This briefing aims to highlight some of the issues that may be encountered when dealing with the insolvency of a company that operates beyond the boundaries of any particular jurisdiction or legal system. In a large insolvency it is now the norm, rather than the exception, that the debtor company in question will have assets and operations in several states.
To attempt to set out the legal structure of cross-border recognition proceedings, even focused on the UK, would be a task for a textbook rather than an article. It is the complexity and shifting nature of this area of law that may lead to confusion for insolvency practitioners and company directors alike. Under English law there are at least four different methods for assisting or recognising a foreign insolvency officeholder including;
- the Cross-Border Insolvency Regulations 2006 (the Cross-Border Regulations);
- the EC Regulation on Insolvency Proceedings (the EC Regulation);
- s426 of the Insolvency Act 1986; and
- the common law.
I do not intend to discuss the EC Regulation, which has been the subject of numerous articles and cases, but instead to focus on insolvency proceedings that involve states outside of the EU.
For a foreign insolvency officeholder and their advisers, there arise not only questions of how to obtain recognition and the assistance of a foreign court, but also tactical considerations of whether and in what way to seek recognition. In circumstances where insolvency proceedings have been initiated in two countries and their interests conflict, the strategy of whether, when and how to apply for recognition will be of vast importance to the all-important recovery of assets.
Section 426 of the Insolvency Act 1986: Useful but narrow
Section 426(5) provides for international co-operation between courts in specified jurisdictions when dealing with insolvency matters. The concept is a useful one, which enshrines in statute, to a limited extent, the common law principle that an English Courtwill (in general) recognise the effect of a winding up or dissolution of a foreign company under the law of its incorporation. However, s426 is only concerned with requests for assistance from foreign courts and the officeholder must therefore apply to his local court for a request to be made to the English Court for assistance. It does not cover direct requests from foreign office-holders and these must be dealt with at common law or through the Cross-Border Regulations. Further, s426 refers only to requests by courts in relevant countries. As defined, the term ‘relevant countries’ includes the Channel Islands, the Isle of Man and a number of Commonwealth countries with common law legal systems. Certain Commonwealth countries are not included, including large nations such as India. In circumstances where an insolvency procedure has been initiated in a country that is not covered by s426, the officeholder will be forced to look elsewhere for assistance.
Cross-Border Regulations: new rule on the block
The Cross-Border Regulations came into force in the UK on 4 April 2006 and implemented the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross-Border Insolvency (the Model Law) into English Law. The Model Law has been adopted by the US (Chapter 15 of the Bankruptcy Code) and approximately 15 other countries, but its aim of a universalist approach to insolvency remains as yet unfulfilled.
The Cross-Border Regulations allow for the recognition of foreign proceedings as either ‘main’ or ‘non-main’ proceedings. Main proceedings are those that take place in the state where the debtor company has its centre of main interest (COMI), while non-main proceedings are those that take place where the debtor company has only an establishment or place of operations. The distinction, and the concept of COMI, correspond to the difference between main proceedings and territorial/secondary proceedings under the EC Regulation. Recognition of a main proceeding will result in an automatic stay of proceedings related to the debtor’s assets in the UK (broadly equivalent to the stay of creditor action in a liquidation). There are various other forms of relief that may be granted following recognition (whether the proceedings are main or non-main).
The Cross-Border Regulations are a welcome development in the English law, providing a clearer framework for recognition by the English courts and for the exercise of powers by foreign officeholders in the UK. However, these Regulations are loosely drafted and much remains to be interpreted by the courts in future cases. Areas that may become problems include the definitions of main and non-main proceedings and the concept of COMI. Further, the Regulations do not apply to insurance undertakings or credit institutions. The definition of ‘foreign proceeding’ may also prove problematic.
‘Foreign proceeding’ under the Cross-Border Regulations means:
‘… a collective judicial or administrative proceeding in a foreign state, pursuant to a law relating to insolvency in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court for the purpose of reorganisation or liquidation.’
The term ‘collective proceeding’ is one of those that is bandied around by writers and commentators as if it were an easily understood concept but, unfortunately it is in fact rather loose and difficult to define. Under UK law it will probably include administrations, liquidations and voluntary arrangements but not those procedures that focus on recoveries for specific creditors such as administrative receiverships. When the English courts are applying the Cross-Border Regulations they are likely to come across foreign insolvency proceedings that are not so easy to classify as collective or otherwise. Some procedures may, in specified circumstances, have the ability to make distributions to creditors but not include other elements of a ‘collective procedure’. For example, is a form of receivership with limited powers of distribution to creditors a collective proceeding for the purpose of reorganisation or liquidation? The courts will have to assess each case on its merits.
Where a foreign insolvency proceeding is deemed not to be a foreign proceeding within the Cross-Border Regulations (or the Regulations are inapplicable for some other reason) the applicant officeholder must fall back onto the common law as a basis for recognition.
Common Law: Dealing with the rest
While the English courts have the ability to exercise their discretion in and assistance in the recognition of foreign proceedings on several bases, the principle of comity requires that recognition will be acknowledged by the courts where a foreign officeholder has been appointed by a court that was jurisdictionally competent to make the appointment.
It was decided in Schemmer v Property Resources Ltd [1974] that a foreign court will be regarded as being jurisdictionally competent if there is:
‘… sufficient connection betweenthe company in respect of which the receiver is appointed and the jurisdiction in which the foreign receiver was appointed to justify recognition ofthe foreign court’s order.’
This test will be met without question if the appointment is made by a court in the country in which the debtor company is incorporated. It is also likely that an appointment will be recognised if the debtor submitted to the jurisdiction of the court that appointed the officeholder or if the appointment is recognised by the courts of the country in which the debtor company is incorporated. These two factors are not the only ones that the court will consider; sufficient connection ought also to include factual connection, which may be evidenced by the location of central management and control, as well as the location where the company carries on its main business.
If a sufficient connection is established, an appointment or procedure may still fail to gain recognition if it does not accord with general principles of conflict of laws in English private international law. In this regard the courts will have to consider:
- whether recognition will be contrary to public policy;
- whether fraud or unfairness have been involved in the foreign proceedings; and
- whether recognition will be contrary to principles of natural justice.
These elements of the test for recognition will infrequently be invoked. However, in addition to these rules the English courts were, until recently, also concerned with the long-established (and more relevant) rule of private international law that they will not give effect to foreign penal laws. Schemmer had previously decided that proceedings brought by a US receiver could not be recognised both because of a lack of sufficient connection between the US and the debtor company, but also because the Act under which the receiver was appointed was concerned with penal law, it was designed to prevent the commission or continuation of offences against US federal law. This reasoning was overturned in The United States Securities and Exchange Commission v Manterfield[2009], where the Court of Appeal decided that the fact that a foreign statute contains criminal sanctions does not mean that separate provisions of that statute, which may be concerned with the operation of insolvency proceedings, should also be deemed penal.
Other states, other issues
If a foreign officeholder is seeking recognition in England they may also be seeking recognition elsewhere. Those applications elsewhere may influence each other, with each court taking note of the decisions of the others with regard to, for example, the location of the COMI of the debtor company. Other foreign proceedings can therefore be as important in the UK as regards their interrelationship as they are in their own right.
While there are cases that do not fall within the English statutory procedures for recognition and where recognition would have to be decided under common law, the recognition laws of some other countries could, perhaps uncharitably, be described as underdeveloped.
In some jurisdictions any application for recognition may very well be the first of its kind and the procedure for such an application may not be clear or indeed even established. Although the Model Law has attempted to codify rules which could be applied in any UN member state, the courts and regulatory bodies of nations where the Model Law has not been adopted will have their own quirks and rules as to whether they will recognise a foreign insolvency officeholder or proceeding. For example, it may be that the important factors for a foreign court to consider will include:
- that the authority or order that gave rise to the proceeding is valid;
- that the courts of the jurisdiction in which a proceeding is begun would allow reciprocal applications; and/or
- that the officeholder applying for recognition is able to demonstrate that they represent the jurisdiction where the debtor company had its registered office.
Summary
There are several layers to the procedures for recognition of cross-border insolvency procedures in the UK, each of which has its merits and its disadvantages. As it appears that the Cross-Border Regulations are intended to streamline the process of recognition, it may be that the courts will be more inclined to use the provisions set out in the regulations and to disapprove of any perceived attempts to circumvent them. Even though it is not specifically addressed in this article, the EC Regulation is the subject of a growing body of jurisprudence and any application for recognition involving an EU country should consider whether the EC Regulation will have an effect.
A foreign officeholder will need to thoroughly consider which method they should use to attempt to gain recognition in both the UK and abroad, which will include considerations such as timing, the possibility that the application will be contested by a third party and an analysis of the likelihood of success. In the UK a hearing may be expedited and the recognition process perhaps concluded in a matter of weeks. In other jurisdictions, however, that may not be possible. When an application may be contested, estimates of the time that recognition applications are likely to take will rise significantly. Getting in first may be one of an officeholder’s primary concerns.
When an application for recognition is likely to be opposed, whether by potential creditors or by insolvency officeholders in competing jurisdictions, the consideration of when and how to apply for recognition will become more important.
We have seen above that both in England and in other jurisdictions it may be easier to achieve recognition under the Cross-Border Regulations if the foreign proceeding in question is a collective proceeding analogous to an English liquidation or administration. Where an insolvency is likely to include cross-border considerations and where a foreign officeholder (or creditor’s committee etc) has a choice as to which insolvency procedure is to be used, the ease with which the procedure would be recognised should be considered at the outset.
Because of the complexities surrounding recognition of one country’s insolvency in another, it is important for debtors and creditors alike to have experienced professional advisers assisting them.
By Dickon Court, associate, Jones Day. E-mail: This e-mail address is being protected from spambots. You need JavaScript enabled to view it .