Jurisdiction of uk courts under the brussels i regulation

2012-10-03

When will a court in the United Kingdom hear a case where the action or liability didn't arise in the UK?

The issue of legal jurisdiction is largely determined by the Counsel Regulation (EC) No 44/2001 of 22 December 2000, on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters, (Brussels I).

Brussels i regulation

The scope of Brussels I is largely defined in articles 1, 2, 3 and 4, as read with article 59 and 60. Article 1 of the regulation states:

1) This regulation shall apply in all civil and commercial matters whatever the nature of the court or tribunal. It shall not extend, in particular, to revenue, customs or administrative matters.

2) The regulation shall not apply to:

a) the status or legal capacity of natural persons, rights and property arising out of a matrimonial relationship, rules and succession;

b) bankruptcy, proceedings relating to the winding up of insolvent companies or other legal persons, judicial arrangements, compositions and analogous proceedings;

c) social securities;

d) arbitration.

To determine if a court has jurisdiction over a foreign (peregrinus) company, article 2 and article 60 must be applied. These articles read:

2.1 Subject to this regulation, persons domiciled in a Member State shall, whatever their nationality, be sued in the courts of that members state.

2.2 Persons who are not nationals of the Members State in which they are domiciled, shall be governed by the rules of jurisdiction applicable to nationals of that state.

60.1 For the purposes of this regulation, a company ... is domiciled at the place where it has its:

a) statutory seat; or

b) central administration; or

c) principal place of business ...

In terms of these provisions, the decisive consideration regarding jurisdiction in the courts of a member of the EU, such as the UK, is whether the defendant is domiciled in the member state irrespective of the nationality of the parties to the law suit and irrespective of the domicile of the plaintiff.

It is therefore critical to determine the legal definition of domicile as interpreted by the UK Courts.

Definition of central administration and principle place of business

A UK court will have jurisdiction over a company if it is domiciled in the UK; if the company has its statutory seat, central administration or principle place of business in the UK.

The definition of central administration and principle place of business has received considerable judicial consideration within the UK, and is best illustrated with reference to some of the applicable decisions.

The rewia decision

In the case of Rewia [1991] 2 Lloyds Rep 325 (Rewia) the court considered the meaning of the term the principle place of business of a corporation. The defendant contested jurisdiction and argued that they were domiciled within Germany and not in the UK.

It was common cause that the defendant was domiciled in West Germany because the company's central management and control existed there. The court a quo came to that conclusion, which was not subject to appeal, on account of the following facts:

• all the directors were German and resident in West Germany;
• the shares in the Defendant were all beneficially owned or controlled by German companies;
• major policy decisions were made in Germany;
• meetings of the directors were held in Germany; and
• the management agreement concluded between the defendant and the managing company of the vessel, which operated from Hong Kong reserved major policy decisions for the board of directors of the defendant.

A matter to be decided on appeal was the location of the defendant's principle place of business, and in particular, if the principle place of business was located in Hong Kong where the management company carried out the day to day management, or in West Germany.

Leggatt LJ cited various precedents with approval. The decision in De Beers Consolidated Mines Limited v Howe [1906] AC 455 stated that while it is accepted that for the purposes of income tax a company resides where its real business is carried on, the true rule would be where the central management and control of the company actually abides.

In Daimler Co. v Continental Tyre and Rubber (Great Britain) [1916] 2 AC 307, it was held that the test of residence was the place where the real business centre from which the governing and directing minds of the company operated, regulating and controlling its important affairs.

Similarly, in the case of Polzeath [1916] P241 the court had to decide if a company's principle place of business was in the UK. The court considered the shareholding and directors of the company, the company's financial control and banking, the charging and insurance of the vessel, as well as the day to day management of the company, all which were conducted in England. The court, however, held that the control and management of the company was in Hamburg. It was held:

...in considering what is the principle place of business of the company, one has to consider the centre from which instructions are given, and from which control is exercised on behalf of the company over the employees of the business of the company, and where control is exercised, and the centre from which the company is managed without any further control, except such control as every company or the directors of the company which they represent, the shareholders of the company in general meetings.

The court held that irrespective of the fact that the manager had exercised full control over the day to day management of the company, he had always acted under the direction of the company chairman located in Hamburg.

In determining the principle place of business in the Rewia case, the court stated that the principle place of business does not mean main. The court held that in this context, it means chief or most important. The principle place of business is not necessarily the place where most of the business is carried out. It was stated:

... the principle place of business was not necessarily the place where most of the business was carried out; there was nothing uncommercial or inapposite about the conclusion that the principle place of business was in Hamburg or the company registered in Liberia owning a ship, the means of which will ultimately be remitted to Germany, and about which the most important decisions would be taken in Germany; although in practice, [the management company] had a free hand in the day to day management in the vessel from Hong Kong. All that they did was subject to the control of the directors in Hamburg; that was the centre from which instructions were given when necessary and ultimate control exercised; the reference to principle place did not require identification of a particular building...

Douglas king v crown energy trading a.g

In the case of Douglas King v Crown Energy Trading A.G and Another [2003] EWHC 163 (COMM) (Crown Energy) the court considered the definition of both central administration and principle place of business.

The company had two offices, in London and Zug. The court considered various factors to determine where the company's place of central administration and principle place of business was. The factors included the size of the London office, which was larger than any of the other offices operated by the company, and the fact that the principle executive and all operational staff were employed in London, including the chairman, chief executive officer and chief operating officer and the head of each of the firms main departments.

The court didn't place any emphasis on the location at which the board members met or where resolutions were tabled and passed for the purposes of determining the location of the company's central administration or principle place of business. The court held that:

Administration is clearly an aspect of the conduct of business. Administration ensures that all runs smoothly; moneys got in, debts are paid, leases and transport are arranged, personnel are looked after. But what of central administration? ... The larger the organisation, the easier it should be to discern a division of responsibilities. The location of the company's secretary's office in a major organisation might provide a good clue ... I think that in this case a simple listing of those with important responsibilities ... will be enough to show where the central administration is to be found. Also it seems to me that the same approach shows where one may find the company's principle place of business.

Based on the fact that ultimate control rested with the board members located in the company's London office, the court held that the central administration and principle place of business was located in London, and that the court therefore had jurisdiction.

Ministry of defence and support of the armed forces for the islamic republic of iran v faz aviation limited

In the case of Ministry of Defence and Support of the Armed Forces for the Islamic Republic of Iran v Faz Aviation Limited ([2007] EWHC 1042 (COMM) (Faz) the court considered the meaning of the principle place of business of a company.

The court applied the judgment of the Rewia case, and stated that the Rewia decision supports a number of obvious propositions, namely:

(i) the central administration and principle place of business of a company may be, and I would add, frequently will be, in the same country;

(ii) the focus, in matters of jurisdiction, is on the country rather any one particular location;

(iii) the principle place of business (if there is one) is likely to be the place where the corporate authority is to be found (shareholders and directors), and it is to be the place there the company is controlled and managed;

(iv) the place where the day to day activities of the company are carried out may not be the principle place of business if those activities are subject to the control of senior management located elsewhere.

The company gave evidence that it had at all times been emphasised that, for UK tax reasons, all decisions relating to its business must be taken outside the UK. Evidence was also presented that all decisions taken by Faz were made under the direct supervision and with the express authority of a certain shareholder located in Cyprus.

The court held that notwithstanding that the day to day management of the company was conducted in England, in a real sense the business of the company was controlled largely from Cyprus.

Further, the court held, based on facts and evidence, that no business was administered from London. The court therefore held that the court did not have jurisdiction in the matter.

Alberta inc v katanga mining limited

In the case of Alberta Inc v Katanga Mining Limited [2008] EWHC 2679 (COMM) the court considered the definition of central administration.

The company was incorporated in Bermuda and resident in Canada for tax purposes. The company had ten directors, three based in London. The key decision making for the company's business took place by way of board meetings which were held predominantly in Canada with only two of the thirty two board meetings taking place within England.

The company also had a UK service company that provided consultancy services to the entire group, which included not only the company but also the its mining operations carried on by its subsidiaries in the Democratic Republic of Congo (DRC).

The court held that the central administration of the company was located within England and that the court held jurisdiction. The court stated:

Whilst it can plausibly be said that [the Defendant] has a real connection with Canada, to my mind the connection with England is much more real. It is where the entirety of the administration takes place and where all known management resides – the sole executive director, the president, the chief executive officer, the senior vice president and the chief financial officer, albeit that it is only two people. London must be the centre from which management instructions are given when necessary. Whilst key decisions may be made in board meetings, co-ordinated from Canada and sometimes taking place in Canada, everyone active on [the Defendants] behalf operates in London.

Central administration and principle place of business may well and will frequently be found in the same country ... but that is not always so. Although I am not attracted to it, there may be a case for saying that the principle place of business is here in Canada because that is where the corporate authority ultimately resides, even if only for the most part by reason of a conference call being facilitated through a Canadian telephone connection. I cannot, however, conclude that central administration is to be found in Canada. No administration is found in Canada, and it is not shown that the day to day activities in London are subject to the control of senior management located elsewhere ... One approach to central administration in the Regulation may be to examine where those who have the serious responsibilities in the company have their place of work, and this may also indicate the principle place of business. I agree that this is a helpful approach ... I find that the central administration is here in London. I do not need to decide where is the principle place of business ...

Distinction between central administration and principle place of business

A company's principle place of business is found to be in a location where instructions to the company are given, and where ultimate control of the business is exercised, without any further control. Emphasis is placed on the persons or entities controlling the affairs of the company, which may include shareholders, and not on the location where the board of directors of the company are located, where board decisions are formally taken, or where the day to day activities and/or management of the company occurs.

The place where the board of directors resides, and/or holds office will be considered when determining the location of a company's central administration.

It can therefore be said that the principle place of business of a company is the location from which the company is controlled and policy decided, while central administration is the location from which the policy is executed.

Shadow directors and control of a company

If it is found that a peregrinus company is controlled from the UK, the UK courts will have jurisdiction over a matter instituted.

To determine ultimate control of a company, and where such control vests, it is useful to examine directors as well as shadow directors within the UK law as well as the South African position. While these definitions and provisions may not be the only way of determining control within a company, they serve a useful purpose for the purposes of this discussion, because the presence of a shadow director in the UK who may have control over a peregrinus company would mean that the UK courts may have jurisdiction.

A shadow director is defined in section 251(1) of the UK Companies Act, 2006 (UK Companies Act) as a person in accordance with whose directions or instructions the directors of [a] company are accustomed to act.

Section 251(2) states that a person shall not be considered a shadow director by reason only that the directors act on advice given by him in a professional capacity.

Further, section 251(3) qualifies section 251(1) by excluding a body corporate from being regarded as a shadow director for the purposes of general duties of directors, transactions requiring members approval and contract/s with a sole member who is also a director from falling within the meaning of shadow director, even if a subsidiary is accustomed to act in accordance with a body corporate's directions or instructions.

The pre-eminent English case in respect of shadow directors is that of Secretary of State for Trade and Industry v Deverell [2001] Ch 34. Morrit LJ provides a comprehensive explanation of the requirements for a shadow director:

• the purpose of the legislation is to identify those, other than professional advisors, with real influence in the corporate affairs of the company;
• it is not necessary that such influence should be exercised over the whole field of the company's corporate activities;
• the concepts of direction and instruction do not exclude the concept of advice for all three share the common feature of guidance;
• it is not necessary to show that in the face of directions or instructions from the alleged shadow director that the directors cast themselves in a sub-servient role or surrendered their discretion, it is only necessary to prove that the communication was given and that the directors were accustomed to act on such directions; there must be a pattern of compliance;
• instructions need not extend over all or most of the corporate activities of the company, nor is it necessary to demonstrate a degree of compulsion in excess of that implicit in the fact that the board are accustomed to act in accordance with them.

Morrit LJ adds that the director needs not have to lurk in the shadows and can openly direct the company. An example which Morrit LJ believes is likely to qualify as a shadow director is:

...a person resident abroad who owns all the shares in the company but chooses to operate it through a local board of directors. From time to time, the owner to the knowledge of all to whom it may be of concern, gives directions to the local board what to do but takes no part in the management of the company himself.

The South African Companies Act, No 71 of 2008 (SA Companies Act) does not include a definition of shadow director. It has, however, been submitted that the definition of a directorin section 1 of the SA Companies Act is wide enough to include shadow directors because the definition is not limited to persons who are formally appointed as directors. The wide, open ended definition ensures that most persons who have control over the management of companies fall within the ambit of the definition.

Despite that the South African legislation does not expressly provide for addressing the position of shadow directors, the principle has been addressed judicially. In the case of Robinson v Randfontein EST GM Co Limited 1921 AD 168, the court was tasked to decide the matter wherein the directors of a subsidiary company were accustomed to act in accordance with the wishes of the chairman of the holding company.

In this case, the directors of the subsidiary company administered the separate mining activities of the subsidiary companies. The directors denied the allegation that they did not use their own discretion, claiming that only matters of finance and policy were dictated by Robinson, the chairman of the holding company. The directors testified that they left all decisions on policy and finances to Robinson because he was a respected businessman and they trusted his judgment.

The court did not decide the matter based on the fact that Robinson was a shadow director, but found that Robinson had an implied mandate, alternatively that he put himself in a position of trust and owed the same fiduciary duties as a director towards the subsidiary companies. It has been stated that the decision in the Robinson case is authority that the South African Law recognises shadow directors, and that shadow directors owes the company the same fiduciary duties as any other director.

With regard to the holding company and subsidiary company relationship, it has been held in terms of the UK law in Re Hydrodam (Corby) Limited [1994] 2 BCLC 180 (CHD) that a holding company can be shadow directors of their subsidiaries but only if they act outside the scope of activities of a shareholder.

Therefore, where directors of a holding company, or the holding company itself, partakes in the activities of a subsidiary company outside of general meetings of shareholders, the holding company, or the directors of the holding company, may be found to be shadow directors of the subsidiary company.