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No freezing order against subsidiary of arbitration award judgment debtor

29 December 2014

In an important decision for anyone trying to enforce an arbitration award,  in Cruz City 1 Mauritius Holdings v Unitech Ltd & 7 ors [2014] EWHC 3704 (Comm) Males J ruled that the English court did not have jurisdiction to make a freezing order against subsidiaries of the judgment debtor, to further aid enforcement of the award, in circumstances where the subsidiaries had not been party to the arbitration agreement or the arbitration proceedings, and there was no substantive claim against the judgment debtor (just a claim for ancillary relief). Males J noted the need for caution in the exercise of the Chabra jurisdiction, which applies with even greater force when the third party is a foreigner with no presence or assets within the jurisdiction.

In last month’s Review, we covered a decision of Males J, who exercised his jurisdiction to appoint receivers by way of equitable execution over a judgment debtor’s shareholdings in four subsidiary companies for the purposes of enforcement of a London arbitral award (Cruz City Mauritius Holdings v Unitech Ltd & ors [2014] EWHC 3131 (Comm)). In these related proceedings, Males J was asked to determine whether the English court has jurisdiction to make a freezing order against those subsidiaries to further aid enforcement of the award in circumstances where no substantive claim is asserted against the subsidiaries and none has any presence or assets within the jurisdiction.

In July 2012, the claimant, Cruz City Mauritius Holdings (Cruz City), obtained an LCIA arbitration award, now worth more than GBP 350 million (the Award), against the defendant, Unitech Ltd (Unitech). Since then, the parties have been embroiled in litigation across a number of jurisdictions as Cruz City attempts to enforce the award and Unitech (in the words of Males J) does whatever it can to avoid having to meet its liabilities. In these proceedings, Cruz City sought to obtain a freezing order against five of Unitech’s subsidiaries (the Subsidiaries) in aid of enforcement of the Award. The complications for Cruz City were twofold: (1) the freezing order was sought against third parties; and (2) none of those third parties has officers, assets, or conducts any business, in England and Wales. The judgment focuses on the latter complication, with Males J not required on this occasion to consider the merits of the former. He nonetheless provided a useful summary of what is known as the Chabra jurisdiction.

The Chabra jurisdiction: freezing injunctions against third parties

Where a claimant can show a good arguable case that assets apparently owned by a third party are in fact beneficially owned by the defendant against whom there is a cause of action, it can obtain a freezing injunction against that third party (TSB Private Bank International SA v Chabra [1992] 1 WLR 231). That jurisdiction has been extended over time such that a freezing order may be granted to preserve assets that are or may be available to the judgment creditor, if necessary by the appointment of a liquidator or receiver, by exercising the rights of the judgment debtor to compel the third party to disgorge property or otherwise contribute to the funds or property of the judgment debtor.

Males J emphasised that this is “an unusual jurisdiction” in that it involves the exercise of the court’s compulsive powers against a party against whom no cause of action is asserted. Its effect in cases such as this – where the exercise of the jurisdiction is based not on beneficial ownership but on the possibility of the judgment creditor being able to exercise rights of the judgment debtor – is to restrain the third parties from dealing with assets over which they have both legal and beneficial ownership. For that reason, Males J noted the need for caution in the exercise of the jurisdiction, which applies with even greater force when the third party is a foreigner with no presence or assets within the jurisdiction.

The jurisdictional gateways

Because the Subsidiaries were all incorporated outside England and Wales, conducted no business here, and had no assets, directors, officers or other presence within the jurisdiction, Cruz City could only obtain the freezing order if it first satisfied the requirements of one of the “jurisdictional gateways” for service of a claim form out of the jurisdiction.

Ultimately, and having conducted a lengthy review of the relevant authorities, Males J accepted the Subsidiaries’ argument that Cruz City’s claim for Chabra relief did not fall within either gateway that it relied upon. In doing so, he had reference to one of the “cardinal principles” of construction: any doubt as to the correct construction of the jurisdictional gateways ought to be resolved in favour of the foreign defendant.

The gateways relied upon by Cruz City, and Males J’s reasoning in relation to them, were:

(1)   CPR 62.5(1)(c): a court may give permission to serve an arbitration claim form out of the jurisdiction if the claimant seeks a “remedy…affecting an arbitration…, an arbitration agreement or an arbitration award”.

It was clear on the authorities, Males J held, that service out of the jurisdiction pursuant to this gateway is permissible only against a party to the arbitration agreement or arbitration proceedings in question. The Subsidiaries were party to neither the arbitration agreement nor the arbitral proceedings, thus the gateway did not apply.

(2)   CPR PD 6B, para 3.1(3): a court may give permission for service out of the jurisdiction on C where there is a claim made by A against B and: (a) there is between A and B a “real issue which it is reasonable for the court to try”; and (b) C is a “necessary or proper party to that claim”.

To satisfy this gateway, Cruz City first had to establish that there was a “claim” made against Unitech as the “anchor defendant”. However, recent case law established that this requirement is satisfied only where there is a “substantive dispute” between the claimant and the anchor defendant before the English court. Cruz City’s claim for a freezing order sought only ancillary relief. Accordingly, there was no “claim” against the anchor defendant before the English court and the prerequisite to reliance upon this gateway did not apply.

In support of that view, Males J made reference to the specific terms used in the Rule (a “claim”, a “real issue” and a trial (“reasonable for the court to try”)), all of which he took to suggest that a substantive claim is required. In his view, relief that is ancillary to the enforcement of a judgment or award does not fit naturally into that language. His Honour also relied upon the “long-standing approach to construction of the rules for service out of the jurisdiction”, which requires that the rules are generally to be construed as relating to claims which involve the determination and enforcement of legal rights, and not to applications for interim relief that involve no process of adjudication upon substantive rights: Mercedez Benz AG v Leiduck [1996] AC 284.

Even if a “substantive claim” was not required, Cruz City was unlikely to have satisfied the requirements of this gateway because Males J did not consider there to be a “real issue” between the parties that it was “reasonable for the court to try”. The freezing order sought would, he observed, add nothing of substance to the relief already obtained by Cruz City (namely, a worldwide disclosure order, worldwide freezing order, and receivership order). It was not sufficient to establish jurisdiction that there was a mere possibility that a need for the additional freezing order may arise in the future.

Comment

For parties attempting to enforce arbitral awards, this decision is significant. It appears to render highly unlikely that an award creditor could obtain a freezing order against a non-party outside the jurisdiction, where that order is sought in aid of enforcement of an arbitral award. Males J was alive to the fact that such a result is contrary to the English court’s much touted policy that it should do what it properly can to assist in the enforcement of arbitral awards, but held that the policy cannot justify construing the jurisdictional gateways in a manner that extends their scope beyond their proper bounds.

The decision therefore gives some protection to an award debtor’s subsidiaries that were neither a party to the arbitration agreement nor a participant in the arbitral proceedings, and suggests that an award creditor may be more successful in enforcement by use of a strategy that focuses on the pursuit of measures against the debtor itself, which could also extend to its subsidiaries (for example, the appointment of receivers).