Case of the week: Civil procedure

Regulation 44/2001 article 6(1) was limited to cases where the same claimant was bringing proceedings against both the defendant domiciled in the UK and the non-domiciled defendant and did not confer jurisdiction where one claimant sued the UK defendant and another sued the non-domiciled defendant. Applications granted

Madoff Securities International Ltd (MSIL) applied for a freezing injunction or a proprietary injunction against Sonja Kohn and her company Bank Medici.

The defendant counterclaimed to set aside the proceedings on the grounds of want of jurisdiction.

As liquidator of the Bernard L Madoff Investment Securities LLC (BLMIS), Irving Picard is responsible for recouping $19.5bn (£12.44bn) lost by investors in the scheme.

MSIL was the England-based arm of BLMIS, 99 per cent of which was owned by Madoff. It was used to launder money and to make payments of stolen money.

Kohn was an Austrian national who introduced investors to Madoff. In return Kohn and her companies received nearly $50m from Madoff and MSIL, which were proceeds of the fraud. BLMIS made the relevant payments through MSIL. Kohn described the payments as ‘commission’ but the invoices rendered by her companies referred instead to such things as research, analysis and consulting. MSIL’s case was that the payments were illegitimate and that the invoices were shams.

The directors of MSIL said that the payments were made on Madoff’s instructions in respect of research provided by Kohn.

MSIL brought proceedings against the directors alleging breach of contract and fiduciary duty in relation to the payments to Kohn, alleging knowing receipt and constructive trust.

Kohn submitted that under Regulation 44/2001 article 2 the directors had to be sued in the member state of their domicile.

It was further submitted that there was no serious issue to be tried between MSIL and its directors because MSIL had suffered no loss as the money to make the payments was provided by Madoff. Applications granted

Article 6(1) did not apply where it was another claimant who had made a claim against the anchor defendants.

The policy of the Convention was to produce predictable results and article 6 should be narrowly construed as an exception to the general rule that jurisdiction was based on the defendant’s domicile.

Article 6(1) should be limited to cases where the same claimants were bringing the claims against both the anchor defendant(s) and the non-domiciled defendant.

Accordingly, the court had no jurisdiction over claims against Kohn.

A claimant did not need to establish any more than a serious issue to be tried against the anchor defendant before article 6(1) could be invoked against the non-domiciled defendant.

The principle that a company could not bring a claim for breach of duty against its directors where their conduct had been approved or authorised by the shareholders, was subject to an exception where the transaction would be a fraud on the company. The fact that the money came from MSIL by way of subvention and that but for that MSIL would not have had the money in the first place, was beside the point.

The claimant was entitled to a proprietary injunction against Kohn.

The claimant was also entitled to a freezing injunction and related relief including disclosure orders against Kohn and her company.

For Madoff Securities

Pushpinder Singh QC, Blackstone Chambers
Shaheed Fatima, Blackstone
Robert Weekes, Blackstone
Tom Richards, Blackstone
Nick Moser, Taylor Wessing

For Kohn

Terence Mowschenson QC, Wilberforce Chambers
Sebastian Allen, Wilberforce Chambers
Steven Corney, Olswang
James Levy QC, Hassans

Commentary
Stephen Gentle and Richard Foss

This latest round in Madoff-related litigation comprised three interloc-utory applications before Mr Justice Flaux in the Commercial Court.

Of particular interest was the application by defendant Sonya Kohn and one of her defendant corporate vehicles (the Kohn defendants) to set aside proceedings issued against them by the second claimant and trustee in liquidation of Madoff’s US company on the grounds that the requirements of Article 6(1) of Council Regulation (EC) 44/2001 (Article 6(1)) were not met.

Article 6(1) allows claims against a non-domiciled defendant in the same jurisdiction as an ’anchor’ defendant where claims are ’closely connected’ and separate proceedings may result in ’irreconcilable judgments’.

Flaux J endorsed emphatically a restrictive interpretation of Article 6(1) when considering derogation from the basic principle that defendants should normally be sued in the contracting state where they are domiciled (Article 2).

Although the court accepted jurisdiction over the claims by Madoff Securities International (MSIL) against the Kohn defendants because it is also suing the English-domiciled ’anchor’ defendants, there was no jurisdiction over the claims by the trustee. Also, the court did not accept that irreconcilable judgments could result in circumstances where the claims were governed by two different systems of law.

The judgment is unwelcome for the Madoff trustee chasing the $19bn (£12.18bn) lost to Madoff’s fraud. As a substantive judgment on Article 6(1) it will have wider currency both here and in Europe.

Stephen Gentle and Richard Foss, partners, Kingsley Napley