In a recent decision, the Paris Judicial Court considered whether a Dutch company was able to recover assets from a Panamanian company, by virtue of it being sufficiently linked to the Iraqi State.
Background facts
In 1996 and 2003, two ICC arbitration awards were rendered against Iraqi State entities, including the Iraqi Ministry of Defence and Ministry of Justice. Those awards were enforced in France by court order, and confirmed by a Paris Court of Appeal judgment in 2018.
By virtue of the decisions, the Iraqi entities were ordered to pay Instrubel NV (a Dutch company) €16.7 million.
As a means of enforcing the orders, Instrubel sought to seize assets belonging to Montana Management Inc. (Montana) The reason Instrubel could pursue Montana’s assets was that Instrubel argued that Montana was an “emanation of the Iraqi State.”
Under French law, a party can seize assets which are owned or controlled by an entity which is an emanation of the State, so long as it can prove that such a relationship exists. In order to do so, Instrubel had to show that:
- Montana lacked functional independence from the Iraqi State
- Montana’s assets were not distinct from those of the Iraqi State
Ultimately, Instrubel was denied the ability to seize the assets which had been frozen, but this was due to the international sanctions against Iraq.
In this article, we look at the application of the alter-ego principle in deciding whether or not Montana was an emanation of the state.
Lack of functional independence
Instrubel provided numerous elements demonstrating the lack of functional independence of Montana from the Iraqi State.
First, Montana was created to allow the Iraqi State to invest in French media as part of a more global commercial partnership, and Montana was managed by figures close to the Iraqi regime.
In fact, it was listed under the UN Security Council Resolution 1518 as an entity that deals with Iraq’s funds and financial assets. There was therefore a confusion of assets between the Iraqi State and Montana. It appeared that Montana lacked assets in its own right.
Further, the US Treasury Departments listed Montana as part of the network of companies created to plunder Iraqi resources. One of Instrubel’s assertions was that the purpose of creating Montana was to invest funds embezzled from the Iraqi regime.
For those reasons, it followed that Montana was an emanation of the Iraqi State, so that Instrubel could seize assets in its hands in execution of the sentence pronounced against the Iraqi State.
However, Instrubel had not sought prior administrative authorisation from the French authority, the Directorate General of the Treasury, and so the court annulled the seizure of the frozen assets.
Alter-ego principle
The alter ego principle allows a company who has a successful award against a sovereign state to pursue attachment proceedings against a state-owned enterprise. In other words, the property owned by the entity may be collected against to pay the debts of the state.
However, proving that a state-owned enterprise is an alter ego of a debtor-state is often very difficult. There is, for instance, a strong presumption under English law that the separate corporate status should be respected. First, the award-creditor must find assets which can be seen to be held by the state. Then the award-creditor needs to show that the state cannot succeed in an argument that the assets benefit from state immunity, which would debar the execution of an award.
There are a few criteria which point towards an entity being an alter ego. By way of example:
- The debtor state has undermined the standalone status of the enterprise through extensive political meddling. i.e. the board includes government ministers, or senior civil servants, the government supervises the companies’ day to day operations.
- The company performs a public function that is not usual in private entities.
- The degree of separation between the company’s property and the state’s property.
The alter-ego principle and international arbitration
While it is not always easy to establish that an entity is an alter-ego of a state, the courts around the world have shown willingness to apply the principle so that award-creditors can enforce their awards.
This upholds the efficacy of international arbitration, even where difficult issues such as state immunity come into play.
