Commercial Law International

By: Ainsley Brown

The safety of the people is not the supreme law

While terrorism, terror financing and constitutional principles such as the rule of law and Parliamentary supremacy are not the usual subjects covered here at Commercial Law International, this seeming break from tradition is in fact not such a stretch.

As our moniker indicates Commercial Awareness is Global – it is important to note and as will soon become clear, coverage of this case in no way departs from this.

This landmark ruling is instructive for the “normal” subjects covered on this blog because it illustrates the legal limits imposed on the state – read the government – as it pertains to its ability to interfere with the assets of an individual (natural or juridical). These limits are even justified, as their Lordships have ruled, when combating the scourge of international terrorism. As the Deputy President of the Court, Lord Hope of Craighead, put it: “Even in the face of the threat of international terrorism, the safety of the peoples is not the supreme law.” In other words the government of the day only has as much power as Parliament has allowed it to have; the will of Parliament being express of course in the laws its passes.

The offending powers struck down by their Lordships are the Terrorism (United Nations Measures) Order 2006 and the Al-Qaeda and Taleban (United Measures) Order 2006. The Orders were issued by the then Chancellor of the Exchequer and now Prime Minister Gordon Brown in response to United Nations (UN) Resolutions passed in response to the September 11th attracts. The Resolutions sought global co-operation on combating the financing of international terrorism.

Unlike in many other countries the United Kingdom under its UN obligations did not pass legislation in order to give effect to the Resolutions. Instead, the Chancellor issued these Orders, empowering Her Majesty’s Treasury (Treasury) to seize the assets of suspected terrorist, Al-Qaeda and or Taleban members or supporters. The seizures could take place on mere suspicion without an hearing and would not be under scrutiny of the courts through judicial review.

The case was the first to be heard in the newly minted Supreme Court when it opened last year. The appeal was brought by five men whom successfully argued their case in the High Court that the Orders were unfair and breached their fundamental right guaranteed by the laws of Britain; however, they were later over turned by the Court of Appeal.

The question before their Lordships though a simple one was non the less a profound one. And it was this when Parliament empowered the Treasury to make orders did it in turn give the Treasury the power to “interfere so profoundly with individuals fundamental rights without parliamentary scrutiny[?]”

With word such as “oppressive,” “paralysing” and “draconian” peppering the decision, their Lordships answered the question with a resounding NO!

In a nation such as Britain, with a “unwritten constitution” it must always be remembered that Parliament is supreme and it is only through Parliament that the government has the exercise power. Moreover, when such power involves the interference with an individual’s basic rights such authorization cannot be implied but must be explicit. In any democratic-capitalistic society access to the courts and property rights are sacrosanct. As Lord Phillips of Worth Matravers, the President of the court put it: “Access to the court to protect one’s rights is the foundation of the rule of law.” And without the rule of law there can be no liberal-democracy.

For those that would say that this ruling is just another example of judges legislating from the bench in breach of Parliamentary supremacy, Lord Philips has a stern rebuke. His Lordship countenanced with “on the contrary it upholds the supremacy of Parliament in deciding whether or not measures should be imposed that affect the fundamental rights of those in this country” without explicit grant by Parliament.

It is important to not that Supreme Court are not saying that these laws are in and of themselves illegal – not at all. However, what their Lordships are saying is that if the government of the day wants exercise such extensive powers they much first seek and then be granted Parliamentary approval. Lord Hope put it best: “If the Executive considers that such far-reaching measures are necessary or expedient for combating terrorism or honouring the United Kingdom’s international obligations it must obtain approval for them form Parliament.”

In response to the judgment the Gordon Brown’s is rushing through Parliament the Terrorism Asset-Freeze (Temporary) Provision Bill which is expected to have retrospective effect and by and large mirror the quashed Orders. If all goes to plan the Bill will become law some time this week.

By: Ainsley Brown

The UK’s highest court, its new Supreme Court – new in name only, it still has the same functions as the old House of Lords – has handed down its first business case ruling. And it is a significant one, not just for those directly affected by the ruling but also within the wider UK and international capital markets.

What am I am talking about? Well, the Sigma SIV ruling.

The ruling by the UK Supreme Court – it will take some getting use to saying that – can be best characterized as part of the clean up after the fallout from the UK’s, and the world’s for that matter, financial markets’ meltdown.

Sigma SIV, the world’s largest structured investment vehicle collapsed and went into bankruptcy in 2008 owing investors about $9 billion. Nine billion dollars, it just blows the mind, and not surprisingly it was a figure that was significantly more that its actual investments. So as is the usual case with these things to court we go.

In the High Court, later to be affirmed in the Court of Appeal, a very controversial ruling was made which departed significantly from the normal practice in bankruptcy in the UK. The court ruled that investors, who were owed about $6.2 billion, would be ranked and paid according to how soon their investment matured. This would mean that otherwise identical investments that came to maturity first, let’s say in 2009, would rank in priority – i.e. get their money first – than those that matured at a later date, say 2010.

At first blush that my might seem not only to make sense but to be fair – first in first out, right? However on much deeper consideration not only does it not make sense it is wholly unfair. You need to consider three things. First, the investments, apart from the maturity date are identical, logic and any sense of justice would dictate that like ought to be treated alike. Second, no matter what the maturity date Sigma SIV has already collected money from investors, and presumably invested it in a like manner. Why should an investor be prejudiced by a later maturity date when they have already expended funds? Third, a later maturity date says nothing of the time of investment. An earlier maturity date does not necessarily indicate an earlier investment.  An investor, as part of their portfolio or tax management could have chose or been assigned a later maturity date. So the first in first out is actually turned on its head.

 The judges of the UK Supreme Court – I guess they are still called Law Lords –  did not have to turned to either logic or a sense of fairness, the simply had to turn to the law. The normal practice, in fact is one of is foundational principles, in UK bankruptcy and insolvency law is that like ought to be treated alike. That is to say that all identical creditors – and at this point the investors are creditors – are ranked equally and are entitled to the remaining assets of Sigma SIV in proportion to their investment.

Thankfully the Law Lords, by a majority of four to one, reaffirmed this basic principle and made it clear that structured investment vehicles are no different in an insolvency situation. As the clean up from the financial fallout continues this ruling has now provided firm guidance to the financial community and their lawyers on how investment vehicles and similar financial products are going to be treated, as far as creditor rakings are concerned, in insolvency.