April 05 2011
The recent case of FG Hemisphere Associates LLC v Democratic Republic of Congo ( JRC 195) considered the issue of the situs of a debt.
In April 2003 FG Hemisphere Associates LLC had obtained, by assignment, the benefit of International Chamber of Commerce arbitration awards made against the Democratic Republic of Congo (DRC) and a Congolese company, and was attempting to recover in excess of $100 million.
In March 2009 Hemisphere had obtained an order from the Royal Court of Jersey for an interim injunction on the right to receive payments on shares in Groupement pour le Traitment du Terril de Lubumbashi Limited (GTL) that were owned by La Générale des Carrières et des Mines, which was itself wholly owned by the DRC.
The payment rights related to a debt in respect of a contract for the supply of cobalt and copper-bearing slag believed to be worth $30 million to $45 million a year. Hemisphere contested that as GTL was resident in Jersey, the GTL shares and the debt represented by the slag sale payments were subject to Jersey law (ie, that the situs of the shares and the debt owed was Jersey). GTL argued that although it was incorporated and held its registered address in Jersey, it had no assets and no real connection with the island.
The court confirmed certain relevant principles derived from Rule 120 of Dicey, Morris & Collins on the Conflicts of Law and from the cases of New York Life Insurance Company v Public Trustee ( CA2 Ch 101) and Kwok v Estate Duty Commissioner ( Privy Counsel 1 WLR 1035) as follows:
- The situs of a debt owed by a corporate body is the place where that body resides.
- Residence for this purpose is where that body carries on business.
- If a body carries on business in more than one place, it is regarded as resident in each of these locations and, subject to the bullet point below, a debt owed by it will be treated as being located in each of those places.
- However, if one rather than another of those places has been expressly or implicitly selected as the place where it is recoverable, that will be regarded as its situs.
- A debt payable in future is no less a debt than one that is payable, and is subject to the same rules on situs.
The court cited Kwok in concluding that:
"the true view is that the corporation resides for the purposes of suit in as many places as it carries on business… under ordinary circumstances, the debt would be situated in each place where the corporation can be found."
The court accepted that what may or may not constitute 'residence' for tax purposes is irrelevant for present purposes, and that what matters is where a corporation carries on business. Furthermore, referring to Kwok, the fact that the board of directors in that case were all resident in Hong Kong and therefore, as a consequence, management and control was there, did not, of itself, result in the company being resident in Hong Kong. A company is resident where it can be found and made subject to a process of enforcement.
Kwok is cited by Dicey as authority for the proposition that a corporation is also resident for situs purposes in its jurisdiction of incorporation. The court rejected the defence's argument that, for residence, there should also be some trading in that jurisdiction or, at the very least, a bank account. The court stated that the fact that a company is incorporated and has its registered office in a jurisdiction is sufficient to make it resident in that jurisdiction for the purposes of the situs of the debt, irrespective of where its daily business activities are conducted, where its directors happen to live or where its bank accounts are located.
The court went on to consider whether GTL was carrying on business in the DRC. It cited Kwok as follows:
"in that situation, it is clearly established that the locality of the chose in action [in this case a debt] falls to be determined by reference to the place - assuming it to be also a place where the company is resident - where, under the contract creating the chose in action, the primary obligation is expressed to be performed."
Therefore, if the DRC was held to be a jurisdiction in which GTL carried on business and there was an express or implied contractual stipulation that performance or discharge was to be in the DRC, this would result in the DRC being regarded as the situs to the exclusion of any other place, presumably including the jurisdiction of incorporation.
On the facts, the court held that GTL did not carry on business in the DRC, notwithstanding that it owned operating companies in the DRC and had entered into the slag supply agreement with a Congolese company. There was no evidence of carrying on business in terms of premises, staff or what the company actually did in the DRC on a day-to-day basis.
The court accordingly found that the shares in GTL and the slag sales payments were situated within the jurisdiction of Jersey.
This case is useful for international companies that retain their registered office in one jurisdiction and carry out their business activities in alternative jurisdictions. It provides such companies with a clear indication that the situs of their intangible assets will remain with the jurisdiction of their incorporation and registered office.
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