U.K. Perspective Recognition of Overseas Insolvency Procedures: Spoiled for Choice?
Every day we see ever more signs that the world is becoming smaller and more global. As a result, some things become simpler but others more complex. One sign of a rapidly shrinking world is the undoubted trend for insolvencies and financial restructurings to be cross-border in nature. U.K. professionals advising on these matters have to look out and look in. We need to “look out” because a debtor group needing to restructure or facing an insolvency is likely to be made up of a whole host of domestic and overseas obligors with borrower and guarantor debt obligations and with group assets located in many countries and an international creditor profile. We also have to “look in” because overseas insolvency office holders (such as trustees, administrators, and liquidators) may increasingly wish to obtain recognition of a foreign debtor’s bankruptcy or insolvency proceedings in the U.K. in order to gain control over assets located here for the purpose of realizing on and/or repatriating them to the home country of the insolvency. To achieve his objectives, the overseas office holder may want to exercise in the U.K. powers and rights afforded to him under the insolvency laws of his home country or those available to U.K.-appointed insolvency office holders under U.K. insolvency laws. This article delves inside the legal toolbox available to overseas office holders seeking recognition or legal assistance in the U.K. Its focus is on the U.K. Cross-Border Insolvency Regulations 2006 and how they were applied in the recent Stanford International Bank case.
Procedures Under English Law to Seek
Recognition or Assistance in England
There are four legal avenues available to a foreign office holder seeking recognition or assistance in England:
- Principles of comity existing under common law;
- Section 426 of the U.K. Insolvency Act 1986;
- The EU Insolvency Regulation on Insolvency Proceedings (the “EU Insolvency Regulation”), which came into force in 2003; and
- The U.K. Cross-Border Insolvency Regulations 2006 (the “Cross-Border Regulations”), which came into force in April 2006.
Of the above methods, the EU Insolvency Regulation has received the most attention and certainly has enjoyed a fruitful life since its inception. For Europe-wide insolvencies, it will be the EU Insolvency Regulation that will determine the recognition and effect of, for example, a French sauvegarde or a German Konkursvervaltung in the U.K. As the EU Insolvency Regulation has been the subject of much academic comment, this article will focus on the other methods of U.K. recognition of overseas insolvency procedures. However, we can expect further legal developments under the EU Insolvency Regulation. It has been in relative hibernation since the European Court of Justice gave its decision in Eurofood (making it harder for a group of companies to enter into a single insolvency procedure), giving rise to something of a legal cliff-hanger. We await with bated breath how the EU Insolvency Regulation will be adapted and interpreted in the coming months and years on such issues as how to determine a debtor’s center of main interests (“COMI”), particularly where it is a member of a corporate group, and the ease with which a debtor can migrate its COMI from one country to another. Let us now address the other methods of cross-border recognition.
Assistance Under Section 426 of the Insolvency Act
Section 426 of the Insolvency Act provides a statutory basis under which the U.K. courts must assist the insolvency courts of “relevant countries” that ask it for assistance. The U.K. courts are able to provide this assistance by making orders allowing overseas office holders to make use of U.K. insolvency laws or (less commonly) by applying the local insolvency laws of the requesting court in the U.K. Section 426 is a useful but very limited provision because it applies only to requests for assistance made by the insolvency courts of “relevant countries.” Such countries consist mostly of Commonwealth countries or remaining U.K. colonies. Examples of section 426 in operation include where the English court: (i) makes an administration order in respect of an Australian company in an Australian liquidation; (ii) summons directors of a South African company in a South African liquidation to give information about company assets by applying its powers under section 236 of the Insolvency Act; and (iii) allows a British Virgin Islands (“BVI”) liquidator to propose an English company voluntary agreement (“CVA”). This last example was undertaken in a case involving the liquidator of a BVI company that operated a highly dubious scheme to sell interests in a pre-Columbian art collection to a large number of U.S.-based physicians. The company’s founders wished to propose a settlement with the creditors, and the most effective means of doing it was a CVA (which had no equivalent under BVI law). The CVA was approved and the settlement was implemented.
Mainly because of the limited number of countries to which section 426 applies (even large Commonwealth countries such as India and Pakistan are not included as “relevant countries”), we are unlikely to see section 426 used in the future as a significant recognition cross-border tool. Where section 426 does not apply, overseas office holders must look to the Cross-Border Regulations or English common law to come to their aid.
The Cross-Border Regulations
The Cross-Border Regulations have been the sleeping tiger of the cross-border insolvency tool kit. Coming into force at a time of relatively benign economic conditions, the Regulations have not been widely used, but their day has surely come.
What Do the Cross-Border Regulations Do?
Among other things, the Cross-Border Regulations:
- Confer rights upon a “foreign representative” to apply to the British courts for recognition of a “foreign proceeding” in which the foreign representative has been appointed;
- Confer direct access upon the foreign representative to the British courts;
- Confer rights upon the foreign representative to commence British insolvency procedures; and
- Give the foreign representative the right to participate in a debtor’s British insolvency process.
Effect of Recognition
The right to “recognition” is a key feature of the Cross-Border Regulations. If recognition is conferred, a panoply of benefits may flow. If the foreign proceeding is a “foreign main proceeding” (i.e., the debtor’s COMI is located in the country in which the foreign proceeding has been commenced), the foreign representative will automatically have the benefit of an English liquidation-type injunction (which is not as extensive as the English administration moratorium, meaning that secured creditors are still able to enforce their security rights against the debtor’s English-located assets).
In addition, following recognition, the English court has discretion to grant further relief that would be available to an English office holder in English insolvency proceedings. The additional relief could include:
- A more extensive stay, such as one equivalent to an administration moratorium;
- The ability to examine witnesses before the court and receive information about the debtor’s assets or affairs; and
- The right to apply to the court to challenge fraudulent or preferential transactions and to void floating charges or extortionate credit bargains.
As such, a foreign representative who obtains recognition would be at a tremendous advantage compared to an overseas office holder who has to rely on recognition under common-law principles.
Key Terms Under the Cross-Border Regulations
The pivot on which the Cross-Border Regulations balance is the venue of a “foreign proceeding” conducted by a “foreign representative”:
- A “foreign proceeding” is “a collective judicial or administrative proceeding in a foreign state pursuant to a law relating to insolvency in which proceeding, the assets and the affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganisation or liquidation”; and
- A “foreign representative” is “a person or body authorised in a foreign proceeding to administer the reorganisation or the liquidation of a debtor’s assets or affairs or to act as a representative of the foreign proceeding.”
In many cases, what qualifies as a “foreign proceeding” will be obvious. However, in some cases, it will not be so clear-cut. At one end of the spectrum, the old-style English receiver appointed under a debenture to realize on assets for the benefit of a secured creditor is clearly not a foreign proceeding. Less clear is whether receivers or other officials appointed under financial regulatory regimes or criminal laws to protect assets of an enterprise or individual acting in breach of a country’s regulatory or criminal legislation or in cases of suspected or actual fraud would pass muster. For example, would the equivalent of an English Criminal Justice Act receiver appointed in Canada or Japan be able to seek U.K. recognition under the Cross-Border Regulations?
The key word in the “foreign proceeding” definition is “collective,” and surprisingly, it is a word much used but rarely defined. The characteristics of a collective proceeding can be summarized as follows:
- The proceedings are conducted in the interest of creditors as a general body rather than in the interest of a particular state, regulatory body, or single creditor or creditor class;
- The procedure recognizes the pari passu principle and requires the equal treatment of creditors; and
- The proceeding involves not merely the protection and collection of assets under the control of the foreign office holder but also the determination of claims against the insolvent estate and the distribution of the assets to creditors.
As evidenced by the Stanford International Bank decision (discussed below), the English court’s approach will be to scrutinize the legislation under which the proceeding in question is conducted to ascertain its purpose and characteristics and to match them to what it considers to be the essential elements of a “collective proceeding.”
Ascertaining whether someone is a “foreign representative” should also be obvious in most cases, particularly as it does not appear necessary that the foreign representative be appointed by court order. In this regard, one issue that arises is whether the debtor in possession in chapter 11 of the U.S. Bankruptcy Code qualifies for recognition under the Cross-Border Regulations, bearing in mind that a chapter 11 case is generally conducted without the debtor’s assets coming under the control of a bankruptcy trustee or other office holder. Including a chapter 11 debtor in possession or a creditors’ committee in the ambit of “foreign representative” appears to strain the language of the Cross-Border Regulations, but the issue has yet to be decided in the courts. In practice, a U.S. bankruptcy court typically appoints a specific individual or body to act as a foreign representative on behalf of the debtor outside the U.S., so the question may not have to be decided for some time.
Experience With the Cross-Border Regulations
The Cross-Border Regulations have so far been used in only a handful of cases (e.g., recognition of a U.S. chapter 7 case in connection with the bankruptcy trustee’s efforts to recover land in England, recognition of the Norwegian insolvency of the European Insurance Agency, and recognition of the Korean rehabilitation procedure of Samsun Logix Corporation). In the Samsun case, the English court granted the Korean court-appointed receiver’s request for an English administration type of moratorium (which includes a bar on enforcement of security).
Stanford International Bank
The U.K. High Court recently considered the application for recognition under the Cross-Border Regulations by the Antiguan liquidators of Stanford International Bank Limited, an Antiguan incorporated company. The case is of particular interest because the liquidators faced a competing claim for recognition by the receiver appointed by a U.S. court under securities protection legislation. Much of the argument centered on the location of the company’s COMI. Following the European Court of Justice’s recent ruling in Eurofood, the U.K. court held that the COMI test under the Cross-Border Regulations was the same as the test under the EU Insolvency Regulation, and it emphasized the need for COMI to be ascertainable by third parties (in particular the company’s creditors). This meant that COMI was to be determined by what was in the public domain about the company and what a typical third party would learn as a result of dealing with the company in the ordinary course of its business. On the facts, the company’s COMI was held to be in Antigua. According to the U.K. court, the U.S. receiver bore the burden of rebutting the presumption contained in the Cross-Border Regulations (and the EU Insolvency Regulation) that the country of incorporation is presumed to be the COMI, and he could do so only by objective facts ascertainable by third parties. The receiver did not satisfy the burden in this case. On the contrary, the evidence reinforced the conclusion that COMI was in Antigua rather than anywhere else (e.g., the company’s physical headquarters were in Antigua, most of its employees were located there, its major contracts were governed by Antiguan law, checks from depositors were banked in Antigua, and its marketing material gave prominence to its presence there).
The court also considered whether the U.S. receivership was a foreign proceeding for the purpose of the Cross-Border Regulations. The court held that it was not. The court scrutinized the U.S. court order appointing the receiver and found that it demonstrated that the receivership was not a “collective proceeding.” This was because the order: (i) provided that the receiver was obligated to prevent dissipation of assets rather than provide for their liquidation; (ii) provided that the receiver was acting in the interests of investors rather than creditors in general; (iii) provided that the receiver did not have power to distribute assets and would have needed a further court order to do so; and (iv) was not made under an insolvency law (such as the Bankruptcy Code), evidenced by the fact that there was no allegation of insolvency leading up to the issuance of the order of appointment.
The U.S. receiver made one last attempt—recognition under common law. However, the court held that, although it was possible for a receiver to be recognized under common law if the Cross-Border Regulations did not apply to him, recognition would not be extended under common law if a foreign representative has been recognized under the Cross-Border Regulations with respect to the same assets. In other words, there is no room for competing office holders fighting to get control over the same assets. According to the U.K. court, a foreign representative (here, the Antiguan liquidators) recognized under the Cross-Border Regulations will be given preference over an office holder seeking recognition under common law.
The Common Law
Common-law recognition has been based on the principle of judicial comity, under which English courts have extended recognition and given effect to the bankruptcy laws of other countries within the English jurisdiction.
Recognition under common law is likely to be less significant going forward and will be confined to cases that do not fall within the three methods of recognition discussed above. One residual circumstance in which it will still be of importance involves receivers who are not appointed in relation to a “foreign proceeding” for the purposes of the Cross-Border Regulations (and where there is no foreign representative who has successfully obtained recognition under them in relation to the relevant assets).
English courts have recognized overseas receivers at common law if:
- There is a sufficient connection between the foreign court and the debtor (incorporation in the country in which the receiver is appointed will be sufficient connection, as will the circumstance where the country of incorporation itself recognizes the receiver or there is a factual connection, such as a place of management);
- Recognition is not contrary to public policy; and
- There is no fraud or unfairness in relation to the appointment of the receiver.
In the past, English courts refused recognition where it would involve giving effect to foreign penal laws. This rule has very recently been narrowed. The present position is that the mere fact that the statute under which the receiver was appointed contains criminal sanctions does not mean that the provisions under which the receiver is appointed would automatically be regarded as penal.
The substance of what the receiver wishes to do in England is the decisive factor in the current application of the rule. If the receiver is seeking civil remedies to recover proceeds of a fraud in order to enhance the pool of assets to be distributed to creditors, U.K. courts are likely to recognize the receiver even if appointed under a court order relating to criminal proceedings.
The trend of common-law recognition is to be a flexible friend of overseas insolvency procedures as seen in the Navigator case. In Navigator, the U.K. Privy Council gave effect to a U.S. chapter 11 plan involving a compulsory transfer of shares to representatives of a U.S. creditors’ committee. Although a Privy Council decision, the ruling is a persuasive illustration as to how English courts will give effect to an overseas insolvency procedure. The case involved the Privy Council on the basis that an equivalent result could have been achieved under an Isle of Man scheme of arrangement (which closely resembles an English scheme of arrangement).
Cross-border insolvency bears very much a “watch this space” banner. If unfavorable economic conditions continue, increasingly debtors will be forced to restructure or enter into insolvency procedures. We will therefore see greater use of cross-border techniques and procedures to streamline the conduct of rehabilitation and insolvency procedures. This should lead to an easier and enhanced asset recovery for creditors. It is not only the Chinese, but all of us, who can say (and I paraphrase): “We live, and not for the first time, in interesting times.”
Re Eurofood IFSC Limited (C-341/04)  E.C.R. 1-3813.
Schemmer v Property Resources Ltd [1974 3 WLR 406].
The United States Securities and Exchange Commission v Manterfield [2009 EWCA Civ 27].
Cambridge Gas Transport Corp v The Official Committee of Unsecured Creditors of Navigator Holdings [2006 BCC 962].