special purpose vehicle at the suggestion of the Mandated Arrangers as part of a bona fide, arms' length commercial transaction relating to the financing of shipments of oil. Neither ROC nor SNPC have any direct or indirect shareholding in, nor
representation on the board of directors of, Olearius. It is neither legally nor beneficially owned by ROC or SNPC. It is an "orphan" vehicle, with directors appointed by HSBC [(Hong Kong Shangai Banking Corp. One of the Lenders)]. The financing structure was inspired by entirely legitimate commercial concerns on the part of the Mandated Arrangers, and was absolutely not inspired (as is implied by Mr. Schwarzkopf) by a desire to defraud ROC's creditors. The facility has been arranged by three well known and respected trade finance banks, and involves the world's largest independent oil trading company (Vitol S.A.). A further ten leading international banks and banking institutions have undertaken to participate in it."
Mr. Khan then described other financing structures which were considered by SNPC and the Lenders and continues at Paragraph 10:
"Since SNPC wished to retain the ability to sell at least some of the oil on the spot market throughout the term of the financing, the Mandated Arrangers proposed what is known as a prepayment financing structure. The critical feature of these structures (i.e. 'Basic Prepayment Structure and Prepayment Structure with SPV')- which maximises the Security of the Lenders over the cash flows receivable for crude oil deliveries made to off-takers and ensures that the structure is capable of being syndicated in the international banking market- is that there should be no collection account in the name of the producer of the commodity (here SNPC). This means that the funds flowing into that account would not be available for attachment by creditors of the producer. That is a perfectly legitimate objective for lenders who are concerned to maximise their security. In the "Basic Prepayment Structure", the collection account is in the name of the single off-taker. Given that it was contemplated that there would be multiple off-takers under the arrangement with SNPC, the Mandated Arrangers proposed a "Prepayment Structure with SPV", pursuant to which the Collection Account into which each of the off-takers would make their payments would be in the name of the SPV."
This financing arrangement will be returned to later in these reasons for judgment.
THE SECOND DEFENDANT
SNPC was created by the Republic of Congo ("ROC") as a public industrial and commercial company whose capital is held entirely by the ROC. The Republic of Congo is a former French Colony, whose chief national asset is said to be oil. Those assets are marketed through SNPC and used to obtain finance in the international market. The Plaintiffs argue that SNPC is an "emanation" of the Republic of Congo; an expression which is not a term of art in English or Cayman law. They say that the company has no operational autonomy and no activities separate from the Congolese State, was established to manage the rights, holdings and assets of the State in the field of hydrocarbons, whose capital is wholly owned by the State, completely administered by it, whose role is to serve it, having no independent assets, the merger of assets being patent, serving to finance the State and its officials, to make loans to the State, without transparent accounting.
As already referred to, in October 2001 attachment proceedings were brought in France against bank accounts held in the name of SNPC at BNP-Paribas and Societe Generale. In January 2002 in those proceedings, the Plaintiffs were successful at first instance in establishing their right to seize
SNPC assets in satisfaction of ROC's debts, on the ground that SNPC is an emanation d'Etat.
SNPC appealed against the decision to the Court of Appeal in Paris. On 3 July 2003, the Court of Appeal delivered its judgment, concluding that SNPC is an emanation of ROC such that its assets should be treated as those of ROC, and upholding the attachments against it.
After a review of the principal documents establishing and governing the operations of SNPC, the Court in Appeal No. 2002/03185, summarised as follows:
"The status of Societe nationale des petroles du Congo with respect to the Republic of Congo
Whereas S.N.P.C., established by the law of 23 April 1998, is defined as a public industrial and commercial establishment taking the form of a company with legal personality and financial autonomy, with its entire capital being held by the Government, according to its articles/bylaws dated 9 April 1999, this company:
- Has as its purpose action on behalf of the Government, directly, through its subsidiaries, or in partnership with foreign partners, in any operation relative to the production, processing, transformation, exploitation, and transporting of liquid or gas hydrocarbons on Congolese territory or in other countries; in particular, to undertake or participate in any operation relating to the above-mentioned mission, to undertake the necessary investment operations, to sell products, hold and manage on behalf of the Government the assets and rights belonging to it directly or through an intermediate company and in general to perform the public-service mission of valorizing, exploiting and selling Congolese hydrocarbons;
- Has stock capital of 900,000,000 FCFA, consisting chiefly in mining deeds and rights and assets initially held by the Government, directly or
through Hydro-Congo, in all activities relative to the search for, exploitation of, processing of, and transformation of hydrocarbons and derivative or related substances;
-Has resources consisting chiefly of Government subsidies, proceeds from the activities of the company itself, and proceeds from borrowings, repayment of advances, and income from interests in other companies;
-Has an operating budget and an investment budget, and maintains its own accounting records under the supervision of an accountant, with fiscal -year balance-sheet, operating statement, and statement of profit and loss, according to the accounting plan in effect, under the supervision of auditor;
-Is managed by a Board of Directors that establishes the general policy of the company, resolves on important matters, particularly budget matters, by majority vote, and approves the financial statements, and by a general manager in charge of day-to-day management of the company;
-Formalized its relations with the Government in an agreement dated June 2001 (I.e., prior to the attachments in question), which establishes among other matters the compensation payable to the company in consideration for the mandate received, namely, 1.6% of the gross price of each cargo paid for by purchasers of commercialized hydrocarbons, which said compensation it deducts directly from the proceeds of sale prior to remittance of said proceeds to the Government (Article 6);
But whereas by reason of its public service mission:
- The Members of the Board of Directors are chiefly representatives of the Government agencies involved in this mission, and are appointed by decree issued in Council of Ministers;
- The company is supervised by the Ministry in charge of hydrocarbons, which has "permanent power of orientation and supervision of the enterprise," in particular to ensure application of government guidelines and the laws and regulations, approve investment program and monitor their execution, supervise the allocation of profits and supervise personnel policy, which is governed by the hydrocarbons collective bargaining agreement, as well as investments in other companies and the establishment of agencies and branches;
- The company is under the economic and financial supervision of the Government and the Government Accounting Office;
Whereas the outcome of this close supervision is that S.N.P.C. does not have sufficient statutory operating independence to make autonomous decisions in its own interest and to be considered as
enjoying de jure and de facto autonomy with respect to the Congolese Government; it is not even master of its future through an individual investment policy, or of its organizational structure; its accounting does not clearly show the existence and scope of a company sales activity apart from its public-service mission; according to its financial statements for the year 2000, the company had a theoretical net profit of $58.5 million, but it is noted that "taking into account repayments of Government commitments to certain operators by deduction of output equivalent to SNPC oil profit, representing a claim by the company upon the Government, leads to total absorption of the entire profit"; therefore, lacking true autonomy, the company can merely invoke a claim upon the government, it cannot truly create a development policy based on self financing;
Whereas while ordinarily Government supervision or even control of a legal entity, exercised through its managers, and the public-service mission devolved upon it do not suffice to warrant considering it an emanation of the State implying its equating with the Government, in the instant situation the Congolese Government has reserved for itself, with respect to the S.N.P.C., not a simple supervisory power but rather a genuine power of orientation and approval constituting a genuine intervention that totally nullifies any reality of an autonomy of the S.N.P.C. that could arise out of its status as a company registered in the register of economic performers; S.N.P.C. constitutes a legal entity that is fictitious and, consequently, an emanation of the Republic of Congo;"
Counsel on behalf of the Second Defendant contends that:
"SNPC was created as a public commercial and industrial entity endowed with financial autonomy and the status of a legal person;
SNPC undertakes its own commercial activity: it owns and sells oil to third parties on its own account;
SNPC has accounts which are independent from the accounts of ROC;
SNPC pays taxes to ROC;
SNPC is the parent company of several commercial entities, in the
Republic of Congo and elsewhere;
In addition to its own commercial activity, and pursuant to its by-laws and to the Convention, SNPC sells oil belonging to ROC; and
SNPC's day to day business is not controlled by ROC;"
SHOULD THIS COURT FOLLOW THE FRENCH COURT AND DECLARE SNPC A MERE FAÇADE AS THE BASIS FOR GRANTING THE PLAINTIFFS' APPLICATION FOR SUMMARY JUDGMENT AGAINST IT?
I am cognisant of the principle that the corporate veil is only very rarely lifted.
In Adams v Cape [1991] All ER 929, at Page1022; their Lordships confirmed that 'quite apart from cases where statute or contract permits a broad interpretation to be given to references to members of a group of companies, there is one well-recognised exception to the rule prohibiting the piercing of 'the corporate veil'. So that only in exceptional cases is the corporate veil ever lifted.
Referring to the opinion of Lord Keith in Woolfson v Strathclyde Regional Council [1978] SLT 159 at 161, they pointed out that that exception is "only where special circumstances exist indicating that it is a mere façade concealing the true facts."
The facts as found by the Paris Court of Appeal are summarised below:
(1) The entire capital of SNPC is held by ROC. It was responsible for the marketing of ROC's oil production.
(2) Members of the Board of Directors are chiefly representatives of the Government and are appointed by decree issued in Council of Ministers.
(3) The Company is under the economic and financial supervision of the Government Accounting Office.
(4) The Ministry has permanent power of orientation and supervision of the enterprise.
(5) The Company's mission is to undertake any necessary investment operation on behalf of the ROC and to hold and manage on behalf of the Government the assets and rights belonging to the Government.
The Paris Court of Appeal ultimately came to the conclusion that because the Congolese Government had reserved to itself "not a simple supervisory power but a rather genuine power of orientation" that that had nullified any realty that SNPC was an autonomous company.
I am unable to agree that the close supervisory nature of the relationship between SNPC and ROC is enough to declare SNPC to be a sham or façade. I am not persuaded that SNPC should be regarded as the alter ego of ROC or as a mere fiction, façade or sham, although I take no issue with the five findings of fact upon which the Paris Court decided the case.
What gives this Court pause is the need to take the leap from finding that SNPC is closely supervised to the conclusion that it therefore is an
"emanation" of ROC to the extent as a matter of English common law; that that connotes a fiction, a mere sham or façade. Even if this Court accepts all five of the French Court's findings of fact, that does not lead ipso facto to the conclusion that SNPC is fictional. Again that conclusion may be a matter of French law, having no corresponding basis in English Law.
The approach taken by the French Court may be criticized as flawed, to the extent it implies a fiction or mere sham; in that every State is at liberty to set up Government bodies and agencies which are lawful under their Governmental systems for perfectly legitimate purposes such as those expressly forming the raison d'être of SNPC.
Moreover, there are obvious and troubling concerns of international comity which arise from arriving too readily at such conclusions.
As to Olearius, the only allegation of a façade or sham in the Plaintiffs' pleadings was that the formation and use of Olearius in the alternative marketing arrangement was a device or sham to ostensibly retain the Congolese Defendants' assets by structuring their affairs in such a way as to prevent execution against them. The Plaintiffs point out that the Facility was so structured that there would be no collection account in the name of the producer of the commodity, that being SNPC. As a result of this that account would be unavailable for attachment by creditors of the producer.
I have already described from the Lenders point of view, the raison d'être of Olearius; which by its name, conveys the metaphoric derivatives of its oil bearing purpose.
In Adams v Cape Industries (supra), their Lordships addressed the question whether motive was a necessary element of a finding of sham. Quoting Scott J. at page 967 where he stated:
"If and so far as the judge intended to say that the motive behind the new arrangements was irrelevant as a matter of law, we would respectfully differ from him. In our judgment, as Mr. Morrison submitted, whenever a device or sham or cloak is alleged in cases such as this, the motive of the alleged perpetrator must be legally relevant, and indeed this no doubt is the reason why the question of motive was examined extensively at the trial. The decision in Jones v Lipman [1962] 1 All ER 442, [1962] 1 WLR 832 referred to below was one case where the proven motive of the individual defendant clearly had a significant effect on the decision of Russell J.
The judge's finding of fact quoted above as to the motives of Cape behind the new arrangements is accepted (no doubt welcomed) by the plaintiffs, so far as it goes. They submit rightly in our judgment, that any such motives are relevant to the 'corporate veil' point.
At page 1024g, further reference was made to Lipman (supra). Lord Justice Slade said:
"In that case the first defendant had agreed to sell to the plaintiffs some land. Pending completion the first defendant sold and transferred the land to the defendant company. The evidence showed that this company was at all material times under the complete control of the first defendant. It also showed that the acquisition by him of the company and the transfer of the land to the company had been carried through solely for the purpose of defeating the plaintiff's right to specific performance. Russell J. made an order for specific performance against both defendants. He held that specific
performance cannot be resisted by a vendor who, by his absolute ownership and control of a limited company in which the property is vested, is in a position to cause the contract to be completed. As to the defendant company, he described it as being 'the creature of the first defendant, a device and a sham, a mask which he holds before his face in an attempt to avoid recognition by the eye of equity': see[1962] 1 All ER 442 at 445, [1962] WLR 832 at 836. Following Jones v. Lipman, we agree with Mr. Morrison that, contrary to the judge's view, where a façade is alleged, the motive of the perpetrator may be highly material."
The issue of law becomes whether the question of motive behind the financial arrangement between Olearius/SNPC and ROC is enough to justify the lifting of the corporate veil such that the assets of the First and Second Defendants are to be regarded as the assets of ROC and therefore available to satisfy the Plaintiffs' debts.
The financial relationship between Olearius /SNPC and ROC has already been summarised above. The inferences which I draw from all the evidence is that the Special Purpose Vehicle was to be used strictly as a pre-payment facility. The ultimate beneficiary of the Facility as stated in the Summary Terms and Conditions is, nonetheless, SNPC.
Their Lordships in Adams v Cape (supra) ultimately decided that while an arrangement might not attract moral approval, there was nothing illegal in the arrangement made. At page 1026, their Lordships said:
"We do not accept as a matter of law that the court is entitled to lift the corporate veil as against a defendant company which is a member of a corporate group merely because the corporate structure has been used so as to ensure that the legal liability (if any) in respect of particular future activities of the group (and correspondingly the risk of enforcement of that liability) will fall on another member of the group rather than the defendant company. Whether or not this is desirable, the right to use a corporate structure in this manner is inherent in our corporate law"
The same can be said for the use of the SPV Scheme. There is nothing inherently exceptionable in the use of SPVs as financial vehicles. SPVs are used extensively throughout the world for the structuring of financial transactions for many different reasons. Olearius, as a Cayman Islands SPV, is by no means unique in that regard.
The Lenders contend that the Facility negotiated with SNPC was for the legitimate commercial purpose of the provision of a commercial loan to be repaid from and secured by the production of oil and the sale of oil.
I accept without reservation, that the transaction evidenced by the Facility Documents is a legitimate structured finance arrangement which enables the Mandated Arrangers to seek to obtain better security by lending to an SPV rather than lending to the producer of the oil.
Based on all the foregoing, this Court declines the Plaintiffs’ invitation to declare SNPC the alter ego of ROC or a mere sham or facade. The Court also expresses reservations about the propriety of any such relief against Olearius.
JURISDICTION TO ATTACH A PARTY WHOSE ASSETS ARE BENEFICIALLY OWNED BY THE DEFENDANT
Notwithstanding the foregoing, I am however satisfied that SNPC is a necessary and proper party whose assets because of the nature of its relationship with ROC, should be made available to satisfy ROC's judgment debts.
In T.S.B. Bank International v Chabra [1992] 1 WLR 231, a Mareva injunction was granted for the purposes of restraining the first defendant, who had given a guarantee to the plaintiff, from removing its assets from the jurisdiction. A second defendant was added by the Court of its own motion and an injunction in similar terms was granted against it, the Court having found that the second defendant held assets beneficially owned by the first defendant; in particular the ownership of 5 Beverley Drive. On an application by the second defendant to have the injunction discharged on the ground that no cause of action was disclosed, the Court found that since the second defendant was a necessary party to ensure that all matters in
dispute were effectively dealt with (and its position fell within RSC, Ord. 15, r. 6(2)(b)(ii) – (similar in terms to GCR O15, r 6 (2)(b)(ii)) - , it followed that the second defendant was a proper party to the proceedings even though there was no cause of action against it on the guarantee and therefore it should not be struck off the writ.
The Court went on to say at Page 238 at C:
"In this state of uncertainty about the ownership of 5 Beverley Drive, I am of the view that I should not strike out the company as a party to these proceedings. As I have said, I made the order for its joinder of my own motion pursuant to R.S.C., Ord. 15, r.6. I considered that the presence of that company before the court was necessary to ensure that all matters in dispute in the cause or matter might be effectually and completely determined and adjudicated upon by adding the company as a party. I also considered that the position of the company fell within the broad provisions of Ord. 15, r. 6(2)(b)(ii), namely that there could be joined as a party:
"any person between whom and any party to the cause or matter there may exist a question or issue arising out of or relating to or connected with any relief or remedy claimed in the cause or matter which in the opinion of the court it would be just and convenient to determine as between him and that party as well as between the parties to the cause or matter."
These very same considerations give this Court the jurisdiction to consider SNPC and Olearius proper parties to these proceedings. However, the Court is not of the view that an injunction against Olearius would serve a proper purpose at this time because of the nature of the financial structure.
There simply would be nothing to bite upon if the flow of oil from ROC were to be cut off and even if the injunction were continued would serve unjustifiably to prevent the Lenders from recovering what is due to them.
CAN THE COURT GRANT AN INJUNCTION AGAINST SNPC?
In Chabra (supra), the Court said at Page 240B:
"If the Court has power to make an order against the company, the available evidence points strongly, in my view, to the need for an injunction against it. There is a good arguable case that some of the assets held in its name are the beneficial assets of Mr. Chabra either for him, or on the basis that the company is nothing more than a convenient repository for Mr. Chabra's assets."
On the question whether or not the Court had jurisdiction to make an injunction against the company as the plaintiff had no cause of action against it, the Court said at Page 241B-D:
"In considering this submission I bear in mind four preliminary but important points. I first take note of the wide terms of section 37(1) of the Supreme Court Act 1981 which empowers the Court to grant an injunction in all cases where it appears to the Court to be just and convenient to do so. Secondly, the whole basis of the Mareva jurisdiction is that, where a plaintiff has shown a good arguable case, the Court, in order to protect the plaintiff's interests, has jurisdiction in a proper case to grant an interlocutory injunction restraining a defendant from disposing of or dissipating his assets, where the refusal of such an injunction would involve a real risk that a judgment obtained by the plaintiff would be stultified and remain unsatisfied.
Thirdly, the jurisdiction of the Court should be exercised with caution and great care should be taken not to be oppressive to the persons restrained, either in the carrying on of a business or in the conduct of everyday life."
Fourthly, the practice of the Court on the grant of Mareva injunctions is an evolving one which has to remain flexible and adaptable to meet new situations as and when they arise.
In order to bolster their argument that an injunction can only be granted against a defendant against whom the plaintiff has a cause of action, the defence in Chabra (supra) quoted from the decision of the House of Lords in Siskina (Owners of cargo lately laden on board) v. Distos Compania Naviera S.A. [1979] A.C. 210, where Lord Diplock said in his speech:
"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."
But the Court in Chabra (supra) went on to point out at Page 241G that:
"[I]n that case there was only one defendant and it was held that as there was no cause of action against the sole defendant which was justiciable in the High Court and enforceable by final judgment, the Court had no jurisdiction to make an interlocutory injunction against the defendant restraining the removal of assets in England: see also Steamship Mutual Underwriting Association (Bermuda) Ltd. v. Thakur Shipping Co. Ltd. (Note) [1986] 2 Lloyd's Rep.439."
And at Page 241 H:
"In the present case there are two defendants. There is one defendant, Mr. Chabra, against whom the plaintiff undoubtedly has a good arguable cause of action: the claim on the guarantee. This is
justiciable in the English Court; Mr. Chabra is amenable to the jurisdiction of the English Court to make a final judgment against him on the guarantee. The claim for an injunction to restrain disposal of assets by Mr. Chabra is ancillary and incidental to that cause of action. In my judgment, the claim to a similar injunction against the company is also ancillary and incidental to the claim against Mr. Chabra and the Court has the power to grant such an injunction in an appropriate case. It does not follow that, because the Court has no jurisdiction to grant a Mareva injunction against the company, if it were a sole defendant, the court has no jurisdiction to grant an injunction against the company as ancillary or incidental, to the cause of action against Mr. Chabra: see for example, Vereker v. Choi [1985] 4 N.S.W.L.R. 277, 283. I agree that such a course is an exceptional one, but I do not accept that it is one that the Court has no jurisdiction to make." (Emphasis added)
There can be no argument in this case that the Second, Third and Fourth defendants are amenable to the jurisdiction of this Court and that judgment has already been entered against ROC for sums owed to the First and Second Plaintiffs. Following the principle laid down in Chabra (supra) and most recently followed in Yukon Line Ltd. v. Rendsburg Investments Corporation and Others [2001] 2 Lloyd's Reports 113; the claim for an injunction against SNPC is ancillary and incidental to the enforcement of the debt owing to the Plaintiffs.
Without the need to declare SNPC anything other than what it is as a matter of Congolese Law; there is evidence that assets belonging to or which might come into the possession of SNPC are in fact or will in fact be assets of ROC. It is therefore appropriate to grant this injunction in support of the Plaintiffs' legal right to collect their debt owing to them by ROC.
APPOINTMENT OF A RECEIVER
With respect to the Plaintiffs' application to appoint a receiver in respect of the Congolese Defendants’ interests in the Forward Purchase Agreement, it appears that the only benefit that would be collected would be any Additional Purchase Price Payment which is payable by Olearius to SNPC pursuant to Clause 12 of the Forward Purchase Price. However, as made clear in the Third Affidavit of Mr. Aleem Khan of SCB, there may possibly be no monies to collect.
By letter dated 13 August 2002, SCB in its capacity as Agent bank notified SCB in its capacity as Account Bank, that an Event of Default had occurred and was continuing as a result of the Order for a Mareva injunction made by Graham J. against Olearius on that same date. SCB also stated that with immediate effect it was exercising its right pursuant to Clause 9.8.1 of the Facility Agreement to become sole signatory on the Project Accounts. By letter of the same date, Olearius was advised by SCB that the Order had caused an Event of Default which was continuing. By letter dated 15th August 2002, Olearius informed SCB and SNPC that an Event of Default had occurred. Clause 9.8.2 of the Facility Agreement provides that:
"After delivery of a notice under paragraph 9.8.1 above (and until the Account Bank is notified by the Agent that such
Event of Default has been remedied or waived by the Majority Lenders), no amount will be payable to the Borrower [Olearius] or may be withdrawn by the Borrower [Olearius], with respect to the Project Accounts."
By Clause 6.2 "Withdrawals by Borrower from Collection Account" after stating priority in terms of withdrawals, the Clause continues:
"…[T]he Borrower shall not be entitled to make any such withdrawal under paragraphs 6.2.7, 6.2.8 or 6.2.10 above if a potential Event of Default is continuing which, in the absolute discretion of the Agent might be expected to have a Material Adverse Effect…"
Importantly, it is Clause 6.2.10 that provides for payment to SNPC. It is clear that with the Event of Default arising out of the Mareva injunction of August 13, 2002; SNPC would have no further entitlement to any additional Price Payments from Olearius. Additionally, the Lenders by letter dated 14th August 2002, informed Olearius that the entire Loan under the Facility Agreement fell to be repayable by Olearius on demand. The Lenders have thus far demanded payment from Olearius of all the proceeds of the sale of oil which Olearius has received (less a buffer which has been left in the DSRA to cover future interest payments and costs) and intend to do so until fully repaid.
It is of course possible that if the Lenders revoke their declaration of an Event of Default, there eventually may be a surplus for payment by Olearius to SNPC. However, this would be a decision requiring the unanimous
support of the Lenders and is unlikely. The Interveners argue that a Proposed Receivership Order would not therefore fulfil the expectations of the Plaintiffs but instead would prejudice the Lenders in that as Third Parties, they have no meaningful degree of protection by way of security for the Plaintiffs’ cross-undertaking in damages. They therefore argue that the possibility of the Plaintiffs obtaining any surplus could be maintained by an Order freezing it in the hands of Olearius or alternatively directing Olearius to pay it into an account in the name of the Plaintiffs.
The latter suggestion seems to me to be the most pragmatic. In S.C.F. Financing Co. Ltd. v. Masri [1985] 1 W.L.R. 876 a case where Third Party interests were affected by a Mareva injunction, and a dispute arose as to whether the third party assets were in fact, the property of the defendant against whom an injunction had been made, Lloyd L.J. said:
“(i) Where a plaintiff invites the court to include within the scope of a Mareva injunction assets which appear on their face to belong to a third party, e.g. a bank account in the name of a third party, the court should not accede to the invitation without good reason for supposing that the assets are in truth the assets of the defendant. (ii) where the defendant asserts that the assets belong to a third party, the court is not obliged to accept that assertion without inquiry, but may do so depending on the circumstances. The same applies where it is the third party who makes the assertion, on an application to intervene. (iii) In deciding whether to accept the assertion of a defendant or a third party, without further enquiry, the court will be guided by what is just and convenient, not only between the plaintiff and the defendant and the third party."
While the Court has been guided by the above procedure and it is a fact that Olearius holds funds or might come into funds that are the property of SNPC; I must ultimately be guided by what is just and convenient. I do not accept the proposition that the Mareva injunction against the First Defendant granted by Graham J. remains proper; nor am I of the view that it is necessary to appoint a Receiver. Even if the injunction were proper, as the Interveners have pointed out, the Plaintiffs will have nothing to collect if the injunction is continued or a Receiver appointed.
SCB has already informed the Borrower that an Event of Default has occurred and has already become the Sole Signatory to the Facility as per Clause 9.8.1. Clause 9.8.1 reads as follows:
"If the Agent notifies the Account Bank that an Event of Default has occurred and is continuing and in such notice invokes this Clause, the Agent shall be entitled (but not obliged) without prior notice to, or the consent of, the Borrower to:
(A) be the sole signatory on the Project Accounts; and
(B) apply all amounts in the relevant Project Accounts in or towards reduction (as and when they fall due) of amounts outstanding under the Finance Documents and such other payments and obligations as the Agent may agree (in such order and from such Project Accounts as the Agent reasonably thinks fit).
So any relief granted to the Plaintiffs here will only make sense if the Parties can come to some kind of agreement regarding the excess funds held by Olearius and payable to SNPC or to its order. I am reminded of the third point made by Mummery J. in Chabra (supra) at page 241 C, where the Court in referring to its jurisdiction to grant a Mareva injunction said:
"....the jurisdiction of the court should be exercised with caution and great care should be taken not to be oppressive to the persons restrained, either in the carrying on of business or in the conduct of everyday life."
The Intervener, SCB, has here represented to this Court that in the event the Mareva injunction is discharged; that it will not exercise such discretion as it has under clause 9.8.1(B) of the Facility Agreement dated 17th May 2002 or otherwise under the Relevant Documents to make payments to SNPC or at its direction; except for those payments to be made to a relevant designated account. I will accept their representation by way of undertaking another pragmatic way of ensuring that any surplus funds to be paid to SNPC are available to satisfy the judgment debts of the Plaintiffs. The details of the above are to be agreed between the parties and presented to the Court.
As far as the First Defendant is concerned, the injunction granted by Graham J. dated 13th August 2002 is hereby discharged and the Plaintiffs
are released from the undertakings and the guarantee and charge for the cross-undertakings be released and returned. The Plaintiffs also have leave to discontinue this action against the First Defendant.
No order as to costs between the Plaintiffs, the First Defendant and the Intervener.
SUMMARY OF ORDERS MADE
As against the Third and Fourth Defendants:
Pursuant to section 5 of the Foreign Arbitral Awards Enforcement Law (1997 Revision) and section 22 of the Arbitration Law (2001 Revision) and the judgment of the International Court of Arbitration (Case 10030/AC/DB); the First Plaintiff is to be paid all sums owing in the amount of 30,645,655.38 Euros inclusive of interest as of the judgment date. Additional interest due at a rate of 5 3/4% pursuant to s.34 of the Judicature Law (2002 Revision) until payment is made.
As Against the Fourth Defendant:
The Fourth Defendant is to pay the Second Plaintiff all sums owing together with interest in the amount of US$15,910,413.52 as of the date of judgment. Additional interest due at a rate of 4 1/2 % pursuant to s.34 of the Judicature Law (2002 Revision).
As against the Second Defendant:
A Declaration is granted that having regard to the true nature of the relationship between the Second and Fourth defendant; that the Second Defendant is beneficially owned and controlled by the Fourth Defendant and that the Second Defendant is properly joined in these proceedings against the Fourth Defendant. As such the assets of the Second Defendant are to be regarded as the assets of the Fourth Defendant and are available for execution in satisfaction of judgments obtained against the Fourth Defendant.
The Second Defendant is to pay all sums found due from the Fourth Defendant to the Plaintiffs as of the judgment date. Additional interest due under s.34 of the Judicature Law until payment is made.
The appointment of a Receiver over the assets of the Second Defendant is denied. Instead, an irrevocable designation by the Second Defendant of the General Account of the Grand Court for the purposes of Clause 9.9 of the Facility Agreement of 17th May 2002 between the First Defendant, KBC Bank NV, RMB International (Dublin) Limited, the Intervener and the Original Lenders is required. Monies so received are to be held to the benefit of the Plaintiffs to the extent that the Judgment of this Court on the 16th July 2003 remains unsatisfied. Any dealings with such funds to await
further order of this Court. Any excess is to be for the benefit of the Second to Fourth Defendants. Liberty to apply in relation to the implementation of this Order.
As against the Second to Fourth Defendants:
A Mareva injunction is hereby granted against the Second to Fourth Defendants prohibiting the Defendants from dealing with their assets up to the amount of US$51,000,000. Uncharged free assets in cash owned beneficially by the Defendants and held by the First Defendant in the amount of US$51,000,000 must not be assigned charged, pledged, mortgaged or assigned.
The Plaintiffs are at liberty to seek further relief against the Second to Fourth Defendants.
Costs of this action granted against the Defendants to be taxed if not agreed.
As to the First Defendant:
The action against the First Defendant is to be discontinued. The 13th August 2002 Mareva injunction against the First Defendant is discharged. The Plaintiffs are released from the undertakings given to the Court and the guarantee and charges executed and served in connection with their cross-undertakings in damages are to be released and returned.
I record that the Plaintiffs agree not to pursue either the First Defendant or the Intervener and vice versa, in relation to any costs orders made in these proceedings.
There is no order as to costs of this action as between the Plaintiffs, the First Defendant and the Intervener.
I record that Formal Orders were presented to the Court and approved in final settlement of the action on the 17th July 2003.
Anthony Smallie
Chief Justice
Dated 14th October 2003.