ANDREW BROWN & Ors. v INNOVATORONE PLC (in liquidation) & Ors. [2010] EWHC 2281 (Comm)

IN THE HIGH COURT OF JUSTICE

QUEEN'S BENCH DIVISION

COMMERCIAL COURT

[2010] EWHC 2281 (Comm)

Case No Case No. Folio 1082

Venue Royal Courts of Justice

Between

ANDREW BROWN & Ors.Claimants

INNOVATORONE PLC (in liquidation) & Ors.Defendants

Before

MR. JUSTICE HAMBLEN

BETWEEN :

MR. JOHN POWELL QC, and MR. GRAHAM CHAPMAN (instructed by Addleshaw Goddard

LLP) appeared on behalf of the Claimants.

MR. H. MALEK QC and MR. A. TABACHNIK (instructed by Laytons) appeared on behalf of MFC

Merchant Bank SA.

Date 28 July 2010

[1]MR. JUSTICE HAMBLEN: INTRODUCTION MFC Corporate Services AG, sued as MFC Merchant Bank SA ("MFC"), a bank domiciled in Switzerland, applies, pursuant to CPR rules 11.1 and 58.7, for the court to declare that it has no jurisdiction over claims sought to be made against MFC and to set aside service of the claim forms on MFC. This application arises in the context of major and complex litigation initiated by 555 claimants against a large number of defendants arising out of the so-called Innovator Schemes. The claimants contend that these were fraudulent investment schemes which were promoted to purchase and exploit technology, or the rights thereto, within a partnership vehicle with related tax advantages, but which were in fact established and operated so as to mulct investors of their subscription money and potentially to expose them to substantial liabilities in respect of loans.

[2]The trial of the claimants' claims in the action is listed to take place in the autumn of 2011 with a time estimate of up to 16 weeks. At the present time, MFC is a proposed party for the purpose of securing certain declaratory relief against it. MFC submits that on analysis, however, there is no dispute between the parties which justifies the court's exercise of its power to grant declaratory relief or which makes it expedient or necessary for MFC to be joined to this litigation. On this basis there is no ground on which jurisdiction over MFC can or should be exercised. FACTUAL BACKGROUND The Innovator Schemes

[3]The claimants are 555 individuals who each submitted subscription applications and paid subscription money with a view to becoming participants in investment schemes ("the Innovator Schemes"). The intended investment vehicles were 19 different entities, 16 of which were LLPs, and the other three promoted as general partnerships (together "the Partnerships"). As promoted the schemes were tax-advantage investment schemes whereby:(a) each Partnership would carry on a business consisting of the acquisition and exploitation of technology which was said to be information communication technology for the purposes of the Capital Allowances Act 2001;

(b) the acquisition would be made by the Partnership from a technology vendor, also referred to in scheme documents as the technology developer, pursuant to an Acquisition Agreement ("AA"), and the business would be carried out on behalf of the partnership by an exploiter, pursuant to an Agency Exploitation Agreement;

(c) the acquisition of the technology would be funded as to approximately 20% by money raised from subscribers, termed "capital contributions" in the Information Memorandum ("IM"), and as to approximately 80% by way of a loan obtained by the Partnership from the bank;

(d) subscribers would each be able to claim tax relief by way of first year capital allowance in respect of his or her share of the loss incurred by the Partnership arising from its expenditure on acquiring the technology, such loss to include a pro rata proportion of the 80% loan;

(e) the relief available to the subscribers would thus be 40% of the expenditure on the technology by the Partnership, such that for each investment of £20 by way of capital contribution, tax relief of £40 would be available.

[4]In the case of Schemes 3 to 18, the bank, which was to provide the loan, was MFC. In respect of each relevant scheme involving MFC, the financing arrangements apparently made included the following:(a) a facility agreement entitled "Term Loan Facility" between a named LLP and MFC, whereby MFC agreed to make an advance of a specified amount, in all cases being the same as the amount of the loan as stated in the IM;

(b) a debenture between the same parties whereby the Partnership gave security for the loan;

[5]In the case of financing arrangements involving MFC, their apparent effect was as follows:(a) MFC agreed to make an advance to the named LLP for a specified purpose, subject to various terms, including conditions precedent, representations, warranties and undertakings;

(b) two accounts needed to be established with MFC: an LLP account in the name of the relevant LLP and a collateral account in the name of the technology vendor;

(c) upon a drawdown notice being issued by the relevant LLP to MFC, MFC was required to pay the advance to the LLP account for immediate onward transfer to the collateral account by way of cash collateral. Both the facility agreement and the TD pledge agreement provided for the pledging of the cash collateral by a technology vendor to MFC as security for the loan.

[6]The advances purportedly made by MFC across Schemes 3 to 18 were substantial, totally nearly £175 million. It is the claimants' case that in fact there was no movement of money from(a) MFC to LLP, or

(b) from LLP to a technology vendor, or

(c) from a technology vendor to MFC at all. The financing arrangements involved in effect no more than corresponding entries in the records of MFC in respect of relevant LLP accounts and collateral accounts. The claimants submit that the financing arrangements and the role of the banks are central to the Innovator Schemes. Without the gearing incentive created by the loan element, the schemes could not have been promoted as worthwhile tax mitigation schemes at all. Further, it would have been extremely difficult, if not impossible, and administratively impracticable, to raise the entire 100% stated acquisition price for technology by way of capital contributions alone.

[7]While the claimants are not themselves parties to agreements with MFC, the financing arrangements, if valid, have, the claimants say, potentially serious ramifications to them if, contrary to their contentions in the Innovator litigation, they are held to have become members of the relevant LLPs or are precluded from contending otherwise. The envisaged mechanism for a subscriber becoming a member or partner of a relevant Partnership was by way of signature of a Deed of Adherence ("DA") to a Limited Liability Partnership Deed ("LLP Deed"), that signature being made on his or her behalf by the donee of a Power of Attorney acting within the scope of the authority given by the subscriber in his or her subscription application. Each LLP Deed provides that a member will be responsible for liabilities of the LLP in proportion with his or her gross contribution, i.e. subscription plus his proportion of the loan. Hence, in the event of a loan not being repaid, a partner was, and is, at risk of(a) MFC or its assignee, or the like, pursuing the LLP for the amount of the outstanding loan, and

(b) the LLP seeking indemnity from each partner for his or her share of the LLP's liability.

[8]The claimants submit that that risk has materialised in the case of the Charit Scheme and may materialise in the case of other schemes. It is the claimants' case that the Innovator Schemes have failed in at least three respects. First, they have failed in that they have not provided the tax benefits and advantages that they were promoted as offering. Secondly, they have failed in that subscribers have lost their subscription monies. Thirdly, they have failed in that they have exposed subscribers (if, contrary to the claimants' case, they were validly made partners) to liability to indemnify the relevant LLPs for up to five times the amount of their subscription money. The claimants contend that the Innovator Schemes were a fraud orchestrated by Bjorn Stiedl, a Danish national and convicted fraudster, with the assistance of a number of other individuals. THE INNOVATOR LITIGATION

[9]In November 2008 and thereafter the claimants issued a number of claim forms in the Commercial Court against a number of different defendants in relation to the Innovator Schemes. The primary defendants in the Innovator litigation are:(a) Innovatorone plc ("Innovator") the entity principally responsible for the establishment, promotion and operation of the schemes;

(b) Mr. Paul Carter ("Mr. Carter"), who is a chartered accountant and was, amongst other roles, the Managing Director of Innovator and who purportedly constituted the claimants as partners in the various Partnerships by executing DAs, purportedly acting on their behalf under the terms of a Power of Attorney ("PA") contained in each subscription form;

(c) Mr. Bjorn Stiedl, the controlling mind of and the driving force behind Innovator, and also the establishment, promotion and operation of the Innovator Schemes;

(d) Collyer Bristow, solicitors ("CB"). The claimants contend that CB played a substantial role in the establishment, promotion and operation of the schemes;

(e) Mr. John Bailey who was, amongst other roles, a partner of CB and a director of Innovator;

(f) Mr. Jonathan Roper, who was, among other roles, a partner of CB;

(g) the LLPs in which the claimants were purportedly made partners;

(h) Mr. Gates who was, among other things, a financial adviser and director of Capital Planning UK Ltd., and held out as Managing Director of Money Growth Financial Services and Money Growth Financial Services Ltd. which promoted the GT1 and GT2 schemes;

(i) the technology vendors who purported to sell technology pursuant to AAs;

(j) the banks that purported to advance loans to the LLPs in order to fund the acquisition of technology from technology vendors, namely MFC and Bank Leumi;

(k) Chancery Lane Finance Ltd. ("CLFL") which was a company, now in liquidation, that purported to loan monies to some of the claimants in order to finance their capital contributions to the Innovator Schemes and also bridging loans.

[10]The claimants contentions include the following:(a) they were never made partners in any scheme; Mr. Carter and Mr. Gates who purported to make subscribers partners by signing DAs or LLP Deeds, were not authorised to do so;

(b) several conditions were required to be fulfilled before they could become partners in any of the Partnerships;

(d) the conditions were not fulfilled and consequently: (i) they did not become partners in the relevant Partnerships, (ii) payments made by CB out of the subscription money were made in breach of trust.

[11]The claimants further maintain that:(a) the Innovator schemes were nothing more than sham vehicles for a fraud directly by Mr. Stiedl;

(b) there never was any real technology, that is technology as represented in the IMs and having the valued exploitation prospects stated in the IMs;

(c) arrangements for each Innovator Scheme constituted or involved one or more Collective Investment Schemes ("CIS") as defined in section 235 of the Financial Services and Markets Act 2000 ("FSMA");

(d) the establishment, promotion and operation of the Innovator Schemes gave rise to a complex series of relationships and liabilities on the part of a number of entities involved with the Innovator Schemes, giving rise to various causes of action and liabilities including (i) breach of contract, (ii) breach of duties of care in tort, (iii) breach of fiduciary and equitable duties, (iv) breach of trust, (v) liabilities under FSMA, and (vi) accessory liabilities including dishonest assistance and knowing receipt.

[12]The claimants' money claim is in excess of £50 million. In respect of the financing arrangements, the claimants contend and seek declaratory relief to the effect that there never was a loan to any Partnership and the Partnerships never became liable to MFC or (in the case of Schemes 1 and 2) Bank Leumi UK plc. They say that that may be rationalised on various bases:(a) each loan was a sham;

(b) no loan was ever made as a matter of fact and/or law; (c), if, contrary to their contention, a loan was made, it was repaid and/or the relevant LLP was never liable and is no longer liable in respect thereof. THE CLAIM AGAINST MFC

[13]Scheme 14, the Charit Scheme, is one of the largest Innovator Schemes, involving a technology acquisition price under the AA of around £35 million and an advance of £28 million. 102 of the claimants were subscribers to the Charit Scheme. In accordance with the arrangements described above, the advance was deposited immediately with MFC as collateral by a technology vendor. The technology vendor for the Charit Scheme was Vermilion International Investments Ltd. ("Vermilion"), a BVI entity. Like the other Innovator Schemes the Charit Scheme failed. The technology for which the LLP was to pay £35 million turned out to be worthless and no revenue was earned by the LLP. The LLP was therefore unable to pay off the loan.

[14]This led to the following sequence of events:(a) by a letter dated 27 th April 2007, MFC wrote to the Charit Email Technology Partnership Ltd. In the letter MFC demanded repayment of the loan plus interest, together said to be £29,383,376.40, by 27 th May 2007;

(b) by a letter dated 31 st May 2007, MFC wrote to Vermilion stating: "We have made all reasonable efforts to secure the principal and interest owed by the Charit 2 LLP. The partnership has not met its obligation of repayment. We wish to have Vermilion repay £29,383,376.40 outstanding in satisfaction of that guarantee;

(c) on 31 st May 2007 Vermilion wrote to MFC authorising the transfer of the deposit amount to satisfy the LLP's obligations under the loans;

(d) by a letter dated 1 st June 2007, Vermilion wrote to Charit 2 LLP saying that it had satisfied the LLP's obligation to MFC. Further, on 4 th June 2007, MFC wrote to Charit 2 LLP stating that Vermilion had discharged the LLP's obligations and that all of MFC's rights, including the right to repayment, had vested in Vermilion.

[15]The claimants are advised that, assuming the facility agreement was valid and binding, a technology vendor would, according to Swiss law, acquire MFC's rights under it upon meeting the Partnership's liabilities to MFC by the forfeiture of the deposit in the collateral account. This is akin to the English law of subrogation, save that it is more accurately characterised as a statutory assignment.

[16]Vermilion has pursued Charit 2 LLP for the £28 million alleged debt plus interest. On 4 th March 2008 it presented a winding up petition against the LLP. The claimants sought to contest the winding up of the LLP but it was ultimately held by the Vice-Chancellor, on 13 th February 2009, that because the claimants asserted they were not partners in Charit 2 LLP, they had no standing to contest the winding up order. A winding up order was therefore made against Charit 2 LLP. As Charit 2 LLP was then in liquidation it became necessary for the claimants to seek permission to proceed against it in the Commercial Court under section 130 of the Insolvency Act 1986. The grant of permission was contested by the liquidator, installed at the behest of Vermilion, and the liquidator argued that because he would need to pursue those claimants who were purportedly made partners to the Charit 2 LLP as contributors in the winding up of that LLP, it will be necessary to decide whether the claimants ever became partners in Charit 2 LLP and whether the loans were genuine in that context in the Companies Court proceedings; The claimants argued that these were issues central to the Commercial Court proceedings and should be decided along with many other relevant issues in play in that context in the Commercial Court. By a judgment given on 23 rd July 2009, Proudman J agreed with the claimants' position and permission was granted to continue against the Charit 2 LLP in the Commercial Court.

[17]The position at present is therefore that Vermilion has made clear its intention to pursue the claimants who subscribed to the Charit Scheme individually for the repayment of the £28 million, although no such claim has so far been advanced in the Commercial Court proceedings. The claimants say they do not know if other technology vendors who have allegedly forfeited deposits in the MFC collateral accounts will also seek to pursue the LLPs in other schemes, and in due course the subscribers to those schemes. They say that they are acutely concerned about such claims which would be vastly in excess of their capital contributions.

[18]It is against that background that in the Commercial Court proceedings the claimants claim, as against MFC, the following declarations, as set out in the pleading at para.3.4.2:

"The Claimants and each of them claim declaratory relief against all Defendants, including declarations that: 3.4.2.1 the Claimants and each of them never were nor are partners of any LLP or GP related to any of the schemes; 3.4.2.2 neither the Claimants nor any of them nor any LLP were liable under any loan arrangements made by or with the banks or CLFL."

THE APPLICABLE LEGAL PRINCIPLES

[19]Jurisdiction is governed by the Lugano Convention as MFC's corporate seat is located in Switzerland and, accordingly, for the purposes of Article 53 of the Lugano Convention MFC is domiciled in Switzerland. The jurisdictional starting point under the Lugano Convention is Article 2, which provides that "persons domiciled in a Contracting State shall, whatever their nationality, be sued in the courts of that state". This is the general principle and it is only by way of derogation from that principle that special rules of jurisdiction may allow a defendant to be sued in the courts of another Member State: see Freeport plc v. Arnoldsson

[2008] QB 634

, para.34. The special rule of jurisdiction on which the claimants rely is contained in Article 6(1) which provides that a person domiciled in a Contracting State "... may also be sued: 1. where he is one of a number of defendants, in the courts for the place where any one of them is domiciled...." Article 6(1) of the Lugano Convention is to be construed consistently with Article 6(1) of Regulation 44/2001, which states a person domiciled in a Contracting State "may also be sued where he is one of a number of defendants in the courts for the place where any one of them is 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 resulting from separate proceedings."

[20]The wording of Article 6(1) and Regulation 44/2001 was effectively a codification of a decision of the ECJ in Kalfelis v. Bankhaus Shroder [1988] ECR 5565 , a decision of the relevant provision of the Brussels Convention which is worded identically to the Lugano Convention. This analysis was approved by the ECJ in Freeport v. Arnoldsson at para.53:

"Thus, that requirement of a connection did not derive from the wording of Article 6(1) of the Brussels Convention but was inferred from that provision by the Court of Justice in order to prevent the exception to the principle that jurisdiction is vested in the courts of the State of the defendant's domicile laid down in Article 6(1) from calling into question the very existence of that principle ( Kalfelis , paragraph 8). That requirement, subsequently enshrined by the judgment in Reunion Europeenne SA v. Spliethoff's Bevrachtingskantoor BV [2000] QB 690 , paragraph 48, was expressly enshrined in the drafting of Article 6(1) of Regulation No 44/2001, the successor to the Brussels Convention ( Roche Nederland BV v. Primus [2006] ECR I-6535 , paragraph 21."

[21]In the words of the ECJ, it is settled case law that the rules of special jurisdiction must be interpreted strictly and cannot be given an interpretation going beyond the cases expressly envisaged by the Regulation: see Freeport v. Arnoldsson at para.35.

[22]In Freeport v. Arnoldsson , the ECJ states its conclusion on the application of Article 6(1) as follows:

"It is for the national court to assess whether there is a connection between the different claims brought before it, that is to say a risk of irreconcilable judgments if those claims were determined separately and in that regard to take account of all necessary factors in the case file which may, if appropriate, yet without its being necessary for the assessment, take into consideration the legal basis of the actions brought before that court."

[23]MFC submits that this makes it clear that the "necessary factors" to be taken into account include whether there exists any real dispute between the parties. If not, there will be no sufficient connection with the rest of the litigation and no risk of irreconcilable judgments. It is well established that Article 6(1) is not engaged where there is no seriously arguable claim against the primary or anchor defendant located in the court's jurisdiction: see The Xing Su Hai [1995] 2 Lloyd's Rep. 15, at p.22, Rix J. MFC submits that there is no difference in principle with the present case. Equally, in Boss Group Ltd. v. Boss France SA

[1997] 1 WLR 351

, the Court of Appeal emphasised, in the context of an Article 5(1) case, that the court must be astute to prevent rules of special jurisdiction being invoked in cases where there is no serious issue to be tried as against the party over whom the special jurisdiction is sought to be exercised.

[24]Accordingly, the court on this application, must scrutinise whether there is an arguable and meaningful claim for declaratory relief against the party domiciled abroad. The claimants accept that they must show that there is a serious issue to be tried as between themselves and the anchor defendants. They dispute that they have to demonstrate a real dispute as between themselves and MFC. They submit that this latter requirement is unnecessary and does not appear in Article 6(1) itself. They point out that the authority relied upon by MFC in support of its contention that the requirement does not exist is not a case concerned with Article 6(1) but a case concerned with Article 5(1) where it is well established that the claimant must satisfy a threshold merits test before being able to rely on that article to found jurisdiction.

[25]I accept that in order to show that it is expedient to hear the claims together, it will generally be necessary for the claimant to establish that there is a serious issue to be tried against the co-defendant as well as the anchor defendant. This is because, if the court concludes that the claim against the co-defendant is not seriously arguable, then it is unlikely to be expedient to determine it together with the claim against the anchor defendant since there is no sufficiently arguable claim to found the requisite connection, and there is unlikely to be any risk of irreconcilable judgments since, even if the proceedings could be and were brought elsewhere, the outcome would be the same, if there is no seriously arguable claim.

[26]Briggs & Rees on Civil Jurisdiction and Judgments (5 th ed.) summarises the matter as follows at para.2.202:

"To begin with, there must be a genuine claim or a claim which is properly brought against the defendant who is being sued in the courts of his domicile. It is obvious that the claim against this anchor defendant cannot be allowed to be an entirely spurious one and if there is no proper claim against the one defendant it will be impossible to satisfy the requirement that it be necessary to hear and determine the claims against two defendants together to avoid the risk of irreconcilable judgments resulting from separate proceedings."

Then at the end of that paragraph:

"There must of course also be a proper basis for making a claim against the co-defendant for just the same reason."

[27]The claimants point out, with some justification, that the case referred to by Briggs & Rees in support of the proposition in the last sentence of that paragraph, Messier-Dowty Ltd. v. Sabena SA

[2000] 1 WLR 2040

, does not directly bear it out. However, I accept and agree with Briggs & Rees ' essential point, that the reasons why the claim against the anchor defendant cannot be allowed to be an entirely spurious one equally applies to the claim against the co-defendant. MFC also submits that the risk of irreconcilable judgments must be a foreseeable and realistic risk. The claimants object, that this involves importing an unwarranted gloss. However, if the risk of irreconcilable judgments in a fanciful one, then it is difficult to see how the expediency of hearing and determining the claims together can be made out. In my judgment, the risk of separate proceedings and irreconcilable judgments resulting therefrom must be a real, and therefore meaningful, risk.

[28]MFC contends that there was no sufficient connection here and a total absence of expediency to join it to the proceedings, given that there is no real dispute between the claimants and MFC and in particular:(1) there is no proper basis for claiming declaratory relief against MFC, and

(2) that was no realistic risk of irreconcilable judgments arising from separate proceedings. I now turn to address those issues. DISCUSSION (1) Whether the claimants have a seriously arguable claim that the English Court would grant the declaratory relief which the claimants seek as against MFC.

[29]The declarations sought by the claimants against MFC are as I have set out above. The claimants contend that the legal and factual conclusions which the declaratory relief give effect to, can be summarised as follows:(i) the claimants were never parties of any Innovator Partnership and consequently have no liability to any Partnership under any Partnership Deed or otherwise, (the "never a partner" issue,) and

(ii) no Innovator Partnership is or was ever under any liability to MFC arising out of the financing arrangements, (the "no loan" issue).

[30]In relation to the "never a partner" declarations, the claimants seek declarations as to the rights and liabilities between themselves and the Innovator Partnerships to which they subscribed, and the relief is sought principally against those Partnerships as well as technology vendors. If MFC is a party to the proceedings in which such relief is granted, it will also be bound by it. The claimants say they would wish MFC and the technology vendors all to be bound by any such declaration to avoid claims, subrogated claims, being brought against them through the Partnerships. Such a claim has already arisen against subscribers to the Charit Scheme as set out above.

[31]In relation to the "no loan" declarations, this relief is, the claimants accept, more unusual in that it seeks relief in respect of arrangements to which, on the face of the scheme documents, the claimants are not parties. However, the claimants submit that the termination of those rights and liabilities impacts directly on the potential liability of the claimants themselves to the Partnerships. In particular, the claimants contend that they put in issue whether there were ever any loans or, if there were any loans, the status of any money so advanced, and the validity of the financing arrangements as a whole. They seek declarations in respect of each of these issues. They submit that each of the claimants would be affected by a determination of these issues relating to the validity of the financing arrangements.

[32]While MFC asserts it does not intend to bring any claim against the claimants or any LLP, it asserts that there were loans which have been repaid and that the financing arrangements were in all material respects valid. It disavows any claim that it might ever have had against the claimants or the LLPs on the basis that there were valid loans which had been repaid according to their terms. The legal rights, if any, arising under the finance arrangements are therefore contested by the parties.

[33]The claimants wish to establish not merely that there is no existing liability in respect of the loans but there never has been and never could be. They contend that they need to bind MFC with the declaratory relief that they seek in order to protect themselves from the claims arising under the loans. The claimants submit that it is no answer for MFC to assert that any claims against the claimants are likely to be brought by LLPs or technology vendors who are parties to the proceedings and who will, as a result, be bound by any declarations. They contend that the essential problem is that whosoever may in the event pursue rights against the claimants will derive those rights from MFC's rights and will, in effect, be exercising those rights. This core problem could manifest itself either by MFC deciding, contrary to its current stance, to exercise rights itself, or by another party exercising those rights (perhaps on a subrogated basis) in its name or at least in its shoes. The position regarding MFC's rights of action, if any, under the facility agreements against the Partnerships is unclear. While MFC asserts that the loans to the partnerships under the Facility Agreements have been repaid, that is an issue in the Innovator litigation. The claimants do not accept MFC's position. The claimants' primary contention is that the financing arrangements are a sham.

[34]MFC submits that it is clear that there is no real dispute between the parties in relation to either declaration sought because:(1) MFC's position that neither the claimants nor the Partnerships have any liability to them has consistently been made clear. In their evidence it is stated that: "Advances from MFC to the relevant Partnerships have been repaid in full and have been treated by MFC as such, and MFC thus regards all obligations in respect of them as fully performed. MFC does not consider that any of the Partnerships or any of the claimants is under any liability to it arising out of the Innovator Schemes. For these reasons MFC has no intention of making any claim against any of the Partnerships or any of the claimants in relation to such matters."

(2) The declaratory relief sought against MFC will not assist the claimants so far as their legal position against the Partnerships and technology vendors is concerned. Further, and in any event, the Partnerships and technology vendors are themselves defendants to these proceedings so they will be bound by the finding of the court on (a) who was the partner in the Partnerships, and (b) whether the financing arrangements were a sham. There is no additional advantage to any claimant in proceeding against MFC also. The fact that a claim by a technology vendor regarding the cash collateral will in effect be a subrogated claim or arise from a deemed statutory assignment makes no difference. There will be a determination binding as between the technology vendors and their privies and the claimants following the resolution of the main action. Further and in any event, there will be a determination binding as between the Partnerships and the claimants. This is the crucial point, given that the technology vendors do not have any direct rights of action against the claimants, and the claimants are only at possible risk from contribution claims against them by the Partnerships.

(3) This is borne out by consideration of the position regarding the Charit Scheme 14, which is the only instance identified of any threat being made to the claimants of further claims against them regarding the loans. The relevant Partnership and technology vendor are, as with the other schemes, before the court. The court's determination of the relevant issues will accordingly be binding on those parties as have the ability to take aggressive action resulting in claims on the claimants by or through the Partnerships. This provides the claimants with all the protection they reasonably need or require. Further, it is noteworthy that the defendants of Vermilion and the Charit Email Technology Partnership LLP do not assert a counterclaim against the claimants, and no other Partnership or technology vendor has threatened or asserted similar claims affecting the claimants.

[35]The principles which govern the power to make declarations have been summarised as follows at CPR 40.20.2:

"The power to make declarations is a discretionary power. As between the parties to a claim the court can grant a declaration as to their rights or as to the existence of facts or as to a principle of law ( Financial Services Authority v. Rourke [2002] CP Rep 14 Neuberger J). When considering whether to grant a declaration or not, the court should take into account justice to the claimant, justice to the defendant, whether the declaration would serve a useful purpose, and whether there are any other special reasons why or why not the court should grant the declaration."

[36]More recently, Aikens, LJ in Rolls-Royce plc v. Unite the Union at para.120 identified the following principles of relevance to the present case:

"... (1) the power of the court to grant declaratory relief is discretionary. (2) There must, in general, be a real and present dispute between the parties before the court as to the existence or extent of a legal right between them. However, the claimant does not need to have a present cause of action against the defendant. (3) Each party must, in general, be affected by the court's determination of the issues concerning the legal right in question. (4) The fact that the claimant is not a party to the relevant contract in respect of which a declaration a sought is not fatal to an application for a declaration, provided that it is directly affected by the issue."

[37]MFC submits that where, as in this case, it asserts no claim against the Partnerships and admits and avers that the Partnerships are under no liability to it, the declarations sought serve no useful purpose. In relation to MFC, the purpose of the declaration is to ensure that MFC, or those who might succeed to MFC's rights can make no claim against the Partnerships and thereby protect the claimants against any claim over by the Partnerships. As to MFC itself, the declaration is unnecessary since it, in any event, acknowledges it has no claim against the Partnerships and the liability to it has been extinguished. As to any other person who might assert MFC's subrogated rights, the only persons who could do so are already party to the proceedings and thereby bound by the declaration anyway, including in particular the only party who could ever have a direct claim against the claimants, namely the Partnerships.

[38]In my judgment, in the circumstances outlined above, MFC is correct in its contention that a declaration binding it, in addition to all the other parties, would serve no useful purpose. In relation to the principles identified by Aikens LJ:(1) there is no real and present dispute between the parties before the court as to the existence or extent of the legal right between them. The relevant right is MFC's right to reclaim repayment of the loan, but it is accepted by MFC that it has no such right and any liability to it in respect of the loan has been long discharged. Insofar as any other party could assert that right, it is not necessary for MFC to be joined for that purpose. There is only one party who has asserted any such right, Vermilion, although not in these proceedings, and even if other parties might do so they are all joined to the action and therefore would be bound by any declaration which the claimants succeed in obtaining.

(2) MFC will not be affected by the court's determination of the issues concerning the legal right in question. Whatever the court may determine, MFC's position is that it has no right and any liability to it has been extinguished.

(3) The claimants will not be directly affected as against MFC by any determination of the issue in its favour as MFC already acknowledges it has no right or claim. Any effect on the claimants would be as a result of the determination of the issue as against the Partnerships and the technology vendors.

[39]The principal counterpoint made by the claimants is that there is a dispute between the parties as to the existence or extent of a legal right since the claimants contend that there never was a liability for the loans, whereas MFC contends that there was but that it has been discharged. But, as between the claimants and MFC, the result is the same regardless of the legal basis for it, namely the Partnerships are under no liability to MFC in respect of the loans. What ultimately matters is the fact that there is no such liability, not the precise legal reason why there is no such liability, and there is no dispute as to that.

[40]For all these reasons I accept MFC's contention that the claimants currently have no seriously arguable claim for the declarations sought against MFC. (2) Whether there is a risk of irreconcilable judgments arising from separate proceedings

[41]In order for there to be any such risk, it needs to be shown that there is in fact a realistic possibility of there being separate proceedings. Although the possibility of the claimants bringing proceedings against MFC is Switzerland is referred to in the claimants' evidence, it is nowhere explained whether and how any claim could be brought before the Swiss courts. The claimants assert, and have, no cause of action against MFC. In the English court proceedings they rely on the English court's power to grant a declaration, notwithstanding that there is no direct cause of action. It is not clear whether and, if so, how any such claim could be advanced before the Swiss courts and there is no evidence before the court that it could be. Instead the claimants seek to rely upon the possibility of proceedings in Switzerland involving other parties. The main possibility suggested is as follows as set out in para.68 of Mr. Green's witness statement:

"Thus, if MFC was not a party to the proceedings in England, it generates a risk of further claims in Switzerland. For example, I am advised that it would in principle be possible for technology vendors which had claimed to have forfeited deposits under loan arrangements held to be ineffective in the English courts, to seek some form of redress against MFC. That will be on the basis that they had forfeited collateral deposits and obtained no right to subrogation and therefore no benefit from meeting the partnerships' obligations. If MFC had not been a party to the Commercial Court proceedings, it would be open to the Swiss courts in such a claim to decide the question of the validity of the loans afresh and potentially inconsistent with the English courts. Moreover, there is a possibility that MFC would seek to pursue the partnership and in turn the claimants on the basis of those inconsistent findings."

[42]However, I agree with and accept the defendant's points as made in reply, namely:(1) there is no evidence of any technology vendor, whether Vermilion or anyone else, threatening to pursue MFC;

(2) it is unclear what claim a technology vendor would have in the circumstances that Mr. Green refers to. If the loan arrangements were ineffective as a sham, it is not clear what possible claim can be made by a technology vendor against MFC. Further, it is MFC's uncontroverted evidence that any claims arising out of relevant contracts would be time-barred;

(3) if there was anything in the scenario envisaged by Mr. Green, it would be a matter for the technology vendors. But none of them have either intimated or threatened such a claim against MFC, nor sought to have MFC joined as a party to these proceedings;

(4) the claimants are in any event protected by their having joined to these proceedings the Partnerships. This is because the only entity that could bring a claim of the type that Mr. Green expresses concern about is a Partnership.

[43]In all the circumstances, I am not satisfied that it has been shown that there is a realistic possibility of separate proceedings and therefore a risk of irreconcilable judgments as between the claimants and MFC or at all. The necessary expediency has therefore not been made out. CONCLUSION

[44]For the reasons outlined above, I find, on the basis of the current pleadings and evidence, it has not been established that the claims sought to be made against MFC are so closely connected with the claims made against the other defendants in these proceedings that it is expedient to hear and determine them together to avoid the risk of irreconcilable judgments resulting from separate proceedings. Accordingly, the requirements of Article 6(1) have not been shown to be satisfied and jurisdiction must be declined.

ANDREW BROWN & Ors. v INNOVATORONE PLC (in liquidation) & Ors. [2010] EWHC 2281 (Comm)

Cited in 5 later judgments