Last week saw the 5 year anniversary of the Supreme Court. It is the highest court in the country and decisions made within its walls cannot be subjected to further review by another court. Because of this, the cases that are brought to it are often complex and of constitutional importance to everyone in the UK. In acknowledgement of the Court's importance, Taylor Wessing has pulled together what it thinks are some of the Court's most influential judgments. 

1. Lehman Brothers International (Europe) Limited client money application

One of the most hotly anticipated judgments handed down by the Supreme Court since its opening was the Lehman Brothers International (Europe) Limited ("LBIE") client money application. The case sought to clarify how client money should be identified and how it should be distributed if the financial institution enters a formal insolvency process. The case also provided guidance on the client money requirements in chapter 7 of the FSA's Client Assets Sourcebook ("CASS 7") in the event of a failure by an FSA authorised firm to segregate client monies.

The Supreme Court upheld the decision of the Court of Appeal and held that (a) client money is automatically held on trust upon receipt (regardless of whether it is actually segregated), (b) client monies which should have been segregated but were in fact held within LBIE's own accounts were to be included within the pool of client monies and (c) all creditors with an entitlement to client money were able to claim against the client money pool regardless of whether their money had in fact been segregated.

This was a significant decision in the administration of LBIE as it opened the door for clients whose money had not been segregated to claim against the client money pool, and significantly diluted the pool of client assets. At the time the judgment was handed down, Taylor Wessing commented that the clarification of the CASS 7 requirements should lead to a reduction in the time it takes clients to recover client money upon the insolvency of a financial institution. However, the uncertainty regarding the potential for tracing claims and the significant dilution of claims led to the FSA responding with a consultation paper in September 2012. That paper highlighted the problems with the current legislative regime. On one hand the paper considered the possibility of reversing the effect of the Supreme Court's judgment by requiring client money distributions to be limited to clients whose assets were actually in the segregated pool of client money. On the other hand it considered the possibility of extending the Supreme Court's judgment to all custody assets and client money.

Therefore, whilst the Supreme Court's decision has advanced the discussion regarding the effectiveness of the current legislative regime on how to deal with client money on insolvency, it has not resolved the uncertainties. It is likely that the dialogue that has been opened will continue for the foreseeable future and a much broader review of the relevant legislation will be needed before the faults in the UK's current client money regime can truly be fixed.

By Emma Allen, associate in the Disputes and Investigations team at Taylor Wessing

2. R (on the application of Prudential plc and another) (Appellants) v Special Commissioner of Income Tax and another (Respondents) [2013] UKSC1

In 2013, the Supreme Court considered whether the principle of legal professional privilege should be extended to include legal advice given by non-lawyer professionals who were qualified to give it.

An inspector of taxes sought to obtain documents detailing transactions that Prudential plc and a subsidiary had undertaken to give effect to a tax scheme. Prudential argued that they were privileged documents because they related to Prudential seeking and receiving legal advice from their accountants in connection with the transactions. The general rule is that where legal professional privilege ("LPP") attaches to a communication between a legal adviser and a client, the client is entitled to object to any third party seeing the communication for any purpose.

The Supreme Court held by majority that the principle of LPP should not be extended for three main reasons: firstly, that such a decision would introduce uncertainty into a well understood principle; secondly, that matters of policy should be left to Parliament's discretion; and thirdly, that considering Parliament had legislated on the assumption that this privilege was restricted to advice given by lawyers, such an extension by the courts would be inappropriate.

This case demonstrated the Supreme Court's acknowledgement that there are some decisions which Parliament is better and more legitimately placed to make (even when the technical authority to make such a decision lies with the courts).

It is therefore important to be aware that LPP continues to apply only to advice given by lawyers. It applies to confidential communications which pass between a client and their lawyer, which have come into existence for the purpose of giving or receiving legal advice about what should prudently and sensibly be done in the relevant legal context. Communications with accountants may be subject to litigation privilege in circumstances where a confidential communication between either a lawyer (acting in a professional capacity) or the client and a third party is made for the dominant purpose of litigation, such litigation being pending, existing or reasonably contemplated.

By Michael Henley, trainee solicitor in the Disputes and Investigations team at Taylor Wessing     

3. The FSA and Freezing Injunctions

Financial Services Authority v Sinaloa Gold plc & Ors and Barclays Bank plc [2013] UKSC 11

In this Supreme Court case, the FSA (now the FCA) alleged that the defendants were fraudulently promoting the sale of shares in Sinaloa Gold plc. The FSA sought and obtained a freezing injunction (without informing the defendants). Its effect was to prevent the defendants from disposing of or dealing with their assets. The FSA provided an undertaking in the injunction to pay the reasonable costs of third parties who may be affected by the injunction and compensation for any losses caused. The FSA applied to remove the obligation to compensate third parties' losses, which Barclays Bank plc (as a potentially affected third party) opposed.

The court held that "there is no general rule that the FSA should be required to give a cross-undertaking, in respect of loss suffered either by the defendants or by third parties". It distinguished between private and public claims. It made clear that in private claims it is only fair that the applicant who chooses to seek an injunction should be expected to give a cross-undertaking to pay damages to any defendants and third parties. However, as a public body, the FSA was looking to enforce the law in the interests of the public, and it should not be expected to use the public purse to pay for losses of third parties.

The decision is important for banks holding client assets that are or could be affected by a freezing injunction granted pursuant to FSA action: e.g innocent third party banks, who are affected by an injunction granted to the FSA, cannot automatically expect financial protection against losses caused by that injunction, as the FSA will only be required to give a cross-undertaking in damages in limited circumstances. The reasoning if the decision has since been followed in a case brought by the Pensions Regulator, demonstrating that the courts remain keen to enable public bodies to perform their duties without having to first expose themselves to the financial risks attendant upon a cross undertaking as to damages.

By Jemilla Olufeko trainee solicitor in the Disputes and Investigations team at Taylor Wessing

4. Rubin v Eurofinance

The much anticipated judgment of the Supreme Court in the joined appeals of Rubin v Eurofinance SA and New Cap Reinsurance v AE Grant [2012] UKSC 46 was handed down on 24 October 2012.

The issue in these cases was whether foreign insolvency orders made in relation to avoidance proceedings should be enforceable in the English courts in circumstances where there had been no submission by the defendant to the jurisdiction of the foreign court in the original proceedings.

It is a settled principle of English law that foreign in personam judgments are only enforceable in England at common law if the judgment debtors were present in the foreign jurisdiction when proceedings were brought, claimed or counterclaimed in the proceedings, submitted to the jurisdiction of the foreign court by voluntarily appearing or agreed to submit to the jurisdiction prior to proceedings being commenced. Similar rules apply pursuant to the Foreign Judgments (Reciprocal Enforcement) Act 1933 (the 1933 Act).

The Court of Appeal in Rubin sought to distinguish between judgments deriving from proceedings which were integral to, or part and parcel of, insolvency proceedings (which included avoidance proceedings) and those which were not (such as claims which could have been brought by the company in its own name). The Court of Appeal held that, in applying the analysis of the Privy Council in Cambridge Gas, the enforcement of orders in relation to the former category of claims should be governed by separate rules, rules which would permit recognition and enforcement of insolvency orders by the English courts in circumstances where the traditional tests set out above were not met.

The Supreme Court, however, held that whilst there were characteristics of avoidance claims which could distinguish them from other insolvency claims (avoidance claims being a mechanism for the collection and fair distribution of a debtor's assets to creditors as opposed to a claim for the determination of rights as against the debtor), the difference in character between the claims did not warrant orders deriving from avoidance proceedings being treated by the English courts as falling within a sui generis category of orders subject to special rules on enforcement.

In finding that the judgment in question was not enforceable under English common law, the Supreme Court also held that neither could the judgment be enforced under the CBIR (Rubin) or section 426 of the Insolvency Act 1986 (New Cap) given that neither contained express provisions pertaining to enforcement of foreign judgments and it would be surprising if such issues were to be dealt with by implication. The Supreme Court held that to enable insolvency orders to be enforceable in England despite not meeting the traditional tests would be too radical a departure from the settled law in this area: a step the court felt should be reserved for the legislature.

This case is significant because it illustrates the competing issues at play in this area; the desire on one hand for universality (global co-operation between the courts of different countries in the collection and distribution of assets in bankruptcy) in an ever more global community, and on the other hand, respect for the principle that the legislature should create new law, not the judiciary. Of particular significance to the Supreme Court in coming to the conclusion that the court should not depart from the settled law in this area, was the fact that the majority of both domestic and international law in this area depends on reciprocity between nations. Thus, any development in the law over recent years has been the product of extensive and complex negotiations between countries, a role that cannot be carried out by the English courts. Moreover, to permit the English courts to create new rules for the enforcement of foreign insolvency orders on a case by case basis without a clear statutory framework would introduce uncertainty into an already complex area of law. Therefore, while the development of more expansive rules relating to the enforcement of insolvency orders may be viewed as a necessary and welcome development in the law, such progression will have to be implemented by the legislature, if at all.

By Georgina Jones, associate in the Disputes and Investigations team at Taylor Wessing & Amy Patterson, senior associate in the Restructuring and Corporate Recovery team at Taylor Wessing

5. VTB Capital plc (Appellant) v Nutritek International Corp and others (Respondents)

The judgment handed down by the Supreme Court in February 2013 in the case of VTB v Nutritek has had important implications for commercial solicitors, particularly litigators. The appeal was of particular note because it concerned two important legal principles, forum non conveniens and "piercing the corporate veil", both of which are rarely considered by the highest courts.

Forum

In an area of law where the courts have a degree of discretion, it was perhaps unsurprising that the court was divided in its decision on forum non conveniens. By a majority of three to two, the court confirmed that the appropriate test for forum remained as established by the decision in Spiliada, namely that the court must conduct a balancing exercise and weigh up a number of factors. Deciding the correct forum is dependent on the unique circumstances of each case and any express choice of governing law, whilst relevant, will not be determinative, since issues of fact and practicality remain key considerations.

Despite the close split, one aspect on which the judges all agreed was that appellate courts should not ordinarily interfere with the decision of the lower courts in relation to forum arguments. The court was clear that if the only complaint is one of an incorrect evaluation, an appeal is not appropriate. As such, the judgment stands as a barrier for potential appellants attempting to secure permission to appeal on forum challenges.

Piercing the corporate veil

Under English law companies have a separate legal identity, meaning that, in line with the doctrine of privity of contract, a claimant cannot sue the shareholders of a company under a contract where it is the company, rather than the shareholders, which is the contracting party. Upholding the findings of the High Court and Court of Appeal, the court overruled the troubling decision of the High Court in Antonio Gramsci and unanimously reaffirmed the importance of privity of contract. They found that the claimant bank did not have the right to sue the owners of the borrowing company under a facility agreement to which the owners were not party.

Whilst it did not take the opportunity to confirm what power there is under English law to pierce the veil, the court did acknowledge that it would be appropriate in limited circumstances, notably where a corporate structure is used to conceal wrongdoing. To pierce the veil, and seek a remedy from a wrongdoing shareholder in place of the company itself, the claimant must show an exceptional circumstance which is in the interests of justice. In reality, this means the company must be "a mere facade concealing the true facts"; a vehicle of fraud or a means of avoiding an existing obligation. Practitioners will have to wait until the matter is before the Supreme Court again in order to obtain some clear principles, but by correcting the decision in Antonio Gramsci the court has at least remedied one glaring anomaly.

Whilst VTB v Nutritek was hotly anticipated by commercial lawyers, some have commented that the justices shied away from confirming that the principle of piercing the corporate veil exists under English law. However, by reversing Gramsci and confirming Spiliada, the case very clearly warrants its place as one of the most influential Supreme Court judgments of the last five years.