OUTER HOUSE, COURT OF SESSION [2008] CSOH 120
	OPINION OF LORD HODGE in the Petition of ROSSERLANE CONSULTANTS LTD AND GLENN ARTHUR NOBES For Appointment of a judicial factor over the estates of the former partnership, Caspian Energy Group Limited Partnership No 5104 ________________

Petitioner: Dean of Faculty & Sean Smith, Advocate; Anderson Strathern

Respondent: H W Currie QC and Paul O'Brien, Advocate; Burness LLP

20 August 2008

[1] This an application for recall of the appointment of an interim judicial factor on the estates of the now dissolved Scottish limited partnership, Caspian Energy Group Limited Partnership ("Caspian"). On 23 July 2008 Rosserlane Consultants Limited ("Rosserlane"), an Isle of Man company, and Glenn Arthur Nobes ("Mr Nobes") presented a petition to the Court of Session for the appointment of a judicial factor and on that date applied for and, before intimation of the petition, obtained the appointment of Thomas Campbell MacLennan CA as interim judicial factor on Caspian's estates. In that application the petitioners represented that they were creditors of Caspian and that, if a freezing injunction granted by the High Court in England were to be recalled, the interests of creditors might be defeated as a result of irregularities in the winding up of Caspian which I describe below.

Background

[2] Caspian was established in 2003 as a vehicle to hold a 51% shareholding in Shirvan Oil Limited ("Shirvan"), which was a joint venture company established in Azerbaijan to explore for oil and develop the Kyurodag oil field. Rosserlane was the general partner in Caspian and Swinbrook Developments Ltd ("Swinbrook"), a company incorporated in the British Virgin Islands, was the limited partner. Both Rosserlane and Swinbrook were part of a group of companies which were ultimately controlled by Dr Zaur Leshkasheli ("Dr Leshkasheli"), who is a businessman and a citizen of the Republic of Georgia.

[3] Mr Nobes is a business consultant and affirms that he is a creditor of Caspian as a result of a consultancy agreement which was entered into in 1996 by another limited partnership which was ultimately controlled by Dr Leshkasheli. Caspian took over the agreement when it became the shareholding vehicle in relation to the interest in the Kyurodag oil field. In support of his claim to be a creditor of Caspian Mr Nobes produced the consultancy agreement with Whitehall International Traders, the predecessor limited partnership, which was dated 1 July 1996 and signed by him and Dr Leshkasheli, and also periodic acknowledgements signed by Dr Leshkasheli of the indebtedness of the limited partnerships arising out of that agreement. That alleged liability comprised consultancy fees of £31,080 per week and expenses. The agreement empowered Mr Nobes to call for payment at any time and provided for interest at 12% per annum to run on any unpaid balance. Mr Nobes's acknowledged claim against Caspian as at 31 December 2007 amounted to £33,847,318.

[4] Caspian and several corporate entities under the ultimate control of Dr Leshkasheli entered into an agreement dated 14 December 2006 with Credit Suisse by which a consortium of financial institutions arranged by Credit Suisse granted a loan facility of $127 million to Caspian ("the loan agreement"). Caspian's co-obligants under the loan agreement included Rosserlane.

[5] The problems which have given rise to this application followed from the decision by the lending institutions to exercise their powers under the loan agreement to force the sale of the securities which included Rosserlane's and Swinbrook's interests in Caspian. Those partnership interests were put up for sale and, on 15 February 2008, were acquired for $245 million by Berghoff Trading Limited ("Berghoff"), a Cypriot company, and GEA Holdings Limited ("GEA"), a company incorporated in the British Virgin Islands. By that assignation the former became the general partner and the latter the limited partner in Caspian. Mr Nobes affirms his belief that the person ultimately interested in Berghoff and GEA is Mr Mikhail Gutseriyev, a Russian citizen whom he describes as "a very well known oil oligarch".

[6] On 20 March 2008 Caspian sold its shareholding in Shirvan Oil Limited for $245 million to Global Energy Azerbaijan Limited, the consideration comprising two promissory notes payable on 29 March 2013.

[7] Dr Leshkasheli and the corporate entities under his control were displeased at the forced sale of their interests in the oil field. Representatives of Rosserlane expressed the view that the true value of the partnership interests was at least $500 million and therefore the sale was at a very considerable undervalue. Berghoff and GEA encountered difficulties in obtaining the transfer of all of Caspian's assets as a result of assertions emanating from the corporate interests under Dr Leshkasheli's control that the sale was invalid. Berghoff, GEA and Caspian commenced legal proceedings in the High Court in England against Swinbrook, Rosserlane and Dr Leshkasheli seeking delivery of the partnership assets and a declaration that the sale was valid. On 19 March 2008, the High Court in a consent order declared the sale of the partnership interests to be valid. On 1 April 2008 Rosserlane gave notice that they proposed to counterclaim in the English proceedings and on 8 May 2008 they applied for permission to do so.

[8] On 13 May 2008 Caspian pledged the promissory notes to Brander Enterprises Limited ("Brander"), which were the assignees of loans of $245 million which Ligasoff Holdings Limited had provided to Berghoff on 15 February 2008 to fund the acquisition of the partnership interests in Caspian. It was not clear on the information before me whether that pledge was in performance of any prior obligation to provide security.

The English legal proceedings and Berghoff's response

[9] On 21 May 2008 Mr Nobes commenced proceedings against Caspian in the High Court in London claiming payment of £35,418,281 as a contractual debt due under the consultancy agreement. As appears in paragraph 15 below, Caspian did not defend the action.

[10] Berghoff and GEA consented to the application by Rosserlane to counterclaim in the proceedings referred to in paragraph 7 above and the counterclaim was served on 9 June 2008 in which Rosserlaine claimed from Caspian $176,906,883.13 on the basis that it had discharged the debt which Caspian owed to Credit Suisse. Goldring J on 14 June 2008 issued a freezing injunction against Berghoff, GEA and Caspian which among other things prohibited each of Berghoff and Caspian from removing from England and Wales any of its assets up to the value of £95 million and from disposing of, dealing with or diminishing the value of any of its assets whether they were in or outside England and Wales up to that value.

[11] Berghoff, GEA and Caspian sought recall of the freezing injunction by applying for summary judgment upon Rosserlane's counterclaim and after a hearing on 17 July 2008 Teare J in a judgment dated 28 July 2008 ([2008] EWHC 1785  (Comm)) held that Rosserlane's counterclaim had no real prospect of success and entered summary judgment in favour of the claimants. He refused Rosserlane's application for permission to appeal but, to allow them to seek leave from the Court of Appeal, he ordered that the freezing injunction should be continued until the later of (a) 4pm on 18 August 2008, or (b) if Rosserlane's notice were filed and served before then and permission to appeal were refused, such final refusal, or (c) if the notice were filed and served timeously and the Court of Appeal granted permission to appeal, the determination of the appeal. Thus when the motion for recall of the appointment of the interim judicial factor was presented the freezing injunction was in place and I was informed that Rosserlane were to apply for permission to appeal before 18 August. If they have done so timeously the freezing will continue after 18 August 2008.

[12] Meanwhile Berghoff, on the advice of their lawyers, Grundberg Mocatta Rakison LLP ("GMR"), attempted to avoid becoming embroiled in litigating the claims by Rosserlane and Mr Nobes by denuding Caspian of its assets and by seeking to wind up Berghoff. First, on 12 June the partners of Caspian resolved to dissolve it and the dissolution agreement of that date purported to transfer to Berghoff not only Caspian's assets but also its liabilities. It was not made clear to me how those liabilities could have been transferred from Caspian to another entity without the consent of the creditors or an order of the court, except by operation of law for the purposes of winding up the partnership under section 38 of the Partnership Act 1890 ("the 1890 Act") in which event the assets of the dissolved firm would be held in trust to meet those obligations. See sections 20 and 44 of the 1890 Act which would apply as default rules in the winding up of Caspian's estate unless the partnership agreement provided otherwise.

[13] Secondly, at about the same time, steps were taken to wind up Berghoff by means of a creditors' voluntary liquidation. By letter dated 13 June 2008 Ernst & Young LLP wrote to Mr Nobes intimating that the directors of Berghoff had called a meeting of creditors in Nicosia on 3 July 2008 for the purpose of voting on a resolution to wind up the company. In the directors' statement presented to that meeting it was stated that the directors considered that Dr Leshkasheli, Rosserlane and Mr Nobes were not creditors of Berghoff . In the same statement the directors stated the reasons for Berghoff's insolvency thus: "Following the assumption of the liabilities of Caspian and demands being made on the unsecured assets of the Company by its creditors, the directors of the Company considered Berghoff to be both balance sheet and cash flow insolvent". In the directors' statement no distinction was made between the creditors of the dissolved Caspian and those of Berghoff. At the creditors' meeting Elizabeth Ann Bingham ("Ms Bingham") of Ernst & Young LLP explained that the directors had taken legal advice and that they had concluded that the claims by Rosserlane and Mr Nobes were wholly without merit. Their proxies were therefore not allowed in the vote of the creditors. The creditors then voted to appoint Ms Bingham and Ninos Hadjirousos of Ernst & Young Cyprus Limited joint liquidators of Berghoff.

[14] The Dean of Faculty, who appeared for the petitioners, in a colourful phrase characterised the plan to dissolve Caspian and wind up Berghoff as a "scorched earth" policy which prejudiced the petitioners. Mr Currie, for the respondents, accepted that the dissolution and the winding up were an arrangement adopted on legal advice but described it as a plan to avoid unmeritorious litigation which sought to undermine the sale of Caspian. He conceded that if the petitioners were creditors of Caspian there was an argument that Caspian's actings amounted to the giving of an unfair preference. He did not make clear whether that argument was confined to the transfer of Caspian's residual assets to Berghoff or extended to the pledging of the promissory notes to Brander.

[15] In the context of the implementation of this plan, GMR, acting on behalf of Caspian, sent an e-mail to Mr Nobes's solicitors on 10 June 2008 stating that they expected to receive instructions to file an acknowledgement of service of Mr Nobes's claim and asked for confirmation that the last day for doing so was 12 June 2008. In the event Caspian did not defend the action but on 12 June 2008 GMR wrote again to Mr Nobes's solicitors intimating that Caspian had been dissolved with effect from midnight on 11 June 2008. GMR stated that they were instructed to act on behalf of Berghoff and confirmed that they would not oppose the substitution of Berghoff in place of Caspian. Mr Nobes chose not to bring Berghoff into the action but on 20 June 2008 applied for default judgment against Caspian. On 9 July 2008 Berghoff sought leave to enter the proceedings to defend Mr Nobes's claim in place of Caspian. The outcome of this application is as yet unknown.

The grounds on which the respondents seek recall
[16] Mr Currie submitted that the appointment of the interim judicial factor should be recalled on four grounds. First, he submitted that the petitioners, if they were creditors of Caspian, did not have title or interest to seek the appointment of a judicial factor to the estates of a partnership. Secondly, in any event, the appointment was a remedy of last resort and was not merited in this case where there were other legal remedies available to the petitioners. Thirdly, he submitted that the petitioners had no stateable case or at best a very weak case that they were creditors of Caspian. Fourthly, he argued that there was no cogent reason for the appointment of an interim judicial factor pending consideration of the petition and answers.

[17] The Dean of Faculty submitted that there was no problem with title or interest as the appointment of a judicial factor was a remedy which the court provided in the exercise of its nobile officium to prevent injustice and the circumstances in which the court would exercise that power were not closed. In support of the continuance of the appointment of the judicial factor he did not rely on Rosserlane's claim but submitted that Mr Nobes had a prima facie claim vouched by the consultancy agreement and the several acknowledgements by Dr Leshkasheli of Caspian's accumulating indebtedness. Thirdly, he submitted that there were no other remedies practically available to the petitioners to protect themselves against injustice in the face of the attempt to defeat their claims. Finally, he submitted that the interim appointment was of practical value as the judicial factor could take steps to identify the assets of Caspian, ascertain the whereabouts of the promissory notes and take proceedings to preserve them. The judicial factor by virtue of his office would have title to seek freezing orders in other jurisdictions which Rosserlane and Mr Nobes might not be able to obtain without first establishing their claims.

[18] In the course of argument I was referred to the following authorities. In relation to the appointment of judicial factors on the estates of partnerships I was referred to Clark on Partnership Vol. II pp. 674-5, Innes Chambers & Co v T D McNeill & Son 1917 1 SLT 89, the Partnership Act 1890, s. 39, Carabine v Carabine 1949 SC 521, Walker on Judicial Factors pp.48-49, and Miller on Partnership pp.543-551. On the court's power to appoint judicial factors more generally counsel referred to Leslie's Judicial Factor 1925 SC 464, Stair Memorial Encyclopaedia Vol.2 para 1318 and Vol.24 paras 237- 240, McCulloch v McCulloch 1953 SC 189, Lunan v MacDonald 1927 SLT 661, Thurso Building Society's Judicial Factor v Robertson 2000 SC 547 and Institute of Chartered Accountants in Scotland v Kay 2001 SLT 1449.

Decision

[19] I am satisfied that there is no merit in the challenge to the title or interest of the petitioners to apply for the appointment of a judicial factor on the estate of a dissolved partnership on the basis that they are allegedly creditors of the former partnership. While the books to which I was referred did not contain examples of the court making such appointments at the instance of creditors, that may be because there were other remedies available such as sequestration of the partnership estates under the bankruptcy legislation. It would be inconsistent with the nature of the remedy for the court to refuse to give it to a creditor, who had an interest in an estate and who faced serious prejudice through its mismanagement, on the basis that, as creditor, he had no title to sue.

[20] From the authorities it appears that the powers of the court to appoint judicial factors, other than when it acts under statutory powers, may be summarised as follows. First, the court has power to appoint a judicial factor to ingather, preserve and manage property in the exercise of its nobile officium. Secondly, the court can exercise this power whenever it is necessary or expedient to protect against loss or injustice. Thirdly, it follows from that that the circumstances in which the court may appoint a judicial factor are not closed. But, fourthly, the power is available as a last resort and a person with an interest in an estate is normally required to exercise ordinary legal remedies if they are available to him and can provide appropriate protection. See Leslie's Judicial Factor (above) the Lord President (Clyde) at p. 469, Thurso Building Society's Judicial Factor v Robertson (above), Lady Paton at paras.12 and 13, Institute of Chartered Accountants in Scotland v Kay (above), Lord Carloway at p.1451 D-G, and Stair Memorial Encyclopaedia, Vol. 24 paras 237-240.

[21] In the context of this case what is important is (a) that a person with an interest in the property has title and interest to apply to the court for the appointment of a judicial factor, (b) that the ground of appointment is to protect against loss or injustice, and (c) that the appointment is a remedy of last resort and the interested party is normally expected to exercise ordinary legal remedies if they can provide appropriate protection against the threatened loss or injustice.

[22] What is now in issue is the appointment of an interim judicial factor and not the determination of the petition and answers. Thus, as Mr Currie submitted, the court has to look to the strength of any prima facie case for the appointment of a judicial factor and the balance of convenience.

[23] In support of his application the Dean of Faculty did not rely on Rosserlane's claim, which was based on (a) the alleged payment by it of Caspian's debt under the loan agreement giving rise to a right of relief under the law of guarantee, (b) a resolution by Caspian dated 5 January 2007 and (c) a claim in restitution in relation to the payment in (a). As I have said, Teare J has held that Rosserlane's claim has no real prospect of success and Rosserlane intend to appeal his decision. Instead the Dean of Faculty relied on the claim by Mr Nobes which was supported by affidavits from the claimant and Dr Leshkasheli and accompanying documentation. He also referred me to an affidavit by James Dugald Campbell, a partner in the firm of Jones Day, who are acting for Mr Nobes in his claim in the High Court in London, explaining the procedural steps which parties had taken in relation to his claim, and to related documentation. I was also shown an affidavit by Fiona Catherine Gillett, a senior associate in Masseys LLP, who are Rosserlane's solicitors in their English proceedings, and accompanying documents.

[24] Standing Teare J's decision, I do not consider that Rosserlane has made out a prima facie case that it is a creditor of Caspian.

[25] Mr Nobes's claim is supported by the written consultancy agreement dated 1 July 1996 and the periodic acknowledgements by Dr Leshkasheli of sums accruing under the agreement and his certification on behalf of Caspian that the sums were due for payment. At the same time no evidence was proffered, nor was it asserted, that anyone other than Mr Nobes and Dr Leshkasheli were aware of the consultancy agreement or the sums due under it. As Mr Currie pointed out, the partnership accounts of Caspian and its predecessor limited partnership made no reference to the liability. Significantly also there was evidence that the existence of the alleged debt had not been disclosed to Credit Suisse when it undertook a due diligence exercise in 2006 before providing the $127 million loan facility. In a statement (which was an as yet unsigned affidavit) Mr Peter Firmin, an employee of Credit Suisse Securities (Europe) Limited, explained that he had acted as lead structurer of the loan facility transaction and that he had had day to day contact with Caspian, Dr Leshkasheli and the other companies involved in the deal. He explained that he had had no knowledge of the consultancy agreement and that it had not been disclosed to Credit Suisse before the loan facility was provided in 2006 or amended in 2007. Caspian had responded to a due diligence questionnaire, in which it was asked to provide copies of all agreements and other documents which could result in a liability of more than $500,000, by denying that there were such documents other than those already provided. Nor did Caspian disclose the consultancy agreement as a contingent liability. The answers to the questionnaire were signed on Caspian's behalf by Dr Leshkasheli. Nor did Dr Leshkasheli disclose the liability in the Deed of Warranty which he signed on 14 December 2006. Nor in Schedule 3 to the Loan Agreement, which listed the existing indebtedness of Caspian and other entities covered by the Obligors' representations in clause 14(r), was any mention made of the debt to Mr Nobes. All this occurred when the acknowledgement of debt to Mr Nobes (p.63 of the documents attached to Mr Nobes's affidavit) certified the debt as amounting to £29,708,512 as at 31 December 2006. The representations in clause 14 of the Loan Agreement were confirmed by the Obligors as at 13 December 2007 in the Deed of Amendment and Restatement which the Obligors signed on that date. As mentioned in paragraph 3 above, by 31 December 2007 the certified debt under the consultancy agreement (p.5 of the documents annexed to Mr Nobes's affidavit) had risen to £33,847,318. This is remarkable.

[26] Mr Currie invited me to accept that there was a serious question as to the validity of Mr Nobes's claim. The Dean of Faculty responded by referring to Mr Nobes's affidavit and supporting documents. He submitted that if I were to reject the claim I would be concluding that Mr Nobes had sworn a false affidavit and uttered false documents. That is not necessarily the case. It appears from Dr Leshkasheli's affidavit that Mr Nobes did a considerable amount of work for Caspian as a consultant but that he was not finance director of Caspian. Mr Nobes made the same point, affirming that he was not involved in preparing Caspian's accounts. He accepted that one of his roles was to identify sources of finance for Caspian but both Mr Nobes and Dr Leshkasheli affirmed that he was not involved in the negotiation of the loan agreement with Credit Suisse or in the due diligence process. Mr Nobes was however the finance director of Shirvan and had an extensive involvement in Caspian's business and Mr Currie asserted that he operated several of the bank accounts of Caspian. In a context where no information has been provided to me that any third party outside Caspian and Dr Leshkasheli's business group was aware of the arrangement between Mr Nobes and Dr Leshkasheli on behalf of Caspian or the extent of the liability, it may be that Mr Nobes and Mr Leshkasheli were content that Caspian's obligation remained latent. As Mr Nobes was active on behalf of Caspian, it is difficult to infer that he was not aware of that latency. If so, issues of personal bar or estoppel may arise if there were detrimental reliance on Caspian's accounts or the representations to Credit Suisse.

[27] In the circumstances I do not conclude on the information provided to me that Mr Nobes's claim is invalid but I am satisfied on that information that the prima facie case which the consultancy agreement and the certificates support is seriously weakened by the apparent latency of the alleged arrangement. Dr Leshkasheli's assertion in his affidavit that he recalled telling Mr Firmin and Mr Benyatov of Credit Suisse "on more than one occasion that Caspian had various agreements with parties who had supported the partnership from the very beginning and that the substantial liabilities under these agreements would have to be paid by Caspian" does not alter my conclusion. That is no answer to the formal representations which he made to Credit Suisse and in the partnership accounts.

[28] I turn then to Mr Currie's submission that there were ordinary legal remedies available to the petitioners. He submitted that they could (a) attempt to sequestrate Caspian's estates on the ground of insolvency, (b) seek (unspecified) remedies in the winding up of Berghoff in Cyprus or (c) pursue their claims in the English courts.

[29] I am satisfied that it would not be practicable for Rosserlane or Mr Nobes to protect their interests by seeking to sequestrate Caspian's estates under sections 5 and 6 of the Bankruptcy (Scotland) Act 1985 because those who are charged with winding up Berghoff and Caspian's estates would challenge the claim that they were creditors. I envisage similar difficulties arising if insolvency proceedings were commenced in England under the Insolvent Partnerships Order 1994. I am also not satisfied that there are remedies available in Cypriot law as parties were not able to inform me of the corporate insolvency regime there. In any event I observe that the liquidators of Berghoff do not appear to be receiving independent legal advice in a context in which it was conceded that the dissolution of Caspian and the winding up of Berghoff were parts of a plan adopted in an attempt to prevent or discourage Rosserlane and Mr Nobes from pursuing their litigation. In that context in which the directors' report on Berghoff's insolvency (which was issued by Ernst & Young) draws no distinction between the creditors of Caspian and the creditors of Berghoff and shows no awareness that Caspian's assets are held by Berghoff in trust for Caspian's creditors, this may be important. That leaves the proceedings in the English courts.

[30] As mentioned above, both Rosserlane and Mr Nobes have raised claims in the High Court in England. Rosserlane has obtained a freezing injunction. Mr Nobes has not attempted to do so. The Dean of Faculty gave no explanation why Mr Nobes had not sought such an order beyond saying that it was not apparent that he would be granted one. Such an order would bind Caspian (or, strictly, those holding its estate after dissolution) and Berghoff and thus the liquidators who are responsible for winding up the estates of each of the entities. Similarly I do not see why Mr Nobes, relying on the same material as he has presented to this court, should not seek a similar order against the pledgees of the promissory notes, Brander, in the British Virgin Islands. It is no answer to say that the interim judicial factor would have an unquestioned title and interest to sue for such an order while Mr Nobes would have to persuade the court of his claim. That simply begs the question whether there is a proper basis for the interim appointment. On the information before me I am persuaded that there are appropriate ordinary legal remedies available to Mr Nobes in England and probably in the British Virgin Islands which he has not pursued.

[31] Finally, in relation to the submission that there was no cogent reason requiring an interim appointment, it appears to me that there may be a case for interim measures to preserve Caspian's estates (including the promissory notes) if there are creditors of Caspian whose claims cannot be satisfied by the funds in the control of the liquidators of Berghoff which are available to meet Caspian's debts. This would be so particularly if the pledge of the promissory notes should turn out to be an unfair preference. But it does not appear that any assets of the dissolved partnership or those who hold them are located in Scotland. I see no basis on which a Scottish remedy should be preferred over the remedies available in other jurisdictions.

[32] In summary, I am not satisfied that either of the petitioners has a strong prima facie case of an enforceable claim against Caspian after the interests in it were assigned to Berghoff and GEA. I am persuaded that Mr Nobes, having raised proceedings in England to establish his claim, can seek a freezing order from the High Court as Rosserlane did. No persuasive reason has been advanced why he should not also seek a similar order in the British Virgin Islands against Brander in relation to the promissory notes, if the liquidators of Berghoff do not take steps to preserve those assets. Having regard to the weakness of the petitioners' claims and as ordinary legal remedies are available to them, I do not consider it appropriate that the interim appointment should stand. Further, having regard to (a) the weakness of Mr Nobes's claim, (b) the availability of ordinary remedies and (c) the continued existence of the freezing order in England I am also satisfied that on balance of convenience the interim appointment should be recalled.

Determination

[33] In the circumstances I grant the motion of Berghoff and recall the appointment of the judicial factor ad interim, recall the sequestration ad interim of Caspian's estates and assets and find the petitioners liable for any fees and expenses which the interim judicial factor has earned or incurred to date.