Article: November 2012 London Litigation Update

State Immunity: In SerVaas Incorporated v. Rafidain Bank and others [2012] 3 WLR 545, the UK Supreme Court considered the scope of a state’s immunity from execution of a judgment and provided helpful guidance in relation to the “commercial purpose” exception provided for in section 13(4) of the State Immunity Act 1978 (“the Act”).

SerVaas sought enforcement of a judgment by applying for a Third Party Debt Order in relation to dividends payable to Iraq by Rafidain under a Scheme of Arrangement. Iraq resisted this on the grounds that the money due to the state was immune from execution by virtue of section 13(4) of the Act as the funds were not property “for the time being in use or intended for use for commercial purposes”. The application was dismissed at first instance and an appeal by SerVaas was also dismissed by the Court of Appeal. Undeterred, SerVaas then mounted a further appeal to the Supreme Court.

The Supreme Court unanimously dismissed the appeal and confirmed that the nature of the property against which execution was sought was irrelevant to the “commercial purpose” analysis. Parliament did not intend a retrospective analysis of all the circumstances which gave rise to the property, but an assessment of the use to which the state had chosen to put the property. Unhelpfully for SerVaas, a certificate was signed by the Iraqi Ambassador in London stating the dividend payments would not be used for any commercial purpose. The Supreme Court noted that this certificate created a presumption that SerVaas had no real prospect of rebutting.

This decision demonstrates the considerable limitations of the “commercial purpose” exception. This development may create challenges in enforcing judgments against states in the United Kingdom and, therefore, any party contracting with a state should carefully consider insisting upon an express waiver of immunity from execution when drafting contractual dispute resolution clauses.

Determining a Debtor’s COMI: Should a German national (B) who owed a German Bank (the Bank) more than €3 million be allowed to take advantage of England’s debtor-friendly bankruptcy regime to erase his liabilities to the bank? This was what the Court had to decide in Sparkasse Hilden Ratingen Velbert v. Benk and another [2012] EWHC 2432. B, who had been declared bankrupt in England, owed the Bank more than €3 million. The bankruptcy had run its course and B had been discharged, erasing his liabilities to the Bank. The Bank argued that the English Court should not have made the bankruptcy order because B’s COMI had been in Germany at all relevant times and that his presence in England was only temporary. For the Bank to succeed, they had to establish that B’s COMI was not in England at the time the petition was presented.

The Court held that B’s COMI was in Germany at the time the second petition was presented and when the bankruptcy order was made. It found that B was habitually resident in Germany but only lived in England temporarily. Habitual residence did not require presence at any particular time, only habit: B’s professional domicile was in Germany. B was a notary in Germany at all material times and even though he was suspended from practice at the time of the second petition, he had lodged numerous appeals in Germany to resume his practice. This Court found that this showed B’s motive to resume professional activities in Germany once discharged and his purported job in England as a professional sports photographer was mere “window dressing”. The Court also found that B’s only economic activity since relocating to England (i.e. the appeals he had lodged to revive his notary practice) took place in Germany which also pointed to a German COMI. B’s partner, E, on whom he was dependent, financed B through her German bank accounts and maintained a German residence despite B’s tenancy agreement in Birmingham, England being in their joint names. E’s residence was deemed to be in Germany, and the Court found that the mutual emotional dependence of B and E as a couple made it unrealistic that they would have separate COMIs.

Most of B’s creditors were also located in Germany and B had not taken steps to inform them of his change in COMI. The Court held that even though the creditors would have known of his change of COMI by way of an earlier unsuccessful bankruptcy petition, this was insufficient to establish a change in COMI. The Court noted that a debtor should not normally need to notify his creditors of a change in COMI, but he should not hide his COMI from them either. B’s subjective intent was also a factor in the Court’s decision. The judge found that his evidence as a witness pointed to his presence in England as a short-term arrangement. B’s ultimate objective was to return to Germany free of his debt and resume his practice as a notary. Lastly, the fact that he had been untruthful in the past and openly used a company which advertised services aimed at helping German debtors relocate to England to work around German bankruptcy law, showed that he had made no real effort to settle in England.

Countries such as Ireland and Germany have much stricter bankruptcy laws than England, and debtors often try to establish England as their COMI to take advantage of the more relaxed laws there. While this decision does not affect the requirements for the establishment of COMI, it certainly shows the English Court’s sympathy for the anti-forum-shopping arguments which creditors frequently raise against their debtors when seeking to set aside English Bankruptcy petitions.

Causation in Financial Services Cases: Section 150 of the UK’s Financial Services and Markets Act creates a cause of action for private persons who have suffered loss as a result of a financial institution’s breach of a rule contained in the FSA’s Conduct of Business Sourcebook (COBS). Case law (e.g. Camerata v. Credit Suisse [2012] PNLR 15) had suggested that where a breach of COBS led a Claimant to make an investment they would not have made but for the breach, but Claimant went on to suffer loss as a result of unforeseeable market events (e.g. the collapse of Lehman Bros), then such loss was not recoverable under section 150. In Rubenstein v. HSBC [2012] EWCA 1184, the Court of Appeal departed from that principle. Rix LJ held that “It was the bank’s duty to protect Mr Rubenstein from exposure to market forces when he made clear that he wanted an investment which was without any risk (and when the bank told him that his investment was the same as a cash deposit)... [A] bank must reasonably contemplate that, if it misleads its client as to the nature of its recommended investment, and thereby puts its client into an investment which is unsuitable for him, when it could just as easily have recommended something more suitable which would have avoided the loss in question, then it may well be liable for that loss.” This approach recognizes that the tort created by section 150 is intended to protect investors, and that questions of causation and foreseeability must be understood in that context. This is a welcome development in an area of the law where English claimants have historically faced severe challenges in holding financial institutions to account for their wrongdoing.