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Anchor Defendants: Court of Appeal confirms no 'sole object' test applies

07 November 2019. Published by Andy McGregor, Head of Civil Fraud and Emily Fischer, Associate (Australian Qualified)

The Court of Appeal confirmed that article 6(1) of the Lugano Convention[1] is not subject to a 'sole object' test[2].

Where claimants have a sustainable claim against an 'anchor defendant' that they intend to pursue to judgment, they may rely on article 6(1) to bring a foreign co-defendant within the jurisdiction. This will be the case even if the claimant's sole object in suing the anchor defendant is to sue the foreign co-defendant in the same proceedings.

Background


The claimant, Privatbank, commenced proceedings in England against two Swiss-domiciled individuals, Igor Kolomoisky and Gennadiy Bogolyubov, as well as companies domiciled in England and the British Virgin Islands. Privatbank alleged that the defendants were involved in fraudulently misappropriating over US$1.9 billion from the bank.

Privatbank relied on article 6(1) of the Lugano Convention to sue each of the defendants in England and obtained a worldwide freezing order against all the defendants. Under article 6(1), defendants domiciled in a Convention state may be sued, where there are multiple defendants, in the jurisdiction where any of the defendants are domiciled, 'provided the claims are so closely connected that it is expedient to hear and determine them together to avoid the risk of irreconcilable judgments'.

On application by the defendants, the High Court discharged the freezing order. The court found that as Privatbank commenced proceedings against the English defendants with the 'sole object' of bringing Mr Kolomoisky and Mr Bogolyubov within the jurisdiction, it was not entitled to rely on article 6(1). On that basis, the court did not have jurisdiction over these defendants. The High Court also stayed the proceedings against the English defendants and found that it did not have jurisdiction over the claim against the BVI defendants on the grounds of forum non conveniens.

Privatbank appealed.

A key issue for the Court of Appeal was whether article 6(1) of the Lugano Convention is subject to a 'sole object' test that precludes claimants from relying on it for the sole object of subjecting a foreign defendant to another jurisdiction.

Other issues on appeal included whether the court had jurisdiction to stay the proceedings against Mr Kolomoisky, Mr Bogolyubov and the English defendants and, if so, whether the High Court correctly exercised its discretion in deciding to grant a stay.

The 'sole object' test

The Court of Appeal held that article 6(1) is not subject to a sole object test. The court considered that the terms and drafting history of article 6(1) favour this view. As article 6(2) expressly includes a sole object condition, it is fair to ask why one is not also included in article 6(1) if it was intended to apply.

Further, adding a test to article 6(1) based on a claimant's intentions would add uncertainty to a question that requires certainty and predictability: the allocation of jurisdiction among member states.

Applying relevant authorities, the court found that article 6(1) is subject to the principle of abuse of law, which applies generally to rights under EU law, rather than a sole object test: claimants cannot rely on article 6(1) where they artificially fulfil or prolong the 'close connection' condition. The court gave examples of this, such as using a fictitious anchor defendant.

The court also accepted that relevant decisions of the Court of Justice of the European Union support the proposition that the 'vice' in using article 6(1) solely to remove a foreign defendant from the state of their domicile was met by the 'close connection' condition.

Privatbank was therefore entitled to rely on article 6(1) even if its sole object in commencing proceedings against the English defendants was to bring Mr Kolomoisky and Mr Bogolyubov within the jurisdiction of the English courts.

The court went on to find that even if article 6(1) was subject to a sole object test, it was not met here. A claimant's object must be determined objectively. Aside from suing foreign defendants in England, Privatbank had another reason to sue the anchor defendants: obtaining relevant documents through disclosure. The sole object test was not therefore passed.

Stay of proceedings

Did the court have jurisdiction to stay the proceedings against Mr Kolomoisky and Mr Bogolyubov?

The High Court held that even if it had jurisdiction over these individuals, it would have granted a stay of the English proceedings against them because a related action was pending in Ukraine. Mr Kolomoisky had brought a defamation claim against Privatbank and a journalist in Ukraine, in respect of an article alleging that he had fraudulently siphoned substantial funds from the bank. The other defendants to the English proceedings were joined as third parties to the Ukrainian defamation action.

The High Court applied article 28 of the Lugano Convention, which provides that where related actions are pending in different Convention states, any court other than the court first seised may stay its proceedings. Actions will be ‘related’ if they are ‘so closely connected that it is expedient to hear and determine them together to avoid the risk of irreconcilable judgments'.

Article 28 did not apply directly here, as Ukraine is not an EU or Lugano Convention state. However, the High Court applied it 'reflexively', or by analogy.

The Court of Appeal held that it was correct to do so. Recognising that the same principles underlying the Convention should apply in cases involving pending proceedings in a third state, the court found that this approach did not impermissibly extend the scope of the Convention or undermine it. Rather, a reflexive application was in line with the Convention's purpose: achieving certainty in relation to jurisdiction and avoiding the risk of inconsistent judgments.

The Court of Appeal also approved the High Court's finding that the proceedings were 'related' for the purpose of article 28. The court's decision on this point is discussed further below.

Accordingly, the High Court did have jurisdiction to stay the proceedings against Mr Kolomoisky and Mr Bogolyubov.

Did the court have jurisdiction to stay the proceedings against the anchor defendants?

The High Court also stayed the proceedings against the English defendants, pursuant to article 34(1) of the Recast Brussels Regulation[3], on the basis that related proceedings were pending in Ukraine. For a stay to be granted under article 34(1), it must be 'expedient to hear and determine the related actions together to avoid the risk of irreconcilable judgments'.

The Court of Appeal agreed that Mr Kolomoisky's Ukrainian defamation claim and Privatbank's English fraud claim were 'related' for the purpose of both article 34(1) of the Recast Brussels Regulation and article 28 of the Lugano Convention. As a result, the High Court had jurisdiction to grant a stay.

The court rejected Privatbank's submission that as the claims could not be consolidated, they were not related. The word 'expedient', as used in article 28 and article 34(1), was more akin to 'desirable' and did not require that consolidation be possible or practicable. If it was intended that proceedings had to be capable of consolidation in order to be 'related', the articles would expressly refer to consolidation, as other provisions of the Recast Brussels Regulation do.

Did the High Court correctly exercise its discretion in staying the proceedings?

While the High Court's decision that it had jurisdiction to stay the proceedings was correct, its exercise of that jurisdiction was not.

The Court of Appeal set aside the decision to stay the proceedings against Mr Kolomoisky, Mr Bogolyubov and the English defendants and held that these claims could proceed in England. The fact that proceedings cannot be consolidated is a compelling reason to refuse a stay without a strong countervailing factor and here, there was no countervailing factor. It would be ‘entirely inappropriate’ to stay an English fraud claim in favour of Ukrainian defamation claims where the fraud claim involved ‘fraud and money laundering on an “epic scale”’ and the bank had a good arguable case to recover US$1.9 billion.

Further, the High Court had erroneously proceeded on the basis that the Ukrainian court had not considered the merits of Mr Kolomoisky's defamation claim, when in fact the Ukrainian court had assessed the claim to be 'frivolous and fabricated'. In those circumstances, the correct exercise of the High Court's discretion would have been to refuse a stay.

The Court of Appeal also set aside the High Court's decision to stay the proceedings against the BVI defendants on the ground of forum non conveniens. The BVI defendants were necessary or proper parties to Privatbank's English claim.

Comment

By confirming that claimants are entitled to use article 6(1) of the Lugano Convention as a vehicle to submit foreign co-defendants to a chosen venue, this decision will be of significant assistance to claimants where one or more co-defendants are domiciled in their preferred jurisdiction.

The decision confirms that not only is it legitimate to have regard to the various advantages that certain jurisdictions offer, it is also perfectly acceptable to commence proceedings against an anchor defendant with the sole object of securing those advantages. While claimants that use article 6(1) in this way must have a sustainable claim against an anchor defendant which they intend to pursue to judgment, and must not artificially fulfil or prolong the close connection condition, these qualifications are not unduly onerous.

This case also provides helpful clarity as to the reach of the Lugano Convention and confirms that courts may apply article 28 reflexively where related proceedings are pending in a third state.

[1]  Convention on Jurisdiction and the Enforcement of Judgments in Civil and Commercial Matters [2007] OJ L339/3.
[2] JSC Commercial Bank Privatbank v Kolomoisky & Ors [2019] EWCA Civ 1708.
[3] Regulation (EU) No 1215/2012 of the European Parliament and of the Council of 12 December 2012 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (recast) [2012] OJ L 351/1.