Sparkasse Bregenz Bank Ag Appellant v Associated Capital Corporation Respondent

• Jurisdiction: British Virgin Islands
• Judge: BYRON, C.J.
• Judgment Date: 18 June 2003
• Neutral Citation: VG 2003 CA 3
• Judgment citation (vLex): [2003] ECSC J0618-5
• Court: Court of Appeal (British Virgin Islands)
• Docket Number: CIVIL APPEAL NO.10 OF 2002
• Date: 18 June 2003

[2003] ECSC J0618-5

IN THE COURT OF APPEAL

Before:

His Lordship, The Hon. Sir Dennis Byron Chief Justice

His Lordship, The Hon. Mr. Albert Redhead Justice of Appeal

His Lordship, The Hon. Mr. Ephraim Georges Justice of Appeal [Ag.]

CIVIL APPEAL NO.10 OF 2002

Between:

Sparkasse Bregenz Bank Ag

Appellant

and

In the Matter of Associated Capital Corporation

Respondent

Appearances:

Mr. S. Moverley Smith, QC for the Appellant

Ms. N. David for the Respondent

BYRON, C.J.

1 Matthew J dismissed a petition to wind up Capital [the respondent] for an alleged unpaid debt of US$430,322.12 to Sparkasse [the appellant]. He concluded that there was a genuine and substantial dispute as to whether the debt was in fact due, and that under the terms of the contract between the parties, a Court in Austria had exclusive jurisdiction to resolve any possible legal dispute arising out of the agreement. It was his order that a winding up order could not be made until the Court in Austria had resolved the dispute as to whether the debt was due.

The Grounds of Appeal

2 The grounds of appeal could be briefly expressed. Sparkasse contended that by failing to lead evidence of Austrian Law, Capital became incapable of discharging its burden of proving that there was a substantial dispute of the debt under Austrian Law; and that although there was a clause in the contract providing that an Austrian Court had exclusive jurisdiction the Court in BVI was obliged to evaluate the validity of the claims of the parties. It also contended that the Judge having found that quantum was disputed should have rejected the opposition to the petition on that ground.

The Settled Law

3 The law governing the making of winding up orders is well settled and could easily be set out at this stage. The Court will order a winding up for failure to pay a due and undisputed debt over the statutory limit, without other evidence of insolvency. If the debt is disputed, the reason given must be substantial and it is not enough for a thoroughly bad reason to be put forward honestly. 1 But if the dispute is simply as to the amount of the debt and there is evidence of insolvency the company could be wound up. 2 To fall within the principle, the dispute must be genuine in both a subjective and objective sense. That means that the reason for not paying the debt must be honestly believed to exist and must be based on substantial or reasonable grounds. Substantial means having substance and not frivolous, which disputes the Court should ignore. There must be so much doubt and question about the liability to pay the debt that the Court sees that there is a question to be decided. The onus is on the company to bring forward a prima facie case which satisfies the Court that there is something which ought to be tried

either before the Court itself or in an action or by some other proceeding. 3 A creditor who has served a statutory notice on the company is not entitled to a winding up order if the company bona fide disputes the debt and there is no evidence of the insolvency of the company. 4 If the existence of the debt on which the winding up petition is founded is disputed on grounds showing a substantial defence requiring investigation, the petitioner would not have established that he was a creditor and thus would not be entitled to present the petition, accordingly the presentation of such a petition would be an abuse of the process of the Court. 5 The process of the Companies Court could not be used in cases where there were issues of disputed fact. Such questions must be resolved in actions. A debt disputed on genuine and substantial grounds could not support a winding up petition. Invoking the process of the Court in relation to a debt which was known to be disputed on genuine and substantial grounds was an abuse of the process of the Court. 6

The Proper Forum

4 I think that I should dispose of the argument relating to adducing evidence of Austrian Law and the obligation of the Court to determine the validity of the claims. The agreement between the parties clearly mandated that the agreement is subject to the law of Austria and that the Court responsible for the bank's headquarters in Vienna has exclusive jurisdiction over any possible legal dispute arising out of the agreement. This provision is unambiguous. Austrian Law would be relevant to resolve the questions that were raised by the parties. It is not necessary to rely on Austrian Law to determine whether there was a dispute. One can conclude that a dispute exists without knowing how the dispute would be resolved. The learned trial Judge concluded that there were disputes of both a factual and legal nature and it is not for this Court to resolve those disputes. He

concluded that the dispute between the parties should be settled in accordance with the terms of the agreement before it could be said that there was a debt which could ground a winding up order. The principles outlined above, clearly indicate that it was his duty to determine whether there is a genuine and substantial dispute as to whether there is a debt. None of the jurisprudence indicates that it was his duty to resolve the dispute. I reject the contention that the failure to lead Austrian Law in evidence was an error or impacted on the burden of proof. The questions that the judge was required to answer, and those that he did answer did not require any knowledge of Austrian Law. If he had attempted to resolve the dispute he would have been improperly encroaching on, and usurping a jurisdiction which the parties had conferred on the Austrian Court

5 There is authority for the proposition that a winding up order should not be made where the company is claiming that it has a genuine and substantial dispute with the creditor to the extent or in excess of the alleged debt, and that dispute is to be determined by another Court or tribunal. This was so even where the creditor had established its debt to the extent that it was entitled to levy execution, and the company's claim was by way of a cross-claim which had not as yet been adjudicated. This gives effect to the rationale that a winding up order could sound the death knell of a company and it would be unlikely that a liquidator would prosecute the company's claims with the diligence and efficiency of the directors. I think that the learned trial judge was correct to conclude that a possible legal dispute between the parties as to the existence of the debt should be resolved in the correct forum as a condition precedent to commencing the winding up proceedings in these Courts. 7

The Sparkasse Claim

6 Sparkasse is a bank operating in Austria, and offered its customers a service enabling them to place orders for the sale and purchase of options and other

securities on foreign exchanges. Capital is a BVI corporation engaged in the business of investing in various financial markets. The EUREX derivatives exchange is one of the world's largest markets for trading and clearing of futures and options in shares, stock indices, bonds and money market instruments. Capital wished to trade in DAX options on the German EUREX exchange and entered into a written customer agreement with Sparkasse. The EUREX exchange is only open to a restricted number of institutions termed in the rules governing trading on the exchange as "Clearing Members". These are the only persons entitled to enter into exchange transactions. Sparkasse was not any material time a Clearing Member of the EUREX exchange

7 Pursuant to the customer agreement Sparkasse undertook orders from Capital in relation to the purchase and sale of DAX options and in order to effect the transactions entered into mirror agreements with a Clearing Member, Commerzbank, which in turn entered into identical transactions with EUREX in accordance with the EUREX rules.

8 Sparkasse alleged that by September 2001 significant arrears had accrued on the account and in October made a demand in the sum of US$ 420,000.00. The money was not paid and the winding up petition was issued.

The Dispute

9 Capital challenged the petition on the ground that there is a dispute that the debt is owed.

10 There was a factual challenge to the assertion that there was a negative trading balance. Mr. Hodyjas the representative of Capital, gave evidence on affidavit that all options are settled on a monthly basis and that a settlement had taken place on the 21 ^st September 2001. He was summoned to a meeting at the offices of Sparkasse in Bregenz, Austria on 24 ^th September, 2001 to discuss the effect of the events of September 11 ^th 2001 in the U.S.A. on the stock market. At that meeting Sparkasse demanded that Capital deposit US $420,000.00 or all the Company's options then open would be closed. On 26 ^th September 2001, he was summoned to another meeting where he was again asked to ensure that the deposit was made. He stated that he explained that Capital could not make the deposit because there was no basis upon which Sparkasse could legitimately make such a demand. On 5 ^th October 2002 Capital was served with a demand for the payment of $430, 322.15. Since then efforts have been made to settle the dispute. He said that at a meeting on 8 ^th October, he was presented with a blank promissory note but he refused to sign it, after his request to have his lawyer present and to be given information as to how the sum was computed were denied. According to him it was at that time that he was told that contrary to the EUREX rules Sparkasse did not maintain the infrastructure necessary to ensure that the Margin was properly calculated and maintained. Despite his requests he has never been provided with specific information as how the sum claimed became due.

11 I must confess some surprise, when even during argument on appeal counsel for Sparkasse maintained that the assertion that the trading account showed a negative balance in the sum...