Case Preview: Stanford International Bank (acting by its joint liquidators) v Director of the Serious Fraud Office
08 Tuesday May 2012
(ii) Stanford International Bank (acting by its joint liquidators) (Respondent) v The Director of the Serious Fraud Office (Appellant) (Oral Hearing)
Earlier this year, the Supreme Court heard a complex dispute arising from the collapse of Stanford International Bank (“SIB”) in early 2009. The two appeals concern the proper administration of the world-wide assets of SIB in order to compensate the victims of an alleged “Ponzi” scheme perpetrated by (the then “Sir”) Allen Stanford and other individuals charged in the U.S. The key legal questions facing Lords Phillips, Brown and Kerr are likely to concern the interpretation of:
(1) The Cross Border Insolvency Regulations 2006;
(2) UNCITRAL Model Law on Cross-Border Insolvency; and
(3) The Proceeds of Crime Act 2002 (External Requests and Orders) Order 2005. SI No. 3181 (the “ERO Order”).
SIB was incorporated in 1990 (and at all times thereafter had its registered office) in Antigua and Barbuda. The bank was allegedly involved in a ‘Ponzi’ fraud in which around 27,000 (primarily Central, North and South American) investors bought certificates of deposit amounting to $104bn.
In February 2009, a Texan Court made an order enabling the U.S. Securities and Exchange Commission to appoint a receiver (the “US Receiver”) over the assets of SIB, Allen Stanford and other individuals who were allegedly running the scheme. In April 2009, the Antiguan High Court approved an application and a petition presented by the Financial Services Regulatory Commission of Antigua to appoint joint liquidators of SIB (the “Antiguan Liquidators”) and approve the compulsory winding up of SIB. Under the terms of the order, all of the assets of SIB, wherever situated, were vested in the Antiguan Liquidators.
On 6 April 2009, shortly before the handing down of the above order, the U.S. Department of Justice wrote to the U.K. (the “Letter of Request”) to request immediate assistance in relation to the fraud investigation by the DOJ pursuant to the U.S./U.K. Mutual Assistance in Criminal Matters Treaty. The Letter of Request sought restraint in the UK of all assets of SIB, Allen Stanford and other named individuals so that they might be secured for confiscation at a later date. The Serious Fraud Office then applied to the Central Criminal Court for an external restraint order, a request by an overseas authority to prohibit dealing with relevant property under Article 8 of the ERO Order, in respect of the assets set out in the Letter of Request. The application was successful and the Restraint Order was granted to the SFO and served on SIB in late April 2009.
The Model Law – recognition applications
When $110m of SIB assets were identified as being held by certain financial institutions inEngland, the Antiguan Liquidators applied to the English High Court on 22 April 2009 for recognition of the Antiguan liquidation of SIB and for an order entrusting to them the distribution of the assets of SIB situated in the U.K. This application was made under article 15 of the Model Law which was implemented in the U.K. by the Regulations.
On 8 May 2009 the US Receiver also applied to the High Court in England under Article 15 of the Model Law for recognition of the US Receivership of SIB (and the other SIB entities) as the foreign “main proceeding” and of himself as the foreign representative of SIB.
The First Instance decision in the High Court
In the approved judgment by Mr Justice Lewison on 3 July 2009, the recognition application of the Antiguan Liquidators as foreign representatives of a main proceeding under the Regulations was accepted, as the bank’s “centre of its main interest” (“COMI”) was Antigua. As SIB’s registered office was in Antigua, it was presumed that the COMI must be there too. Approving the ECJ’s judgment in Re Eurofood IFSC Ltd, Re (C-341/04) (2006), it was held that the onus was on the U.S. Receiver to rebut the presumption that the company’s COMI was at its registered office with factors that were both objective and ascertainable by third parties. The presumption was not rebutted and the U.S. Receiver’s application was dismissed.
Mr Justice Lewison also observed that the Texan court order appointing the U.S. Receiver was not made “pursuant to a law relating to insolvency” but rather to prevent the detriment of investors. Lewison J said that the common law should supplement the Regulations and not usurp them. If it is established that liquidators have been properly appointed with the power and duty to collect assets on behalf of all the creditors, then – unless exceptional circumstances arise – they should be able to continue such duties without outside interference from others. This would promote a general policy of universalism, to enable there to be one collective proceeding in which all creditors were entitled to participate, irrespective of where they were located.
The Antiguan Liquidators were therefore the proper liquidators and were permitted to take possession of SIB assets within the jurisdiction and to remit the SIB assets toAntigua.
Misrepresentation and Material non-disclosure
It later emerged that the court had not been informed of the Restraint Order and as such, the SFO had not been provided with the opportunity to be heard on the applications pursuant to Article 17 of the ERO Order. When the Restraint Order was made known to him at a subsequent hearing to determine the form of the High Court order, Lewison J modified his High Court order so as to take effect subject to the Restraint Order.
Central Criminal Court – HH Judge Kramer QC
The Antiguan Liquidators applied to Judge Kramer QC in the Central Criminal Court to vary the Restraint Order to enable the High Court judgment to be carried out. During the hearing for this application, the evidence submitted to the court when the Restraint Order was made (in April 2009) was put for the first time before the Antiguan Liquidators, who then expanded their application to Judge Kramer QC in order to seek the discharge of the Restraint Order altogether on grounds of misrepresentation and material non-disclosure. Both the respective applications to discharge and vary the Restraint Order were deemed unsuccessful.
The Court of Appeal decision
In February 2010, the Court of Appeal held as follows:
(1) Dismissing the U.S. Receiver’s appeal against the recognition of the Antiguan Liquidators as the foreign main proceeding as defined in Article 2 of the Model Law. The Antiguan liquidation proceeding satisfied the conditions for the application of the Model Law because it was collective, judicial and pursuant to a law relating to insolvency. Despite new evidence being presented before the court, the U.S. Receivers were held not to possess the necessary characteristics to be deemed a “foreign representative”. Accordingly, the High Court was correct in following Re Eurofood to hold that the presumption could be rebutted only by factors that were both objective and ascertainable by third parties.
(2) (Arden LJ dissenting) allowing the U.S. Receiver’s appeal against the refusal of Judge Kramer QC at the Central Criminal Court to discharge or vary the Restraint Order which he made in April 2009 against those named in the Letter of Request under article 8 of the ERO Order. The Restraint Order was set-aside on grounds of substantial misrepresentation and non-disclosure of material matters on behalf of the SFO when the Restraint Order was obtained without notice. The granting of an order unlimited in point of time could not have been justified by proper disclosure (Brinks Mat Ltd v Elcombe  1 WLR 1350, 1357).
(3) However, the Restraint Order was re-granted but with effect from 29 July 2009, making it later in time than the date on which SIB was wound up by the High Court of Antigua. Referring to article 46 of the Model Law, the Court of Appeal decided to re-grant the Restraint Order (which was to be tailored so as avoid inconsistency between the two orders) conferring on the SFO administrative priority in respect of SIB’s assets in the U.K.
The Court of Appeal relied on Article 46(1)-(3) which states, at Article 46(2)(b), that the power to grant an external restraint order must be exercised “with a view to securing that there is no diminution in the value of the property identified in the external request”. Using this guidance, the Court of Appeal, having deemed references to “property” held by SIB to include references to property vested in the Antiguan Liquidators, held that the re-granting of the Restraint Order was necessary to stop the risk of diminution in the value of the deposits held in U.K. banks in the name of SIB in paying the costs of the Antiguan liquidation proceedings.
Practitioners of international insolvency law will be interested to see how the Supreme Court responds to the new appeals. Of particular interest will be the interpretation of the COMI test in respect of the application of the Re Eurofood principles and how the competing claims under the Regulations which implement the Model Law are managed.