The England and Wales High Court (‘EWHC’) has considered whether there was a cause of action to allow judgment debtors (‘Marex’) to pursue a claim against the controlling person (‘CSG’) of two British Virgin Islands (‘BVI’) companies (in liquidation) (‘the Companies’) where CSG had allegedly asset-stripped the Companies and dissipated their assets. The issue arose in a challenge by CSG to the jurisdiction of the EWHC. If Marex could not show a basis on which to bring such a claim then CSG’s jurisdictional challenge would succeed.  (For the purpose of the hearing the facts were assumed to be as alleged by Marex in their claim.)

Case reviewed: Marex Financial Ltd v Carlos Sevilleja Garcia [2017]

What happened?

Marex successfully sued two companies in the EWHC and had a US$5m judgment in its favour (the ‘Judgment Debt’). Marex’s claim was that that between a draft judgment (19 July) and a freezing injunction being obtained (14 August) the Companies were dishonestly asset-stripped and that this was induced and procured by CSG, who was ‘the ultimate beneficial owner of the Companies, their controller, their agent, a de facto or shadow director of them and the holder of a power of attorney from them.’ Of these assets US$9.5m was allegedly moved from accounts in England and ultimately brought under CSG’s personal control.

What is the basis of Marex’s claim?

Usually a creditor of a company cannot recover sums due other than from the assets of the company. However, in common law jurisdictions such as the UK, USA and the Cayman Islands over time the Courts have accepted that certain wrongs (torts) give rise to a claim against the wrongdoer personally for damages for loss caused or other remedy. Here, Marex alleges that CSG is liable in tort, for either:

  • - knowingly inducing and procuring the Companies to act in wrongful violation of Marex's rights under the judgment, alternatively
  • - intentionally causing loss to Marex by unlawful means or by unlawful interference with Marex's economic interests. (‘Unlawful means’ being unlawful acts by X against Y which a) interfere with Y’s freedom to act and  b) which X intends will cause loss to Z.)

As Marex alleges the actions were to frustrate payment of the Judgment Debt awarded by the EWHC the claim was brought in that court’s jurisdiction.

How did CSG respond?

CSG is not resident in England and Wales and Marex’s claim documents were served on him outside the EWHC’s jurisdiction. He rejected:

a)         the EWHC’s jurisdiction to hear the claim and challenged service of Court documents on him. He argued that as the Companies were incorporated in BVI that was where the action should have been brought. Further, Marex had registered proofs of debt in the liquidation of the Companies in BVI and had thereby submitted to BVI jurisdiction, and they were trying to recover the Companies assets when that was the job of the Companies’ liquidator.

b)    i) the existence of a tort of inducing or procuring another to act in wrongful violation of rights under a judgment.

ii) He further argued that even if such a tort existed it was the Companies which had suffered the loss and the Companies which had to bring the action. In previous cases it had been held that where a company suffers a loss as a result of an alleged breach of duty owed to it then only the company can bring the claim and not a shareholder.  This is because the loss claimed by the shareholder would be a ‘reflective loss’:  whilst the company’s loss may be reflected in a drop in the value of the shareholder’s shares, the company is the ‘person’ which has suffered the loss and therefore it is the only one entitled to bring any claim. CSG argued that rule applied not just to shareholders but also to creditors.

c)         the unlawful means claim on the basis that in a previous case it was found that ‘unlawful means’ did not include acts by X against Y which, whilst unlawful, do not affect Y’s freedom to deal with Z. He argued that removing the means to pay is not the same as preventing payment. The action of asset stripping the Companies, did not prevent the companies  paying Marex. Although it reduced the money they had available to pay Marex, the Companies were still free to come to an arrangement with Marex for payment in the future.

What did the court have to say?

The hearing concerned whether the EWHC was the correct jurisdiction for the claims by Marex against CSG and permission for documents a starting the Marex claim in the EWHC to be served outside of England. To decide these issues the EWHC considered first whether Marex had a legal basis for its claim against CSG. Taking the points raised by CSG the EWHC decided:

a)         The proper place for Marex's claim to be heard is, “clearly and distinctly” England and Wales as it relies on an alleged decision by CSG to cause the Companies to move assets out of England and Wales based bank account taken in response to a Draft Judgment in proceedings where EWHC had jurisdiction between Marex and the Companies.

b)   i) As to whether or not there is a tort of inducing or procuring another to act in wrongful violation of rights under a judgment, the EWHC considered Marex had a stronger argument than CSG as to the existence of the tort. Marex argued that the existence of the tort is recognised where the violation is of rights in contract (based on a case from 1853). It would not be surprising if the courts recognised  the existence of the tort where there is violation of rights under the judgment (i.e. the non-payment of the Judgment Debt which is recognised as a wrong (tort) giving rise to a claim).

      ii) Whilst the judge accepted that the principle which does not allow claims for reflective loss is valuable and important, he considered that it does not apply where Marex is suing for CSG’s knowingly inducing and procuring the Companies to act in wrongful violation of Marex’s rights, or for his intentionally causing loss to Marex by unlawful means.

The court did not accept CSG’s distinction that removing the funds with which the Companies could pay the Judgment Debt left them free to negotiate and come to terms for its payment.  The judge commented “I respectfully disagree. A very point of asset-stripping in this context is to take away from the company the freedom to meet its obligation to the claimant.

What was the decision?

At this preliminary stage of the case the EWHC made its decision assuming all facts asserted by Marex are true. On that basis the EWHC consider that Marex has a ‘good arguable case’ and that England is the correct place for Marex to sue and so permission to serve the claim on CSG outside of England was appropriate.

Why is this important?

The important issue is the judge’s willingness to accept the existence of the possibility of a tort of ‘inducing or procuring another to act in wrongful violation of rights under a judgment’. This would be a new cause of action and one which could prove useful for creditors and liquidators of companies in circumstances where a controlling person has asset-stripped a company. Whether this cause of action ultimately does exists may be established by the EWHC if this case goes ahead to trial on the facts, as established by evidence. We at Solomon Harris will watch with keen interest and report any developments.

Solomon Harris

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The information contained in this article is necessarily brief and general in nature and does not constitute legal advice. Appropriate legal or other professional advice should be sought for any specific matter.





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