Case law Developments in PIL
English High Court Rules Owusu Also Excludes Modified Universalism
This post was contributed by Dr Nicolas Kyriakides, who is a practising lawyer in Cyprus and an Adjunct Faculty at the University of Nicosia, and Ms Yomna Zentani (LLM, Cantab – Cambridge Trust scholar), who is a future Trainee Solicitor at Clifford Chance LLP.
On 21 April 2021, the English High examined the interplay between the Brussels Recast Regulation (BRR) and the principle of 'modified universalism' in international insolvency proceedings in WWRT Ltd v Tyshchenko & Anor ([2021] EWHC 939 (Ch)). It particularly addressed whether proceedings can be stayed on the grounds of modified universalism, despite jurisdiction having been established by Article 4 of the BRR (see also the previous report of G. van Calster).
The claimant, WWRT, brought proceedings against the defendants, Mr Serhiy Tyshchenko and his ex-wife Mrs Olena Tyschchenko on the grounds that they had both carried out extensive fraud on the Ukrainian Bank, JSC Fortuna Bank which was owned by Mr Tyschenko between the years 2011 and 2014. The fraud consisted of the granting of numerous loans to companies with limited commercial activity who had no intention of repaying these loans. This then led to the bank declaring insolvency and being liquidated by which a package of assets consisting of also the disputed loans, was sold to Star Investment One LLC, a Ukrainian Company. The package, along with the rights to them were sold to WWRT in March 2020. WWRT argued that it had now acquired the rights to bring the claim relied upon in the present proceedings and obtained ex parte a worldwide freezing order. Mr and Mrs Tyschenko were both served in England within the court's jurisdiction.
One of the main arguments centred around Mr Tyschenko's objection to the court's jurisdiction. He argued that WWRT's claims should be stayed under common law so as to prevent WWRT from circumventing the Ukrainian insolvency proceedings opened on 9 December. He submitted that under Ukrainian law, claims such as the one contested in this case should only be adjudicated within the proceedings opened in December and thus must be stayed on the principle of "modified universalism." The discussion surrounding this principle is of particular interest in this case.
Modified Universalism and Owusu
As potentially one of the final cases concerning the Brussels Regulation in England and Wales, we are reminded of the importance of the CJEU judgment in the case of Owusu v Jackson which set out that a finding of jurisdiction under Article 4 would exclude any challenge on forum non conveniens grounds.
Mr Tyschenko was found to be domiciled in England for the purposes of Article 4, however, a further argument was advanced on whether the court may stay these proceedings on the principle of modified universalism. Whilst accepting that Article 4 jurisdiction could not be challenged, a further argument was made by Mr Tyschenko's legal representation, stating that the court in Owusu did not address the question of whether "…a domestic court could nevertheless stay its proceedings in favour of insolvency proceedings that had already commenced in another Member State." He went on to state (at [52]) that the principle at work in such a case was not one of forum non conveniens but rather the common law principle of modified universalism, which carries with it the requirement to provide assistance to foreign insolvency proceedings. As stated by Lord Sumption in Singularis Holdings v PriceWaterhouseCoopers [2015], the principle is founded on
the public interest in the ability of foreign courts exercising insolvency jurisdiction in the place of the company's incorporation to conduct an orderly winding up of its affairs on a worldwide basis, notwithstanding the territorial limits of their jurisdiction.
It was undisputed that a stay on this principle is conceptually different from a stay on forum non conveniens grounds. However, the question that the court had to address was whether this particular distinction could allow the present situation to be distinguished from the rule set out in Owusu and thus allowing a stay of proceedings, despite jurisdiction being founded on Article 4 (formerly Article 2 when Owusu was decided). In other words, whether the particular nature of insolvency proceedings require a different approach to the rule.
The decision on Owusu was reached out of respect for the principle of legal certainty, which the BRR (formerly the Brussels Convention) was built upon and the mandatory nature of Article 4. Allowing a deviation of this rule on the basis of forum non conveniens would have greatly undermined the predictability of the rules of jurisdiction as laid down by the Convention.
Further, insolvency proceedings and their peculiarities were taken out of the scope of the BRR altogether and reflected in other legislation, namely the Recast Insolvency Regulation and the UNICTRAL Model Law on cross-border insolvency. As such, the court reaffirmed the significance of Article 4 and held that a stay could not be granted on the basis of modified universalism. The court subsequently upheld the worldwide freezing injunction.
Analogous Application of Article 34 BRR?
In the alternative, the defendant suggested that a stay could be granted by the reflexive or analogous application of Article 34 of the BRR. This Article provides that:
1. Where jurisdiction is based on Article 4 … and an action is pending before a court of a third State at the time when a court in a Member State is seized of an action which is related to the action in the court of the third State, the court of the Member State may stay the proceedings if:
(a) it is expedient to hear and determine the related actions together to avoid the risk of irreconcilable judgments resulting from separate proceedings;
(b) it is expected that the court of the third State will give a judgment capable of recognition and, where applicable, of enforcement in that Member State; and
(c) the court of the Member State is satisfied that a stay is necessary for the proper administration of justice.
The defendant accepted that "[…] the bankruptcy exclusion in Article 1 of the BRR precludes the express application of Article 34 if the pending action in the third State is in the nature of bankruptcy or insolvency proceedings." However, he nevertheless contented that the Article could be applied by analogy to this case similarly to how Article 28 of the Lugano Convention was applied by analogy or reflexively to pending proceedings in JSC, Commercial Bank v Kolomoisky [2019] EWCA Civ 1708 §§159-181.
However, the court was not satisfied that the present proceedings were in anyway related to the pending insolvency proceedings in Ukraine (those opened on the 9th of December), to the effect that they would create a risk of irreconcilable judgments. Distinguishing Kolomoisky, the court stated that Article 28 was only given reflexive or analogous effect to the pending proceedings in Ukraine in that particular case in order to "[…] address the problem of the lacuna that would otherwise have arisen from the fact that Article 28 expressly applies only to related actions pending in the courts of different States bound by the Convention." (at [91])
The reflexive application in Kolomoisky would not subvert the objectives of the Convention but would further its purposes by achieving legal certainty and ensuring that the risk of inconsistent judgments is avoided.
In the current case, the court held that the problem that was trying to be avoided in Kolomoisky when applying Article 28 reflexively, did not arise in this instance. This is because Article 34 of the BRR now specifically addresses proceedings in third States. The defendant's argument thus attempted to advance a different proposition, distinct from what was advanced in Kolomoisky. The court held that the defendant's apparent extension of Article 34, namely that it should be applied to proceedings which the defendant accepts as expressly excluded from the scope of the BRR, is not a proper one. The court continued that even in the event Article 34 could be applied by analogy or reflexively, it was not satisfied that the pending insolvency proceedings in Kyiv were related to the extent that they could create a risk of irreconcilable judgments.
Consequently, the proceedings were not stayed on the basis of this argument and the court subsequently upheld the worldwide freezing injunction.
2 comments on "English High Court Rules Owusu Also Excludes Modified Universalism"
Manuel Penades
It is perhaps interesting to mention that the Ukrainian insolvency proceedings had not been recognised in England at the time this decision was made, and that the court expressly accepted that "there are specific statutory mechanisms under which a stay can be sought" [par. 77] (ie, Article 20(1) of the UNCITRAL Model Law, as given effect by the Cross-Border Insolvency Regulations 2006, which provides for an automatic stay of proceedings upon recognition).
Should the Ukrainian insolvency proceedings have been recognised and an automatic stay been ordered, then one could wonder whether as a matter of principle jurisdiction under art. 4 Brussels I Regulation bis (EU law) would prevail over automatic stay (national law) [principles of effectiveness and primacy of EU law, etc]. Or whether the mandatory nature of jurisdiction under art. 4 Brussels I Regulation bis would be sufficient ground to lift the automatic stay.
Perhaps a procedural strategy seeking recognition of the Ukrainian insolvency proceedings earlier (even for precautionary reasons) would have been effective to prevent the English litigation…
Nicolas Kyriakides
These are very sound observations. Arguments put forth to circumvent the mandatory nature of art 4 Brussels I Regulation bis are always interesting to examine. Perhaps such a procedural strategy would have indeed held up better than the arguments made in the case.