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	England and Wales High Court (Commercial Court) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Commercial Court) Decisions >> Madoff Securities International Ltd v Raven & Ors [2011] EWHC 3102 (Comm) (25 November 2011) URL: http://www.bailii.org/ew/cases/EWHC/Comm/2011/3102.html Cite as: [2012] Bus LR D125, [2011] EWHC 3102 (Comm), [2012] ILPr 15, [2012] 2 All ER (Comm) 634

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IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		25/11/2011

The Honourable Mr Justice Flaux:

Introduction and background

1. Over a period of some twenty years until he confessed his fraud to US federal agents in December 2008, Bernard Madoff perpetrated a massive multi billion dollar fraud on investors by way of an elaborate Ponzi scheme. His New York company, Bernard L. Madoff Investment Securities LLC ("BLMIS") (of which the second claimant is the Liquidation Trustee in New York) had three divisions, investment advisory, market-making and proprietary trading. Mr Madoff purported to run the investment advisory business as a legitimate and highly successful business with impressive returns, in which high net worth individuals and, latterly, corporate investment funds invested.
2. However, the reality was that the investment advisory business made no material investments at all. Clients' money was pooled in a single account at JP Morgan and treated by Mr Madoff and his associates as his own. He would pay "profits" or "redemptions" to clients ostensibly by way of return on their investment, but in reality this consisted of other clients' money, the Ponzi scheme being funded by a constant influx of funds. However, in December 2008, requests for redemptions by customers nervous at the financial crisis and the collapse of Lehman Brothers exceeded the amount of funds deposited by new customers and the scheme collapsed. The customers of the investment advisory business had between them lost about US$ 19.5 billion.
3. The first claimant, Madoff Securities International Limited ("MSIL") was an English registered company incorporated in 1983 of which Mr Madoff was 99% shareholder, the remaining 1% being held by his brother Peter, the sixth defendant, who seems to have acted in accordance with Mr Madoff's instructions. The first five defendants were the English directors of MSIL. The sixth to eighth defendants (Mr Madoff's brother and two sons) were also directors of MSIL, although not domiciled in the United Kingdom. The ostensible purpose of MSIL was to hold a seat on the London International Financial Futures Exchange. It did carry out some legitimate trading activities but its primary function was to facilitate the concealment of Mr Madoff's fraud and the distribution of its proceeds. In particular, Mr Madoff used MSIL to launder stolen money and as a vehicle for making payments of stolen money.
4. The ninth defendant, Mrs Sonja Kohn, is Austrian but has lived and conducted her affairs internationally, through a series of corporate vehicles including the eleventh and thirteenth defendants. I will refer collectively to her and her companies as "the Kohn defendants". She met Mr Madoff in the 1980s and began to introduce investors to him, specifically those who invested via corporate investment funds or feeder funds, with many of which she had a connection. The monies invested in his ostensible investment advisory business through her introductions amounted to billions of dollars.
5. In return for effecting these introductions, over the years, the Kohn defendants received tens of millions of dollars directly from BLMIS and indirectly via MSIL, which monies were of course part of the proceeds of the Madoff fraud. It is important to note at the outset that, despite some serious allegations levelled by the second claimant against Mrs Kohn in various public pronouncements he has made, it is no part of the claimants' pleaded case that Mrs Kohn or any of the other Kohn defendants was actually a party to Mr Madoff's fraud or that she or any of them was or ought to have been aware of it.
6. The monies received amounted to at least US$35 million from BLMIS and at least £13.9 million via MSIL. MSIL did not have sufficient funds of its own to make these payments, which accounted for about a third of its overheads, but was dependent upon subventions from BLMIS, with instructions from Mr Madoff to the directors to make the payments to various entities, including the Kohn defendants. Over the years, the payments were made to a number of Mrs Kohn's corporate vehicles, variously the tenth to thirteenth defendants.
7. The detail of the payments does not matter for the present applications, save to note that, although the payments to the Kohn defendants are said by those defendants to be in the nature of commissions for the introduction of customers, they were never once described as such in any of the invoices issued by her companies. Instead the invoices refer to "services", "research, analysis and consulting", "market researches", "updating" "strategic consulting and market researches" and, in the case of the eleventh defendant only, "strategies and strategic alliances".
8. Although it is not alleged that Mrs Kohn was complicit in Mr Madoff's fraud, nonetheless, the claimants' pleaded case (to which I refer in more detail below) is that the payments were illegitimate payments amounting to secret kickbacks to Mrs Kohn for introducing money into Mr Madoff's scheme and that Mrs Kohn knew that the real reason for the payments was secretly to pay her for introducing money into the scheme and that the various invoices were sham documents intended to hide the true nature of the payments to the Kohn defendants.
9. According to the defences of the directors of MSIL, they did not know or believe that the payments MSIL made to the Kohn defendants were by way of commission for introductions. Rather, they say the payments were made on Mr Madoff's instruction in respect of the research Mrs Kohn provided. Box loads of purported research were delivered by her to MSIL in London and to BLMIS in New York, yet, save on a couple of isolated occasions, MSIL had not requested research from Mrs Kohn. It is contended by the claimants that the research was either useless or at least went unused. Furthermore, the claimants point out that it is surprising, to say the least, given the volume of alleged research provided, that there was no formal contract between Mrs Kohn and MSIL for the provision of research.
10. The allegation that the research was some sort of sham to disguise the true nature of the payments is strenuously denied by Mrs Kohn in her witness statements served in relation to the various applications which have been issued. She contends that she did provide valuable research to MSIL at its request, but then says in her third witness statement: "Payments were not primarily for research but were commissions for introductions made". Part of the difficulty with that explanation is that none of the invoices breaks down the amount demanded into "research" and "commission", indeed commission is not mentioned at all.
11. Mrs Kohn then goes on to say: "I was happy to provide the research to Madoff as part of my client management and in order to develop my business relationship with him" which, as the claimants point out, seems to be an acceptance that she was providing or would have provided the research for free, which makes it all the more puzzling that the invoices (or so many of them) appear to be for research and the like but never mention commission.
12. No real explanation is currently put forward by Mrs Kohn as to why, if, as she contends, the payments were essentially legitimate payments of commission for the introduction of customers, the invoices did not simply say that the payments requested were for "commission" and why it was necessary to adopt a whole series of descriptions, none of which made reference to commission. It seems to me that this is an area which cries out for a proper explanation from Mrs Kohn, which has currently not been forthcoming.
13. However, given the impossibility of deciding contested issues of fact at an interlocutory stage, I do not propose to deal in more detail with the underlying facts. For the purposes of these applications, I simply proceed on the basis that the claimants have an arguable case that Mr Madoff and Mrs Kohn disguised the true nature and purpose of the payments to the Kohn defendants.

The present applications

14. In the time available at the hearing on 14-16 September 2011, the court heard two of the applications which have been issued by the parties: (1) the application by Mrs Kohn and the thirteenth defendant to set aside the proceedings by the second claimant against them on the grounds of want of jurisdiction and (2) the application by the first claimant, MSIL, for a freezing injunction and/or a proprietary injunction against Mrs Kohn and the thirteenth defendant. Before considering the detail of the applications, it is necessary to set out at least an overview of the claimants' pleaded case.

The pleaded case

15. As is clear from the Particulars of Claim, each of the claimants has quite separate and distinct claims, although there is an obvious factual overlap between the claims in so far as they are pursued against the Kohn defendants, not least because ultimately all the money paid to the Kohn defendants emanated from BLMIS. So far as is relevant to the claims with which these applications are concerned, the first claimant, MSIL, alleges that in making the payments which MSIL made to the Kohn defendants, each of the directors of MSIL was in breach of contractual and fiduciary duties owed to MSIL, in that they knew that the "research" for which Mr Madoff insisted they paid the Kohn defendants via the subventions from BLMIS was useless. It is said that the directors knew that the payments were inappropriate and suspicious and/or had knowledge of numerous indicia that these were illegitimate payments. It is important to note that, although the directors are said to have been in breach of their duties to MSIL in that regard, it is not alleged that in sanctioning the payments to Mrs Kohn, the directors were parties to Mr Madoff's fraud.
16. The pleaded case of MSIL against the Kohn defendants is one of knowing receipt and constructive trust. It is alleged that Mrs Kohn knew that the research for which invoices were issued was useless and unused and that the real reason for the payments was as secret payments or "kickbacks" for the introduction to Mr Madoff's scheme of various customers. It is then alleged that she and her companies (which are said to have been facades or shams for the improper receipt of monies) received the MSIL payments with knowledge that they represented the proceeds of the directors' breaches of fiduciary duty, so that it is inequitable for the Kohn defendants to assert any beneficial interest in the payments. It is pleaded that the MSIL payments and their traceable proceeds were received and held by the Kohn defendants on constructive trust for MSIL. Orders are sought for the repayment of the payments or their traceable proceeds, alternatively for equitable compensation.
17. Two points should immediately be noted in relation to that pleaded case. First, despite the seriousness of the allegations of knowing receipt and constructive trust in relation to payments variously described in the Particulars of Claim as secret payments or kickbacks, which seems to me to amount to allegations of dishonesty, it is not pleaded that the Kohn defendants were parties to Mr Madoff's fraud or knew or ought to have known that that fraud was taking place. Second, it is not suggested that, if the payments had been legitimate payments of commission and had been properly described as such in the invoices, the commission in question would have been excessive or disproportionate in amount.
18. The claim against the Kohn defendants advanced by the second claimant on behalf of BLMIS is distinct from the claim by MSIL but is founded upon much of the same factual background, involving payments for "research" and the like to the Kohn defendants by the directors and officers of BLMIS, in breach of fiduciary duty. It is said that, as a matter of New York law, the Kohn defendants received and held the BLMIS payments as constructive trustees and/or are liable to make restitution, on the basis that it is inequitable for them to retain the monies.
19. It is also worth noting, in terms of the factual overlap, that the sixth to eighth defendants (Mr Madoff's brother and sons, one of whom has died) against whom MSIL has other claims in these proceedings, were directors of BLMIS at the relevant time. Further, whilst none of the directors of MSIL was ever a director of BLMIS, the fourth defendant was a senior officer of BLMIS and would have been responsible for dealing with payments to the Kohn defendants.
20. Although the ingredients of the causes of action under New York law are not identical to a claim for knowing receipt in English law and one has to be somewhat cautious, as the precise parameters of those causes of action are in dispute between the parties, it is tolerably clear that two of the ingredients of the New York causes of action, namely breach of fiduciary duty by the directors of the relevant Madoff company and some degree of guilty knowledge by the recipient of monies making it inequitable to retain them, are essentially the same as for the English cause of action. On the other hand, I accept that, as Mr Mowschenson pointed out, other aspects of the constructive trust cause of action in New York law are different from the English law cause of action, for example the need for a confidential or fiduciary relationship between BLMIS and Mrs Kohn.
21. Once again, it is not alleged that the Kohn defendants were parties to or otherwise complicit in Mr Madoff's fraud, nor is it alleged that, if the BLMIS payments had been legitimate payments of commission and described as such in the invoices, the commission would have been excessive or disproportionate.

The jurisdiction application

The issues raised by the application

22. Because Mrs Kohn is domiciled in Austria, a contracting state, the question whether either claimant can proceed against the Kohn defendants before the English courts is governed by Council Regulation (EC) 44/2001 ("the Judgments Regulation"). So far as the claim by MSIL is concerned, the Kohn defendants accept that this court has jurisdiction over them.
23. However, the Kohn defendants dispute that the court has any jurisdiction over the BLMIS claim against them. The direct payments made by BLMIS to Mrs Kohn (unlike the payments by MSIL deriving from the subventions) were never payments made within the jurisdiction but were paid to Mrs Kohn in Austria (or possibly in Switzerland where she seems to have resided much of the time). Accordingly, none of the grounds for special jurisdiction in Article 5 of the Regulation applies and since BLMIS has no claim against the English domiciled defendants (the directors of MSIL), Article 6(1) does not apply either. It is said that the Kohn defendants should be sued in the contracting state where they are domiciled pursuant to Article 2.
24. The second claimant contends that this court does indeed have jurisdiction by virtue of Article 6(1) of the Regulation. This provides:

"Article 6

A person domiciled in a Member 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, 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."

25. The basis for the argument that this court has jurisdiction over the Kohn defendants, even though Mrs Kohn is domiciled in Austria, is that there is a claim before the court against a number of defendants (namely a claim by MSIL against the first to fifth defendants, directors of MSIL) domiciled in the United Kingdom, so Mrs Kohn is one of a number of defendants, one or more of whom is domiciled in the United Kingdom.
26. Mr Mowschenson QC on behalf of the Kohn defendants contends that Article 6(1) has no application here, because it applies only where the defendant or defendants domiciled in the jurisdiction is or are being sued by the same claimant or claimants as is or are suing the defendant domiciled elsewhere. Thus, Article 6(1) gives the court jurisdiction over the claim by MSIL against Mrs Kohn, because MSIL is suing the English domiciled "anchor" defendants, but it cannot confer jurisdiction over the claim by the second claimant on behalf of BLMIS, for the simple reason that that claimant is not bringing any claim at all against any of those English domiciled defendants.
27. Thus, the first and most important issue which arises in considering whether Article 6(1) has any application in the present case, is whether it can apply where the claimant seeking to invoke Article 6(1) does not in fact have a claim against the English domiciled defendants, but another claimant with a similar claim is suing all the relevant defendants (including both the English domiciled defendants and the defendant challenging jurisdiction). It is common ground that none of the earlier decisions, either of the European Court of Justice or of the English courts, deals directly with this issue.
28. Depending upon whether or not the answer to that issue is that, at least in principle, Article 6(1) is capable of application in a case such as the present, a further issue arises as to the extent to which the second claimant has to demonstrate that the claim against the anchor defendant is arguable and whether he can do so, but I will reserve consideration of that issue until I have dealt with the issue of what can be described as the scope of Article 6(1).

Submissions of Kohn defendants on scope of Article 6(1)

29. Mr Mowschenson submits that the principle which lies behind Article 6(1) is that jurisdiction over the non-domiciled defendant derives from the fact that the same claimant or claimants has or have a claim over an "anchor defendant", in other words a defendant domiciled in the member state where the action is brought. Article 6(1) deals with the situation where the claimant(s) who have a claim against the anchor defendant wish to bring a claim against another defendant not domiciled in the same jurisdiction as the anchor defendant. What the Article does not extend to is the "piggy-backing" onto that claimant's claim against the anchor defendant of a claim by another claimant who does not in fact have a claim against the anchor defendant.
30. Mr Mowschenson points out correctly that, because Articles 5 and 6 involve derogation from the basic principle in Article 2 of the Regulation (that defendants should be sued in the courts of their domicile), they are to be construed restrictively: see per Lawrence Collins LJ in Gomez v Encarnacion Gomez-Monche [2008] EWCA Civ 1065 at [72].
31. In that context, Mr Mowschenson relied particularly on the decision of the European Court of Justice in Kalfelis v Bankhaus Schroeder Munchmeyer Hengst & Co [1988] ECR 5565, decided at a time when Article 6(1) did not contain the proviso: "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". However, in interpreting the provision restrictively so as to ensure that the exception in Article 6 did not call into question the principle in Article 2, the Court was prepared to impose such a condition, stating at paragraph 12 of the judgment:

"actions brought against the various defendants are related when the proceedings are instituted, that is to say where it is expedient to hear and determine them together in order to avoid the risk of irreconcilable judgments resulting from separate proceedings. It is for the national court to verify in each individual case whether that condition is satisfied."

32. The first question for the Court in that case was: "Must Article 6(1) of the EEC convention be interpreted as meaning that there must be a connection between the actions against the various defendants?" The Court answered that first question as follows:

"It must therefore be stated in reply to the first question that for Article 6(1) of the same Convention to apply there must exist between various actions brought by the same plaintiff against different defendants a connection of such a kind that it is expedient to determine those actions together in order to avoid the risk of irreconcilable judgments resulting from separate proceedings" (underlining added).

33. Mr Mowschenson thus contends that the decision in Kalfelis is concerned with the possibility of irreconcilable judgments involving claims against different defendants in different jurisdictions by the same claimant. The fact that, in a claim brought by a different claimant on a distinct cause of action (as would be the case of the claim by BLMIS here), another result might prevail from that in the claim by MSIL is not something which leads to the risk of irreconcilable judgments.
34. Mr Mowschenson points out that later cases have at least assumed, even if they have not decided, that Article 6(1) is concerned with claims by the same claimant or claimants against both the anchor defendant and the defendant against whom Article 6(1) is sought to be invoked. Thus in Barclays Bank Plc v Glasgow City Council [1993] QB 429 at 445, Hirst J said:

"I very much doubt, though it is unnecessary for me to decide the point, that the use of the plural in paragraph 12 [of Kalfelis] was intended to connote different defendants in several different unconsolidated actions, since there was only one single action in being in the Kalfelis case, and paragraph 13 (not quoted above) would seem to envisage a claim by the same plaintiff, unlike the present litigation where there are a very large number of different plaintiff banks in different actions."

That analysis was approved by Lloyd LJ in the Court of Appeal in that case: [1994] QB 404 at 414E.

35. The principle that Article 6(1) applies where the action is brought by the same claimant was reiterated by the ECJ in Reunion Europeenne SA v Spiethoff's Bevrachtingskantoor BV [2000] QB 690 at page 717 [48] and Freeport plc v Arnoldsson [2008] QB 634 at 652 ([19]) and 656 ([39]).
36. Mr Mowschenson submits that a further reason why Article 6(1) is limited to actions brought by the same claimant or claimants is the existence of the proviso to the Article, that it only applies where it is expedient to determine those actions together in order to avoid the risk of irreconcilable judgments resulting from separate proceedings. He submits that, where the claims are brought by different claimants, as here, a fortiori if brought under different systems of law (the BLMIS claim being governed by New York law), that requirement that there be a risk of irreconcilable judgments simply cannot be satisfied.
37. The European Court of Justice considered whether claims brought by one claimant against two defendants pursuant to different causes of action fell within Article 6(1) in Freeport v Arnoldsson [2008] QB 634, where the Court said:

"38 It is not apparent from the wording of article 6(1) that the conditions laid down for application of that provision include a requirement that the actions brought against different defendants should have identical legal bases.

39 As the court has already held, for article 6(1) of the Brussels Convention to apply, it must be ascertained whether, between various claims brought by the same plaintiff against different defendants, there is a connection of such a kind that it is expedient to determine those actions together in order to avoid the risk of irreconcilable judgments resulting from separate proceedings: Kalfelis v Bankhaus Schröder Münchmeyer Hengst & Co (Case 189/87) [1988] ECR 5565 , para 13.

40 The court has had occasion to point out that, in order that decisions may be regarded as contradictory, it is not sufficient that there be a divergence in the outcome of the dispute, but that divergence must also arise in the context of the same law and fact: Roche Nederland BV v Primus (Case C-539/03) [2006] ECR I-6535 , para 26.

41 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 the necessary factors in the case file, which may, if appropriate yet without its being necessary for the assessment, lead it to take into consideration the legal bases of the actions brought before that court."

38. In Roche, Advocate General Leger expressed the opinion that the word "irreconcilable" in Article 6(1) should be given a narrower, more restrictive meaning than merely "conflicting" as in decisions on what is now Article 28(3) of the Judgments Regulation (previously Article 22 of the Brussels Convention) dealing with lis pendens, because that Article does not affect the primacy of the principle that a defendant should be sued in his own Member State in the same way as Article 6(1) does. Specifically, he appears to have considered that decisions would only be irreconcilable, in the narrow sense, if one decision against a claimant impacted on the enforceability of another judgment in his favour: see for example [109] of his Opinion. In any event, he seems to have been of the opinion that, whether a narrower or wider meaning were adopted, irreconcilability would only arise where different courts were considering a matter falling within the "same situation of law and fact", see [113] of his Opinion.
39. That case concerned claims by the claimant pharmaceutical companies against companies in the same group, but domiciled in different member states, which had allegedly carried out a concerted course of patent infringement. The Advocate General proposed that the Court should rule that Article 6(1) did not apply to such a case: "it does not apply in European patent infringement proceedings involving a number of companies established in various Contracting States in respect of acts committed on the territory of each of those States even where those companies, belonging to the same group, may have acted in an identical or similar manner, in accordance with a common policy elaborated by only one of them" ([145] of his Opinion).
40. The Court in that case essentially declined to answer the wider questions raised by the Opinion of the Advocate General, concluding that, as the patent law of each member state was different, any divergence in the results of judgments in different member states could not arise in the context of "the same fact and law", so Article 6(1) did not apply. The Court held at [31]-[35]:

"31 It follows that, where infringement proceedings are brought before a number of courts in different Contracting States in respect of a European patent granted in each of those States, against defendants domiciled in those States in respect of acts allegedly committed in their territory, any divergences between the decisions given by the courts concerned would not arise in the context of the same legal situation.

32 Any diverging decisions could not, therefore, be treated as contradictory.

33 In those circumstances, even if the broadest interpretation of "irreconcilable" judgments, in the sense of contradictory, were accepted as the criterion for the existence of the connection required for the application of Art.6(1) of the Brussels Convention , it is clear that such a connection could not be established between actions for infringement of the same European patent where each action was brought against a company established in a different Contracting State in respect of acts which it had committed in that State.

34 That finding is not called into question even in the situation referred to by the national court in its second question, that is where defendant companies, which belong to the same group, have acted in an identical or similar manner in accordance with a common policy elaborated by one of them, so that the factual situation would be the same.

35 The fact remains that the legal situation would not be the same (see paras [29] and [30] of this judgment) and therefore there would be no risk, even in such a situation, of contradictory decisions."

41. Mr Mowschenson relies upon that reasoning in support of his submission that there is no risk of irreconcilable judgments here, because whilst he accepts that there is an obvious factual overlap between the MSIL and the BLMIS claims, in the sense that they both concern the alleged unlawfulness of the payments to the Kohn defendants of monies derived from BLMIS (and thus he accepts, there is a risk of conflicting findings of fact if they are decided by different courts), not only are they claims by different claimants, but the BLMIS claim is governed by New York law, whereas the MSIL claim is governed by English law. Given that different systems of law are involved, he submits Article 6(1) cannot apply, because as the European Court of Justice decided in Roche, in such circumstances there is not a risk of irreconcilable judgments, because the two claims do not involve the same system of law and fact.
42. In support of that submission, he also relies upon the decision of the Court of Appeal in Gard Marine & Energy Ltd v Glacier Reinsurance AG [2010] 2 CLC 430; [2010] EWCA Civ 1052. In that case, the reinsured, Gard, had brought proceedings in London under a reinsurance contract against one of the participants, a Lloyd's syndicate, thus domiciled in the United Kingdom for the purposes of Article 6(1). Gard had joined Glacier, a Swiss domiciled reinsurer, which was also a participant in the same reinsurance. Glacier challenged jurisdiction under the Article, contending that there was no risk of irreconcilable judgments, as its participation was governed by Swiss law and that "irreconcilable" should be given a narrow meaning, a proposition for which Glacier relied upon the decision in Roche.
43. Having considered the various decisions of the European Court of Justice and noted in passing at [31]-[32] that the Court in Roche had in fact declined to resolve what was meant by "irreconcilable", Thomas LJ, giving the leading judgment in the Court of Appeal, reached this conclusion on the correct approach to Article 6(1) at [35] of the judgment:

"In the light of the judgments of the ECJ and in particular Freeport, I consider that the court should approach the matter in the light of the policy of the Convention to produce predictable results and on the principle of the Convention that jurisdiction is generally based on the defendant's domicile. In seeing whether an exception to this general rule exists in a given case, the court must assess the connection between the claims to see whether there is a risk of irreconcilable judgments arising out separate proceedings such that there may be a divergence in the outcome where there is "the same situation in law and fact." In so doing, it is necessary for a national court to look at all the factors. Beyond this, I do not think it is desirable to go in the light of the established case law. It is not necessary to discuss or decide the precise meaning of "irreconcilable judgments" to decide this case: cf. Briggs and Rees: Civil Jurisdiction and Judgments (2009) para. 2.203) or enter into a wider debate on possible problematic results that might arise in practice (cf. Fentiman: International Commercial Litigation at para. 9.78)."

44. Thomas LJ went on to consider whether the subscription of Glacier to the slip was governed by English or Swiss law, concluding it was governed by English law. Although Gard conceded that if it had been governed by Swiss law, there would have been no risk of divergence, Mr Mowschenson submits that Thomas LJ clearly agreed with that proposition, as he stated at [36]:

"If the proper law is Swiss law, as Glacier contended, then, as Gard accept, there is no risk of divergence, as the divergence would not arise from the application of the same law. Construction of the slip under English law would not necessarily be contradictory to or irreconcilable with a different construction under Swiss law."

In those circumstances, the Court of Appeal held that the court had jurisdiction over Glacier by virtue of Article 6(1).

Second claimant's submissions on scope of Article 6(1)

45. On behalf of the claimants, Mr Pushpinder Saini QC contends that the present case falls within Article 6(1), even though it involves claims by two different claimants. First he submits that, as a matter of language, there is nothing in the wording of Article 6(1) to suggest that it is limited to the situation where the claimant or claimants are all bringing claims against the anchor defendant or defendants and no authority which directly decides the point. In so far as Kalfelis and other cases refer to the same claimant, that is only because on their facts, the same claimant was also bringing the claim against the anchor defendant.
46. Having demonstrated that, as a matter of semantics or language, there was nothing in the wording of Article 6(1) to preclude its application in the present case, Mr Saini urged on the court what he described as an assessment based approach in favour of the application of Article 6(1) in the present case. The thrust of his point here was that, when one examined the claims of BLMIS and MSIL, whether based on English law or New York law, they involved essentially the same allegations of breach of fiduciary duty by directors of the two companies and sufficient knowledge on the part of the Kohn defendants of that breach of fiduciary duty to justify clawing the money back. Equally, he pointed out that Mrs Kohn's defence to the two claims would be the same, namely that all payments were by way of commission and above board.
47. In adopting this assessment based approach, Mr Saini submits that the court should have regard to the underlying purpose of Article 6(1) which is to prevent irreconcilable judgments. In relation to that underlying purpose, he relies upon the decision of the Court of Appeal in Masri v Consolidated Contractors International (UK) Ltd [2006] 1 WLR 830; [2005] EWCA Civ 1436. In that case, the claimant brought an action in England against an English domiciled company for breach of an oil concession agreement and subsequently commenced a second action against Greek domiciled defendants for breach of the same agreement. The Greek domiciled defendants applied to set aside the claim against them, contending that Article 2 should apply. The judge dismissed that application, holding that Article 6(1) applied. The defendants appealed on the ground that Article 6(1) did not apply where the claim against the anchor defendant was made in separate proceedings to the claim against the non-domiciled defendants. The Court of Appeal dismissed the appeal, holding that Article 6(1) applied both as a matter of language and having regard to the underlying purpose of the Article.
48. In relation to that underlying purpose, Sir Anthony Clarke MR (as he then was) at [28] referred to the decision of the European Court of Justice in Kalfelis and the Opinion of Advocate General Darmon in that case:

"In considering Kalfelis v Schröder it is right to have regard to the fact that the question for decision arose in a case where there was only one action and not, as here, two actions. The European Court was not therefore specifically considering the question for decision here. It was, however, considering the policy underlying Article 6.1. As Advocate General Darmon observed at page 5573 of the report of Kalfelis v Schröder, the court was asked whether Article 6.1 applies whenever the claims are similar in fact and in law or only where that course is necessary to avoid irreconcilable judgments in separate proceedings. The Advocate General said this, in paragraph 12 of his opinion at page 5575:

"The prevention of the irreconcilability of decisions is the ratio legis both of Article 6(1) and of the third paragraph of Article 22. In those circumstances I cannot see any good reason for not transposing the 'purpose-related' criterion of the latter provision to cases where there are several claims.""

49. The Master of the Rolls continued at [30]-[31]:

"30 It is true that the point now taken did not arise in that case. But it seems to me that if, as the Advocate General said, in my opinion correctly, the ratio legis is the prevention of irreconcilable judgments, the appellants' submissions, if correct, would be contrary to that ratio legis and should therefore be rejected. That is so, to my mind, however narrowly Article 6.1 is construed.

31 Thus, if the construction preferred by the judge is adopted there is, in the words of paragraph 8 of the European Court's judgment, no possibility of the very existence of the principles enshrined in Article 2 being called into question. As to paragraph 9, there is no suggestion here that the action against CCUK was brought with the sole object of ousting the jurisdiction of the courts in Greece. The judge's construction is consistent with the positive principles stated in paragraphs 9 and 11-13 of the judgment. This conclusion seems to me to be consistent with that of this court in Gascoine v Pyrah [1994] 1 L Pr 82, which was also a decision under Article 6.1 of the Brussels Convention and which expressly followed Kalfelis v Schröder."

50. He then concluded at [33] that, as a matter of language the words "defendants" and "claims" in Article 6(1) are wide enough to encompass defendants and claims in more than one action. Mr Saini also relies upon the later decision of the Court of Appeal in FKI Engineering v De Wind [2008] I.L. Pr 33; [2008] EWCA Civ 316 as another example of a case where in the absence of any assistance from the text of Article 6(1) itself or the European Court of Justice, the English court has gone back to look at the underlying purpose of Article 6(1).
51. As to the approach to be adopted in considering whether there is such a connection between the claims at the time when they are instituted that it is expedient to hear and determine them together to avoid the risk of irreconcilable judgments, Mr Saini relied in particular upon the judgment of Gross J (as he then was) in ET Plus SA v Welter [2006] IL Pr 18; [2005] EWHC 2115 (Comm) at [59]:

"i) The test now contained in Art. 6(1) of the Regulation, codifies the effect of the earlier decision of the Court of Justice of the European Communities ("the European Court") on the Brussels Convention in Kalfelis v Schroeder, Muenchmeyer, Hengst & Co. [1988] ECR 5565, at p.5584 (para. 12), namely: whether there is such a connection between the claims at the time when they are instituted that it is expedient to hear and determine them together to avoid the risk of irreconcilable judgments resulting from separate proceedings ("the Kalfelis test"). The risk of irreconcilability may arise from potential conflicting findings of fact or from potential conflicting decisions on questions of law: Gascoine v Pyrah [1994] I.L. Pr. 82, at 93. While Art. 6(1) constitutes an exception to the general rule contained in Art. 2 (that the defendant's domicile governs jurisdiction) and must not be abused, it does not follow that Art. 6(1) is so subservient to Art. 2 that it could only be invoked in special circumstances: Gascoine v Pyrah, at 94.

ii) In applying the Kalfelis test, a "broad commonsense approach" is to be adopted and an "over sophisticated analysis" is to be avoided: Casio v Sayo [2001] ILPr 43 , at paras. [32] – [37], together with the authorities there cited. In my judgment, this decision of the Court of Appeal furnishes the approach to Art. 6(1) to be followed, certainly in this country and it would not be right to be deterred from it by observations of the European Court, in Reunion Europeenne SA v Spliethoff's Bevrachtingskantoor BV [1998] ECR I-6511, esp. at I-6549, para. 50. In Reunion, the European Court appeared to favour a rigid test – so much so, that the mere fact that one claim was in contract whereas the other was in tort meant that the two could not be sufficiently connected for the purposes of Art. 6(1). It is, however, at once to be noted that on the facts of the case such observations were obiter, not least because (it would appear) no defendant was being sued in the courts of his domicile. Further, the Court of Appeal in Casio (at para. 33) treated the observations in Reunion as doing no more than applying the principles of Kalfelis to the facts before it; nothing in the judgment in Reunion "cuts down, qualifies or explains" what was said in Kalfelis. Still further, in Watson v First Choice Holidays [2001] 2 Lloyd's Rep 339 , the Court of Appeal plainly doubted the reasoning in Reunion, remarking (with respect, persuasively) that, but for the observations in Reunion, it would have held that the fact that one claim was based in contract and the other in tort was, at most, only one factor to be considered in deciding whether the connection between the claims was sufficient for the purposes of Art. 6(1); in the event, the Court of Appeal in Watson, to which unfortunately Casio was not cited, went on to order a reference to the European Court, on the basis that Reunion could not be ignored – but the reference was withdrawn when the case settled. Nor do any textbook commentaries shown to me lend any support to Reunion. In Layton & Mercer, European Civil Practice (2^nd ed.), there is a reference to the suggestion that the full implications of Reunion may not have been considered by the European Court. Robustly, Briggs & Rees, Civil Jurisdiction and Judgments (3^rd ed.) (hereafter, "Briggs") describes the observations in Reunion as "extraordinary and…simply wrong". In the circumstances, it is unnecessary and would be inappropriate for me to say more; it suffices, as already indicated, that I simply follow the approach laid down in Casio."

52. In support of what Gross J described as "the broad common sense approach" to the Kalfelis test, Mr Saini relies upon the decision of the Court of Appeal in Gascoine v Pyrah [1994] I.L. Pr 82. In that case, the claimants had purchased a horse to use as a show jumper, but it became lame within two months of purchase. They sued their bloodstock agent, who was domiciled in England, for breach of contract, but when, in his defence, he implicated the vet domiciled in Germany whom he had instructed to examine the horse and report on its condition, the claimants applied to join the vet as a defendant. In fact, by the stage of the Court of Appeal he did not resist joinder, but the Court decided it would be inappropriate to allow the appeal by default since it involved a question of jurisdiction under what is now the Judgments Regulation.
53. The Court of Appeal concluded that Article 6(1) was just as applicable where there was a risk of inconsistent findings of fact as where there was a risk of inconsistent findings of law. Mr Saini relied in particular upon [43] to [47] in the judgment of Hirst LJ:

"[43] In a judgment which I gave in the case of Barclays Bank v. the Glasgow City Council, I concluded that this was the correct construction of the Article, though nothing turned on that in the eventual outcome of the case on Article 6(1) because I also concluded there was no risk in the interest rate swaps case of such inconsistent findings of fact. That part of my judgment has been upheld by the Court of Appeal in a judgment which is yet an unreported but delivered on 19 May, 1993.

[44] There is, therefore, in my judgment clear authority in the Court of Appeal that potential conflicting findings of fact are just as relevant for Article 6(1) purposes as potential conflicting findings of law.

[45] Indeed, I would add two comments on that which seem to me apposite. First, the risk of conflict in conclusions of law may be a serious matter; if they involve a point of European law they may eventually be reconciled on appeal to the European Court of Justice. Conflicting findings of fact, on the other hand, are virtually impossible to reconcile if different judges in different jurisdictions within the EEC, hearing and seeing different witnesses, reach different conclusions which have hinged on an assessment of the reliability of individual witnesses; and of course the problem may be compounded in cases where there are different procedures in the different national courts in the way in which they hear the evidence and assess it. Moreover, different findings of fact also frequently lead to different conclusions of law.

[46] For all these reasons it seems to me that the cases against the two defendants here are so closely interwoven, and the telephone conversation in question is so central to the determination, not only of the second defendant's liability but also of the first defendant's liability, that the risk of inconsistent findings is to be taken particularly seriously.

[47] In my judgment, therefore, this is a case where Article 6(1) applies and to use the words of the European Court of Justice in the Kalfelis case: The Plaintiff has in my judgment succeeded in verifying the conditions laid down in Article 6."

54. Mr Saini points out that the risk of conflicting findings of fact which Hirst LJ identified in [45] would be very similar here. If BLMIS had to sue the Kohn defendants in Austria, which has a civil law system where different procedures for determining disputes apply, for example as regards disclosure or the scope of oral evidence, there would be a serious risk that an Austrian court might reach a different conclusion on the facts from the one that would be reached by this court in relation to the MSIL claim, on what are effectively the same facts.
55. As for Mr Mowschenson's submission that there is no risk of irreconcilable judgments, because the two claims would be governed by different systems of law, Mr Saini submits that that is too extreme an approach and not borne out by the decision of the European Court of Justice in Freeport v Arnoldsson [2008] QB 634, which came after Reunion and Roche. Whilst, in accordance with what appears to be its practice, the European Court of Justice in Freeport does not say in terms that those earlier cases are wrongly decided, it effectively distinguishes them, saying that the fact that claims brought against different defendants had different legal bases (and by implication at least were subject to different systems of law, since one claim was in contract against an English company and the other was in tort or delict against a Swedish company) does not preclude the application of Article 6(1).
56. Furthermore, Mr Saini relies upon the decision of the Court of Appeal in Casio Computer v Sayo [2001] EWCA Civ 661, where the question at issue was whether the cases on Article 22 of the Brussels Convention (now Article 28 of the Regulation) shed any light on the correct approach to Article 6(1). Tuckey LJ (with whom the other members of the Court of Appeal agreed) held emphatically that they did in these terms at [34]-[36]:

"34. So the language of Article 22 is almost identical to the language used by the ECJ in Kalfelis to which I have referred. Such an approach had been described as "the most logical" by the Advocate General in that case who "did not see any good reason for not transporting the purpose related criterion of Article 22 to cases where there are several claims" (paragraphs 11 and 12). I think it is an inescapable conclusion that this is what the ECJ intended. Mr Doctor's detailed analysis of the facts in Kalfelis did not I think in any way undermine this conclusion. One has of course to bear in mind that Article 22 does not itself confer jurisdiction, whereas Article 6 (which does) has to be interpreted restrictively. Nevertheless, I see no reason why the test of irreconcilability should not be broadly the same under each Article. If the ECJ had not intended this to be so, I think they would have made this clear in Kalfelis itself or in the more recent cases in which they have had to consider Article 6(1). They have not done so.

35. Sarrio, relied on by the judge, was an Article 22 case. The facts do not matter. In rejecting the view that Article 22 was only concerned with conflicting judgments about the primary facts necessary to establish the cause of action, Lord Saville, with whom all other members of the House agreed, said (at page 41):

"For these reasons I am of the view that there should be a broad common sense approach to the question whether the actions in question are related, bearing in mind the objective of the Article, applying the simple wide test set out in Article 22 and refraining from an over-sophisticated analysis of the matter."

This judgment makes it clear that the court is not merely concerned with the risks of conflicting decisions giving rise to mutually exclusive legal consequences. It also makes it clear that the court will be concerned with the risks of conflicting decisions on questions of fact as well as law. This Court so held in Gascoigne where Hirst LJ at paragraph 45 said:

"Conflicting findings of fact, on the other hand, are virtually impossible to reconcile if different judges in different jurisdictions within the EEC, hearing and seeing different witnesses, reach different conclusions which have hinged on an assessment of the reliability of individual witnesses; and of course the problem may be compounded in cases where there are different procedures in the different national courts in the way in which they hear the evidence and assess it. Moreover, different findings of fact also frequently lead to different conclusions of law."

36. It seems to me that the judge's approach in this case was entirely consistent with the approach which I have considered above. He did not, as Mr Doctor suggests, simply identify a common question of fact or law and say that Article 6(1) applied. He considered the importance of what he described as the "upstream facts or legal issues" in terms of the end result and decided that if different courts reached different conclusions as to the propriety of Tsuru's conduct in particular, there was a real risk that for this reason different courts could reach different conclusions as to the liability of Kaiser and Patel. I think the judge's reasoning about this cannot be faulted. If so, applying the broad common sense approach advocated by Lord Saville, his decision that Article 6(1) applied to the claim against Kaiser was entirely justified. I should add that the judge could also have considered the downstream events to which I have briefly referred, where it is alleged that Kaiser and Patel (through Crane) were directly involved with one another in the movement and dissipation of the money."

57. Mr Saini also relies upon the Opinion of Advocate General Trstenjak in Painer v Standard Verlags GmbH [2011] ECDR 13. The Advocate General clearly disagrees with the approach to Article 6(1) of her colleague in Roche as to what is meant by "irreconcilable judgments" in that Article. In particular, she expresses the opinion that the issue of connection for the purposes of Article 6(1) is to be determined in the same way as under Article 28 (what used to be Article 22 of the Brussels Convention), in other words that it is sufficient that there is a risk of conflicting decisions and that that risk may still exist even if different claims are subject to different systems of law. There may still be a sufficient legal connection between the anchor claim and the other claim.
58. Of course, too much cannot be read into this, because it is only an Opinion and the decision of the Court itself is still awaited. However, notwithstanding an evident difference of approach at least between Advocates General, if not different constitutions of the Court itself, Mr Saini submits that I am bound by the decision of the Court of Appeal in Casio and should follow it.

Analysis and conclusions

59. Attractively though Mr Saini's submission (that Article 6(1) applies even where it is another claimant and not the claimant seeking to invoke the Article who has made a claim against the anchor defendant(s)) was put, I cannot accept that submission. In my judgment, the assessment based approach to Article 6(1) which he advocates would effectively drive a coach and horses through the clear principle that, because Article 6(1) is a derogation from the normal jurisdiction under Article 2, it is to be interpreted restrictively.
60. Whilst Mr Saini's approach makes sound sense as a matter of case management in the English Commercial Court, that case management approach is not one which accords with what Thomas LJ stated in the Gard case was the correct approach for the English court: "the court should approach the matter in the light of the policy of the Convention to produce predictable results and on the principle of the Convention that jurisdiction is generally based on the defendant's domicile". Adopting the approach which Thomas LJ enjoins, it seems to me that, even though Article 6(1) does not in express terms limit its application to cases where the same claimant(s) are bringing the claims against both the anchor defendant(s) and the non-domiciled defendant, it is appropriate that Article 6(1) should be so limited.
61. Furthermore, whilst it would be dangerous to make too much of any analogy between the European rules on jurisdiction contained in the Judgments Regulation and the domestic rules on service out of the jurisdiction contained in what is now Practice Direction 6B of the CPR, it is striking that BLMIS would not be able to found jurisdiction under any of the grounds in para. 3.1. In particular, BLMIS could not seek to join the Kohn defendants as necessary or proper parties under 3.1(3) for the simple reason that BLMIS could not satisfy 3.1.(3)(a): "there is between the claimant and the defendant a real issue which it is reasonable for the court to try". BLMIS has no claim against the other defendants, specifically the directors of MSIL. It follows that, were the matter simply being looked at from a domestic perspective, whilst it might be sensible case management for the MSIL and BLMIS claims to be tried together, the court would in fact have no jurisdiction over the BLMIS claims. Whilst that is in no sense conclusive as to the scope of Article 6(1), it seems to me that it would be odd if Article 6(1), which as a derogation from the principle of domicile in Article 2 is to be construed narrowly, ended up having a wider scope than the domestic rules on service out. However, that would be the effect of Mr Saini's construction.
62. I do not consider that there is anything in the decision of the Court of Appeal in Masri which supports Mr Saini's submission that Article 6(1) should enable a claimant who has no claim against the anchor defendant(s) to "piggy-back" onto a claim by another claimant (a separate, albeit related, entity) who does have a claim against the anchor defendant and, by that means, to found jurisdiction against a non-domiciled defendant. It seems to me that that is a conclusion which would effectively elevate the risk of irreconcilable judgments (assuming that there is such a risk where the claimants are different, a matter to which I return below) to being the sole determining factor for establishing jurisdiction.
63. In my judgment, that was not the intention of the Court of Appeal in that case. Whilst it is true that the Master of the Rolls gave a purposive rather than a literal construction to the Article, having regard to the underlying purpose of avoiding irreconcilable judgments [see 35], that was in the context of a claimant who clearly had claims against both the anchor claimant and the non-domiciled defendants, albeit that he happened to have brought them in separate proceedings.
64. If, instead of suing the defendants in separate proceedings and then applying for consolidation of the two sets of proceedings (which Cresswell J had ordered at first instance: see [11] of Sir Anthony Clarke MR's judgment), the claimant had applied to join the non-domiciled defendants to the first set of proceedings brought against the anchor defendant, it seems to me that it would have been unanswerable that the Court had jurisdiction under Article 6(1), a point essentially made by Briggs and Rees in Civil Jurisdiction and Judgments 5^th edition at [2.203] on page 292. That is not a point made in the judgment of the Master of the Rolls, but I would be surprised if he did not have it mind, which of course would only serve to emphasise the technical nature of the objection raised by the non-domiciled defendants in that case. I consider there is nothing in the judgment which supports the suggestion that the Master of the Rolls would have been prepared to countenance a yet wider construction, which extended the Article to cover a claimant who had no claim against the anchor defendant at all, merely because another claimant did.
65. Furthermore, whilst as I said at the outset of this part of the judgment, no Court has decided the present point directly, all the authorities which refer to it do so on the assumption that the Article only applies where the claimant or claimants who seek to invoke jurisdiction are claiming against both the anchor defendant(s) and the non-domiciled defendant(s). Apart from the judgment of the European Court of Justice in Kalfelis itself, there is the statement in the judgment of Hirst J in the swaps case (Barclays Bank v Glasgow City Council). Accepting that, as Mr Saini submitted, the statement is obiter, it is still a pretty clear steer as to that judge's thinking and was approved by Lloyd LJ in the Court of Appeal.
66. Further to those references, Mr Mowschenson drew my attention to [63] of the Opinion of the Advocate General in Painer where she states:

"On the other hand, Article 6(1) of the regulation concerns a different case. First of all, it seeks to avoid the risk of irreconcilable judgments by courts or tribunals before they can actually occur. Secondly, it is not a matter only of inconsistencies between two judgments between the same parties, but of potential inconsistencies between two judgments, one of which is given between the applicant and the defendant in the anchor claim and another is given between the applicant and another defendant. Article 6(1) of the regulation gives the applicant the opportunity, in cases where the claims are closely connected, to have both claims decided by the same court in order to avoid the risk of such inconsistencies between the judgments, which may result from the fact that two different courts rule on the claims."

67. There is nothing in that passage to suggest that she thought the same reasoning could or would apply to an applicant who did not have a claim against the anchor defendant at all. Indeed Mr Saini can point to nothing in any of the cases or textbooks which supports this construction. In my judgment that is because it is fallacious. Article 6(1) simply does not extend to such a case and the Court has no jurisdiction over the BLMIS claim against the Kohn defendants.
68. In those circumstances, it is strictly nothing to the point that there might be a risk of a judgment in MSIL's proceedings being "irreconcilable" with a judgment in another jurisdiction (whether Austria or New York) in proceedings by the trustee in liquidation of BLMIS. However, since the point was fully argued, I will consider it.
69. The starting point is to consider whether the Court should adopt a narrower or broader approach to the meaning of the phrase "irreconcilable judgments". On reflection it seems to me the answer, so far as this court is concerned, is a straightforward one, whatever my personal preference might be. Whilst the debate which seems to be raging in the European Court of Justice (or at least between Advocates General) as to whether the phrase should be given a broad construction, as in the cases concerned with Article 28, or a narrower construction, more in line with the cases on Article 34, is an interesting one, I am clearly bound by the decision of the Court of Appeal in the Casio Computer case. That adopts the broader approach that "irreconcilable judgments" is to be given the same meaning as that phrase in what is now Article 28. The Court refers in terms to adopting a broad common sense approach to Article 6(1), a point picked up by Gross J in the Et Plus case, with whose analysis and approach (as I have said) I agree.
70. Adopting that broad common sense approach, I would agree with Mr Saini that the fact that one claim is governed by one system of law and another claim is governed by a different system of law does not, without more, mean that the judgments on each claim in different jurisdictions would be irreconcilable. Not only does the court have to look more closely to see to what extent the two systems of law are seeking to achieve the same result on a given set of facts (in which case different conclusions on the applicable system of law in different jurisdictions might well mean the judgments were irreconcilable) but, even if they do diverge in their purpose or intent, that is not necessarily determinative against irreconcilability. Whilst it is a factor pointing away from irreconcilability, it is only one factor to be considered.
71. I also agree with Mr Saini that on a proper analysis of the Gard Marine case, Thomas LJ is not saying that, if the claims were governed by different systems of law, that would be conclusive against judgments being irreconcilable in every case. Quite apart from the fact that it was accepted by Gard that, if the Glacier participation in the slip were governed by Swiss law, there would be no risk of divergence so that the point was not one the Court of Appeal actually had to decide, it does not seem to me that Thomas LJ was saying that if different systems of law had applied, that would be conclusive against divergence or irreconcilability. He was only saying that the fact that different systems of law led to a different result would not of itself lead to irreconcilability.
72. From a later passage in his judgment at [54], it is clear that Thomas LJ considered that the determination of the issues against the two defendants arose out of the same factual situation:

"Although there are the differences to which I have referred in the legal bases of the defences raised by Advent Syndicate 780 and Gard arising out of what happened during the placement, the legal basis is in other respects the same and governed by English law. What is more important is that the determination of these issues arises out of the same factual situation. In placements of insurances and reinsurances with different underwriters, an assessment of what actually happened is part of a continuum, as the brokers use the same file and the same basic materials in each placement (as appears to be the case in the placement under consideration). Although what was said or written to each participant may of course differ (as it may well do in this case), it would be wrong to categorise those differences as giving rise to a different factual situation, given the way such placements are made. It is invariably the case that a court hears disputes as to what happened on placements with different underwriters in the same trial, as the court reaches its conclusion as to what happened by its assessment of all the evidence in relation to the placements."

73. Thomas LJ then went on to make an assessment as to the connection between the claims and to determine the risk of irreconcilable judgments if the claims had to be determined separately, the task which the European Court has said is for the national courts. He then concluded at [60]:

"Taking into account the factors that I have set out, it is my view that, as the participation of Advent Syndicate 780 and Glacier in the excess of loss reinsurance are governed by English law and are on the same terms and part of the same placement, there would be a risk of irreconcilable judgments if the primary issue, namely the construction of the excess of loss reinsurance, was decided by different courts. The same is also true of the secondary issue, the defences raised by Advent Syndicate 780 and Glacier arising out of what happened during the placement, as the basis of these defences is governed by the same law and arises out of what is a continuum of factual events."

74. From that passage, it is clear that, whilst the fact that the participations were both governed by English law was one of the factors which led Thomas LJ to conclude that there was a risk of irreconcilable judgments, it was by no means the only factor and the factual overlap clearly had a considerable influence. In my judgment, this demonstrates that the fact that the two claims are governed by different systems of law is not determinative against the risk of irreconcilable judgments within the meaning of Article 6(1). It depends upon all the circumstances.
75. Obviously, in a case where the claims against the anchor defendant and the non-domiciled defendant are being made by the same claimant, if the evidence on the jurisdiction application were that whatever factual conclusions are reached by each court, the different systems of law will lead to a different result, that would militate strongly against any conclusion that there is a risk of irreconcilable judgments. Equally, if the evidence were that, on any given set of factual conclusions, the two systems of law, despite their differences, would arrive at the same result, that would suggest that despite the different systems of law applied to the claims being made by the claimant, there is a risk of irreconcilable judgments.
76. That brings me back to the critical question for present purposes, whether in circumstances where there are claims against the non-domiciled defendant by two claimants, only one of whom is bringing a claim against the anchor defendant(s), there is a risk of irreconcilable judgments within the meaning of Article 6(1) at all. The question is whether, adopting the broad, common sense approach enjoined by Casio Computer and ET Plus, there is such a risk.
77. I asked Mr Mowschenson whether there was any authority on what is now Article 28 (3) of the Judgments Regulation where the courts had decided that actions were deemed to be related, even where different claimants were bringing the claims in each jurisdiction, and he said he was unaware of any such authority.
78. However, it seems to me that the judgment of the European Court of Justice in The Tatry [1995] IL Pr 81 may be an example of such a case. There, Question 4 (c) for the Court was:

"For the purposes of Article 22 of the Brussels Convention as amended:

(c) If proceedings are brought in one Contracting State in respect of a claim by one group of cargo owners against a shipowner for damage to their portion of a bulk cargo carried under specified contracts of carriage and if separate proceedings are brought in another Contracting State against the same shipowner based on essentially similar issues of fact and law but by a different cargo owner for damage to its portion of the same bulk cargo carried under separate contracts of carriage on the same terms, do these proceedings, if heard and determined separately, involve the risk of giving rise to legal consequences which are mutually exclusive or are they otherwise related actions for the purposes of Article 22?"

79. The Court answered that question in the affirmative at [49]-[58], concluding at [58]:

"Consequently the answer to the fourth question is that, on a proper construction of Article 22 of the Convention, it is sufficient, in order to establish the necessary relationship between, on the one hand, an action brought in a Contracting State by one group of cargo owners against a shipowner seeking damages for harm caused to part of the cargo carried in bulk under separate but identical contracts, and, on the other, an action in damages brought in another Contracting State against the same shipowner by the owners of another part of the cargo shipped under the same conditions and under contracts which are separate from but identical to those between the first group and the shipowner, that separate trial and judgment would involve the risk of conflicting decisions, without necessarily involving the risk of giving rise to mutually exclusive legal consequences."

80. It seems to me to follow from that judgment that if, as the Court of Appeal in Casio Computer has held, the phrase "irreconcilable judgments" in Article 6(1) is to be given the same meaning as in what is now Article 28 (3), it must follow that if (contrary to my decision that Article 6(1) is only intended to cover the case where the claimant who seeks to invoke jurisdiction under that provision is also pursuing a claim against the anchor defendant) the Article was intended to have the wider purpose for which Mr Saini contends, the fact that claims were being brought by different claimants against the Kohn defendants would not preclude a conclusion that it was expedient to hear them together to avoid the risk of irreconcilable judgments if they were pursued in different jurisdictions.
81. However, because I have concluded that Article 6(1) does not apply where the relevant claimant (here the second claimant as trustee in liquidation of BLMIS and Mr Madoff) is not making any claim against the anchor defendants (here the English directors of MSIL) it necessarily follows that the court has no jurisdiction over the BLMIS claim. In those circumstances, it is not necessary to go further and consider whether there would indeed be a sufficient risk of irreconcilable judgments that it would be expedient to hear the claims together. All I need say for the present is that, whilst Mr Saini focused on potentially irreconcilable judgments of the English court and the Austrian court, I am far from convinced that that is a realistic comparison.
82. In fact BLMIS is also suing Mrs Kohn in the Southern District of New York and, on the assumption that the District Court has jurisdiction, it is overwhelmingly more likely that any claim against her will be pursued there rather than in Austria. In those circumstances, I agree with Mr Mowschenson that, given that her defence is the same in relation to all the payments and given those elements of the New York cause of action which are similar to the elements of the cause of action in knowing receipt under English law, the risk of conflicting decisions being reached is more apparent than real. However, as I say, it is not necessary to decide that point, because, for the reasons I have given, the court has no jurisdiction under Article 6(1).

Requirement to show a serious issue to be tried against anchor defendant

83. In those circumstances, it is not strictly necessary to decide the further point raised by Mr Mowschenson as to why Article 6(1) does not apply, namely that, even if, in principle, Article 6(1) could apply where the claim against the anchor defendant is by another claimant, the Article still does not apply in the present case because the court must be satisfied that there is a good arguable case against the anchor defendants, here the English directors of MSIL. Mr Mowschenson contends that the claimants cannot show that MSIL has such a good arguable case. However, since this point has to be determined anyway in the context of the application for a freezing and/or proprietary injunction, I will need to decide it.
84. The first question which arises is as to the level of arguability of the case against the anchor defendants which the claimants have to demonstrate for the purposes of Article 6(1). Mr Mowschenson contends that, before the Court could assume jurisdiction which derogates from the usual rule in Article 2 that a party should be sued in the jurisdiction where he or she is domiciled, the claimant must demonstrate that he has a good arguable case against the anchor defendant, in the sense in which that phrase has been interpreted in cases dealing with whether a jurisdictional threshold is satisfied for the purposes of the Regulation.
85. Mr Mowschenson relies upon the decision of the Privy Council in Bols Distilleries v Superior Yacht Services Ltd [2007] 1 WLR 12; [2006] UKPC 45, where, at paragraph 28 Lord Rodger of Earlsferry expressed the principle as follows:

"Their Lordships would respectfully join …in endorsing the approach in the judgment of Waller LJ [in Canada Trust v Stoltzenberg [1998] 1 WLR 547 at 555]. Despite the submissions of counsel for the defendants to the contrary, it appears to the Board that, if the standard of "a good arguable case" is properly understood and applied, there is no risk that the effectiveness of the Regulation will be impaired. The rule is that the court must be satisfied, or as satisfied as it can be having regard to the limitations which an interlocutory process imposes, that factors exist which allow the court to take jurisdiction. In practice, what amounts to a "good arguable case" depends on what requires to be shown in any particular situation in order to establish jurisdiction. In the present case, as the law of the Court of Justice emphasises, in order to establish that the usual rule in article 2(1) is ousted by article 23(1), the claimants must demonstrate "clearly and precisely" that the clause conferring jurisdiction on the court was in fact the subject of consensus between the parties. So, applying the "good arguable case" standard, the claimants must show that they have a much better argument than the defendants that, on the material available at present, the requirements of form in article 23(1) are met and that it can be established, clearly and precisely, that the clause conferring jurisdiction on the court was the subject of consensus between the parties." (see also per Longmore LJ in Deutsche Bank AG v Asia Pacific Broadband Wireless Communications [2008] 2 Lloyd's Rep 619; [2008] EWCA Civ 1091 at paragraph 16.

86. Those cases are concerned with the assumption of jurisdiction under Article 23 concerning jurisdiction clauses, but Mr Mowschenson submits that the same principle must apply wherever the claimant seeks to rely upon any of the heads of special jurisdiction in the Regulation to oust the usual rule under Article 2.
87. Mr Saini contends that that submission is fallacious because it confuses the satisfaction of the jurisdictional gateway or threshold, where the test is indeed "the better of the argument", with consideration of the underlying merits of the claim, where the test is the lower one of "a serious issue to be tried". In support of that proposition, he relies upon the third section of the analysis of Gross J in [59] of his judgment in Et Plus SA as to the correct approach to Article 6(1). Dealing with the present question, Gross J says this:

"iii) As to the strength of the case against the "anchor" defendant, there was no dispute of the need for the Claimants to establish a "good arguable case" as to the facts essential for establishing jurisdiction ("jurisdictional facts"). In general, Mr. Smouha accepted that, as to the merits of each claim, it was for the Claimants to establish that there was at least a serious issue to be tried (as in the old RSC O.11, authoritatively established by Seaconsar v Bank Markazi [1994] 1 AC 438 and as in the present CPR 6.20). However, with regard to the merits of the claim against the anchor defendant, Mr. Smouha submitted that this was a matter of jurisdictional fact; accordingly, the Claimants needed to establish a good arguable case on the merits against the anchor defendant. By contrast, Mr. Englehart submitted that all that was necessary for the assertion of jurisdiction against foreign defendants under Art. 6(1) was a real or serious issue to be tried against the anchor defendant. In the view which I take of the matter (see below), it is strictly unnecessary to resolve this difference. But my strong inclination is to prefer Mr. Englehart's submission, for the reasons which follow. First, it is plain that the domicile of the anchor defendant is a matter of jurisdictional fact; so, the Claimants must here establish with regard to the relevant anchor defendant at least a good arguable case that that defendant is domiciled in England: see: Canada Trust v Stolzenberg (No. 2) [2002] 1 AC 1, at p.13. Secondly, I am minded to accept that the existence of at least a serious or real issue to be tried against the anchor defendant constitutes jurisdictional fact in the context of Art. 6(1) – if the claim against the anchor defendant is entirely spurious, the Kalfelis test either does not arise or cannot be satisfied: Briggs, at para. 2.165. But, thirdly, it does not at all follow that the Claimant needs to establish anything more than a serious or real issue to be tried on the merits against the anchor defendant in order to invoke jurisdiction against other defendants under Art. 6(1). The matter may be simply tested; provided there is a real issue to be tried between claimant and anchor defendant, those proceedings (at least ordinarily) cannot be struck out in this country and will continue; if so, then the Kalfelis test is capable of being satisfied; whether, in any given case, it will be satisfied on all the facts is, of course, another matter. Insofar as the contrary was suggested, nothing in Canada Trust v Stolzenberg (No. 2) suggests otherwise. See too, The Rewia [1991] 2 Lloyd's Rep. 325, at 329."

88. In my judgment, that analysis cannot be faulted and I gratefully adopt it. As Gross J says, the fact that the anchor defendant is domiciled in England and that the claim against him at least gives rise to a serious issue to be tried, so that it is not entirely spurious, are jurisdictional facts which require to be established before Article 6(1) can be invoked against the non-domiciled defendant. However, it is not necessary to go beyond showing a serious issue to be tried against the anchor defendant in order to invoke jurisdiction against the non-domiciled defendant. Once there is a serious issue to be tried against the anchor defendant, the claim against that defendant will proceed and, if the other requirements of Article 6(1) are satisfied, such as that a risk of irreconcilable judgments is shown, Article 6(1) can be invoked.
89. I note that Tuckey LJ in FKI Engineering at [18] also states that the standard to be applied in considering the merits of the anchor claim is that of serious issue to be tried or real prospect of success, which he takes to be the same. What this means in practical terms is that, unless the court considers that an application by the anchor defendants to strike out the claim against them in relation to the payments to the Kohn defendants would succeed, the claimants will have shown there is a serious issue to be tried.
90. Mr Mowschenson on behalf of the Kohn defendants contends that there are two reasons why the claims against the anchor defendants in relation to the payments to the Kohn defendants cannot succeed and thus there is not a serious issue to be tried in relation to those claims:

(1) that because the monies paid by MSIL to the Kohn defendants all derived from subventions from BLMIS to make the payments to the Kohn defendants, MSIL has not in fact suffered any loss and, thus, there was no breach of fiduciary duty by the directors who are the anchor defendants;

(2) that because the Kohn payments by MSIL were payments which were authorised by Mr Madoff (who was 99% shareholder of MSIL with whom his brother who held the remaining shareholding always agreed) and indeed were paid pursuant to his instructions, either the making of the payments was not a breach of fiduciary duty by the directors at all or, if there was a breach of fiduciary duty, it was ratified by the consent of all the shareholders of the company.

91. I will consider in turn each of those reasons for saying there is no serious issue to be tried. So far as the "no loss" argument is concerned, Mr Mowschenson contends that, because the monies which MSIL received and paid to the Kohn defendants were all subventions from BLMIS to be used for the specific payment of those monies to the Kohn defendants, MSIL cannot be said to have suffered any loss by paying the monies out for the specific purpose for which it had received them. He submitted that MSIL would never have received the monies in the first place if it had not been going to pay them over to the Kohn defendants, so by paying them over it had suffered no loss.
92. Mr Saini's answer to this was as follows. He submitted that this was not a case where the "subventions" were paid to MSIL on trust for a particular purpose. Rather money would come over from BLMIS in one lump described as "fees receivable", only some of which was used to pay the Kohn defendants, the rest being used for other illegitimate payments, of which the claimants complain in the proceedings, but which are not relevant to the claim against the Kohn defendants. Accordingly, when the monies went into MSIL's bank account, they were MSIL's monies and the fact that MSIL was under an obligation to BLMIS to pay the monies over for particular purposes was res inter alios acta so far as the Kohn defendants are concerned.
93. It seems to me that even if Mr Mowschenson's point were right at the end of the day, as matters currently stand, it involves a number of factual assumptions in his clients' favour which it would not be appropriate to determine on a summary basis and which, as Mr Saini submitted, could only be determined at trial.
94. Mr Mowschenson's second reason for saying there is no serious issue to be tried is a more formidable one. He submits that, where the acts of directors of a company have been either requested or approved by the shareholders, those acts are the acts of the company and that, as a matter of company law, the company cannot contend that the directors have acted in breach of fiduciary duty. Either there was no breach or any breach has been ratified. Mr Mowschenson contends that the only exception to this principle is if the transaction carried out by the directors at the request of or with the approval of the shareholders is one which is likely to jeopardise the solvency of the company or cause loss to its creditors.
95. The general principle that, where the conduct of the directors has been approved or authorised by the shareholders, the company cannot bring a claim for breach of duty against the directors, because the acts of the shareholders are the acts of the company, is recognised in a number of cases. A summary of the relevant principles of law is set out in the judgment of Lawton LJ in Multinational Gas v Multinational Services [1983] Ch 258 at 269A-E:

"In my judgment these cases establish the following relevant principles of law: first, that the plaintiff was at law a different legal person from the subscribing oil company shareholders and was not their agent: see the Salomon case [1897] AC 22, per Lord Macnaghten at p. 51. Secondly, that the oil companies as shareholders were not liable to anyone except to the extent and the manner provided by the Companies Act 1948: see the same case at the same page. Thirdly, that when the oil companies acting together required the plaintiff's directors to make decisions or approve what had already been done, what they did or approved became the plaintiff's acts and were binding on it: see by way of example Attorney-General for Canada v. Standard Trust Co. of New York [1911] AC 498; In re Express Engineering Works Ltd. [1920] 1 Ch 466 and In re Horsley & Weight Ltd. [1982] Ch 442. When approving whatever their nominee directors had done, the oil companies were not, as the plaintiff submitted, relinquishing any causes of action which the plaintiff might have had against its directors. When the oil companies, as shareholders, approved what the plaintiff's directors had done there was no cause of action because at that time there was no damage. What the oil companies were doing was adopting the directors' acts and as shareholders, in agreement with each other, making those acts the plaintiff's acts.

It follows, so it seems to me, that the plaintiff cannot now complain about what in law were its own acts."

96. Dillon LJ at 288D-G stated the applicable principles as follows:

"The heart of the matter is therefore that certain commercial decisions which were not ultra vires the plaintiff were made honestly, not merely by the directors but by all the shareholders of the plaintiff at a time when the plaintiff was solvent. I do not see how there can be any complaint of that.

An individual trader who is solvent is free to make stupid, but honest commercial decisions in the conduct of his own business. He owes no duty of care to future creditors. The same applies to a partnership of individuals.

A company, as it seems to me, likewise owes no duty of care to future creditors. The directors indeed stand in a fiduciary relationship to the company, as they are appointed to manage the affairs of the company and they owe fiduciary duties to the company though not to the creditors, present or future, or to individual shareholders. The duties owed by a director include a duty of care, as was recognised by Romer J. in In re City Equitable Fire Insurance Co. Ltd. [1925] Ch 407, 426-429, though as he pointed out the nature and extent of the duty may depend on the nature of the business of the company and on the particular knowledge and experience of the individual director.

The shareholders, however, owe no such duty to the company. Indeed, so long as the company is solvent the shareholders are in substance the company."

97. The existence of an exception to that principle, where the transaction authorised by the shareholders is one which jeopardises the company's solvency or causes loss to its creditors, as Sir Andrew Morritt V-C said in Bowthorpe Holdings v Hills [2003] 1 BCLC 226 at 241; [2002] EWHC 2331 (Ch) at [51]), can be traced to dicta of Cumming-Bruce and Templeman LJ in Re Horsley & Weight Ltd [1982] Ch 442.
98. In that case, the company in question had three directors, two of whom held all the issued shares. The company had, with the approval of all three, expended a substantial sum of money on the purchase of a pension annuity for the director who was not a shareholder. Subsequently, the company went into voluntary liquidation and the liquidator made claims against the director who had received the pension. One of those claims was that the taking out of the pension was a misfeasance on the part of the directors, which was not cured or validated by the fact that two of the directors were the only shareholders and, as such, had approved the transaction. The Court of Appeal dismissed that claim (and another claim that the purchase was ultra vires the company). They did so applying the general principle that the company was bound by the unanimous agreement of its shareholders.
99. However, Templeman LJ considered that, if the company had been doubtfully solvent at the date the pension was granted, there would have been both misfeasance and a fraud on the creditors. He stated the matter in these terms at 455C-456B:

"There remains the question whether the grant of the pension was in the circumstances a misfeasance committed by the two directors who procured the grant and by the respondent, the director who accepted the grant. If the company had been doubtfully solvent at the date of the grant to the knowledge of the directors, the grant would have been both a misfeasance and a fraud on the creditors for which the directors would remain liable. But the good faith of the directors is not impugned.

In the absence of fraud there could still have been negligence on the part of the directors. If the company could not afford to spend £10,000 on the grant of a pension, having regard to problems of cash-flow and profitability, it was negligent of the directors to pay out £10,000 for the benefit of the respondent at that juncture. There could have been gross negligence, amounting to misfeasance. If the company could not afford to pay out £10,000 and was doubtfully solvent so that the expenditure threatened the continued existence of the company, the directors ought to have known the facts and ought at any rate to have postponed the grant of the pension until the financial position of the company was assured.

The findings of the judge are sufficient to support the suspicion that the company could not afford to pay out £10,000 for the benefit of the respondent, but this suspicion is largely based on hindsight. The accounts show that business was expanding, that there were no discernible cash-flow problems and that past profits were sufficient to absorb half of the payment for the pension, leaving the other half to be absorbed in the future. There seemed to be every indication that with the profits anticipated, and the possibility of reducing directors' salaries if necessary, the remainder of the payment for the pension could be absorbed by the company. In these circumstances it is difficult to convict the directors of negligence. It is impossible to convict them of gross negligence amounting to misfeasance because the allegation was never clearly levied, the directors were not even accused by the liquidator and did not give evidence, and the judge therefore made no sufficient finding.

I would dismiss the appeal on the grounds that the payment was intra vires the company and on the grounds that misfeasance by the directors was not proved.

If, however, there had been evidence and a finding of misfeasance and it appeared that the payment of £10,000 in the event reduced the fund available for creditors by that sum, or by a substantial proportion of that sum, I am not satisfied that the directors convicted of such misfeasance, albeit with no fraudulent intent or action, could excuse themselves because two of them held all the issued shares in the company and as shareholders ratified their own gross negligence as directors which inflicted loss on creditors. I should be sorry to find the scope of section 333 so restricted and need not do so on this occasion."

100. A similar dictum is to be found in the judgment of Cumming-Bruce LJ at 454H-455B:

"The ratification by the shareholders was effective unless the decision of the directors was proved to have been misfeasance on their part. Their good faith was not questioned. The evidence gives rise to suspicion that at the time of the decision by the directors and of the purported ratification the company was not in a position to pay £10,000 to the respondent. But that evidence fell far short of proof that the directors should at the time have appreciated that the payment was likely to cause loss to creditors.

On these facts it is unnecessary to decide whether, had misfeasance by the directors been proved, it was open to them in their capacity as shareholders to ratify their own negligence and so to prejudice the claims of creditors. It would surprise me to find that the law is to be so understood."

101. Although Dillon LJ in Multinational Gas at 291B-F was somewhat critical as to whether the exception extended to cases of negligence by the directors, the existence of this exception to the general principle has not been doubted in later cases. The subsequent development of the exception is summarised by the Vice-Chancellor in Bowthorpe Holdings [2003] 1 BCLC 226 at 241-2 ([51]-[52]) as follows:

"In Nicholson v Permakraft (NZ) Ltd [1985] 1 NZLR 242, 250 Cooke J, with whom the other members of the Court of Appeal in New Zealand agreed, considered that where the transaction in question was likely to cause loss to creditors or threaten the continued existence of the company then the unanimous assent of the shareholders is not enough to justify a breach of duty to the creditors. In such a case

"Concurrence by the shareholders prevents any complaint by them, but compounds rather than excuses the breach as against the creditors."

52. In Kinsela v Russell Kinsela (1986) 4 NSWLR 722 the Court of Appeal for New South Wales approved and applied that dictum. At p. 732 Street CJ said

"It is in my view legally logical and acceptable to recognise that, where directors are involved in a breach of their duty to the company affecting the interests of shareholders, then shareholders can either authorise that breach or ratify it in retrospect. Where, however the interests at risk are those of creditors I see no reason in law or logic to recognise that the shareholders can authorise the breach. Once it is accepted, as in my view it must be, that the directors' duty to a company as a whole extends in an insolvency context to not prejudicing the interests of creditors...the shareholders do not have the power or authority to absolve the directors from that breach."

An earlier statement to the like effect was approved by Dillon LJ in West Mercia v Dodd [1988] BCLC 250, 252 and by the Court of Appeal in Official Receiver v Stern [2002] 1 BCLC 119, 129 para 32"

102. The earlier passage in the judgment of Street CJ in Kinsela approved by Dillon LJ in West Mercia v Dodd is as follows:

"In a solvent company the proprietary interests of the shareholders entitle them as a general body to be regarded as the company when questions of the duty of directors arise. If, as a general body, they authorise or ratify a particular action of the directors, there can be no challenge to the validity of what the directors have done. But where a company is insolvent the interests of the creditors intrude. They become prospectively entitled, through the mechanism of liquidation, to displace the power of the shareholders and directors to deal with the company's assets. It is in a practical sense their assets and not the shareholders' assets that, through the medium of the company, are under the management of the directors pending either liquidation, return to solvency, or the imposition of some alternative administration."

103. Mr Mowschenson submitted that this exception, that the transaction authorised must not be likely to jeopardise the company's solvency or cause loss to the creditors, was the limit of any exception to the general principle. In particular, he submitted that there was not some wider exception that the directors' breach of fiduciary duty could not be ratified where the transaction in question was not bona fides or honest.
104. He made the point that, in the present case, at the time that the payments were made to the Kohn defendants, MSIL was completely solvent (and the contrary is not contended by the claimants). Furthermore, since the payments made all derived from the subventions from BLMIS, the creditors of MSIL could not be said to have suffered a loss, even if the company had been doubtfully solvent. In those circumstances, it was nothing to the point that Mr Madoff, the 99 % shareholder of MSIL, was a fraudster or that the payments to the Kohn defendants were the proceeds of that fraud, albeit it is not suggested in the pleadings that the Kohn defendants were aware of the fraud. It is equally irrelevant that the true nature of the payments was disguised by Mr Madoff and Mrs Kohn or that, on the claimants' case, these were illegitimate payments. The directors' actions in making the payments had been requested or approved by Mr Madoff, so MSIL was bound by his consent and could not be heard to complain of breach of fiduciary duty by the directors.
105. Mr Saini challenged that conclusion. He submitted that there was a wider exception based on grounds of public policy, that the general principle would not apply where the shareholders, in ratifying the directors' acts, were acting dishonestly or using the company as a vehicle for fraud or wrongdoing. That was the case here, since Mr Madoff was using MSIL as a money laundering vehicle to disguise and distribute the proceeds of his fraud, including by way of the payments to the Kohn defendants.
106. In support of the submission that the "doubtful solvency or loss to creditors" exception is not the only exception or is, at least, part of a wider exception, Mr Saini relies upon the judgment of the Vice-Chancellor in Bowthorpe Holdings. In that case, one of the questions was whether the sale of shares in another company by the directors of that company was an improper exercise by them of their powers, because it was effected otherwise than in the interests of the company and at a substantial undervalue. It was submitted that, even on that assumption the claim must fail because the sale was authorised by all the shareholders of that company.
107. Having stated the general principle that a company is bound by the unanimous agreement of its shareholders, Sir Andrew Morritt V-C said this at [50]-[51]:

"But subsequent decisions show that there are exceptions to such a principle. First, the transaction must be bona fide or honest. This, in my view, is demonstrated by the qualification of Viscount Haldane in A-G for Canada v Standard Trust [1911] AC 498, 505 that "the case was not...a cloak under which a conspiracy to defraud was concealed", by Younger LJ in Re: Express Engineering Works [1920] 1 Ch 466, 471 that "no fraud is alleged in respect of this transaction", and by Lawton LJ in Multinational Gas v Multinational Services [1983] Ch 258, 268 that the members must act in good faith. Thus, in Re Duomatic [1969] 2 Ch 365, 372 Buckley J cited with approval the view of Astbury J in Parker and Cooper Ltd v Reading [1926] Ch 975, 984 that the transaction must be both intra vires and honest.

51. The second exception, which may be merely an exemplification of the first, is that the transaction so authorised must not be likely to jeopardise the company's solvency or cause loss to its creditors."

108. Mr Mowschenson sought to suggest that even this "wider" exception was limited to cases where the directors' acts, albeit approved by the shareholders, have caused prejudice to the creditors of the company. He relied upon what the Vice-Chancellor said at [55]-[56]:

"If Yasaiwa establishes the allegations made in its Particulars of Claim it will show that the sale of the Argyll shares was not effected for the purposes or benefit of Yasaiwa but was a dishonest misapplication for the benefit of Peter Hills and Richard Hills. In that event it will come within the first exception. Further, notwithstanding the ingenious arguments of Counsel for the Hills regarding the suggested limitation to the application of what may be called the Kinsela principle, it will also, at least arguably, come within the second.

56. The reality of the matter is, assuming that Yasaiwa proves its case, that Peter Hills, through nominee and alternate directors, misapplied the assets of Yasaiwa otherwise than in good faith. His then transient capacity as the only member, pending completion of the sale of the shares in Yasaiwa to Bowthorpe, could not authorise such a transaction, not least because it prejudiced creditors of Yasaiwa."

109. He questioned the juridical basis of a wider interpretation of the first exception. If the shareholders and directors acted dishonestly, but not in a manner which prejudiced the creditors, then their acts were still those of the company and bound the company, so that the company could not complain. No question of public policy arises in such a situation. It is all simply a question of the internal management of the company. Accordingly, if the Vice-Chancellor was stating some wider exception based on public policy, he was wrong.
110. Although I see the force of Mr Mowschenson's submissions, I am unable to accept them. It is important to have in mind that Mr Mowschenson has to be able to demonstrate that there is no serious issue to be tried. I do not consider he has done so and have concluded that, on the contrary, there is a serious issue to be tried between MSIL and its former directors.
111. In my judgment, the wider first exception stated by Sir Andrew Morritt V-C was not intended to be limited to cases where there is prejudice to the creditors. His reference at the end of [56] to the sole shareholder not being able to authorise the transaction "not least because it prejudiced creditors" is clearly expressed in terms which suggest that the Vice-Chancellor thought that was only one reason why the transaction could not be authorised. It seems to me that, if he had thought that the exception was limited to cases of prejudice to creditors, he would hardly have needed to identify two exceptions at all, let alone a wider one of which the second narrower one was an example. On that hypothesis, the only exception would be the narrower one.
112. In those circumstances, Bowthorpe Holdings stands as an authority of a court of concurrent jurisdiction to this court in support of the wider exception for which Mr Saini contends. In those circumstances, whatever my personal view might be in the light of Mr Mowschenson's submissions, particularly as to the juridical basis for any wider exception, it seems to me that, since the test I have to consider is the same test as on a strike out application, the claimants show a sufficient issue to be tried against the directors of MSIL, even if the decision in Bowthorpe Holdings stood alone.
113. However, that decision does not stand alone. Whilst I accept that the authorities on this wider exception, both before and after Bowthorpe Holdings, are limited, those to which the Vice-Chancellor refers do not suggest that the earlier courts were limiting the exception to instances of prejudice to creditors. Rather, although none of the cases contains full reasoning, the exception recognised seems a much more general one, applicable where the transaction is one which would be a fraud on the company.
114. Thus, in A-G for Canada v Standard Trust [1911] AC 498 at 505, Viscount Haldane LC refers to the proviso or exception in quite general terms:

"The only persons beneficially interested in the company were the four members of the syndicate. The law gave them the complete control of its action. Under that control the company gave effect to the policy of the only persons who had any beneficial interest in its capital. The case is not one in which the apparent procedure can be said to have been unreal, or to have been a cloak under which a conspiracy to defraud was concealed. Under these circumstances, their Lordships are of opinion that the company, notwithstanding that no general meeting, apart from the meeting of directors, appears to have been held for the purpose, was completely bound by the transactions sought to be impeached, and that the appellant, who has certainly no title higher than that of the company against the assets of which he claims, is bound likewise."

115. Similarly, the passage in the judgment of Lawton LJ in the Multinational Gas case at [1983] Ch 258 at 268E-H to which Sir Andrew Morritt V-C was evidently referring, was as follows:

"The submission in relation to the defendants was as follows. No allegation had been made that the plaintiff's directors had acted ultra vires or in bad faith. What was alleged was that when making the decisions which were alleged to have caused the plaintiff loss and giving instructions to Services to put them into effect they had acted in accordance with the directions and behest of the three oil companies. These oil companies were the only shareholders. All the acts complained of became the plaintiff's acts. The plaintiff, although it had a separate existence from its oil company shareholders, existed for the benefit of those shareholders, who, provided they acted intra vires and in good faith, could manage the plaintiff's affairs as they wished. If they wanted to take business risks through the plaintiff which no prudent businessman would take they could lawfully do so. Just as an individual can act like a fool provided he keeps within the law so could the plaintiff, but in its case it was for the shareholders to decide whether the plaintiff should act foolishly. As shareholders they owed no duty to those with whom the plaintiff did business. It was for such persons to assess the hazards of doing business with them. It follows, so it was submitted, that the plaintiff as a matter of law, cannot now complain about what it did at its shareholders' behest."

116. Whilst that passage was recording the submission of counsel for the defendants (who included Mr Donald Nicholls QC), it was a submission which Lawton LJ accepted, as is clear from the next part of his judgment at 269A-B. That passage does not suggest that the circumstances in which the proviso or exception that the shareholders should have acted in good faith and lawfully is limited to cases where their lack of good faith or unlawful acts have caused prejudice to the shareholders.
117. Architects of Wine v Barclays Bank [2007] 1 Lloyd's Rep 55; [2006] EWHC 1648 (Comm) was a case in which the claimant was in the business of selling forward wine contracts. It was a wholly owned subsidiary of Paradigm, of which Middlemiss was sole shareholder. He was also the sole director of the claimant company. When the claimant was facing difficulties with the US regulatory authorities, its Cayman Islands bankers stopped accepting payments from customers. Middlemiss arranged for customers' cheques to be couriered to England to another company owned by Paradigm, AWUK, and presented to the defendant bank. Some 400 cheques to the value of US$1.3 million were paid into AWUK's account with the defendant and then paid away. Paradigm and the claimant went into liquidation.
118. The liquidator brought proceedings against the defendant bank for conversion of the cheques. The bank raised two defences to the claim: one under section 4 of the Cheques Act 1957 and the other that Middlemiss had authorised the transfer of the cheques. David Steel J found against the bank on both. The bank subsequently appealed in respect of the Cheques Act defence and were successful in the Court of Appeal ([2007] 2 Lloyd's Rep 471). However, the Court of Appeal did not address at all the other defence on which David Steel J had found against the bank.
119. He concluded that the transfer of the cheques was a fraud by Middlemiss on both the claimant company and its creditors, at a time when the company was in acute financial difficulties. As such, the learned judge concluded that the transfer was not capable of being authorised by Middlemiss as sole director and shareholder, applying the decision in Belmont Finance v Williams Furniture [1979] 1 Ch 250 at 261 per Buckley LJ.
120. Aside from fraud, the claimant also relied on the two exceptions to the general principle enunciated by the Vice-Chancellor in Bowthorpe Holdings. Having set out those two exceptions, David Steel J concluded at [19]:

"In my judgment, the transactions were not bona fide in the interests of the company, and were in any event likely to jeopardise AWCI's solvency, or if such was a fait accompli , to cause loss to the creditors: see also Underwood v. Bank of Liverpool [1924] 1KB 775."

121. Although Mr Saini accepts that that case does not take the matter much further, because it was a case where the transaction in question was one which, on any view, prejudiced the creditors at a time when the company was of doubtful solvency, it is, as he submitted, a subsequent case where a judge of the Commercial Court has recognised the existence of the two distinct exceptions enunciated by the Vice-Chancellor and did not suggest that there was, in truth, only one narrower exception.
122. Mr Saini also relies upon the decision of John Powell QC, sitting as a Deputy High Court Judge of the Chancery Division in Cox v Cox [2006] EWHC 1077 (Ch). The facts of that case do not matter for present purposes, but it is another case where the court recognised the existence of the two exceptions to which the Vice-Chancellor referred in Bowthorpe Holdings. At [58], the learned Deputy Judge said:

"It was submitted that, notwithstanding the liability of Mr and Mrs Cox as directors and Mrs Cox as constructive trustee, to make good to the Company the excess salary payments to Mrs Cox as a consequence of the Company's contravention of section 151 , it is open to the Company, if it so wishes, to release them from liability. I was referred to passages in Chapter 17 of Gore-Browne on Companies (45th ed.) and to the judgment of Sir Andrew Morritt V-C in Bowthorpe Holdings Ltd, v. Hills [2003] 1 BCLC 226, especially at 241–2 and Buckley (op. cit.) at paragraph 151.32. I accept that it is open to a company, by its shareholders acting unanimously, to release a director from liability for breach of duty, provided that the release does not jeopardise the solvency of the company or cause loss to creditors and that there is no sufficient public policy objection to the [grant] of such release."

123. Mr Mowschenson submitted that the learned Deputy Judge was wrong about there being a public policy exception in circumstances where, as he submitted, ratification of any breach of duty by the directors of a company is an internal matter. However, as I have already indicated, it does seem to me that not only Bowthorpe Holdings itself, but a number of other cases, including Cox v Cox, recognise the existence of a wider exception to the effect that a transaction can be impugned by the company if it is not honest, bona fide and in the best interests of the company. One explanation of that exception may be that public policy demands that a transaction which is not honest, bona fide and in the best interests of the company is not binding on the company. However, whatever the precise juridical basis of the wider exception, I consider that the claimants can show a serious issue to be tried that that exception applies here.
124. Thus, in circumstances where, on the facts, the claimants can show an arguable case that Mr Madoff was using the payments to the Kohn defendants to launder the proceeds of his fraud and thus acting dishonestly, the claimants can show at least a serious issue to be tried, that the fact that the payments were all approved and indeed required by Mr Madoff does not excuse the directors of MSIL from breach of fiduciary duty in permitting and making the payments. Furthermore, although this is no sense determinative, it is striking that, although the directors have pleaded in their respective defences that they were not in breach of fiduciary duty because they acted pursuant to instructions from Mr Madoff, none of them has made any application to strike out the claim against him in respect of the Kohn payments.
125. It follows that, had I concluded that the court had jurisdiction in principle under Article 6(1) in respect of the BLMIS claim, I would have concluded that the claimants had shown a serious issue to be tried against the anchor defendants. However, given the absence of jurisdiction under Article 6(1) for the reasons set out above, the point is academic, although it is obviously of some significance in relation to the injunction application, to which I now turn.

The application for a proprietary injunction

126. The application for injunctive relief was issued on behalf of both claimants, but in the light of my conclusion that the court has no jurisdiction over the claim advanced by the second claimant on behalf of BLMIS, it is only MSIL which is entitled to pursue that application and, in fact, it is only MSIL which advanced the application at the hearing.
127. MSIL seeks a proprietary injunction against the Kohn defendants. It is essentially common ground that there are three elements which the claimant has to demonstrate for the grant of a proprietary injunction, following the approach prescribed by American Cyanamid v Ethicon [1975] AC 396: (1) that the claimant has shown that there is a serious issue to be tried on the merits; (2) that the balance of convenience is in favour of granting an injunction and (3) that it is just and convenient to grant the injunction.
128. In other words, both the basis for a proprietary injunction and the circumstances in which it will be granted are different from the case of a freezing injunction: see Polly Peck International v Nadir (No. 2) [1992] 4 All ER 767 at 787 per Lord Donaldson MR. In particular, unlike in the case of a freezing injunction, it is not necessary to show any risk of dissipation of assets and, even if there has been delay in making an application which might lead to refusal of a freezing injunction, a proprietary injunction may nonetheless be granted: see Cherney v Neuman [2009] EWHC 1743 (Ch) per HHJ Waksman QC sitting as a Judge of the High Court at [101]-[102].
129. So far as the question of a serious issue to be tried is concerned, given that, in the context of the Article 6(1) application, I have already concluded that the claimants have shown a serious issue to be tried between MSIL and the first to fifth defendant directors and, hence, between MSIL and the Kohn defendants, it is not necessary to consider this aspect any further. For the purposes of this application, MSIL has shown a serious issue to be tried of knowing receipt by the Kohn defendants of monies which the directors paid out in breach of fiduciary duty. As I have also said previously, in the context of Mr Mowschenson's "no loss" argument, as between MSIL and the Kohn defendants, the monies are MSIL's monies and the fact that the monies came from BLMIS by way of subvention and that, but for that, MSIL would not have had the monies in the first place is, at least arguably, beside the point and does not provide the Kohn defendants with a defence to MSIL's claim for the return of the monies, on the basis of a constructive trust or tracing.
130. Turning to the balance of convenience, Mr Weekes, who argued the injunction applications on behalf of MSIL, relied upon a number of matters. First, he relied upon the fact that once the court had concluded that there was a serious issue to be tried, one aspect of that was that MSIL had arguably been the victim of a massive fraud and that the Kohn defendants had received substantial sums over a long period of time which, as between MSIL and the Kohn defendants, was MSIL's money. In those circumstances, MSIL was entitled to the return by the Kohn defendants of what is its property.
131. Mr Weekes relied upon a passage in the judgment of Staughton LJ in Republic of Haiti v Duvalier [1990] 1 QB 202 at 213-4 in support of his submission that, where the court was persuaded there was an arguable proprietary claim, relief by way of injunction and orders for disclosure will be more readily and widely granted than in the case of a freezing injunction:

"It may be that the powers of the court are wider, and certainly discretion is more readily exercised, if a plaintiff's claim is what is called a tracing claim. For my part, I think that the true distinction lies between a proprietary claim on the one hand, and a claim which seeks only a money judgment on the other. A proprietary claim is one by which the plaintiff seeks the return of chattels or land which are his property, or claims that a specified debt is owed by a third party to him and not to the defendant.

Thus far there is no difficulty. A plaintiff who seeks to enforce a claim of that kind will more readily be afforded interim remedies, in order to preserve the asset which he is seeking to recover, than one who merely seeks a judgment for debt or damages."

132. Second, Mr Weekes relies upon the fact that, absent a proprietary order and the sort of disclosure order sought as its adjunct (including that Mrs Kohn consent to financial institutions disclosing the whereabouts of the monies), it would be difficult to see how any judgment that MSIL might ultimately obtain against the Kohn defendants would be enforceable.
133. He relies upon three points: (i) despite the fact that Mrs Kohn has been on notice that MSIL intended to make this application since the beginning of this year, Mrs Kohn has not made any voluntary disclosure of her assets; (ii) by her own admission, all her assets are outside the jurisdiction of this court and (iii) that at an earlier stage, when the application for an injunction was threatened, by her solicitors' letter of 31 January 2011, Mrs Kohn offered security for the MSIL claims (on certain conditions, including that the claim by BLMIS would be withdrawn) in the sum of US$16 million over property which despite her ostensible wealth was not her own: the Zurich residence which is in her husband's sole name and cash in a Luxembourg bank account standing to the credit of Herald Asset Management Limited.
134. I was unimpressed by the third point. I do not see anything necessarily sinister in the nature of the security Mrs Kohn offered, let alone anything which has any impact on the enforceability of any judgment in due course. However, I accept that the first two points are significant factors which tilt the balance of convenience in favour of granting proprietary relief.
135. Third, in terms of the other side of the balance, in relation to the potential inconvenience to Mrs Kohn of a proprietary order, Mr Weekes submits that her second witness statement contains no more than very generalised assertions that an injunction would be oppressive and that she would have difficulty locating the payments or their proceeds over a period of nearly twenty years. Mr Weekes submits that it is no answer for the defendant to say in a case such as the present: "it would be difficult for me to comply with the order", and that there is no specific evidence that her business interests would be affected by the making of an order.
136. Finally, in relation to both balance of convenience and whether it is just and convenient to grant an injunction, Mr Weekes relied upon a passage in the opinion of the Privy Council in National Commercial Bank Jamaica v Olint Corporation [2009] 1 WLR 1405, given by Lord Hoffmann. Dealing with how the American Cyanamid test is applied in practice, Lord Hoffmann said this at [16]-[17]:

"The purpose of such an injunction is to improve the chances of the court being able to do justice after a determination of the merits at the trial. At the interlocutory stage, the court must therefore assess whether granting or withholding an injunction is more likely to produce a just result. As the House of Lords pointed out in American Cyanamid Co v Ethicon Ltd [1975] AC 396, that means that if damages will be an adequate remedy for the plaintiff, there are no grounds for interference with the defendant's freedom of action by the grant of an injunction. Likewise, if there is a serious issue to be tried and the plaintiff could be prejudiced by the acts or omissions of the defendant pending trial and the cross-undertaking in damages would provide the defendant with an adequate remedy if it turns out that his freedom of action should not have been restrained, then an injunction should ordinarily be granted.

17 In practice, however, it is often hard to tell whether either damages or the cross-undertaking will be an adequate remedy and the court has to engage in trying to predict whether granting or withholding an injunction is more or less likely to cause irremediable prejudice (and to what extent) if it turns out that the injunction should not have been granted or withheld, as the case may be. The basic principle is that the court should take whichever course seems likely to cause the least irremediable prejudice to one party or the other. This is an assessment in which, as Lord Diplock said in the American Cyanamid case [1975] AC 396 , 408:

"It would be unwise to attempt even to list all the various matters which may need to be taken into consideration in deciding where the balance lies, let alone to suggest the relative weight to be attached to them.""

137. Mr Weekes submits that, in the present case, there would be irremediable prejudice to MSIL if it were potentially deprived forever of its money which had been paid over to the Kohn defendants, which might well be the consequence if no injunction were granted now, which would be much more serious than the inconvenience to Mrs Kohn if monies which on this hypothesis she should not have had in the first place were frozen and she had to comply with disclosure orders. He also submits that Olint essentially demonstrates that, where the balance of convenience is in favour of granting an injunction, then that will also answer in the affirmative whether it is just and convenient to do so.
138. Although in his written skeleton argument, Mr Mowschenson suggested that it would not be open to the court to grant a proprietary injunction because the claim in knowing receipt was not a proprietary claim, in his oral submissions, he wisely eschewed that suggestion, which was misconceived, since it is clear from the Particulars of Claim that MSIL is advancing constructive trust and tracing claims which are proprietary claims. It is in aid of those claims that the proprietary relief is sought.
139. Ultimately the only point made by Mr Mowschenson in his oral submissions on the question of whether or not, in principle, the court should grant proprietary relief was that the court had a discretion, in relation to which the court should have in mind that Mrs Kohn had offered security for MSIL's claim (albeit on the basis that the BLMIS claim was abandoned) and the position had now been reached where the court has held that there is no jurisdiction over the BLMIS claim. He submitted that, in the exercise of its discretion, the court should not grant proprietary relief. As I said to Mr Mowschenson during the course of argument, this point may well be one which goes to the question of costs, but it does not seem to me to be a valid reason for not exercising my discretion to grant relief, if I would otherwise do so.
140. In my judgment, once the position has been reached, as it has in the present case, that the claimant shows a sufficiently arguable case for a proprietary remedy, then, as Staughton LJ stated in the Duvalier case, the court will more readily afford that claimant with interim remedies by way of injunction and disclosure orders. Not to do so might well, as Lord Hoffmann put it in Olint cause irremediable prejudice to the claimant. As I said during the course of argument, given a sufficiently arguable case that the Kohn defendants have had MSIL's money, arguments by Mrs Kohn along the lines of: "it would be frightfully inconvenient to tell you what I've done with your money or to be prevented from continuing to use it" when, on this hypothesis she should not have had the money in the first place, do not cut much ice.
141. Furthermore, I agree with Mr Weekes that, once the court has decided that the balance of convenience favours the granting of the proprietary injunction, as I have in the present case, although the question whether it is just and convenient to do so is a separate question, it is extremely unlikely that the court would say it was not just and convenient, having decided the balance of convenience in favour of the claimant. To the extent that it is necessary to make a separate finding, I find that it is just and convenient to grant an injunction.
142. In so far as an exercise of discretion is involved, I consider that this is a case where my discretion should clearly be exercised in favour of MSIL. It follows that, in principle, MSIL is entitled to a proprietary injunction and ancillary relief in the form of a disclosure order or orders. I will leave over for further hearing and argument from counsel questions as to the precise form of the relief to be granted, including whether the court should make an order for "repatriation" of the payments to the jurisdiction.

The application for a freezing injunction

143. At first blush, if the court is prepared to grant a proprietary injunction as I am, it might be questioned why a freezing injunction is also necessary. However, Mr Weekes made the point that such an injunction was also required by MSIL, because the thrust of what Mrs Kohn is saying in her second affidavit, is that she cannot be expected to identify, after twenty years, whether particular assets she holds are her own assets or the traceable proceeds of the Kohn payments. In those circumstances, I could quite see why MSIL said it needed both forms of injunction, as a freezing injunction would assist enforcement against whatever assets she held.
144. In relation to the application for a freezing injunction, three questions need to be addressed:

(1) Whether MSIL has shown a sufficiently arguable case for an injunction to be granted;

(2) The delay in bringing the application and the extent to which that precludes MSIL from bringing an application now;

(3) Whether MSIL has shown sufficient risk of dissipation of assets if the injunction is not granted.

Arguable case

145. To justify obtaining a freezing injunction, a claimant has to show a good arguable case on the merits. In Ninemia Maritime Corporation v Trave Schiffahrtsgesellschaft GmbH ("The Niedersachsen") [1983] 2 Lloyd's 600 at 605, Mustill J (as he then was) described a good arguable case for these purposes as "one which is more than barely capable of serious argument, but not necessarily one which the judge considers would have a better than 50 per cent chance of success". It can immediately be seen that this either is the same test as "serious issue to be tried" for the purpose of resisting a strike out application or, if there is any difference between the two tests, it is an imperceptible one.
146. As I have said in the context of the application for proprietary relief, given that, in the context of the Article 6(1) application, I have already concluded that the claimants have shown a serious issue to be tried between MSIL and the first to fifth defendant directors and, hence, between MSIL and the Kohn defendants, it is not really necessary to consider this aspect any further.
147. Once the point has been reached where, as I have concluded, neither of Mr Mowschenson's two arguments, the no loss argument and the ratification argument, is a knock out blow so far as the Kohn defendants is concerned, then, as Mr Mowschenson was really constrained to accept in argument, MSIL has a sufficiently arguable case against the Kohn defendants to go forward to trial. Whilst I accept that, in her witness statements, Mrs Kohn puts forward explanations for her conduct which may or may not provide a good defence at trial, it would be totally inappropriate and, indeed, impossible, to determine such contested issues of fact on affidavits and witness statements. Suffice it to say that, despite what Mrs Kohn says in her witness statements, for the purposes of obtaining a freezing injunction, MSIL has shown a good arguable case on the merits, of knowing receipt by the Kohn defendants, of monies which the directors paid out in breach of fiduciary duty and, hence, of constructive trust.

Delay

148. On the face of it, there does seem to have been delay in making the application for an injunction. The critical dates can be summarised as follows. Mr Madoff confessed and was arrested in December 2008. Mrs Kohn was interviewed by the Austrian state prosecutor in April 2009. The present proceedings were issued on 8 December 2010. On 7 January 2011, the claimants' solicitors put the Kohn defendants on notice of their intention to apply for a freezing injunction. The present application was issued on 15 March 2011 and, allowing for time for the Kohn defendants to file evidence in response, was ultimately listed for hearing on 14-16 September 2011.
149. Mr Weekes submitted that, on closer analysis, there was not in fact any delay in bringing the application for which the claimants could be blamed or which should in any sense preclude the granting of a freezing injunction. So far as the period between Mr Madoff's arrest in December 2008 and the issue of proceedings in December 2010 is concerned, the second claimant explains in his first affidavit the complexity of the investigation that had to be conducted into the affairs of BLMIS, MSIL and Mr Madoff and Mrs Kohn's involvement with them. Forensic accountants were involved in both the United States and this jurisdiction. The MSIL documents were located in 450 storage boxes and in April 2010 137,000 documents were obtained.
150. In the meantime, the second claimant had to coordinate a global investigation into the whereabouts of the proceeds of Mr Madoff's fraud. As he explains, the period from September to December 2010 was occupied with preparation of the Particulars of Claim in order that proceedings could be issued before the expiry of the two year cut off period under US bankruptcy laws. Having considered the second claimant's explanation, I do not consider that MSIL can be criticised for any delay before December 2010, nor indeed did Mr Mowschenson seriously levy such criticism against MSIL in his submissions.
151. Mr Weekes explained that the reason why MSIL's solicitors had put Mrs Kohn on notice in January 2011 of their intention to apply for a freezing injunction was that, once Mrs Kohn was on notice that she was under investigation, which she was from April 2009, MSIL might have faced criticism from the court if they had sought a freezing injunction on an ex parte basis. He relied in this context on what Lord Hoffmann said in Olint at [13] about parties not making applications for injunctions ex parte or at least not doing so without some notice to the other side.
152. I am not sure that passage helps Mr Weekes much, since one of the exceptions to what Lord Hoffmann describes as "the salutary and important principle" of audi alterem partem which Lord Hoffmann identifies is: "unless … giving notice would enable the defendant to take steps to defeat the purpose of the injunction (as in the case of a Mareva or Anton Piller order)". However, in complex cases, it is not unusual for even applications for freezing injunctions to be made inter partes or at least on some form of notice, as the cases to which I refer below demonstrate.
153. Mr Mowschenson does not complain as such about the fact that the application for a freezing injunction was made on an inter partes basis, rather than ex parte followed by a disputed hearing at a return date. Rather, whilst he does not suggest that this is a case where delay in making the application should preclude the application completely, what Mr Mowschenson submits is that, in circumstances where, rather than making an urgent ex parte application for a freezing injunction once all necessary information was available, the claimant adopts a rather leisurely approach of giving notice then allowing time for evidence in reply, the court should look very critically both at whether the claimant really considers there is a genuine risk of dissipation and at whether there is in fact any risk of dissipation.
154. In the context of applications for freezing relief made inter partes and delay in making such applications, there are two recent decisions of the Commercial Court which are illuminating and helpful. First, the decision of David Steel J in Fiona Trust v Privalov [2007] EWHC 1217 (Comm) who, in considering the impact of delay in applying for a freezing injunction against one of the defendants, Mr Skarga, made the following observations at [69]-[71]

"69 There is no doubt that the fact of the failure to make an earlier application against Mr. Skarga is a material consideration vis a vis the application against him. There are in this context two particular considerations:

a) The delay clearly raises the question whether the Claimant really needs an injunction pending trial: in short the delay may give rise to the provisional conclusion that the risk of secretion had already accrued.

b) Nonetheless, the applicant is entitled to take up time in making reasonable enquiries prior to launching an application, the more so where the nature of his case is based on fraudulent or dishonest activity (see Grupo Torras v Al-Sabah, C/A, 16 February 1994): the fact that thereafter the application is made inter partes is scarcely prejudicial to the respondent.

70 Furthermore it has to be borne in mind that the rationale for a freezing order is not so much the risk of dissipation as such, but the risk that a judgment in favour of Claimants would remain unsatisfied either because of dissipation or secretion or dispersal: see Mercedes Benz AG v. Leiduck [1996] AC 284 I accept that delay is potentially a significant discretionary consideration but much depends on the individual facts of each case.

71 Furthermore it strikes me that the Claimants are quite properly focusing on the requirements in the draft orders for disclosure by Mr Skarga and Mr Nikitin of their assets. In practical terms, the world-wide freezing order is ancillary to the disclosure order: see Grupo Torras v Al Sabah , ante."

155. In Antonio Gramsci Shipping Corporation v Recoletos Limited [2011] EWHC 2242 (Comm), Cooke J also had to consider the impact of delay in making an application for a freezing injunction against one of the defendants, Mr Lembergs. He said this at [28]-[29]:

"Up to now, therefore, Mr. Lembergs may have felt secure, in the absence of any proceedings against him in England, when such were being pursued against Mr. Stepanovs, and although alerted to the matters covered by the evidence of Messrs. Meroni, Kveps, Pedera and Stepanovs, there is nothing like the commencement of proceedings to bring home to an individual the risk of a judgment against him and the consequent potential loss of assets. It could be said that, in every case where there is a letter before action, the defendant is alerted to the possibility of a claim and the need for dissipation of assets if the defendant is minded so to do in order to make himself judgment-proof. However, time and again the courts have granted freezing orders on commencement of proceedings following exchanges of correspondence where the merits of the claim have been fully debated and the defendant thereby undoubtedly alerted.

29. In my judgment it is no answer for a defendant to come to the court to say that his horse may have bolted before the gate is shut and then to put that forward as a reason for not shutting the gate. That would be to pray in aid his own efforts to make himself judgment proof - if that, indeed, is what has occurred - and to avoid the effect of any court order which the court might make. If he can show that there is no risk of dissipation on other grounds, that is one thing. If he can show that the claimants do not consider that there is such a risk by virtue of the delay in seeking the order, that again is a relevant factor. However, if the court is satisfied about those matters in favour of the claimant, there is no reason why the court should not shut the gate, however late the application, in the hope, if not the expectation, that some horses may still be in the field or, at the worst, a miniature pony."

156. It seems to me that the following principles relevant to the present application can be discerned from those two cases:

(1) The mere fact of delay in bringing an application for a freezing injunction or that it has first been heard inter partes, does not, without more, mean there is no risk of dissipation. If the court is satisfied on other evidence that there is a risk of dissipation, the court should grant the order, despite the delay, even if only limited assets are ultimately frozen by it;

(2) The rationale for a freezing injunction is the risk that a judgment will remain unsatisfied or be difficult to enforce by virtue of dissipation or disposal of assets (see further the citation from Congentra AG v Sixteen Thirteen Marine SA ("The Nicholas M") [2008] 2 Lloyd's Rep 602; [2008] EWHC 1615 (Comm) below). In that context, the order for disclosure of assets normally made as an adjunct to a freezing injunction is an important aspect of the relief sought, in determining whether assets have been dissipated, and, if so, what has become of them, aiding subsequent enforcement of any judgment;

(3) Even if delay in bringing the application demonstrates that the claimant does not consider there is a risk of dissipation, that is only one factor to be weighed in the balance in considering whether or not to grant the injunction sought.

157. Applying those principles to the present case, for reasons I will elaborate in the next section of the judgment, I am quite satisfied that, notwithstanding delay in making the application and the fact that Mrs Kohn has been alerted for some time to the fact that an application was going to be made, there is a serious risk that assets will be dissipated and judgment rendered nugatory or more difficult to enforce, unless a freezing injunction is granted. Furthermore, I regard the orders for disclosure of assets which accompany a freezing injunction as important in this case in determining where the Kohn defendants' assets are and whether there has been any dissipation of them.
158. Having considered the detailed affidavit evidence filed on behalf of MSIL and, in particular, the affidavits of the second claimant, dealing with the reasons why there is a risk of dissipation, I am quite satisfied that this is not a case where the claimant does not believe that there is a risk of dissipation. Even if I had thought there was any suggestion of that, it would not be determinative against granting a freezing injunction, since in the ultimate analysis, the question whether there is a risk of dissipation of assets is an objective one for the court.
159. For these reasons, I do not consider that any delay in bringing the application for a freezing injunction should prejudice that application in any way.

Risk of dissipation of assets

160. In The Nicholas M at [49], I stated the relevant legal principles for determining whether for the purposes of granting a freezing injunction, the claimant has shown sufficient risk of dissipation of assets as being that the claimant will satisfy that burden if it can show that:

"(i) there is a real risk that a judgment or award will go unsatisfied, in the sense of a real risk that, unless restrained by injunction, the defendant will dissipate or dispose of his assets other than in the ordinary course of business: The Niedersachsen [1983] 2 Lloyd's Rep 600 per Mustill J as interpreted by Christopher Clarke J in TTMI v ASM Shipping [2006] 1 Lloyd's Rep 401 at 406 (paragraphs 24-27) or

(ii) that unless the defendant is restrained by injunction, assets are likely to be dealt with in such a way as to make enforcement of any award or judgment more difficult, unless those dealings can be justified for normal and proper business purposes: Stronghold Insurance v Overseas Union [1996] LRLR 13 at 18-19 per Potter J and Motorola Credit Corporation v Uzan (No 2) [2004] 1 WLR 113 at 153 (paragraphs 142-146) where the Court of Appeal was applying the same principle in the context of disclosure of assets by the defendant."

161. In support of MSIL's case that there is a risk of dissipation of assets by the Kohn defendants, Mr Weekes' primary submission was that the very nature of the case of dishonesty against the Kohn defendants was sufficient to demonstrate a risk of dissipation. On MSIL's case, over a period of more than fifteen years Mrs Kohn issued a whole raft of sham invoices and disguised the true nature of the payments received, in circumstances where the Kohn defendants knew that the payments were made in breach of fiduciary duty by the directors and that the payments were illegitimate payments, so that there was knowing receipt. Mr Weekes submitted that this was evidence of deliberate misconduct on a grand scale over a long period of time.
162. He also submitted that it was not necessary to show for these purposes that Mrs Kohn's deliberate misconduct over a period of time amounted to fraud. It was sufficient to show an unacceptably low standard of commercial morality or discreditable conduct such as demonstrates a risk that unless restrained, the Kohn defendants will dissipate their assets: see The Nicholas M at [50] and [53]. Mr Weekes submitted that at the very least, Mrs Kohn's misconduct in this case satisfied that criterion.
163. In this context, and entirely properly, Mr Weekes referred me to the decision of the Court of Appeal in Thane Investments v Tomlinson [2003] EWCA Civ 1272 where Peter Gibson LJ at [28] deprecates the tendency to infer a risk of dissipation from the fact that allegations of dishonesty are made against the defendant. However, Mr Weekes submitted that Thane Investments was a case which must be approached with caution, as it was an ex tempore judgment given where the defendant was unrepresented, so that the case was not perhaps as fully argued as it might have been. In particular, two earlier relevant decisions of the Court of Appeal do not appear to have been cited to the Court of Appeal.
164. The first is Norwich Union v Eden (1996 25 January, unreported) a decision of a two man Court of appeal (Hirst and Phillips LJJ). The main judgment was given by Phillips LJ who said:

"It seems to me that when the court considers whether there is a good arguable case it is at that stage that it considers whether the likelihood of a judgment in favour of the plaintiff is sufficient to justify the grant of Mareva relief. If it is so satisfied, the question then arises:-if such a judgment is given, what is the risk that there will be no assets there to satisfy it? If the judgment in question being considered is a judgment in which allegations of fraud are made, then it seems to me that it is open to the court to conclude from that fact alone that there is sufficient risk of dissipation of assets to justify the grant of relief. For myself it does not seem to me that there would be any prospect of persuading this court that the learned Judge had erred in principle in so concluding."

165. The other decision is that in Grupo Torras SA v Al Sabah 1997 WL 1105536 (21 March 1997) where Saville LJ said:

"Mr Etherton also criticised the judge for failing, as he put it, properly to address himself to the question whether there was a real risk of dissipation of assets, and simply concluded that such a risk existed because this was a fraud case. In this context Mr Etherton pointed out that Mr Dawson had lived and worked as an investment adviser in Switzerland for a long time and that his assets included a very valuable house in Geneva, so that it was hardly likely that he would set about making them judgment proof. Mr Etherton also drew attention to the fact that the litigation had begun years ago and long before Mr Dawson was joined to it, yet there was no suggestion that he has yet made any attempt to dissipate assets.

These are certainly points that can be made on behalf of Mr Dawson, but again I am not persuaded that the judge simply failed to take them into account. What is clear from the judgment is that the judge took the view that there was a good arguable case that Mr Dawson was knowingly implicated in the fraud; and that the nature of the allegations was such that there was a strong fear of dissipation. Since it is part of Mr Dawson's own case that he was expert in the sort of intricate, sophisticated and international financial transactions which feature in this case, and since the plaintiffs had established a good arguable case that Mr Dawson had used his expertise for dishonest purposes, I am not in the least surprised that the judge reached the conclusion he did. In short I remain wholly unpersuaded that the judge so erred in his assessment of the risk of dissipation that it would be right for this court to interfere."

166. Mr Weekes relied upon that case in support of a submission that, like the defendant in that case, Mrs Kohn is experienced in sophisticated international financial transactions. He submitted that in the light of those earlier authorities, the way in which Thane Investments should be read is correctly set out by Patten J in Jarvis Field Press v Chelton [2003] EWHC 2674 (Ch), where having cited the relevant passage from the judgment of Peter Gibson LJ, the learned judge says at [10]:

"The relevance of that passage, of course, is to the submission made by Mr Lord, on behalf of the claimants on this application, that I should infer from the apparent dishonesty of Mrs Chelton, together with the recent change of circumstances, a real likelihood and risk of dissipation. I have no difficulty in accepting the general principle, emphasised by Peter Gibson LJ, that a mere unfocused finding of dishonesty is not, in itself, sufficient to ground an application for a freezing order. It is necessary to have regard to the particular respondents to the application and to ask oneself whether, in the light of the dishonest conduct which is asserted against them, there is a real risk of dissipation. As Peter Gibson LJ made clear in the passage I have already quoted, the court has to scrutinise with care whether what is alleged to have been dishonesty justifies the inference. That is not, therefore, a judgment to the effect that a finding of dishonesty (or, in this case, an allegation of dishonesty) is insufficient to found the necessary inference. It is merely a welcome reminder that in order to draw that inference it is necessary to have regard to the particular allegations of dishonesty and to consider them with some care."

167. I agree with that analysis of the approach which the court should adopt when considering whether to grant a freezing injunction, in a case where there are allegations of fraud or deliberate misconduct against a defendant. Indeed, Mr Mowschenson did not dissent from that analysis of the applicable legal principles. Rather he took issue with the suggestion that the very nature of the alleged deliberate misconduct in the present case was such as to give rise to the risk of dissipation. He relied upon the fact that, since Mr Madoff's arrest Mrs Kohn had cooperated with the authorities and not tried to evade responsibility. He challenged strenuously the suggestion in the claimants' evidence that she had withdrawn substantial sums from Herald or from HSBC in Luxembourg just before "the balloon went up".
168. I accept those points as far as they go. It is true that she has cooperated with the authorities up to a point, although for reasons I will elaborate below, it seems to me some of her answers to questions posed by the Austrian state prosecutor were evasive. Equally, for present purposes, it does not seem to me that it would be right to decide, on the material before the court, that Mrs Kohn had actively engaged in the dissipation of assets either just before or just after Mr Madoff's arrest. However, again as considered in more detail below, because she has not made voluntary disclosure of her assets, despite ample opportunity to do so, the true position is that the court simply does not know whether she has dissipated her assets or not.
169. Furthermore, in terms of the risk of dissipation arising from the very nature of the dishonest conduct alleged, upon which Mr Weekes relies, I do not find her subsequent conduct after the dishonesty was discovered a very convincing answer to Mr Weekes' point about prior misconduct. As I have said earlier in the judgment, the false description on the invoices over many years cries out for a proper explanation from Mrs Kohn which, bluntly, has not, in my judgment, been provided by the evidence she has put before the court. It seems to me that what emerges is a sufficiently arguable case of deliberate wrongdoing, the issuing of sham invoices and the disguising of the true nature of the payments of millions of dollars made to the Kohn defendants over many years. This demonstrates in itself a serious risk of dissipation.
170. However, even if that were wrong, in my judgment there are a number of other matters which demonstrate the risk of dissipation of assets. Of particular significance, in the context of the suggestion by Mr Mowschenson that there was no risk of dissipation because Mrs Kohn has known about the possibility of the present application for some eight months (essentially the same point as did not impress Cooke J in the Antonio Gramsci case), is the fact that she has not made any voluntary disclosure of assets during that period.
171. Mr Mowschenson sought to counter that by pointing out that Mrs Kohn came from a banking and commercial background on the continent where parties have a high regard for confidentiality and secrecy. He cited the fact that when Mrs Kohn offered security for the MSIL claim in part by way of funds from Herald Management, the second claimant's immediate reaction was to make what Mr Mowschenson characterised as an irresponsible assertion vis-à-vis HSBC, that funds in the Herald accounts belonged to the claimants. This conduct had made Mrs Kohn wary of disclosing her assets to the second claimant.
172. I was unimpressed by this submission. Whatever the culture of secrecy and confidentiality may be in Austria or Switzerland, to which Mr Mowschenson appeared to be referring, it seems to me that is no good reason for Mrs Kohn not to disclose her assets, if it really were the case that she has nothing to hide. Further, in so far as she was concerned about what use the second claimant might make of any disclosure, the short answer is that she could have agreed to make disclosure, pursuant to a court order which imposed upon the claimants obligations of confidentiality and restrictions as to what use could be made of the disclosure. Accordingly, it does not seem to me that any of the matters which Mr Mowschenson relies upon is an answer to the fact that, if Mrs Kohn really was acting entirely honestly and had nothing to hide, she could have made disclosure of her assets voluntarily.
173. Because Mrs Kohn has not made any disclosure of her assets, the submission made by Mr Mowschenson that the fact that eight months passed between her being put on notice that the application was going to be made and the application being heard means that there is no risk of dissipation, is unsustainable. The answer to it is that the court simply does not know whether she has dissipated her assets or not. This is the point made by Patten J in Jarvis Field Press at [13]-[14] with which I agree. In the absence of disclosure, the risk of dissipation must exist. Putting it another way, if Mrs Kohn were not going to dissipate her assets, why has she not given disclosure of them?
174. Next, the claimants rely upon the use by Mrs Kohn of a network of companies. It is accepted that this does not of itself indicate a risk of dissipation, but Mr Weekes submitted that, in this context, there are a number of aspects of her conduct which are unusual and evasive and which suggest that these were not legitimate businesses. First is the fact that Erko Inc was, according to Mrs Kohn, dissolved in June 1998 and yet seventeen invoices were issued in its name between June 1998 and December 2001, which can hardly be explained away as clerical error of some kind by an unnamed individual, which is as much as Mrs Kohn is prepared to vouchsafe by way of explanation in her evidence.
175. Second, the second claimant referred in his first affidavit to the fact that, on 29 December 2008, Mrs Kohn requested Bank Gutmann to transfer €1.98 million of the payments from MSIL to an account of her mother Mrs Blau-Turk. In response to this point, in her second witness statement, Mrs Kohn said:

"Mr Picard also refers in paragraph 52(g) to an instruction given to Bank Gutmann to transfer €1.98 million to an account belonging to my mother. These were assets in my mother's own account belonging to my mother that were transferred by her from one account within Bank Gutmann to another account within Bank Gutmann in the same bank located in Vienna, Austria. This has nothing to do with any of the funds".

176. Mr Weekes submits that every single aspect of this statement is incorrect and that it is difficult to see how she could have got this wrong by mistake, since the bank documents show the monies were not her mother's and the transfer was not made by her mother, who had no signatory power or discretionary authority over the account at the time. The exercise conducted by the claimants' forensic accountants demonstrates that the monies in question were the proceeds of MSIL payments. I agree with Mr Weekes that Mrs Kohn's evidence on this point is highly unsatisfactory.
177. Third, cheques which had been made out by MSIL to Kohn companies were not paid into bank accounts of such companies but endorsed in favour of her daughter, Nicole Herzog, and paid into her daughter's account at Bank Gutmann, over which both Mrs Kohn and her husband were signatories. No explanation for why this was done has been forthcoming from Mrs Kohn.
178. Mr Mowschenson sought to submit in relation to these payments to her mother and daughter that, within the community in which Mrs Kohn moves, family is very important and there is nothing sinister in Mrs Kohn making payments to her family. I accept that general proposition, but it does not begin to explain why Mrs Kohn should untruthfully deny that the money paid to her mother derived from MSIL payments or why her corporate entities did not have their own bank accounts into which cheques of which they were payees were paid, then enabling them to transfer funds to others in the normal way, rather than cheques being endorsed in this odd way.
179. In that context, it is striking that, in connection with the elaborate web of transactions revealed and analysed in diagrammatic form by the claimants' forensic accountants, as attached to the claimants' skeleton argument, the Vienna state police had sent a report to the district attorney forwarding two notifications from Bank Gutmann of suspected money laundering. Whilst it is true that those allegations do not seem to have been pursued by the authorities in Austria, the fact that the bank was concerned that this web of transactions might well be indicative of money laundering, supports MSIL's case that there is a risk of dissipation.
180. Fourth, there is the evidence which Mrs Kohn gave to the Public Prosecutor in Vienna on 21 April 2009. At page 6 of the transcript, she is recorded as saying this (in translation):

"The statement of facts of the SFO in the letters rogatory dated 24 March 2009 charges me with receiving a total of £7 million by 2007 through a consultancy contract with [MSIL]: I personally did not receive any money. I am not prepared for this question and I do not wish to make any further comment on this at the present time. I do not remember whether I have ever known the company Erko Inc. Questioned whether I know the company Tecno Development & Research s.r.l., I do not wish to answer this question at the present time as I wish to make further enquiries in my own time".

181. Making every allowance for the fact that Mrs Kohn may have been under a lot of stress at the time and that she was being questioned in the presence of representatives of the FBI and the SEC, the suggestion that she did not remember or needed to make further enquiries about companies which she had used as vehicles to receive BLMIS and MSIL payments over a number of years is difficult to accept. In my judgment these answers were thoroughly evasive at best.
182. There were a number of other points put forward by the claimants in their skeleton argument, some of which, such as the Freshfields advice point, did not, on analysis, demonstrate any risk of dissipation. It is not necessary to further burden a lengthy judgment by considering all those points. In my judgment, on the material to which I have referred in this section of the judgment, there is ample evidence of a risk of dissipation of assets, if the Kohn defendants are not restrained by a freezing injunction.
183. In all the circumstances, I will grant a freezing injunction and make orders for the disclosure of assets by the Kohn defendants. I will hear counsel on the precise form of the order, but for the avoidance of doubt, from the moment of notification of the terms of this judgment in draft, the ninth and thirteenth defendants will be restrained from disposing of, dealing with or diminishing their assets. I will hear counsel as to the amount to be frozen. They should also commence preparation of the affidavits of assets, which the court is likely to order in the terms of paragraph 13 of the draft order.

Conclusion

184. In conclusion:

(1) The court has no jurisdiction pursuant to Article 6(1) of the Judgments Regulation over the BLMIS claim of the second claimant;

(2) The first claimant, MSIL, is entitled in principle to a proprietary injunction and related relief against the ninth and thirteenth defendants, as to the precise form of which I will hear submissions;

(3) The first claimant MSIL, is entitled to a freezing injunction and related relief (including disclosure orders) against the ninth and thirteenth defendants. Again I will hear submissions as to the precise form of the order.