A recent Supreme Court decision sheds important light on these questions.

Background

On 1 February 2017, the UK Supreme Court handed down its judgment in Akers and others (Respondents) v Samba Financial Group (Appellant) [2017] UKSC 6, which is highly significant to insolvency practitioners.

Saad Investments Co Ltd (“SICL”) is a company incorporated in Cayman Islands. It went into liquidation in the Cayman Islands on 30 July 2009. Liquidators were appointed. The English Companies Court subsequently recognized the Cayman Islands winding up proceedings as a foreign main insolvency proceedings under the Cross-Border Insolvency Regulations 2006.

Mr Al-Sanea, a Saudi Arabian citizen, was the legal owner of shares in five Saudi Arabian banks, valued at around US$318 million. SICL alleged that Mr Al-Sanea held the Saudi Arabian shares (“Disputed Shares”) on trust for SICL. The trust arose allegedly as a result of six transactions, which are all subject to Cayman Islands law.

Six weeks into the liquidation, Mr Al-Sanea transferred all the Disputed Shares to Samba Financial Group (“Samba”) in order to discharge his personal liabilities towards Samba.

The Liquidators of SICL claimed against Samba for the return of the Disputed Shares under section 127 of the Insolvency Act 1986 (equivalent to section 182 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32)), which provides that any disposition of the company’s property made after the commencement of the winding up is void, unless the court otherwise orders.

On the application of Samba, the High Court granted a stay of proceedings on the ground that it was more appropriate for the matters to be dealt with in Saudi Arabia, where the shares are sited. On appeal, the Court of Appeal overturned the High Court’s decision. Samba appealed to the Supreme Court. 

Judgment

The Supreme Court allowed Samba’s appeal, finding that the transfer to Samba did not dispose of any rights belonging to SICL within the meaning of section 127. Lord Mance gave the leading judgment, with which Lord Neuberger, Lord Sumption, Lord Collins and Lord Toulson agreed.

The points raised on appeal are novel and complicated. Essentially, Samba contended that SICL could not have any equitable proprietary interest in the Disputed Shares, because the law of Saudi Arabia, where the Disputed Shares are sited, does not recognize the institution of trust or a division between legal and equitable interests. Samba further contended that even if SICL had equitable interest in the Disputed Shares, there was no “disposition” within the meaning of section 127.

Does SICL have an equitable interest in the Disputes Shares?

In relation to the first contention raised by Samba, the Court considered that a common law trust may be created, come into existence and be enforced in respect of the Disputed Shares, even though Saudi Arabian law does not recognize trusts in any form. In reaching this conclusion, the Court applied the Court of Appeal decision in Lightning v Lightning Electrical Contractors Ltd (1998) 23 (1) Tru LI 35. In Lightning, Mr Lightning claimed to be the beneficiary under a resulting trust in respect of land in Scotland, bought by an English company to which he had advanced the purchase price. Scots law, the lex situs of the land, however, did not recognize any kind of equitable interests. The company having gone into receivership, Mr Lightning successfully obtained a declaration in English proceedings that the property or its proceeds of sale were held on trust for him.

Lightning was followed in a more recent English decision Luxe Holding Ltd v Midland Resources Holding Ltd [2010] EWHC 1908 (Ch), in which the Court went further and held that the reasoning in Lightning is not confined to the particular case of resulting trust. Rather, it applies in all kinds of trust arrangements. Finding otherwise would lead to bizarre results, as the consequences of the same arrangement might then be different in relation to properties acquired in different jurisdictions.

Following Luxe and Lightning, Lord Mance formed the view that in the eyes of English law, a common law trust exists in respect of the Disputed Shares even though Saudi Arabian law does not recognize equitable proprietary interests and may not give effect at all to a common law trust.

Does the transfer constitute “disposition”?

Having concluded that SICL had equitable interests in the Disputed Shares, Lord Mance went on to consider whether the transfer of the Disputed Shares constitutes “disposition” within the meaning of section 127. The definition of “property” is plainly wide enough to embrace both legal and equitable proprietary interests in this context.

However, where a trust exists, the legal and beneficial interests are distinct, and what affects the former does not necessarily affect the latter. Where an asset is held on trust, the legal title remains capable of transfer to a third party, although the disposition may be in breach of trust. But the trust rights are not disposed of, because the trustee simply does not own that title. They continue to be capable of enforcement unless and until the disposition of the legal title has the effect of overriding the protected trust rights. For example, where a legal estate is sold to a bona fide third party purchaser for value without notice, the equitable interest is not transferred to the purchaser. It is overridden, or in other words, it is lost or disappears.

There is no question of Mr Al-Sanea having transferred SICL’s equitable interest in the Disputed Shares to Samba. He simply transferred his legal ownership of the Disputed Shares to Samba. But since Samba, on the assumed facts, was a bona fide purchaser for value without notice, SICL’s equitable interest in the Disputed Shares was effectively extinguished.

In a separate concurring judgment, Lord Neuberger further noted that it would be unfair for a bona fide purchaser of a legal estate from a third party to find that, because of section 127, the transaction in question was liable to be held void owing to the existence of an equitable interest held by a company of which he had no notice. However, it is worth noting that Lord Neuberger did acknowledge that the word “disposition” must be given a wide meaning if the purpose of the legislation is to be achieved, which is to ensure that the company’s property is retained in order to be distributed fairly among its creditors.

In conclusion, the Supreme Court allowed the appeal and declared that for the purposes of section 127 of the Insolvency Act 1986, there was no disposition of any rights of SICL in relation to the Disputed Shares by virtue of the transfer to Samba.

Conclusion

The Supreme Court’s decision is significant in that it is now settled that section 127 does not cover three-party situations where legal title is held and disposed of to a third party by a trustee, and the beneficiary’s beneficial interest either survives or is overridden by virtue of the disposition of the legal title to the third party. But it does not necessarily follow that the third party receiver can always get away. Where the third party has notice of the breach of trust, it could be held liable to return the trust assets on the basis of knowing receipt.

For enquiries, please contact our Litigation & Dispute Resolution Department:

E: insolvency@onc.hk                                   T: (852) 2810 1212 W: www.onc.hk                                             F: (852) 2804 6311 19th Floor, Three Exchange Square, 8 Connaught Place, Central, Hong Kong

Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.

Published by ONC Lawyers © 2017