International Cooperation - The Recent Development of the English Approach

01 August 2007

Mark Andrews, Denton Wilde Sapte LLP

Since the 19th century, the English Court has exercised its inherent jurisdiction to assist the courts of other countries and to recognise and assist insolvency officeholders properly appointed under the laws of their own jurisdictions. It has generally done so under the banner of comity of nations. However, since 1986, the exercise of that jurisdiction has been formalised and extended by a number of measures.

The Insolvency Act 1986

Section 426 of the Insolvency Act 1986 conferred valuable new powers upon the courts of the UK. It provided for automatic recognition throughout the United Kingdom of orders made in any of the constituent jurisdictions (England and Wales, Scotland and Northern Ireland). Most importantly, it gave the UK courts jurisdiction to exercise their full range of powers in the UK on the written request of a foreign court. In the exercise of that jurisdiction, it made administration orders in the UK in relation to foreign companies, ordered the examination of witnesses in the UK to assist foreign insolvency processes and applied foreign law (as the new provision permitted) to assets situated, and issues arising, in the UK. The provision was ground-breaking in nature. Sadly, it never achieved its full potential. When the Act came into force, section 426 only extended its welcome to the courts of a number of former dominions and countries to be subsequently added to the list by order (ie, by secondary legislation). Far from opening the doors of our courts to all comers, the executive proved inexplicably reluctant to extend the provision to other nations (indeed, it only happened in a handful of cases). The task of identifying suitable countries was left with the Foreign Office rather than the Department of Trade and Industry (which then supervised the UK insolvency regime). The Foreign Office was only willing to extend access under section 426 by treaty with states that were willing to grant reciprocal access. One would not expect that, however, to have limited the list of potential beneficiaries so dramatically. The more likely explanation is that the extension of judicial hospitality under section 426 was never seen by the Foreign Office as a diplomatic priority.

The European Insolvency Regulation 2000

The European Insolvency Regulation took effect throughout the European Community (except in Denmark) on 31 May 2002. It provided for a hierarchy of main and secondary (or territorial) insolvency proceedings and for recognition throughout the EC of orders made in relation to insolvency matters by the courts of individual member states. On any view of its operation, the Insolvency Regulation has been a success; it has not, however, been free from controversy. The most major issue to date has been over the power of a national court to open main insolvency proceedings in its own jurisdiction in relation to companies incorporated elsewhere in the EC. Main proceedings are structured to be dominant in nature. They may only be opened in the state where the company has its centre of main interest (COMI) in the community. A company’s COMI is presumed, under the Regulation, to be in the state where it has its registered office, but the presumption is rebuttable by evidence showing it to be elsewhere. The English Court has adopted an extremely liberal approach to the issue, determining on a number of occasions that the COMI of whole groups of European companies is, for the purposes of the Insolvency Regulation, in the United Kingdom. It has continued with this approach despite what some commentators consider to be the discouraging comments of the European Court of Justice in the matter of Eurofoods Limited (Case C-341/04 Eurofood IFSC Ltd [2006] ECR 1-3813). In so doing, the English Court has served a worthy cause, namely, the restructuring of whole international groups of companies in a single jurisdiction. It has facilitated, with great flexibility, the development of an approach that has saved time and money and promoted group restructuring and realisation processes that would, otherwise, have proved impossible. In so doing, however, it has invited accusations of jurisdictional imperialism.

The Uncitral Model Law

By means of the Cross-Border Insolvency Rules 2006, the United Kingdom adopted the UNCITRAL Model Law. Like the Insolvency Regulation, it is predicated upon a hierarchy of main and secondary proceedings and replicates the COMI requirement to determine where main proceedings may be opened. That said, the Model Law works in a very different way structurally. Its most important provisions concern the recognition of foreign representatives (parties with authority under their local law to conduct or supervise insolvency proceedings). Recognition is the first step under the Model Law, giving rise to certain consequences (such as the imposition of a stay on creditor action) and opens the door to the exercise by the English Court of its powers to assist recognised foreign representatives in the collection of assets and otherwise in the discharge of his duties. The 2006 Rules gives courts, quite rightly, a very wide discretion in dealing with these cases. It is, for example, a matter for the discretion of the courts how much executive power foreign representatives may exercise in the UK and whether they may repatriate assets or realisation proceeds from the UK to their own jurisdiction without the express leave of the courts.

As yet, there has been very little English jurisprudence on the workings of the Model Law. Both the courts and the legal profession have been surprised by the rather low level of applications under the 2006 Rules: everyone having assumed that there would be a strong take-up of the new procedure (the experience in the United States following the adoption of the Model Law as the new chapter 15 of the Federal Bankruptcy Code appears to have been similar). The English Court has, however, had the opportunity to give some guidance (see Re Rajapakse [2007] BPIR 99) upon its procedural requirements and the way in which it may exercise its powers. In Rajapakse, the court in London recognised a US chapter 7 bankruptcy trustee as a foreign representative. It is, however, in relation to US chapter 11 reorganisation proceedings that the most interesting decisions will ultimately have to be made. There can be little doubt, following Rajapakse, that, in cases where the US trustee has been appointed, he or she will be recognised here. However, in the vast majority of chapter 11 filings, the US trustee is not involved at all and the moving force in the proceedings is the debtor in possession. There is real doubt whether the debtor in possession (or any other player in the chapter 11 process, such as the official creditors’ committee) could qualify under the 2006 Rules for recognition as a foreign representative, which potentially leaves the world’s most popular restructuring procedure beyond the assistance of the Model Law (unless, that is, a practice is developed in the Unites States whereby the US trustee could be appointed for the limited purpose of applying for recognition and seeking any necessary consequential relief in other appropriate jurisdictions).

Before moving on, it is appropriate to comment briefly upon the interplay between the Model Law and other relevant codes or statutory provisions. In cases where the Insolvency Regulation applies, it prevails over the Model Law (so the Model Law has no application to companies that have their COMI within the European community). To the surprise of some, the introduction of the Model Law was not accompanied by any repeal or restriction (to, for example, its application to the constituent jurisdictions in the UK) of section 426 of the Insolvency Act 1986, leaving a parallel and very different jurisdiction open for use in appropriate circumstances (which are likely to be rare).

Comity

Notwithstanding the introduction of these new procedural formulations, we should not forget where we started, with comity. There has recently been a strong restatement of the jurisdiction of the UK courts to assist the process of foreign courts in insolvency cases. In Cambridge Gas Transport Corporation v The Official Committee of Unsecured Creditors (of Navigator Holdings PLC and Others) [2007] 1AC 508, the Privy Council decided that the Isle of Man Court (on grounds that would apply equally to the English Court) had the power to direct (without further formality) the registration of a share transfer to assist the US Court in promoting the implementation of a chapter 11 confirmed plan of reorganisation. The judgment of the Privy Council was delivered, interestingly, without a single reference to comity, but it is there, in truth, that the jurisdiction invoked by the Court begins and ends.

The Navigator decision will not lead to a flood of comity-based applications for assistance or the abandonment of parallel plenary proceedings in large bi-jurisdictional cases. The facts of Navigator were very straightforward, the fairness of the compulsory share transfer was obvious and there was no unfair prejudice to any of the parties involved. Unfortunately, life is rarely so simple and in cases where there is a real issue over the fairness of the foreign compromise measure, it will be inadvisable to reach for Navigator as a means of subduing UK-based dissidents.

Parallel Proceedings

Parallel plenary proceedings in the UK and other jurisdictions arise, typically, where a company seeks to restructure in a jurisdiction other than that of its physical location, but requires protection at home while the restructuring process is played out. In practice, such cases almost invariably involve a chapter 11 filing in the US, where the jurisdictional barriers to filing tend to be easily surmountable. The most remarkable recent example was the parallel chapter 11 and administration filings by 134 UK-registered companies in the Federal-Mogul Group (a filing that explored, in both jurisdictions, many of the issues which can arise in such cases).

Parallel proceedings are cumbersome, expensive and can, in some cases, be fraught with difficulty. However, there will still be instances where complete protection during the restructuring process cannot be assured by any other means and where, therefore, the trouble and expense will be justifiable. The need for full protection is not satisfied by the Model Law – the automatic stay on creditor action consequent upon recognition under the Model Law is limited in extent (and, in particular, would not prevent secured creditors or landlords from taking enforcement action). Worse still, a recognition order would not (unlike a full administration process) command full automatic recognition throughout the EC under the Insolvency Regulation. Add to this the potential problem with using the Model Law to support the US chapter 11 process and it seems likely that parallel plenary proceedings will be seen for some years to come.

Inter-Court Communication

There is a great deal of current interest in the subject of inter-court communication. In bi-jurisdictional cases, can the judges communicate directly to help the process along? There is no process or protocol covering communication between European courts in proceedings under the Insolvency Regulation (but it is to be hoped that something of this kind will emerge in time, as it will be badly needed in practice). There appears to be a considerable appetite in the United States for direct judge-to-judge communication in restructuring cases. This is probably because the active case-management role of the US bankruptcy judges predisposes them to take whatever steps to assist the process the US parties think would be helpful. There are established protocols in the United States for communication between, for example, the US and Canadian courts. In the UK, the question of communication has usually arisen in the context of US cases. In the Maxwell Communications Corporation and Cenargo Group administrations, there were famous instances of direct judge-to-judge communication. However, in the recent case of T&N Limited, the major Federal-Mogul operating company in the UK, Mr Justice David Richards declined (In Re T&N Limited [2004] EWHC 2878 (Ch)) to make a direct communication requested by the US parties. He has, quite wrongly, subsequently been criticised by some commentators for his reluctance. It tends to be forgotten by the critics that, although the judge declined the specific request, he had already approved a detailed inter-court communication protocol that explicitly contemplated direct communication between the judges. The whole question of inter-court communication is an interesting one, but it is unlikely that such communications will become commonplace unless and until we have, in the UK, assigned judges who take on a case management role in plenary insolvency proceedings.

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