A significant amount of asset tracing work now originates from Eastern Europe. Where the parties to a dispute have chosen English law and the English courts as a forum in their contract, the very great differences between the various legal systems that the parties may be used to gives rise to difficult issues of conflict of laws.1
This case involved an application for a freezing order arising from a share sale agreement. In considering whether to grant a freezing order over the proceeds of the sale of shares to a third party, in breach of a Sale and Purchase Agreement (SPA), the court considered whether the applicant, Luxe Holding Limited (Luxe), might have a proprietary claim to the proceeds.
The court confirmed that the question of whether Luxe had a proprietary claim should be decided under English law because the SPA was governed by English law. It did not matter that a proprietary claim might not be recognised in the countries in which the shares were held.2
Midland Resources Holding Limited (Midland), a company incorporated in Guernsey, agreed to sell its shares in various companies, the majority of which were Russian or Ukrainian companies, to Luxe, a company incorporated in Cyprus, pursuant to an SPA. The SPA was governed by English law and the parties agreed to submit to the exclusive jurisdiction of the English courts. There was also a clause in the SPA which stipulated that Midland would pay a US$50 million “fine” if it failed to perform its obligations.
Less than two weeks before the shares were due to be transferred to Luxe, Midland gave notice that it was pulling out of the deal and had sold the shares to a third party. Midland accordingly returned the payment made by Luxe as well as a further US$50 million for payment of the “fine”.
Luxe alleged the failure to complete the sale was a breach of the SPA. Midland argued the SPA was insufficiently certain to be enforceable,3 or that alternatively on its true construction the SPA allowed Midland to withdraw on payment of the US$50 million “fine”.
- The proprietary claim
Luxe argued that it had acquired a beneficial interest in the shares as of the date of the SPA. When the shares were sold to a third party in breach of the SPA, the beneficial interest transferred to the proceeds of the sale obtained by Midland, insofar as these exceeded the balance of the price that Luxe would have had to pay.
Midland submitted that ownership of the shares was governed by lex situs, which was Russia or Ukraine. Ukrainian and Russian law do not recognise beneficial interests. Further, Midland could not have had a proprietary interest in the shares as they were held through subsidiaries, so it could not have passed a beneficial interest to Luxe.
The court held that Luxe had at the very least a good arguable case in the form of a proprietary claim. A quasi trust arose because the SPA was specifically enforceable – the obligation to be enforced was that Midland must procure that the shares were transferred.
Mr Justice Roth said (at paragraph 31):
“…I think it is necessary to ask what sort of trust, and thus beneficial interest, arises on the sale of land or of shares in private companies. In such a case, a trust arises only because the agreement is specifically enforceable. In a sense, therefore, it is the corollary of the remedy of specific performance. Thus it is not a full trust in the classic sense. The nature of the trust which arises on the exchange of contracts for the sale of land … has been described as a “qualified trust” and the vendor has been referred to by Lord Greene MR as “a quasi-trustee”.”4
Hence Luxe had a sufficient interest in the subject matter of the contract to trace in equity into the proceeds of the sale to the third party.
The court held that the applicability of lex situs to questions of ownership did not alter the position as between the contracting parties. Equity acts in personam – the parties had chosen to govern the relationship between them according to English law, so “they have voluntarily subjected themselves to the English system of remedies.
It was accepted by Luxe that any beneficial interest in the shares was terminated when they were sold to the third party, and its claim was to the proceeds in Midland’s hands. Thus, there was no interference with the property transfers under Ukrainian or Russian law.
- Freezing order – risk of dissipation
Mr Justice Roth considered that to obtain the freezing order Luxe had to show there was a real risk of dissipation by Midland.6
The following factors were considered relevant:
- Midland had no assets in the UK, and only very limited cash deposit assets in other EU countries, which could be moved very rapidly.
- It had substantial real estate assets in Russia, held through subsidiaries.
- Interestingly, one factor was disregarded. Luxe submitted that enforcement of an English judgment against real estate assets in Russia is very difficult. Mr Justice Roth said:
“Luxe chose to contract with Midland and agreed that exclusive jurisdiction under the contract should rest in the English court. Any difficulties that may exist regarding enforcement on Russian assets (as to which I make no findings) are therefore inherent in doing business with Midland and cannot, in my judgment, constitute a risk of dissipation that can justify a freezing order.” (at paragraph 62).
- There was evidence Midland had been able to very quickly re-organise the ownership of its Russian assets to transfer them out of the reach of Luxe.
- The court considered whether, applying guidance from Gee on Commercial Injunctions, there was evidence Midland had an “unacceptably low standard of commercial morality giving rise to a feeling of uneasiness about the defendant”. Mr Justice Roth said there was evidence Midland and its solicitors had misled Luxe on a number of occasions, by indicating that the sale to Luxe was going ahead and that, once the breach had become clear, it was premature for Luxe to seek an injunction even though it was in fact a matter of great urgency. Mr Justice Roth said that Midland had intended to give Luxe false assurances and:
“[T]he fact that Midland has engaged in such dissimulation so as to frustrate effective recourse to the English court, in my judgment provides real grounds for serious apprehension that it would act so as to place its assets out of the reach of Luxe as a judgment creditor.” (at paragraphs 66 and 67).
The court granted the freezing order. Perhaps most importantly, this case serves as a warning that when contracting with parties whose assets are based in foreign jurisdictions, a party may be deemed to have accepted the risk of enforcing judgment against those assets.