Erste Group Bank AG London Branch v J 'VMZ Red October' & Ors

The necessary or proper party gateway requires the court to examine the claims against the anchor defendants in isolation. An arguable claim and an English jurisdiction clause do not establish that there is a real issue which it is reasonable to try. Practical utility matters.

Proving in a foreign insolvency constitutes submission without receipt of a dividend. A submitting creditor cannot resist an insolvency avoidance order merely because its contract is governed by English law. Loss caused by non-payment to a contractual collection agent occurs at the stipulated place of payment; failure of an onward payment to England does not establish separate English damage.

For an extraterritorial claim under section 423 of the Insolvency Act 1986, sufficient connection and practicable relief must be assessed on a serious issue basis when permission to serve out is considered.

The claimant bank participated in a syndicated loan to a Russian steelworks company. The borrower's parent guaranteed repayment. Both agreements were governed by English law and provided for London arbitration, with an option to require proceedings in the English courts. Repayment was due to the facility agent in New York. The agent was then to forward the bank's share to London.

The borrower and guarantor entered Russian insolvency proceedings. The bank proved its claims and participated extensively in those proceedings. The Russian courts subsequently set aside the guarantee. The bank brought English proceedings against those companies and six other defendants. It alleged that the defendants had conspired to strip assets and manipulate the insolvencies, preventing repayment. It also sought relief under section 423 of the Insolvency Act 1986.

The third defendant, a Russian state corporation alleged to control the relevant companies, and the fifth defendant, its wholly owned subsidiary, challenged service in Russia. Cooke J had granted permission to serve out. The bank subsequently obtained summary judgment against the borrower and guarantor on its contractual claims. Flaux J dismissed the jurisdiction challenges.

The third and fifth defendants appealed. The issues concerned the necessary or proper party and tort gateways, the prospects of obtaining statutory relief, the applicable law, and whether England was clearly the appropriate forum.

The appeal was allowed. The court set aside permission to serve the third and fifth defendants outside the jurisdiction.

1. The necessary or proper party gateway required separate consideration of whether the claims against the anchor defendants, viewed without the proposed foreign defendants, raised a real issue which it was reasonable for the English court to try. Mere arguability was insufficient. An English jurisdiction clause did not answer that question. The relevant position was that existing when permission was granted, although later events could illuminate it (paras 37–48).

2. By proving and participating in the Russian insolvencies, the bank had submitted to the Russian courts in relation to issues arising in those insolvencies. Acceptance of a proof or payment of a dividend was unnecessary. The contractual and tort claims sought the same recovery and were capable of proof. Applying New Cap and Shell, the bank could not challenge the guarantee's avoidance merely by invoking English governing law and jurisdiction. The correctness of the Gibbs principle did not require reconsideration (paras 51–76).

3. Independently of submission, trying the anchor claims had no practical utility. The debt had been admitted in Russia, the tort claims duplicated the contractual recovery, and enforcement depended on the Russian insolvencies. The necessary or proper party gateway therefore failed (paras 77–82).

4. The contractual place of repayment was New York. Payment to the facility agent would discharge the borrower and guarantor. Failure of the agent's onward payment to London was an indirect consequence, rather than fresh or separate damage. The tort gateway failed. The court expressed reservations about authorities permitting reliance on any domestic damage, but left their correctness undecided (paras 94–108).

5. Under article 4.3 of the Rome II Regulation, the alleged conspiracy was manifestly more closely connected with Russia. The English contractual provisions did not outweigh its Russian participants, acts, assets and insolvency context. Nevertheless, failure to plead Russian law did not defeat the tort claims at this stage. The defendants had not alleged that Russian law rendered the pleaded conspiracy unactionable (paras 97–100, 109–112).

6. A claim under section 423 of the Insolvency Act 1986 could have extraterritorial effect, but sufficient connection and the prospect of practicable relief required examination at the service-out stage. The court preferred Banco Nacional de Cuba to the approach in Fortress Value. Relief would serve all victims and concern transactions already reviewed in Russia. No serious issue concerning sufficient English connection or effective relief was disclosed (paras 115–126).

7. As an independent ground, Russia was clearly the appropriate forum. The judge had overstated the risk of parallel trials and the significance of the contractual clauses, and insufficiently considered the litigation's Russian legal and evidential focus. His evaluation and discretion could not stand (paras 128–151).

• Court of Appeal: In [2015] EWCA Civ 379 , allowed the appeal and set aside permission to serve the third and fifth defendants outside the jurisdiction.
• High Court, Commercial Court: By orders dated 3 and 8 October 2013, Flaux J dismissed the third and fifth defendants' jurisdiction challenges.
• High Court, Commercial Court: On 14 December 2012, HHJ Mackie QC granted summary judgment against the borrower and guarantor on the bank's debt and contractual claims. Those defendants did not appeal.
• High Court, Commercial Court: On 24 October 2012, Cooke J granted permission on the papers to serve the other defendants outside the jurisdiction.