Blog

In February 2024, the High Court was faced with an extraordinary case in which an Arbitration Award and the Arbitration Agreement were fabricated. The facts of the case, Contax Partners Inc BVI v Kuwait Finance House (KFH-Kuwait) & Ors, are concerning, especially for the future as AI and Large Language models (LLMs) become increasingly sophisticated.

Background to the decision

On 21 June 2023, an arbitration claim was commenced by the Claimant (Contax BVI) against the Defendants, comprised of three companies in a banking group. The claim sought to enforce, under section 66 of the Arbitration Act 1996, what was said to be a Kuwaiti Arbitration Award dated 28 November 2022 (the Award). The Award was said to have been rendered in pursuance of an Arbitration Agreement between Contax BVI and the Defendants dated 31 August 2021. The Claim Form was signed by Hamza Adesanu, a Solicitor at H&C Associates, based in London. It stated that it was made on behalf of Contax BVI. Mr Filippo Fantechi, who said he was Contax BVI’s managing director, also provided a witness statement to the Court.

H&C Associates served an Order to the Defendants. After the lapse of 28 days, during which no set aside application had been made, a Third Party Debt Order (TPDO) of £70,634,614.04 against several banks was granted upon application of the H&C Associates.

The Defendants only became aware of the Order and proceedings against them after their bank accounts were frozen. They argued that the order had not been validly served ‘but, ‘more than this, … there was never an arbitration at all’.

The decision

This application was made before Mr Justice Butcher on a without notice basis, for consideration on the papers, which is typically how such applications are made. The Court gave plenty of allowance for the fact that the documents were prepared by people who were not native English speakers and/or whose grasp of English law procedure was not perfect. However, Mr Justice Butcher stated that he was “not on the lookout for fraud” and did not suspect it.

The Court concluded that there was no doubt that the Arbitration Award was fraudulent for the following reasons:

1. There was no original copy of the Award. “No original has been produced. There is no documentary (in which I include electronic) evidence of the existence of this alleged agreement before June 2023, when it was exhibited to the witness statement of, or supposed to be of, Mr Fantechi in support of the application to enforce the award.”
2. The Award itself contained substantial passages taken from Manoukian [v Société Générale de Banque au Liban SAL [2022] EWHC 669 (QB). The wording used “exactly the same phraseology”, including the jargon of English judgments (‘be that as it may’, ‘the submission is not entirely without merit’, ‘that said’, ‘fall to be considered’) and the same punctuation, “even when it was not obvious, and arguably incorrect”. Mr Justice Butcher stated “The almost identical assessment of factual and expert evidence could not, in my view, have been the result of chance, and the echoing of the terms of Justice Picken’s judgment was “not the result of the adoption of transposable legal reasoning”.
3. There was evidence that the Award was in English rather than Arabic and this, along with other aspects of the judgment, did not comply with Kuwaiti law.

In setting the Order aside, Mr Justice Butcher declared:

“The result of this decision is that there are a considerable number of unanswered, but serious, questions, and in particular as to who was responsible for the fabrications which I have found to have been made, and whether there is culpability (and if any whose) as to the way in which the application for permission to enforce the purported award was presented to the court.

“Those are matters which are likely to require investigation hereafter.”

What does this decision mean for the future of arbitration?

The Defendants will likely bring claims against all those involved in fabricating the documents and the fictitious Arbitration Award. However, the problem remains that although the English Court could refuse to recognise or enforce the Award, it does not have the jurisdiction to set it aside. This means the Award could be enforced in another country that is party to the New York Convention on the recognition and enforcement of foreign arbitral awards – regardless of Mr Justice Butcher’s decision.

The other primary concern is that further fabrications of Arbitration Awards could be made using sophisticated LLMs. As Mr Justice Butcher said, he did not suspect nor was he looking for forgery. Following this case, it is vital that English Courts pay close attention to the wording of an Award and the evidence supporting its existence to avoid substantial fraud and injustice.

To discuss any points raised in this article, please call us on +44 (0) 203972 8469 or email us at mail@eldwicklaw.com.

Note: The points in this article reflect sanctions in place at the time of writing, 09 April 2024. This article does not constitute legal advice. For further information, please contact our London office.

What does company administration mean?

Administration is an insolvency procedure whereby an ailing company is able to be reorganised in such a way that it can primarily be “rescued as a going-concern” or secondarily have its assets realised in such a way that a better result could be achieved for its creditors than if the company were wound-up straight away.

There are various routes into administration, including by order of the court, by resolution of the Directors, or by a Qualifying Floating Charge Holder (QFCH):

1. By Order of the Court – This is usually as a result of actions brought by members of the company who believe it is being mismanaged by its Directors or by a substantial creditor of a solvent company who does not want to embark down the winding up route.
2. By a Qualifying Floating Charge Holder (QFCH) – In order to qualify, the floating charge must relate to the whole or substantially the whole of the company’s property and have the stated power to appoint administrators. For example, if a creditor holds debentures (or other charges) over all the company’s property then they may appoint an administrator over that company.
3. By resolution of the Directors or members of the company – If the Directors, or a majority of members, are convinced that the company is (or is likely to be) unable to pay its debts then they can place the company into administration. This will require a ‘Notice of Intention to Appoint Administrators’ to be filed at court and given to any Qualifying Floating Charge Holder.

Benefits of Company Administration

Once a company has filed a Notice of Intention to Appoint Administrators then it has the benefit of an interim moratorium on any claims being brought against it by any disgruntled creditors who the company may be in arrears with.

Administrations are a technical process requiring the appointment of specialist Insolvency Practitioners, who will use the time afforded by the moratorium to take control of all the company’s property and assume all the powers of the board of directors in order to achieve the primary or secondary purpose as appropriate.

To the creditor or a member of a company that is placed into administration, the process offers a final opportunity of a return to profitability that could see the company freed from poor management or its business assets streamlined and reorganised such that it begins to flourish once again and provide a return on investment.

Drawbacks of Administration

Expenses

However, Administrations do not always go as smoothly as intended. Insolvency Practitioners, appointed as administrators, are entitled to deduct their fees and charges as secured creditors in preference to any others in the ‘queue’. If an administration is not successful and the company in question is insolvent with very limited assets, this can mean that there will be very few assets to return to creditors and/or members at the end of the process.

Moratorium

The Moratorium on claims, while incredibly useful to the Administrators attempting to resuscitate the company, is open to be used abusively. The courts are very unlikely to allow any sort of claim that might prejudice the recovery of the company to circumvent the moratorium, which prevents those with genuine extant claims against a company in administration from seeking justice. This can be especially damaging if combined with the ‘Pre-Pack’ process detailed below.

Pre-Pack

The Administration is primarily concerned with rescuing the company as a going-concern or returning as much investment to the members and creditors as possible.

In cases of poor management this is often a simple matter of reorganising the management structure of a company and guiding it back to profitability – but these examples are rare.

More often the company being placed into administration is on its way to liquidation and the administration is just one further step on that journey.

As will be appreciated, a company, as a legal personality, is distinct from the business that it carries on. The latter consisting of the assets, the stock and real estate (for example) that a company may own in order to carry on its trading activities.

Oftentimes, and especially with larger companies, the news of being placed into administration is catastrophic for a company’s reputation and the business it carries on.

Creditors might lose confidence; suppliers lose faith and members might seek to sell off their shares as quickly as they can. In order to minimise the disruption, the company’s board may seek to appoint administrators while already having formulated a plan for how the company’s business assets might be sold off.

This ‘pre-packaging’ cuts down on the amount of work that an administrator might have to do and crucially the amount of time that it would take to facilitate the sale of those assets being completed. In this way the company’s most profitable business assets can be quickly hived off and sold, in order to pay the company’s looming creditors and either return to profitable trading or facilitate its eventual dissolution.

Benefits of Pre-Pack

Pre-Packs can be a very cost-effective way for a company with competent leadership to quickly and flexibly hive off and realise company assets in such a way to pay outstanding liabilities. New owners can be approached, under the cover of confidentiality, before the administration is even announced and sales can be completed very quickly after the appointment of administrators to facilitate an almost seamless transfer of the business that can result in minimal job cuts or losses to suppliers. Pre-Packs also offer an ability for a company with very limited funding to obtain the best possible price for its assets to try and make liquidation as profitable as possible for the remaining creditors and members.

Drawbacks of Pre-Pack

Pre-Packs can be undertaken with very little oversight from members or unsecured creditors. This, coupled with the very limited time-frames, can result in the company’s business being sold at an under-value from what it may have achieved had the assets been sold with a wider marketing campaign on the open market.

Pre-Packs can stray into banned practices of phoenix companies and asset stripping. This can occur where the management of an embattled company transfers the same business to another ‘phoenix company’, that they also manage or own, to continue trading but while shedding the debts it had previously incurred. The entire administration and pre-pack process can also be used by business-partners, who hold Qualifying Floating Charges of the required form over the company, to use the administration procedure to oust other partners who they might seek to deprive of their share of the profits.

Conclusions on the Company Administration Process

Administration is intended to be a process by which companies in dire straits are offered a route back to profitability. For larger companies the successful conclusion of this process will mean a great deal to the wider economy or a large number of unsecured creditors and investors. For smaller companies the process can offer a lifeline opportunity to restructure, but for many it is just another step on the pathway to insolvent liquidation. Pre-Packs offer the possibility of a near-instant panacea or a controversial second-chance for the failed company’s business. In all circumstances specialist advice, taken early on in a company’s misfortunes, can make all the difference.

Eldwick Law has specialist insolvency solicitors who can advise creditors, directors or any other member of a company that might be facing administration. That is especially relevant during these very testing times, with many companies going into administration as a result of the COVID-19 government imposed restrictions.

This piece focuses on how complying with directors’ duties fits into good corporate governance. 

Before we begin discussing corporate governance, let’s remind ourselves of the directors’ duties under 172 of the Companies Act 2006, namely:

• To act within powers.
• To promote the success of the company.
• To exercise independent judgment.
• To exercise reasonable care, skill, and diligence.
• To avoid conflicts of interest.
• Not to accept benefits from third parties.
• To declare any interest in a proposed transaction or arrangement with the company.

The overriding duty is to act in good faith and in a way that promotes the company’s success for its shareholders’ benefit. However, in this day and age, customers, investors, and shareholders demand that this is done sustainably.

Here is where corporate governance comes into play. 

The above is a fine balance as it is not a director’s job to strictly weigh up the company’s interests with those of other stakeholders. Instead, a director must consider the best course of action to lead to the company’s success while considering long-term consequences. This may lead to some stakeholders being adversely affected; however, that does not mean the decision is wrong. 

• How does corporate governance affect director’s duties?
• D&O Insurance to Protect Directors From Liability

A further challenge is that company boards, especially those of large organisations, must  exercise proportionate oversight and monitoring whilst allowing managers to make the decisions required to move the company forward and meet its targets.

What is corporate governance?

Corporate governance is about best practices regarding company board leadership. It is governed by the UK Corporate Governance Code (the Code). The 2024 Code is divided into four sections, namely: Board Leadership and Company Purpose; Division of Responsibilities; Composition, Succession and Evaluation; Audit, Risk and Internal Control; and Remuneration. 

The Code gives a codified framework to ensure board members recognise the collective duties and responsibilities needed to advance the long-term, sustainable success of the company.

Corporate governance can be expanded to ESG, which stands for environment, social, and governance.

How does corporate governance affect directors’ duties?

In 2018, the GC 100 published new guidance on embedding directors’ duties under section 172 in board decision-making. The guidance provides for five specific actions to assist in ensuring section 172 duties are incorporated into any decisions made by directors:

• Strategy: When establishing or updating company’s strategy, the section 172 duties must be kept in mind.
• Training: When a new director is added to the board, they should take part in training based on section 172 principles. Ongoing training concerning section 172 duties and responsibilities and how they should tie into decision-making should be regularly provided. 
• Information: Consider and distribute the information directors require on appointment and going forward to help them carry out their role and satisfy section 172 duties. 
• Policies and process: Establish policies and processes appropriate to support the organisation’s operating strategy and commercial ambitions in the light of section 172 duties. 
• Engagement: Examine and set policies concerning the company’s approach to engagement with employees, investors, suppliers, and other stakeholders.

How can section 172 duties be incorporated into a company’s culture?

In an ideal situation, directors’ duties and responsibilities are woven into a company’s culture, making desirable behaviours automatic. The GC 100 guidance states that although there is no prescribed corporate culture that all companies must abide by, “a clear tone from the top will support developing the culture you wish to have throughout the organisation and inform business decisions at all levels.”

The top-down principle of creating a corporate culture is vital to ensuring its success.

Most employees of large companies are concerned with the actions and responses of their direct line manager and have little contact with board members. Remote policies are quickly read and forgotten. Therefore, each management layer must understand and embrace considerations such as approach to risk, policies on career progression, and communication about market opportunities and challenges.

In addition, line managers and supervisors need to train new employees on what directors’ duties are and how they impact the organisation at a base level. This will ensure that everyone in the company understands how and why certain board decisions are made and the duties and responsibilities considered when making those decisions.

Final words on Corporate Governance and Directors Duties

Throughout this series of articles, we have explained what directors’ duties are and why it is crucial for boards to understand their responsibilities to all company stakeholders. The risk of being challenged by NGOs, governments, and even the company’s own shareholders for breach of directors’ duties is increasing, especially relating to environment matters. Boards now run the risk of legal claims, reputational damage, and losing millions due to shelved projects if they fail to implement section 172 duties in their decision-making process.

To discuss any points raised in this article, please call us on +44 (0) 203972 8469 or email us at mail@eldwicklaw.com.

Note: The points in this article reflect the law in place at the time of writing, 25 March 2024. This article does not constitute legal advice. For further information, please contact our London office.

Rashid Gaissin and Waleed Tahirkheli recently travelled to Astana, Kazakhstan to attend client meetings, and deepen Eldwick’s presence within the region.

During their trip, they visited the AIFC (Astana International Financial Centre): a financial hub for not only Central Asian countries, but the Caucasus, Middle East, Europe and China.

Rashid Gaissin and Waleed Tahirkheli were also given a tour of the AIFC Court and International Arbitration Centre: an independent common law court which adjudicates exclusively on claims arising out of the AIFC and other claims where the parties agree to the jurisdiction of the AIFC Court.

The AIFC Court and International Arbitration Centre (IAC) have completed and enforced almost 2200 cases, including 64 court judgments and 415 arbitration awards, including claims with quantum in excess of $300 million.

We are very grateful to Nurkhat Kushimov, Almas Zholamanov, MPA, PMP, CIPR and Yernar Baktiyarov for their personal tour of the AIFC’s facilities.