High Court applies Hague Trusts Convention in granting stay of English proceedings

05/03/14

Saad Investments Company Ltd (‘SICL’) is in liquidation in the Cayman Islands under a winding-up order made on 18 September 2009. Having obtained recognition in England under the Cross-Border Insolvency Regulations 2006, the joint official liquidators of SICL, together with SICL itself, brought a claim in the Chancery Division against Samba Financial Group (‘Samba’), a Saudi Arabian bank. The claimants alleged that certain assets transferred after the commencement of the winding-up to Samba by Mr Maan Al-Sanea, a Saudi Arabian businessman, in purported discharge of his liabilities to Samba, were in fact beneficially owned by SICL. They claimed that the transfers to Samba were void dispositions of SICL’s property under Section 127 of the Insolvency Act 1986. The claimants sought a declaration to that effect and an order for Samba to repay the value of the assets transferred. The disputed assets were shares, alleged to be worth more than US$300 million, in five Saudi Arabian banks, which until transferred to Samba were registered in Saudi Arabia in the name of Mr Al-Sanea. SICL’s alleged rights in the shares were said to arise from a series of share sale agreements and from documents described as declarations of trust executed by Mr Al-Sanea and SICL. The share sale agreements were expressly governed by either Saudi Arabian or Bahraini law but the declarations of trust contained no provision as to governing law. The claimants alleged that the declarations of trust gave rise to trusts governed by Cayman Islands law under which SICL acquired equitable proprietary rights in the shares. It was common ground that under Saudi Arabian or Bahraini law SICL would have acquired no such proprietary rights.

The proceedings were served on Samba as of right in England but Samba applied for a stay on the ground that Saudi Arabia was clearly and distinctly the more appropriate forum. The claimants opposed the stay in reliance on various factors, including the English terminology used in the declarations of trust, that were said to show that the claim would be more appropriately tried in England. They further alleged that they would not obtain a fair trial in Saudi Arabia because the courts of Saudi Arabia would not apply foreign law and so their claims would be bound to fail.

The Chancellor of the High Court, Sir Terence Etherton, granted Samba’s application for a stay, holding that it was not reasonably arguable that SICL had acquired proprietary rights in the shares under trusts governed by Cayman Islands law. He reached this conclusion by applying the Hague Trusts Convention as enacted by the Recognition of Trusts Act 1987. The effect of Section 1(3) of the 1987 Act and Article 15(d) of the Convention was that in relation to the transfer of title to shares the English court would apply non-derogable provisions of the law of the place where the shares were situated, which in this case was Saudi Arabia, to the exclusion of the law applicable under other provisions of the Convention. Since Mr Al-Sanea was the legal owner of the shares, and the law of Saudi Arabia does not recognise a distinction between legal and beneficial ownership, SICL could not have acquired equitable title to the shares. Alternatively, if Article 15(d) were not applicable, under Article 8 of the Convention the validity and effects of the alleged trusts would be governed by the law specified by Article 6 or Article 7. The Court could not reach a final conclusion as to whether under Article 6 there had been an effective express or implied choice of either Saudi Arabian or Bahraini law. However, on the assumption in favour of the claimants that there had not, the governing law under Article 7 would be the law with which the trusts were most closely connected. The relevant facts, including the fact that the transactions between Mr Al-Sanea and SICL were intended to circumvent restrictions under Saudi Arabian legislation on foreign investment in Saudi Arabian companies, overwhelmingly indicated that the alleged trusts were most closely connected with Saudi Arabian law and not with the law of the Cayman Islands.