Supreme Court interprets exclusive jurisdiction provisions narrowly

On 29 July 2019, the Supreme Court handed down its decision in Akçil and others v Koza Ltd and another [2019], which overturned the decision of the Court of Appeal [2017], with regard to the interpretation of the exclusive company law jurisdictional provisions in Article 24(2) of the Regulation (EU) 1215/2012 (the “Brussels I (Recast) Regulation”)

The judgment overturns the decision of the Court of Appeal and narrowly interprets Article 24(2) of the Brussels I (Recast) Regulation. In so doing, the Supreme Court provided welcome guidance on the correct interpretation of this regulation.

THE FACTUAL BACKGROUND

The case concerned a Turkish company, Koza Altin (the “Turkish Parent”) which operates a gold mining business, part of a group of Turkish companies known as the Koza Ipek Group (the “Group”), a large Turkish-based mining and media conglomerate formerly controlled by Mr Ipek and his family. The first defendants to the appeal was Koza Ltd, an English company which is a wholly owned subsidiary of the Turkish Parent (the “English Subsidiary”). Mr Ipek and his family were the second defendants to the appeal of the Supreme Court.

Following a police raid on the Group’s headquarters in Ankara, allegations were made by the Turkish authorities that the Group was involved in the financing of terrorism. An Ankara Criminal Peace Judge made an order under Art. 133(1) of the Turkish Criminal Procedure Code replacing the existing boards of various companies within the Group, including the Turkish Parent, with appointed trustees who were required to manage those companies pending further investigations. Mr Ipek claimed that both himself and the Group were targeted unfairly by a hostile government in Turkey, including making them the subject of a discriminatory investigation into alleged criminal activity, that caused him to unjustly loose his control of the Group. In order to defend himself as regard to the control of the English subsidiary, Mr Ipek had caused a number of changes to be made to that company’s constitution and share structure. A new class of “A” shares was created, and the English subsidiary’s articles of association (the “Articles”) were amended to introduce a new article which purported to preclude any further changes to the articles of association or any change of directors unless the prior written consent of the holders of the “A” shares had been given. Two “A” shares were subsequently issued: one to Mr Ipek and the other to his brother.

The validity and effect of these changes were at issue in the case put before the Supreme Court. The trustees appointed to control the affairs of the Turkish Parent served a notice on its English Subsidiary, under Section 303 of the Companies Act 2006 (the “Act”), requiring the directors to call a general meeting to consider resolutions for their removal and replacement with three of the new trustees who had been appointed within the Turkish Parent. However, as no such general meeting was called by the English Subsidiary, the Turkish Parent served a notice pursuant to Section 305 of the Act (according to which company company members can request a meeting, or any of them representing more than one half of the total voting rights of all of them, may themselves call a general meeting) to convene a meeting to consider the proposed resolutions. In response, Mr Ipek and the English Subsidiary sought injunctive relief from the English court based on the following two grounds:

  • the notices were void as under the English Subsidiary’s constitution and share structure the consent of Mr Ipek and his brother were required before there could be any change of directors or changes to the company’s Articles (the “Company Law Claim”); and
  • the notices were void on the basis that the English courts should not recognise the authority of the trustees as valid shareholders of the company, as the appointment of the trustees was unlawful under Turkish law, solely on an interim basis and was additionally in breach of natural justice and/or Article 6 of the European Convention on Human rights, under which “In the determination of his civil rightsand obligations or of any criminal charge against him, everyone is entitled to a fair and public hearing within a reasonable time by an independent and impartial tribunal established by law (the “Jurisdiction Claim”).

Injunctive relief was granted and proceedings were issued. However, the Turkish Parent and the trustees challenged the jurisdiction of the English court (save in respect of the Company Law Claim where it was accepted the English court had jurisdiction).

As regard to the Jurisdiction Claim, the English Subsidiary argued that the English courts had exclusive jurisdiction under article 24(2) of the Brussels I (Recast) Regulation against English Subsidiary and the trustees in respect of both claims.

At first instance the court held that all the claims came within article 24(2) of the Brussels I (Recast) Regulation and this was upheld on appeal to the Court of Appeal. The Turkish Parent and the trustees subsequently appealed to the Court of Appeal.

The Court of Appeal dismissed the defendants’ appeal, agreeing that the Jurisdiction Claim was inextricably linked with the English Company Law Claim. It held that Article 24(2) of the Brussels I (Recast) Regulation required the court to form an overall evaluative judgment as to what the proceedings were principally concerned with, in this case a challenge to the ability of the Turkish Parent to act as a shareholder of the English Subsidiary in relation to its internal affairs.

ARTICLE 24 OF THE RECAST BRUSSELS REGULATION

The Brussels I (Recast) Regulation is an EU instrument which determines jurisdiction where the defendant is domiciled in the EU, or where there are other connecting factors with a member state. Article 24 provides for the courts of a member state to have exclusive jurisdiction in certain cases which include:

  • proceedings which have as their object rights in rem in immovable property, where exclusive jurisdiction is given to the courts of the member state in which the property is situated (Article 24(1)).
  • proceedings which have as their object the validity of the constitution of companies or the validity of the decisions of their organs, where exclusive jurisdiction is given to the courts of the member state where the company has its seat (Article 24(2)).

In Hassett v South Eastern Health Board, the European Court of Justice (“ECJ”) held that Article 22(2) (the equivalent provision of the 2001 Brussels I (Recast) Regulation) had to be interpreted strictly (that is, narrowly) since it was an exception to the general rule of jurisdiction based on domicile. Article 22(2) only covered “disputes in which a party was challenging the validity of a decision of an organ of a company under the company law applicable or under the provisions governing the functioning of its organs“. It was insufficient that the legal action involved merely some link with a decision adopted by an organ of the company. The objective of Article 22(2) is centralising jurisdiction in order to avoid conflicting judgements being given as regards the existence of a company or as regards the validity of the decisions of its organs. The courts of the member state in which the company had its seat were best placed to deal with such disputes because it is in that state that information about the company will have been notified and made public.

The ECJ adopted the same approach in Berliner Verkehrsbetriebe (BVG), Anstalt des öffentlichen Rechts v JP Morgan Chase Bank NA. The court also observed that one of the aims of Article 22(2) was to confer exclusive jurisdiction on the courts of a member state in circumstances where, having regard to the matter at issue, those courts are best placed to adjudicate upon the disputes falling to them, because there is a particularly close link between those disputes and the member state. The provision only covered proceedings whose principal subject matter comprised the matters set out in Article 22(2).

Schmidt v Schmidt, concerned Article 24(1) and exclusive jurisdiction in a land dispute. There were two claims, for rescission of a gift of land and rectification of the Austrian land register. The ECJ held that the rectification claim was covered by Article 24(1) but the rescission claim was not. The court rejected the argument that since there was plainly a link between the two claims, the whole proceedings should be regarded as falling within Article 24(1). The court followed the approach in the Advocate General’s opinion requiring a focus on each distinct claim in the proceedings.

The principles for the interpretation of Article 22(2) were restated recently by the ECJ in Eon Czech Holding AG v Dĕdouch, including the objectives of predictability of the rules of jurisdiction and legal certainty.

ARTICLE 24 AND NON-MEMBER STATES

In Chaitan Choudhary and others v Damodar Prasad Bhattar and others [2009], the Court of Appeal decided that Article 22 had no application to a defendant not domiciled in a member state. That decision has been much criticised, but was followed recently at first instance in Integral Petroleum SA v Petrogat FZE [2018].

THE SUPREME COURT DECISION

The Supreme Court have unanimously disagreed concluding that the interpretation of Article 24(2) adopted by the Court of Appeal could not be sustained. Applying the principles set out by the ECJ in:

  • Hassett v South Eastern Health Board (Case C-372/07) [2008] ECR I-7403;
  • Berliner Verkehrsbetriebe (“BVG”), Anstalt des öffentlichen Rechts v JP Morgan Chase Bank NA (Case C-144/10) [2011] 1 WLR 2087 (“the BVG case”);
  • ON Czech Holding AG v Dědouch (Case C –560/16), [2018] 4 WLR 94,

the Supreme Court concluded that the provisions of Article 24(2) were to be strictly (i.e. narrowly) interpreted. This had implications for how multiple claims should be evaluated.

The Court of Appeal were found to have misunderstood the BVG case, and erroneously concluded that the court has to undertake “an exercise in “overall classification” and make an “overall judgment” to see whether the proceedings are “principally concerned” with one of the matters set out in” Article. 24

Instead, where, as in this case, there were two distinct claims, one, by itself falling within Art. 24(2) (i.e. the Company Law Claim) and the other, by itself, not falling within Art. 24(2) (i.e. the Jurisdiction Claim), it was not legitimate to maintain that, by an overall evaluative judgment as to both claims taken together, that the second claim also falls within Art. 24(2), thereby conferring exclusive jurisdiction on the English courts. A mere link between the two claims was not sufficient.

The Supreme Court considered that while both claims were connected in a sense, they were, in fact distinct claims which were not “inextricably bound up together”. Each could be brought and made good on their own terms without regard to the other claim. Assessing the Jurisdiction Claim as a distinct set of proceedings, the principal subject matter clearly did not comprise the validity of the decisions or the organs of a company with its seat in England. The English court thus lacked Article 24(2) jurisdiction over the Turkish Parent and the Turkish trustees in relation to that claim.

As to the Company Law Claim related to the English company law, although this claim fell within the material scope of Art. 24(2), that did not confer jurisdiction over the trustees, who were not necessary parties to that claim.

The appeal by the Turkish Parent and the Trustees was allowed by the Supreme Court, therefore overturning the decision of the Supreme Court.

CONCLUSION

In this case, the Supreme Court decisively rejected the approach of the Court of Appeal to Article 24(2) of the Recast Brussels Regulation. This case confirms that, in accordance with EU law, exclusive jurisdiction under article 24 of the Brussels Recast Regulation is to be strictly and narrowly interpreted to cover only disputes where the validity of the actions of a company or association are challenged.  For an English company, this will in most cases likely be a dispute to be decided under the Companies Acts or the company’s articles of association.

In some ways, this decision should not be surprising in light of the jurisprudence of the ECJ.  It is not insignificant that the Supreme Court considered it acte clair that the English courts did not have jurisdiction over the authority claim under the Brussels regime.

Nevertheless, the judgment is noteworthy for the possibility intimated by Supreme Court that jurisdiction could, in theory, have been established on some other basis, such as under the Civil Procedure Rules.  If the UK leaves the EU without a deal, it is likely that such domestic bases for the jurisdiction of the English courts in comparable cases, if any such domestic bases exist, will be developed.  From the inverse perspective, it is clear that courts of the EU member states will continue to be bound to decline jurisdiction over claims concerning the validity of decisions made by the relevant organs of English companies, whether or not the UK remains bound by the Brussels regime.

Companies should therefore be careful is choosing whether or not to bring claims in relation to their subsidiaries, particularly when these claims involve subsidiaries/head companies based outside of the EU.

For more information, and any guidance or advice on drafting and negotiating your commercial contracts, and other commercial documents, Cleveland & Co External in-house counselTM, your specialist outsourced legal team, are here to help.

0 Comments

Leave a reply

Your email address will not be published.

*

CONTACT US

We'd love to hear from you, please get in touch with us if you have any questions.

Sending

©2022 Cleveland & Co

Log in with your credentials

Forgot your details?