Fortress Value Recovery Fund I LLC and Others v Blue Skye Special Opportunities Fund L.P. (A Firm)and Others
| Jurisdiction | England & Wales |
| Judge | Mr Justice Andrew Smith |
| Judgment Date | 04 February 2014 |
| Neutral Citation | [2014] EWHC 551 (Comm) |
| Court | Queen's Bench Division (Commercial Court) |
| Date | 04 February 2014 |
| Docket Number | Case No: 2011 – 1565 |
[2014] EWHC 551 (Comm)
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
COMMERCIAL COURT
The Rolls Building
5 th Floor Rolls Building
7 Rolls Buildings
Fetter Lane
London
EC4A 1NL
Mr Justice Andrew Smith
Case No: 2011 – 1565
Mr Ewan McQuater QC, Mr David Quest QC and Mr Richard Hanke (instructed by Slaughter and May) appeared on behalf of the Claimant
Mr Jamie Goldsmith appeared on behalf of defendant 4
Mr Mark Hapgood QC, Alan Roxburgh and Nicholas Saunders (instructed by Signature Litigation) appeared on behalf of the defendant 5, 7 to 12 and 15 to 17
The trial in this action is due to begin in May 2014, and it is expected to last some eight to 10 weeks. This has properly been described as heavy litigation: by way of illustration, I am told that the pleadings run to nearly 1,000 pages.
The background to the proceedings and the claims in them are described by Flaux J at paragraphs 2 to 26 of his judgment of 16 January 2013 and that description can be regarded as adopted in my judgment without me saying more than that: (1) it is alleged by the claimants that the second and third defendants, Mr Cerchione and Mr D'Avanzo, implemented a dishonest scheme to reorganise a fund called the Blue Skye Fund, the purpose and effect of which reorganisation was to compromise the value of the claimants' interests and rights in respect of the assets of the fund and to enable them and entities associated with them to benefit from the assets at the expense of the claimants, and (2) that among the remedies sought by the claimants is an order under the Insolvency Act 1986 designed to undo, not exactly the structure of the reorganisation, that being impossible, but its financial implications.
I add with regard to the first point that the allegations are disputed. Flaux J and other judges have concluded that the claimants have a good arguable case with regard to them, but I have not myself made such an assessment and I am not asked to do so. And with regard to the second point, the claimants make no proprietary claim in the proceedings.
The claimants have obtained, and there is in force, an order restricting the defendants in their dealings with assets that are the subject of this action. The assets underlying the Blue Skye Fund comprise various businesses in Italy, which are often labelled the Italian assets, which are purported to have a net value of some 200 million Euros and of which the largest single asset is a business called BETA Skye. An order restricting the defendants' dealings was first made by Eder J on 26 January 2012 and the latest version of it was made by Blair J on 25 April 2012. It is that the first seventeen and the twenty-first defendants, the other defendants no longer being party to these proceedings, must not without the prior consent in writing of the claimants:
"in any way dispose of, transfer, sell, deal with, realise, redeem, restructure, reorganise encumber, withdraw, exercise conversion rights in relation to, or diminish the value of any right or interest (including for the avoidance of doubt any share(s) or convertible preference equity certificate(s)) in the companies, partnerships, entities and instruments identified in paragraph 6 below or any assets held by or owned by such companies or entities or in which such company, partnership or entities have any right or interest"
The relevant list in paragraph 6 of the order includes at para 6.1(j) and (k) the twelfth defendant, Blue Skye Financial Holdings SARL ("BSFH"), which is a Luxemburg company, and Beta Skye SRL, which is not a party to the proceedings. Beta Skye is a regulated financial intermediary, whose principal business is apparently factoring public administration receivables and servicing non-performing loans.
Blair J described the order as follows:
"… this is not a freezing order of the usual kind. I think the defendants are right to say the ordinary course of business exception has to be seen in light of the fact that the order freezes the structure rather than the assets. It is correct that the order be made in wide terms, but that this was the intent is made clear in (among other places) the claimants' skeleton argument in support of the application for the order. This says that the order sought was "intended to maintain the status quo of the structure itself, rather than seeking to restrict ordinary day to day management of the underlying Italian assets."
I shall refer to the order as the freezing order, while agreeing that it is not of the usual kind in that its purpose and effect are not only to prevent the defendant from protecting their assets from being available to meet a monetary judgment against them, but, at least in part, to ensure that dealings pending trial do not frustrate the claim under the Insolvency Act.
The freezing order also provided this at paragraph 9:
"This order does not prohibit the Respondents or any party from dealing with or disposing of rights, interests or assets in the ordinary and proper course of conducting the business or management of the corporations or entities identified in paragraph 6.1j-s above, provided that if any such transaction would otherwise contravene paragraph 5.1 of this order the Respondent shall give the Applicants' solicitors 5 working days' written notice of their intention to do so, prior to executing such transaction."
On 24 January 2014 Signature Litigation LLP ("Signature") gave notice of a proposed transaction (the "transaction") under this provision of the order. At that time they represented and were on record for all the defendants other than the fourth defendant, Stepstone Acquisition SARL ("Stepstone"), which is in bankruptcy and acts through its official receiver, and the first and sixth defendant, which are struck off.
Later on 30 January 2014, which was the Friday before the hearing listed for yesterday, a Monday, these defendants gave notice that Signature no longer acted for them and that they represented themselves in the proceedings: the second defendant, Mr Cerchione, the third defendant, Mr D'Avanzo, the thirteenth, fourteenth and twenty-first defendant. There was some suggestion that these defendants might instruct other lawyers, in that Mr Mark Hapgood, QC, who is instructed by Signature of BSFH, so understood from informal discussions, but there is no evidence or definite information about that and I proceed on the basis that these defendants might or might not instruct other lawyers. Therefore, Signature now act only for these defendants: BSFH, the fifth defendant, the seventh, eighth, ninth, tenth and eleventh defendants and the fifteenth, sixteenth and seventeenth defendants; I refer to them in this judgment as the Signature defendants.
The letter of 24 January 2014 described the proposed transaction in these terms:
"At [a shareholders' meeting due to take place on 3 February 2014] the shareholders will propose that following: (i) that an amount of up to €6 million be converted from the outstanding shareholder loan, between BSFH and Beta Skye into subordinated debt and (ii), the declaration of a dividend of up to €6 million. We understand that subordinated debt is treated by the Bank Italy as regulatory capital. The transaction would therefore be neutral in terms of Beta Skye's regulatory capital position. Once the dividend is declared Beta Skye will hold the funds due to be distributed at the direction of BSFH in view of the [know your customer] issues notified to you previously. BSFH intends to direct payment in order to satisfy its liabilities, including salaries, other operating expenses and legal costs."
On 30 January 2014, having received Signature's letter of 24 January 2014, the claimants applied under the freezing order for an order restraining Mr Cerchione and Mr D'Avanzo, BSFH, the fifteenth defendant, Mr Danese, and the seventeenth defendant, Mr Caslini from "carrying out or causing or permitting to be carried out… the proposed transaction described in Signature's first letter of 24 January 2014 to Slaughter and May whereby (1), an amount of up to € six million will be converted from the outstanding shareholder loan between Blue Skye Financial Holdings SARL and Beta Skye SRL into subordinated debt and (2) Beta Skye will declare and pay to Blue Skye FH a dividend of up to € six million."
The claimants rely in support of their application on evidence of Mr Efstathios Michael, a partner in Slaughter and May, the claimants' solicitors. They were represented at the hearing before me by Mr Ewan McQuater, QC. That application was supported by Stepstone, represented by Mr Jamie Goldsmith. It was opposed by BSFH. The other defendants were not represented and did not appear on the application.
Mr Michael stated the proposed transaction is unnecessary and that:
"The...
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