Under section 127 of the Insolvency Act 1986, dispositions of the property of a company made after the commencement of its winding-up are void unless validated by the court. The Supreme Court has held that section 127 does not apply where the company’s beneficial interest under a trust is overridden by the transfer of the trust property by the trustee to a third party.
Saad Investments Company Ltd (‘SICL’) is in liquidation in the Cayman Islands. In a claim brought in England against Samba Financial Group (‘Samba’), a Saudi Arabian bank, SICL and its liquidators alleged that certain Saudi Arabian shares worth over US$300 million, transferred after the commencement of the winding-up to Samba by Mr Maan Al-Sanea, in purported partial discharge of his liabilities to Samba, were beneficially owned by SICL under trusts governed by the law of the Cayman Islands. SICL’s rights were alleged to arise from a series of share sale agreements and from documents described as declarations of trust executed by Mr Al-Sanea and SICL. The claimants alleged that the transfer to Samba involved a disposition of SICL’s property that was void under section 127.
Samba applied for a stay on the ground that Saudi Arabia was clearly the more appropriate forum for the action. The Chancellor of the High Court, Sir Terence Etherton, decided that SICL had not had a proprietary interest in the shares under the alleged trusts, because the existence of a proprietary interest depended upon Saudi Arabian law, as the law of the place where the shares were situated (the lex situs), and not upon the governing law of the trusts. It was common ground that under Saudi Arabian law there is no means of creating equitable proprietary interests separate from the legal ownership of property. It followed that there was nothing to be gained from proceedings in England and so the Chancellor granted the stay.
The Court of Appeal allowed the claimants’ appeal and lifted the stay. It held that the question for the lex situs was whether the trustee has capacity to alienate the property at all, but that once it was clear that the property was alienable in some form under the lex situs, the validity and effects of the trust were a matter for the governing law of the trust under Chapter II of the Hague Trusts Convention, as enacted in the United Kingdom by the Recognition of Trusts Act 1987. Samba had argued that, even if the governing law was prima facie applicable to the alienation of an equitable interest upon the creation of a trust, Article 15 of the Convention preserved the application of non-derogable provisions of the lex situs relating to the transfer of title to property, including the principle of Saudi Arabian law that no division of legal and equitable title is recognised. However, the Court of Appeal held that this was a matter that should be left to be determined at a trial.
On Samba’s appeal, the Supreme Court concluded that the issue on which the proceedings in the courts below had focussed, of whether the trusts had given SICL an equitable proprietary interest in the shares, was largely subsumed in a more general question as to whether, whatever the nature of SICL’s interests under the trusts, there was any disposition of SICL’s property within the meaning of section 127. The appeal could be approached on the basis that SICL’s rights under the trusts were relevant ‘property’ within the definition in section 436 of the 1986 Act, whether they were equitable proprietary rights or purely personal rights. But even if only equitable proprietary rights were capable of being regarded as relevant property, the key question was whether there had been a disposition of those rights.
The Supreme Court unanimously held that, where an asset is held on trust, the legal title remains capable of transfer to a third party, although this undoubted disposition may be in breach of trust. But the trust rights of the beneficiary continue to be capable of enforcement unless and until the disposition of the legal title has the effect under the lex situs of the trust asset of overriding them. If the trust rights are overridden, it is not because they have been disposed of by virtue of the transfer of the legal title. It is because they were protected rights that were always limited and in certain circumstances capable of being overridden by virtue of a rule of law governing equitable rights.
The Supreme Court has accordingly allowed Samba’s appeal and declared that, for the purposes of section 127, there was no disposition of any rights of SICL in relation to the shares by virtue of their transfer to Samba. The Court stated that, on the way the case had been put to date, it appeared to follow that the proceedings against Samba should be stayed or struck out, but it has given the parties an opportunity to file written submissions inviting any other order.
The judgment is here.
Mark Hapgood QC and Alan Roxburgh appeared for Samba, instructed by Latham & Watkins (London) LLP.
Mark Howard QC appeared for SICL and the Liquidators, instructed by Morrison & Foerster (UK) LLP.