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

For service out under the necessary-or-proper-party gateway, an arguable claim against an anchor defendant is insufficient. There must be a real issue which it is objectively reasonable for the English court to try. A creditor who proves and actively participates in a foreign insolvency submits to that court’s jurisdiction in respect of claims capable of proof in the insolvency, including claims differently labelled in domestic proceedings.

The place of direct loss under a loan is the contractual place of payment. An onward payment to a lender in England does not make England the place where the damage was sustained. Where alleged conspiracy, assets, parties, documents, witnesses and insolvencies are overwhelmingly foreign, an English law and jurisdiction clause in contracts to which the alleged conspirators were not parties will not make England the clearly appropriate forum. Extra-territorial relief under Insolvency Act 1986 section 423 also requires a sufficient English connection and practicable relief.

The Bank was one of the lenders under an English-law facility agreement with an English jurisdiction and arbitration mechanism, and held a guarantee on similar terms. The borrower and guarantor entered Russian insolvency processes. The Bank proved its debts, participated extensively in those processes and obtained summary judgment in England on its debt and contractual claims.

It then alleged that the Russian defendants had conspired to strip assets from the borrower and guarantor, to manipulate the insolvencies, and to deprive it of repayment. It sought damages in tort and relief under Insolvency Act 1986 section 423. Cooke J permitted service on the third and fifth defendants in Russia. Flaux J dismissed their applications under CPR Part 11 to challenge jurisdiction.

The central questions were whether the claims satisfied the relevant service-out gateways and whether England was clearly or distinctly the appropriate forum.

1. Appeal allowed. Permission to serve the third and fifth defendants out of the jurisdiction was set aside. The Bank failed to satisfy any of the relied-on gateways and England was not the clearly appropriate forum.

2. Under paragraph 3.1(3)(a) of Practice Direction 6B, the court must separately ask whether there is a real issue between the claimant and the anchor defendants which it is reasonable for the English court to try. The question is not confined to whether the claim is arguable. Applying Stichting Shell Pensioenfonds v Krys [2014] UKPC 41, the Bank’s proofs and extensive participation in the Russian insolvencies amounted to submission to the Russian courts. Its debt, guarantee and conspiracy claims were all capable of proof and duplicated the same underlying loss. In any event, proceedings against insolvent anchor defendants with no English assets and no practical utility were not reasonable for the English court to try.

3. The tort gateway also failed. Under Article 4.1 of the Rome II Regulation, the immediate loss from non-payment was suffered in New York, where payment to the facility agent gave the borrower and guarantor a discharge. The agent’s subsequent failure to remit funds to London was only an indirect consequence. Article 4.3 pointed decisively to Russian law: the alleged conspiracy, participants, asset transfers and insolvency procedures were all centred in Russia. The Court nevertheless rejected the contention that the Bank had to plead Russian law at that stage; a defendant relying on foreign law as a defence had to plead and prove its effect.

4. Although section 423 of the Insolvency Act 1986 may operate extra-territorially, the claimant had to show a serious issue that a sufficient connection with England and effective relief could be established. The impugned transactions had been reviewed by Russian courts, affected many creditors, and could effectively be restored or administered only through the Russian insolvencies. Finally, Russia was plainly the appropriate forum. The English-law contracts required no construction in the conspiracy claim, whereas the dispute concerned Russian events, documents, witnesses, insolvency law and court decisions.

• Court of Appeal (Civil Division): allowed the third and fifth defendants’ appeals and set aside permission to serve them in Russia.
• High Court, Commercial Court (Flaux J): dismissed the defendants’ CPR Part 11 jurisdiction applications by orders dated 3 and 8 October 2013.
• High Court, Commercial Court (Cooke J): granted the Bank permission on 24 October 2012 to serve the proceedings out of the jurisdiction.