Introduction

As befits a subject of high significance, the effect of insolvency has been felt internationally in a number of occasions that took place over the centuries, demonstrating the complications of commercial links and trading which is quite significant for the lifeblood of states. The ascent of international commerce and the option of incorporations having multiple jurisdictions meant that numerous corporations have had little struggle in rapidly expanding corporate empires in the world economy. Considerations of choice of law in contracts and litigation regarding conflicts of law came with the escalating expansions. Inevitably, due to recurring downturns in economies on an international scale, these considerations have formulated the rules related to insolvency with a global dimension. Nonetheless, there are numerous occasions where international insolvencies are problematic and they raise a number of significant issues.

International insolvency has in the last two decades or more gained a prominence in modern discourse, excited much interest in the press as well as on the internet and in social media, aroused speculation in the fields of academia, practice and judicial endeavour and, finally, become the common currency of social conversations. This phenomenon seems amply justified in light of the often spectacular insolvencies on an international scale, including those which have affected large conglomerates and groups of companies and, particularly, institutions in the financial services sector: banks, insurance companies and the like. The fallout from these episodes continues to have an impact on the struggles of many developed and developing states to re-establish themselves following economic downturns. It has also led directly to the spectre of sovereign bankruptcy and crises on regional and global scales that will haunt us for years to come. It may be a paradox that insolvencies, of a magnitude amplified by their occurring without distinction for national borders, have come to symbolise since the 1990s how truly business has expanded on a global scale and has reaped both the fruits and the perils of that expansion.

There are quite a few statutory systems for dealing with cross-border insolvencies in the United Kingdom and the legal jurisdictions into which the country is divided. In order of their introduction, they are s.426 of the Insolvency Act 1986, the European Regulation on Insolvency Proceedings 2000 and the UNCITRAL Model Law on Cross-Border Insolvency 1997. The countries to which they apply form for the most part discrete groups, albeit with some overlap, and the three systems are in theory applicable in different situations. Despite this, the Cross-Border Insolvency Regulations 2006, which implement the Model Law, do determine the priorities between, on the one hand, this text and, on the other, the Insolvency Regulation and s.426. Nonetheless, that does not mean that all conflicts are avoided. A further complicating factor exists in that the courts in England and Wales may also be called upon to resolve any conflict between the texts and other provisions of domestic insolvency law, given that the extent to which the statutory provisions are applied is traditionally subject to the interpretation of the courts and to the use of any common law principles, such as comity, that govern cross-border assistance.

English courts have had a long history of co-operating in insolvency matters. From the first developments in the common law, seen in cases like Solomons, to the enlargement of powers for mutual aid in the Bankruptcy Act 1861 and later improvements represented by the “aid and auxiliary” doctrine seen in s.74 of the Bankruptcy Act 1869, the English courts have enjoyed the ability to develop and extend common law principles to govern insolvencies with an international element and to govern the use and application of statutory provisions on assistance in both personal and corporate insolvencies.

International Company and Commercial Law Review

2009

Cross-border assistance in the common law and international insolvency texts: an update

Paul J. Omar I.C.C.L.R. 2009, 20(11), 379-386

Chapter 1

UNIVERSALISM, MODIFIED UNIVERSALISM & TERRITORIALISM:

Just as company law has evolved to take account of international business, insolvency law has had to cope with the effects the liquidation of a company may have at an international level. The phenomenon of cross-border insolvency has attracted academic, legislative and judicial attention. Traditional rules for approaching the problem of cross-border insolvency, which tend to be divided into territorial and universalist schools of thought, have been seen as inadequate to deal with what has become a significant phenomenon in the 1990s, illustrated by examples such as Bank of Credit and Commerce International, Barings, Daiwa, Maxwell Communications Corporation, Olympia & York, etc.

Universalism:

Universalism considers the world as one global market which needs one market symmetrical law to govern the world wide assets of the debtor. The controlling jurisdiction is the home jurisdiction of the insolvent. Assets located in other jurisdictions would be sent back to the debtor’s home country or be subject to proceedings conducted under the substantive bankruptcy law of the home country, which is the controlling jurisdiction. There is thus the need for cooperation and communication so as to administer the debtor’s worldwide assets. In a world where there are multinational corporations with various functions spread across different jurisdictions, the quest for the debtor’s home country does cause significant problems as will be shown later. Universalism is not without its own criticisms. Mainly, these revolve around the difficulties of organising the application of the rules of a single legal system to assets present in a number of jurisdictions.

Courts have begun to evolve a spirit of co-operation with individuals called in to manage the insolvent company. This attitude comes from the realisation that the results of insolvency can have far-reaching impacts on the society. Where the consequences of insolvency are felt in several jurisdictions, the attitude an individual court takes in the assistance it secures from or gives to other courts involved in the same insolvency may influence the speed of the process of insolvency. With the number of cross-border insolvencies likely to increase, as the function of the decline in the world economy, this judicial attitude may mean the difference between a swift solution to the problem or lengthy litigation, to the detriment of the company’s and its creditors’ interests. Eventually, there may well appear an agreement at an international level of how insolvencies with a cross-b choice of law in that case are solely based on the location of the assets. 

Criticisms of Universalism and Territorialism:

Under universalism, small local creditors are disadvantaged as they have to be forced to file their claims in a foreign jurisdiction and not the local one whose laws they are used to. Territorialism is claimed to be more predictable as the identity of the court that will deal with a particular asset and the law that it will apply are known from the location of the asset. Further, the cost of litigation is relatively cheaper compared to a large consolidated international case that would have to be decided under universalism. Critics of territoriality claim that it is inefficient and costly as it would result in a multiplicity of cases in each location where the debtor’s assets are located. This diminishes the value of the debtor’s estate. It is also said to frustrate reorganisation as there is no proper mechanism for coordination between courts in different countries. On the other hand, it is argued that universalism maximises the value of the debtor’s estate as one court administers the entire estate of the debtor under one law and imposes a worldwide moratorium against the debtor’s assets. Creditors are also likely to be treated more equally. It avoids the duplicated administrative costs that are there in multiple proceedings under territorialism and to the extent that foreign creditors are accommodated, it creates an incentive for lending or investment across-borders. Much as territorialism is the approach adopted in most jurisdictions and universalism is the ideal, academically driven theory with political challenges to encounter, arguably, both theories have features in them that, if carefully blended, can lead to a workable and acceptable cross-border insolvency theory. One of the major disadvantages of territorialism is that reorganising a company or group of companies is quite difficult or even impossible as domestic proceedings are not normally geared to maximising the return other than for local creditors. Unless domestic rules specifically authorise this, insolvency officials are often unwilling to transfer domestic assets elsewhere in order to assist other operations involving the company. Quite often, there may be no specific statutory authority for co-operation and any transactions which could assist insolvency proceedings elsewhere may fall foul of domestic law.

Territorialism also produces unequal results for creditors, despite the likelihood that domestic rules will subscribe to the “pari passu” principle of equal treatment of creditors. At a procedural level, although discrimination in practice against foreign creditors is rare, they may not be able to participate in their debtor’s insolvency because of a lack of effective notice of proceedings and difficulties, especially with language and legal barriers, which may result in claims being processed late or out of time.

Much as territorialism is the approach adopted in most jurisdictions and universalism is the ideal, academically driven theory with political challenges to encounter, arguably, both theories have features in them that, if carefully blended, can lead to a workable and acceptable cross-border insolvency theory.

Modified Universalism:

Territorialists have to contend with the fact that in the real world, local assets may not be enough to settle claims by local creditors who may have to prove their claims in foreign countries. Similarly, Universalists have to contend with the reality that local sovereigns will not easily allow foreign laws to apply in their countries or to repatriate local assets before local claims are settled. Both the territorialist and universalist camps have realised the folly of insisting on pure forms of their theories and this realisation has led to the blunting of the sharp edges of each theory through the conception of middle of the road theories of cooperative territoriality56 and modified universality57 respectively. ‘Modified universalism accepts the central premise of universalism, that assets should be collected and distributed on a worldwide basis, but reserves to local courts the discretion to evaluate the fairness of the home country procedures and to protect the interest of local creditors’.  Hence, local courts where the debtor has an establishment would administer ancillary proceedings and would have the discretion to protect local creditors’ interests under specific guidelines. The territorialist response – cooperative territorialism- still provides for separate proceedings in each country where the debtor’s assets are located but gives the local courts discretion to cooperate with foreign courts. The guidelines for such cooperation are non-existent. Any cooperation is therefore entirely discretionary. Modified universalism retains some of the efficiencies of pure universalism but also incorporates aspects of territoriality through secondary proceedings and the court’s discretion to protect local creditor interests through these.

(Reference it as

TOWARDS MODIFIED UNIVERSALISM: THE RECOGNITION AND ENFORCEMENT OF CROSS-BORDER INSOLVENCY)

The Model Law:

The United Nations Commission on International Trade Law (UNCITRAL) was established by the General Assembly in 1966 to act as the conduit by which the United Nations would play a more active role in reducing the disparities caused by domestic rules governing international trade. Its general mandate is to harmonise and unify the law relating to international trade. It has a good and successful record of developing conventions and model laws in commercial and business law areas, including sale of goods, transport of goods, commercial arbitration, public procurement, international payment systems and electronic commerce. One of the reasons UNCITRAL is said to be particularly successful at securing adherence to its conventions is that it is very selective about the projects in which it undertakes reform, often securing an early consensus as to the desirability of the project and the likelihood of success at securing a convention or Model Law.

UNCITRAL organised a Colloquium in Vienna in April 1994, co-sponsored by INSOL, at which suggestions were formulated for work by UNCITRAL. The first meeting of the UNCITRAL Working Group on insolvency in fact took place in Vienna in 1995 and four sessions were to go by before a definitive text was produced in 1997. It was said the insolvency project began with certain reluctance by countries to take substantial steps toward co-operation although in the end there were substantial compromises reached, which reflected the concerns of many of the delegations from member and non-member states as well as non-governmental organisations which were keen participants in the process. In the discussions, although a significant minority of participants favoured the conclusion of a convention, the format chosen in the end was that of a Model Law, which would allow countries to enact the measure rapidly as part of their domestic legislation.

The final text of the Model Law on Cross-Border Insolvency was adopted by UNCITRAL in May 1997. Although English was the working language in the drafting process and the other language texts were based on the English draft, all six language versions are considered equally official. The text does not use statutory language completely familiar to either common law or civil law jurisdictions, being essentially a compromise between different legislative traditions. It is accompanied, however, by a Guide to Enactment, which was produced in order to assist legislative draftsmen in adapting the Model Law to local conditions. The Model Law was approved by the General Assembly in December 1997, which recommended that member states review their insolvency legislation and give favourable consideration to enacting the Model Law.

Aspects of the Model Law:

The Model Law is a relatively brief document at only 32 articles. There are four key areas to which the document can be divided. These include the scope of the Model Law, rules for access by representatives of foreign insolvency proceedings, including the treatment of foreign creditors, and the effects of domestic recognition of foreign procedures. Finally, and most importantly, there are rules for co-operation and for co-ordination of simultaneous proceedings in several jurisdictions over the same debtor. The text is preceded by a preamble, a legislative form not often seen in common law jurisdictions, which is instructive as to the purpose of the Model Law. These are stated to be co-operation between courts, greater legal certainty for trade and investment, the protection of the interests of all creditors and the debtor, the protection and maximisation of assets in the insolvency and the ease in rescuing financially troubled businesses, thus protecting investment and preserving employment.

General provisions of the Model Law:

The provisions that provide the scope of the law have a number of fundamental definitions. Jurisdiction is given in cases consisting of requests for assistance in insolvency matters, whether these requests come from the domestic or foreign court. It is granted to instances of concurrent proceedings concerning the same debtor and gives permission to the foreign creditor and other interested persons in domestic proceedings. The provisions of the Model Law does not exclude any added assistance that a court may offer in the terms of international insolvencies and courts are always encouraged to interpret the Model Law with regard to its international nature.

Proceedings of a rescue nature and liquidation are covered as are interim proceedings of the variety often found in common law countries. Because co-operation is not conditional on a specific finding of the debtor’s insolvency, pre-insolvency financial difficulties are also covered. An option is given in the Model Law for specific types of insolvencies to be excluded, such as those of banks and insurance companies, often subject to a specialised insolvency regime.  A separate convention will need to be developed for this type of insolvency, although the Model Law may be used for a guide. Some countries, such as the United States, also wish to exclude “consumer” insolvencies, which may only have an incidental international element. The Model Law is drafted so as to apply to both natural persons and artificial entities, thus covering insolvencies of incorporated bodies as well as those of sole traders and partnerships, although no distinction is made between civil and commercial entities, a division often used in civil law countries.

The Model Law states that foreign creditors must me be treated the same way the local creditors are treated and provides them the same rights to commence and participate in domestic insolvency proceedings. The Model Law also rules out some of the drawbacks to which foreign creditors must oblige to by giving notice to domestic creditors in any situation.

Recognition of foreign proceedings:

The Model Law believes that recognition is fundamental to co-operation and makes it a key procedure. The Model Law’s provisions are intended to accelerate the recognition process so that costs in administration can be saved. The Model Law requires recognition of proceedings at the earliest opportunity after a request is made. These proceedings are classified in the Model Law into two types: “main” and “non-main. “Main” proceedings are defined in Article 2 as proceedings taking place in the country where the debtor has the “centre of its main interests”.48 The Model Law puts the presumption forward that a company’s place of incorporation is the centre of its main interests, unless proof to the contrary is brought.49 “Non-main” proceedings are taken to mean proceedings in any other country, provided that the debtor has at least an establishment in that country. This is taken to mean a place where the debtor uses human endeavour, goods or services to carry on an economic activity in a “non-transitory” way.50 The foreign representative is required to inform the court of any change in status of foreign proceedings or the representative’s appointment as well as where the existence of further foreign proceedings becomes known.51 The court still retains substantial discretion under the foregoing provisions to modify or terminate recognition if the grounds for recognition are shown to be wholly or partially lacking or, indeed, have ceased to exist.52

The Model Law also permits interim relief to be sought by the foreign representative while an application for recognition is pending and where the relief is urgently needed to protect the debtor’s assets or the creditors’ interests. Any notice the court requires to be given must be adhered to.53 Only if the relief sought would interfere with the interests of main proceedings occurring elsewhere can the court refuse.54 Presumably this would apply where a number of foreign representatives of both main and non-main proceedings are seeking recognition. Relief, once granted, terminates automatically at the application hearing, unless extended.55

Recognition of proceedings as a foreign main proceeding produces certain mandatory effects, including a stay of action or of execution of any judgment already obtained. Transfers of interests in the debtor’s assets are also limited.56 Recognition of foreign main proceedings is subject to any limitations that would apply under domestic laws and does not affect the opening of local proceedings involving the same debtor or the beginning of litigation if necessary to preserve a claim against the debtor.57

Additional relief is available under the Model Law to foreign representatives of both main and non-main proceedings including staying actions or execution of judgments and freezing transactions involving the debtor’s assets to the extent the relief sought has not already been granted under Article 20. Other relief includes turning over assets to the foreign representative, obtaining information and taking evidence as permitted by local rules for the purposes of foreign proceedings. One important distinction is made between representatives of main and non-main proceedings, in that the latter may use the relief under this article only with regard to assets that the domestic court considers fall within the ambit of non-main proceedings.58 Interim relief and relief under this article are also subject to proper consideration by the domestic court of the need to protect the interests of the *I.C.C.L.R. 247  debtor, creditors or any interested parties.59 The effect of recognition is also to give the foreign representative standing to initiate avoidance actions, although where the recognition relates to non-main proceedings, standing is limited to cover only assets related to those proceedings.60 Similar standing is given to intervene in any proceedings to which the debtor is a party.61

CO-OPERATION

By far the most significant part of the Model Law is Chapter IV which is based on the ideal of co-operation between courts and representatives. Domestic courts have the authority to correspond directly with foreign courts and co-operate to the maximum amount possible. Similarly, the domestic insolvency personnel are also able to co-operate with foreign courts and representatives. Cooperation may occur in a various ways set out in a non-exhaustive list in the Model Law. Types of co-operation include appointing personnel at the direction of the court, communicating information about the debtor’s assets and so on. These provisions are said to be prescriptive in the Model Law and the courts are obliged to use co-operation methods wherever possible. This can be seen as the most useful provision of the Model Law’s provisions, although the institutions in some countries without experience in co-operation may find adjustment to an almost mandatory co-operation difficult.

The other way of ensuring that efficient administration of insolvency proceedings takes place is by the co-ordination of multiple proceedings. This scenario happens a lot in international insolvency situations. The Model Law tackles the problem by promoting coordination, therefore lessening conflict between the interests likely to be competing. In situations where, foreign main proceedings are recognised, the effect of domestic proceedings will be limited to assets present within the jurisdiction as well as to those related to that jurisdiction. Nonetheless, the relief already granted to foreign proceedings will be reviewed to ensure it is not inconsistent with the needs of domestic proceedings. Likewise, relief given where there is recognition of foreign proceedings, whether it is the main or non-main type, is made and where domestic proceedings are already in existence, must also be coherent.

The views of governments of adopting the Model Law:

A number of countries are known to be considering the Model Law for adoption, including Australia, Canada, New Zealand, South Africa, the United States and the United Kingdom. The Australian Law Reform Commission recommended in a report, published in 1996, that the Federal Government, in the person of the Attorney-General, should give a high priority to Australia’s participation in the then current UNCITRAL process. The United States is known to have introduced legislation into Congress providing for the enactment of the Model Law as an amendment to the Bankruptcy Code. This followed the recommendation of the National Bankruptcy Review Commission made in a report published in 1997.

The Law Commission of New Zealand has recommended that New Zealand adopt the Model Law for a number of reasons. These include the need to develop effective laws on the global market to which New Zealand belongs and for these international laws to reflect trading conditions on the international market. In addition, the existence of economic factors such as the need to tackle cross-border insolvency issues, especially fraud, means that international measures are desirable. There is also the likelihood that foreign investors will view New Zealand favourably if the Model Law were enacted and the fact that the favourable drafting of the Model Law does reflect genuine concerns over the intrusion of foreign proceedings into local systems and the inadequacy of present domestic law. Nevertheless, it is intended that the Model Law not be brought into effect until the New Zealand Government is satisfied that a number of countries, with which there are major trading relationships, will be adopting the Model Law.

South Africa, which co-sponsored the General Assembly resolution calling for the adoption of the Model Law by member states, has been actively considering the Model Law for some time. Justice Zulman, a participant in the UNCITRAL Working Group, produced an Interim Report on Transnational Insolvency in 1995 and a Final Report in May 1998. The latter concluded that “the creation of the Model Law is of considerable significance and represents a major step forward in the field of cross-border insolvency”. Several recommendations were made in the report to the effect that the enactment by South Africa of the Model Law was a very desirable step, particularly as it was preferable to the cumbersome task of negotiating separate bilateral or multilateral treaties. As an interim measure, it was recommended that South Africa enact a measure by way of amendments to the Insolvency Act 1936 and Companies Act 1977 to introduce a co-operation framework similar to that in the United Kingdom and designate all of South Africa’s major trading partners. In the long term, the Model Law would be enacted and consultation is occurring as to its form.

The search for an international solution has come a long way since first the problem of cross-border insolvencies was diagnosed and attempts made at effecting a cure. The adoption of the UNCITRAL Model Law represents perhaps the most important step taken thus far in trying to achieve a truly international framework for co-operation in insolvencies across frontiers, in contrast to the limitations of uniquely domestic legislation as well as previous efforts on a regional scale, not all of which have met with success. The reputation of many of UNCITRAL’s previous attempts at harmonising international law may be taken as a guide to the likelihood of success of this measure. In addition, the Model Law respects the concerns of domestic jurisdictions for the efficient administration of assets present within the country and the protection of creditors without sacrificing the principle of equality of treatment of all those affected by the insolvency, creditors for the most part but also the debtor and other interested parties.

The UNCITRAL Model Law also goes some way towards making that other cherished precept of insolvency in the 1980s and 1990s, the concept of “corporate rescue”, achievable. This is because co-ordination of the disposal of assets across jurisdictions becomes a greater possibility and the sale of viable businesses consisting of units located in several countries is made simpler. Where domestic laws contain such possibilities, assistance becomes more effective and the future of the constituent elements of the viable business, which may include very important assets, becomes more assured. Related benefits will include the preservation of associated employment and increased social advantages in the long-term. For all these reasons, the enactment of the Model Law in the United Kingdom could only be of great utility.

Chapter 2

COMI

“Centre of main interests” or COMI is at the core of the Model Law providing the basis for the recognition of foreign main proceedings. These are defined basically as proceedings pending in a country where the debtor has its COMI. Recognition of foreign main proceedings provides a status with the implications set out in art.20 of the Model Law automatically following. First, upon recognition there is an automatic stay on individual proceedings against the debtor’s assets though the apparent breadth of this prohibition is qualified in various respects. Legal proceedings may still be instituted to prevent an action from becoming statute-barred; the stay is subject to whatever exceptions are found in the domestic insolvency law and the right of a qualified party to request the opening of domestic insolvency proceedings is preserved. Secondly, there is a stay execution against the debtor’s assets.

Both Chapter 15 and the CBIR are faithful to the spirit of art.20 though with differences in drafting that reflect local exigencies and the statutory structure in both countries. In the United Kingdom, it is specifically stated that the stay does not affect rights to enforce security, rights to repossess goods under hire-purchase and retention of title agreements, rights of set-off and rights pertaining to financial market transactions to the extent that all these rights would be exercisable in a domestic UK context. Moreover, where the foreign proceedings are of a rescue or reorganisation rather than liquidation nature, the foreign representative, at the time of applying for UK recognition, may apply for the effects of the stay to be modifiedand for more appropriate relief to be granted.

While relatively straightforward as a concept, the COMI notion may defy easy application in practice. This is particularly the case where a debtor has its business operations spread over several states and central control and management functions are performed in a state that is not the state of incorporation and this in turn may be different from the state where the bulk of economic activities are carried out. Also potentially controversial is the situation where a company’s COMI may have shifted during the course of its corporate history especially if the change occurred just prior to the commencement of formal insolvency proceedings. In making use of the COMI concept and putting it centre stage, the Model Law borrows from the still-born EC Convention on Insolvency Proceedings which was later resurrected and came into force as the EIR. Lewison J. in Re Stanford International Bank Ltd however, suggested that the Model Law framers envisaged that the interpretation of COMI in the EIR, necessarily including the effect of recital 13, would be equally applicable to COMI in the Model Law.

US and UK courts appear to have diverged somewhat in their interpretation of COMI and the absence of any equivalent to recital 13 in the Model Law has been one of the interlinked factors in this divergence. Another more significant factor involves British membership of the European Union and the consequent supremacy of decisions of the Court of Justice of the European Union (CJEU) interpreting matters of EU law. But arguably the most significant factor has been differential implementation of the Model Law in the United States and United Kingdom. The UK provision uses the language of the Model Law but when enacting the equivalent of art.16(3), the US Congress changed the wording so that the presumption may be rebutted by “evidence” rather than “proof” to the contrary. It seems doubtful however whether the US Congress believed that it was making a substantive change. In the UNCITRAL’s Guide to Enactment of the Model Law, reference is made to art.16 establishing presumptions that allow a court to expedite the evidentiary process.

In  the case of Eurofood,the CJEU considered COMI in the context of an Irish-incorporated wholly owned subsidiary, Eurofood, of a major Italian-incorporated global food company, Parmalat. Eurofood’s principal business activity was to provide financing facilities for companies in the Parmalat group and it enjoyed tax benefits conditional upon its being managed and operated in Ireland. Eurofood’s day-to-day administration was conducted in Ireland in accordance with the terms of an agreement governed by Irish law and which contained an Irish jurisdiction clause. One might say however, that the central management and direction of the group as a whole was conducted from Italy. Following financial troubles experienced by the Parmalat group, rival insolvency proceedings in respect of Eurofood were opened in both Ireland and Italy. While Eurofood has been cited in the US case law, including Bear Stearns, without apparent disapproval, the US cases attach much less weight to the presumption than does Eurofood. Perhaps without conscious intent, US courts seem to be trying to have it both ways–referring to foreign interpretations and the need for uniformity but at the same time maintaining an individual approach

A certain degree of fuzziness is associated with a COMI type test, no matter whether one applies the multi-pronged inquiry of the US courts or a Eurofood style presumption. COMI has an elasticity of meaning and, despite the rhetoric of  the Model Law, the reality is that if there is any dispute regarding COMI the determination and recognition process will not be speedy or efficient. Moreover, particularly with alleged last minute changes in COMI immediately prior to an insolvency filing there is the possibility of abuse–of strategic game playing and advantage gaining by certain favoured parties compared with others. Firstly, COMI is such a malleable notion that inter-jurisdictional or indeed intra-jurisdictional fluctuations or variations of interpretation are hardly surprising. Secondly, for understandable though controvertible reasons, the UK courts have chosen to apply the same interpretation of COMI under the Model Law as that under the EIR. In respect of the latter, UK courts are obliged to follow CJEU rulings and, on the EIR, the European Court has handed down a judgment that owes much to the distinctive position of COMI within the European firmament as well as the particular questions it was asked to decide by the court of an EU member state. US courts, of course, face no such constraints. While US courts have been faithful to the injunction expressed in art.8 of the Model Law to bear in mind its international character and the desirability of a uniform interpretation, it is hardly surprising that they should not follow a view of COMI that is dictated by specifically European concerns.

The foreshadowed UNCITRAL work on COMI is to be welcomed in the hope of providing some needed clarity and predictability to this crucial concept in international insolvency at the time those dealing with the company need such clarity and predictability. It is to be hoped that UNCITRAL will identify the factors relevant to this COMI connecting factor, outline their relative importance inter se and the appropriate time at which COMI is to be determined.

(Ref:Law Quarterly Review 2012 COMI and comity in UK and US insolvency law Gerard McCormack)

Scheme of arrangement:

The English scheme of arrangement, or ‘scheme’, has existed for over a century and is a flexible tool for reorganising a company’s capital structure. Schemes of arrangement can be used in a wide variety of ways. In theory, a scheme of arrangement can be a compromise or arrangement between a company and its creditors or members about anything which they can properly agree amongst themselves. It is common to see both member-focused schemes and creditor-focused schemes. In practice, the most common schemes are those which seek to transfer control of a company, as an alternative to a takeover offer, and those which restructure the debts of a financially distressed company with a view to rescuing the company or its business.

In recent years, schemes of arrangement have proved popular as a restructuring tool for both English and non-English companies. A number of high-profile cases have allowed financially distressed companies based on the continent to make use of the English scheme jurisdiction to restructure their debts.

English Schemes of Arrangement:

The current statutory provisions regarding English schemes are found in Part 26 of the Companies Act 2006. Section 895 provides a definition of a scheme of arrangement as ‘a compromise or arrangement between a company and its creditors, or any class of them, or its members, or any class of them’. Nothing in the Companies Act 2006 prescribes the subject matter of a scheme. A company can therefore use a scheme to effect almost any kind of internal reorganisation of its equity or debt capital.

Schemes involve a three-stage process. First, a compromise or arrangement is proposed between the company and its members or creditors. A scheme will usually be proposed by the board on behalf of the company. An application must then be made to the court for an order that a meeting or meetings be summoned. Second, meetings of the members or creditors will be held to seek approval of the scheme by the appropriate majorities. Members and creditors meet in classes to consider and vote on the scheme. The court cannot sanction the scheme unless all of the relevant classes have approved it. The approval requirement is a ‘majority in number representing 75% in value’. Third, the scheme must be sanctioned by the court, and the court’s order becomes effective once a copy of it is delivered to the Registrar of Companies.

One of the benefits of a scheme is the fact that it allows a majority of the members or creditors in each class to bind the minority in that class. This ability of the majority to bind the minority can be very useful. In relation to debt reorganisations, for example, it will generally be the case that creditor rights cannot be varied without their consent.

The English court’s jurisdiction to sanction cross-border schemes have been complicated by a number of pieces of EU regulation, in particular the Insolvency Regulation and the Judgments Regulation. Specialist legislation has also been put in place to deal with insurance companies and credit institutions.

In recent years, there has been a steady flow of companies registered in EU Member States other than the UK and with their COMI and establishments outside the UK, seeking to use the English scheme of arrangement to restructure their debts. Examples include German, Spanish, Dutch, Bulgarian, Luxembourg and Italian registered companies. Unfortunately this area of the law remains somewhat unclear. The effect of these EU Regulations on the English court’s scheme jurisdiction has only been discussed in a properly contested court hearing in England once, and then many of the comments made in relation to the issues discussed below were obiter. In many of the cases of companies seeking to use the English scheme, these issues were not discussed or considered in any great detail. The outcome of these cases is uniform: in each instance the English courts were found to have jurisdiction to sanction the scheme provided a sufficient connection was found, i.e., the jurisdiction of the English courts to convene scheme meetings and to sanction these schemes was unaffected by the EU Regulations. However, the reasoning in the cases in reaching this conclusion sometimes varies and is, at times, inconsistent.

It is therefore admirable that the English courts have sought to find pragmatic and flexible solutions to the difficulties they have faced in trying to apply EU regulations to this issue. The conclusion reached in these cases, namely that companies falling within the ambit of the Insolvency Regulation and Judgments Regulation should be treated in the same way as other foreign companies, is sensible and defensible. The outcome is that the English court will have jurisdiction to sanction a scheme, provided the company has a ‘sufficient connection’ with England for this purpose. However, it is unfortunate that the reasoning of the English courts in reaching this conclusion is so messy. This is a result of the fact that schemes sit uncomfortably between the two Regulations: they fall outside the Insolvency Regulation as they are not listed in Annex A, but as collective composition proceedings they do not fit easily within the defendant-centred regime of the Judgments Regulation. The outcome of the negotiations between the Commission and the Parliament as to the text of the amending Regulation, discussed earlier, may have an impact on this issue if the result is that schemes do ultimately end up in Annex A. However, as discussed, this outcome is far from clear.

European Business Organization Law Review

2013

Cross-border schemes of arrangement and forum shopping

Jennifer Payne

Chapter 3

The decision of the UK Supreme Court in Rubin,decided in late 2012, has recently reminded proponents of the modified universalism theory that some barriers still exist to the recognition and enforcement of judgments given by courts that are exercising jurisdiction in insolvency over a debtor. The prior decision of the Privy Council in 2006 in Cambridge Gas had heralded a more open and expansive attitude to co-operation that was based on the principle of “active assistance” and that would allow recognition and enforcement subject only to two caveats, the existence of a domestic statutory rule to the contrary and the need to ensure the protection of creditors. For that reason, the Privy Council’s views have since found favour in a number of jurisdictions worldwide, including Australia, Bermuda, the Cayman Islands, Jersey and New Zealand. Rubin, inspired perhaps by similar views expressed in the 2012 Irish case of Re Flightlease. It also opened up the potential for a divergence of attitudes between common law courts in relation to the administration of cross-border insolvency matters.

Prior to Rubin, though, another English case, Re Phoenix,had adopted the Cambridge Gas principle of “active assistance” in a slightly different context. It was dealing with the issue of whether the common law would allow assistance so as to enable the application of domestic provisions to an office-holder acting on the basis of an appointment made in a foreign proceeding. The court in Re Phoenix held four things: (1) that the common law contains powers to recognise and assist foreign office-holders; (2) that assistance means doing whatever the court could do in domestic proceedings; (3) that insolvency proceedings are about collective enforcement for the benefit of all creditors and include, the issue in that case in particular, set-aside proceedings directed at third parties; and (4) that set-aside proceedings are in fact central to the purpose of insolvency proceedings.10 As such, the office-holder would be permitted to bring the set-aside action within the jurisdiction by the common law extending the benefit of the provision.

Rubin versus Cambridge Gas- the outcome:

In dealing with the recognition and application by analogy issues, counsel for the office-holders also made a number of submissions, in relation to how Rubin has had an impact on Cambridge Gas, to note, first, that the repudiation of Cambridge Gas was not a position shared by all the judges in the Supreme Court, with two of the five, albeit holding different views on the majority judgment given by Lord Collins, emitting views to the contrary on the ground that the matter had not been the subject of argument before the court and that the cases were at the very least distinguishable. In addition, Rubin accepted many of the findings in Cambridge Gas, Lord Collins going so far as to remark that Lord Hoffmann’s analyses in the latter case as well as in Re HIH were “brilliant”. No disapproval was in fact emitted of observations made in Cambridge Gas in relation to the common law power to render assistance to foreign courts, while the blunt statement that the case was wrongly decided did not elaborate on which of its aspects offended.

As stated in Cambridge Gas, although unifying principles of the common law applicable to both personal and corporate insolvency had yet to be fully worked out, the underlying principle of universality was of equal application. For the Privy Council, this would be given effect by recognition of the office-holder appointed under the foreign insolvency law carrying with it, in application of the principle in Re African Farms,] the “active assistance of the court”.The approval in Rubin of these statements and of the rule in Re Impex, on facts similar to the instant case, had the effect of putting the subject-matter of the application in the instant case firmly within the “traditional category” of judicial assistance at common law. Thus, for the judge, there could be no room for doubt that the Bermudian court had the jurisdictional competence to grant the relief sought by the office-holders in relation to Singularis, although the precise basis of that jurisdiction remained to be

Analysis:

The judgment in Cambridge Gas continues to have echoes in the jurisprudence. While some aspects of its decision, have come to be doubted, other pronouncements it makes, particularly in relation to the active assistance principle that is deployed once recognition of overseas proceedings and the appointment of an office-holder is forthcoming, have continued to receive warm approbation. In Rubin, the Supreme Court provides a reminder that judgments to be enforced must adhere still to the common law canons on procedural and substantive fairness. Unfortunately, knowing this, many potential defendants in this age of litigation fallout from the financial crisis are comforted by advisers in their decision to stay away from proceedings, thus frustrating attempts to ensure that determinations in the course of the exercise of bankruptcy jurisdiction have universal effect. If Rubin represents the orthodoxy, then the only option for insolvency office-holders will be to open parallel proceedings in other jurisdictions and/or to engage in litigation in those jurisdictions, raising the spectre of proliferation of proceedings and costs.

In this light, the decision in Re Phoenix does not at first seem surprising. All the court is seemingly doing is, following recognition of his appointment, capacity and status, authorising the foreign office-holder to bring proceedings in the United Kingdom to pursue a debt. Re Phoenix was a case that seemed to establish that the common law continued to have vitality outside the statutory frameworks available for cross-border assistance in the United Kingdom. The case of Cambridge Gas appeared at this point to have resonance in the United Kingdom, where the persuasive and expansive precedent it set had seemingly been followed in a number of important cases: Rubin , New Cap and Re Phoenix . Re Phoenix appeared to add considerably to the canon and range of assistance that had been developed by the courts incrementally over the years since s.426 came into force by restating the view that the common law range of assistance was similarly developing in parallel. This was also something that resonated with the statements of the first instance judge in New Cap . Re Phoenix did, however, throw into relief the fact that the existence of multiple avenues of assistance might lead to confusion in that, as the courts developed principles in relation to each avenue, the risk was that the range of assistance and discretion in its extension might differ from case to case. It was notable in this case, though, that the court was attempting to ensure that, at the very least, the common law and s.426 frameworks kept up with developments in relation to each other, harmonising the remedies and relief available. This would ensure equality of treatment and equality of arms for foreign office-holders and could only be of benefit to foreign office-holders seeking to maximise the debtor’s estate, which ultimately would accrue to the benefit of creditors.

The family of cases that contains, inter alia, Cambridge Gas , Rubin , New Cap , Re Flightlease and Re Phoenix have thrown up a considerable number of issues: first, what judgments are connected to insolvency; secondly, whether such judgments should be recognised and what recognition means (i.e. whether this also encompasses recognition simple or recognition plus enforcement through “active assistance”); thirdly, whether recognition should take place under traditional rules or those developed more recently as alternatives (together with any qualifications on/exceptions to the use of these rules); and, lastly, what presumptions should exist (if any) in favour of enforcement as a corollary of the aspiration towards universality. A number of these cases have also highlighted the importance of the avoidance action, seen by most as central to insolvency matters, as an active component of the management and conduct of insolvency proceedings. The debate is certainly not over in relation to any of these issues, although, for the moment, it seems as if, at common law, the courts in different jurisdictions are moving in two quite polarised and separate directions, depending on their adherence to the principles elaborated in Cambridge Gas . The trend initiated and represented by Cambridge Gas has much to commend it and the case has certainly been instrumental in developing the modern law of insolvency. Despite different schools of thought with regard to the correctness of the case, it will be interesting to see how far, in the quest for universality, the courts will take on board the precepts on active assistance it has reinforced and underlined.

Chapter 4

The application of forum non conveniens and the UNCITRAL Model Law

The Model Law does not seek to alter radically the substantive insolvency laws of enacting states. Instead it aims to encourage co-operation between courts, by setting down principles and procedures for the recognition of foreign insolvency proceedings and foreign representatives. Consequently this does not appear to limit the possibility of opening proceedings in England on the basis of existing jurisdictional criteria. However since one of the purposes of the Model Law is to foster more efficient cross-border insolvencies, it may be appropriate for the English courts to consider whether making an order for the winding-up of a foreign company would be within the spirit of the Model Law. That is although the court has jurisdiction to wind up a company they would refuse to do so on the basis of forum non conveniens. This of course would not prevent the English courts giving assistance to those foreign main proceedings if it was requested.

Article 2870 states that the opening of proceedings on the basis of assets may occur after the recognition of a foreign main proceeding, but under the common law assets are not a prerequisite for winding up a foreign company. For example, in Re Mid East Trading there were no assets in England, but a sufficient connection with this jurisdiction was found. Clearly this connection would not be sufficient to constitute an establishment under the Model Law and so the English proceedings could not be foreign non-main proceedings, as defined in Art.2(c). *J.B.L. 44  Neither could there be a claim that the English proceedings were a foreign main proceeding, under Art.2(b) of the Model Law.71 So in a case like Re Mid East Trading Art.28 would not be applicable. Nevertheless it would seem useful for the English courts in a situation like Re Mid East Trading to make an order for the company’s winding-up notwithstanding the lack of assets. A significant benefit to the creditors would accrue by the making up of a winding-up order because other provisions of the Act could be applied, provisions which might not be present in the law of the company’s place of incorporation. Morritt L.J. made the point in Latreefers that it is difficult to see any developed insolvency system that does not impose some obligation on directors to consider whether the company is insolvent.72 But that may be the very reason why directors have incorporated in a particular country.

It is still possible under the Model Law to have an English winding-up if the facts of Re Mid East Trading were to arise again, but there would be no obligation on other enacting states to recognise the proceedings. Despite this, in cases like Re Mid East Trading where the liquidator supported the application for a winding up in England it should follow that the English proceedings would be formally recognised in the company’s place of incorporation. The English winding-up might also then be recognised in other jurisdictions if it were recognised in the company’s place of incorporation. Although forum non conveniens was not mentioned in Re Mid East Trading the judge did take into account whether England would be an appropriate forum for a winding-up inasmuch as the court felt it necessary to state that proceedings in England would be supported by the liquidator in the company’s place of incorporation. If forum non conveniens was adopted it would make clear that in every case the court must consider the wider picture, not just whether there was a sufficient connection, but whether there is some reason why an English liquidation is needed in addition to one in the company’s domicile,73 thereby potentially preventing unnecessary proceedings which inevitably deplete the resources of an insolvent company. Although a case like Re Mid East is not within the ambit of the Model Law, seeking to limit the number of liquidations occurring and accepting the need to review issues other than simply whether there is jurisdiction to wind up a company, is certainly within the spirit of the Model Law.

The EC Regulation indicates the inappropriateness of allowing the courts of Member States to wind up companies where there is only a trivial connection with *J.B.L. 45  the State. This rule ensures there is a not a multitude of liquidations. This is acceptable under a multi-state agreement because the agreement makes clear which courts may assume jurisdiction and which may not. There is an argument for suggesting that in the absence of a convention or the like the courts should have a greater degree of discretion to intervene. It should be recalled that Morritt L.J. in Latreefers stated that in his opinion the three core requirements were enough to ensure that the power to wind up foreign companies was not exercised exorbitantly. Morritt L.J.’s opinion carries some force since the courts cannot be said to have been zealous in their application of the three core requirements. Nevertheless many of the judgments do seem to make reference to forum non conveniens, albeit sometimes without express mention of that phrase, as in Latreefers where the fact that no liquidation was likely in the company’s place of incorporation was mentioned. And the application of forum non conveniens as an adjunct to the sufficient connection test would not limit the wide jurisdiction the English court presently enjoys, but simply ensure the court considered whether it should make an order.

Conclusion

Where there is a foreign main proceeding, Art.28 allows for a territorially limited winding-up where there are assets present in England. The application of Art.28 relies upon a presence of assets test but as has been shown this is not the test for winding up a foreign company adopted by the English courts. The point is made in the Guide to Enactment that states may decide to alter Art.28 to require an establishment to be present within the jurisdiction, with a view to limiting the number of proceedings that could be opened, since a winding-up where there are assets but no establishment may not be the most efficient way of administering the insolvent debtor’s estate.75 To do this would not be a sensible course of action at the present time. The Model Law is not a convention or a treaty and thus until a sufficient number of states enact its provision a degree of flexibility is preferable. Therefore it is submitted that Art.28 should be retained with its reference to assets. This would mean that on a strict reading of Art.28, cases like Re Mid East Trading could not come within the Model Law since although a foreign main proceeding was occurring in that case, there were no assets in England.

Whether proceedings are opened under Art.28 or outside the Model Law, the sufficient connection test should still be relevant. That is the court is not looking for the mere presence of assets under Art.28, but also that there is some other clear connection between the company and England. This would still leave a place for forum non conveniens. If it was expressly acknowledged as a part of the test the *J.B.L. 46  courts would be bound to consider in every case whether there was a more appropriate forum. Because Art.28 necessitates the opening of a foreign main proceeding before it can be invoked, the court may well consider that although it had jurisdiction to wind up a company, the foreign main proceeding would be a more suitable forum for any action to be taken against the company and its officers. This could act to limit Art.28 based liquidations, thereby promoting one of the aims of the Model Law, to wit, maximisation of the value of the debtor’s assets. Since there is no express obligation on enacting states to recognise an Art.28 winding-up, it would seem imperative that such proceedings occur only when necessary so that the courts of other enacting states are willing to co-operate with the proceedings in England.76 For as has already been emphasised co-operation between proceedings is important to ensure the efficient administration of the debtor’s assets.

Outside the UNCITRAL Model Law, if a case such as Latreefers were to arise again and there was no winding-up in the company’s place of incorporation and none seemed likely to occur, it seems apposite that the courts have a wide discretion and hence could be persuaded to make an order for the company’s winding-up. The sufficient connection test gives the court a wide enough discretion to make an order in these circumstances. But again, now that co-operation and co-ordination of proceedings have been accepted as essential elements of a cross-border insolvency, greater consideration must be given not just to if the English court has jurisdiction to wind up a foreign company but whether it should. Forum non conveniens has been shown to be relevant as it requires the court to consider the wider picture. Thus there may be cases where a sufficient connection between a company and the English court can be established but the court would nevertheless decline to exercise its jurisdiction. For example, if it appeared likely that a liquidation would occur in the company’s place of incorporation, then the courts might decline to make an order for an English winding-up on the basis of forum non conveniens. It would still be possible to open proceedings under Art.28 once the main proceedings were under way if that was necessary to ensure a comprehensive liquidation of the company’s assets. On the other hand, the court would be able to allow a winding-up in this country, where a specific Act of the English Parliament, not mirrored abroad, such as the Third Parties (Rights Against Insurers) Act 1930, made it just to do so.

It is hoped that the preceding discussion has shown that by acknowledging forum non conveniens as part of the test for winding up foreign companies, the English courts can promote generally the ideals of co-operation and co-ordination in cross-border insolvencies. For the application of forum non conveniens does not prevent a court making an order where a sufficient connection between the company and England is established; it places an emphasis on whether the court should make an order. Thus the focus of the court is not just on whether it is permitted to wind up a foreign company, but whether in the interests of justice the court should exercise its discretion in favour of making such an order.

Journal of Business Law

2005

The doctrine of forum non conveniens and the winding up of insolvent foreign companies

Kate Dawson

SUMMARY: The experience in all jurisdictions illustrates that there is a common perception that insolvency is of prime interest to the creditors. Courts therefore seek to preserve assets, define the interests at stake and regulate procedure. This has the effect frequently of also defining the relationship between domestic and foreign participants in insolvency. An element of discretion present in most jurisdictions allows courts to determine the extent to which assistance is given to courts and insolvency participants from other jurisdictions as well as the articulation between the domestic procedure and any parallel foreign proceedings. Nevertheless, despite there being a measure of consensus internationally for equality of treatment for creditors, assistance is often given only in instances where there exists substantial reciprocity of treatment for creditors. The difficulties this places in the path of creditors seeking to obtain remedies in jurisdictions unfamiliar to them cannot be underestimated. The common problems of any international litigation are well known: differences in language, laws and procedure and legal culture as well as the problems of time, distance and cost. To these must be added those peculiar to insolvency, not least that this is an area of law where courts have traditionally been slowest to develop principles of co-operation. From the perspective of the states to which it applies, there are benefits of having the Regulation framework as an instrument to deal with the unstoppable phenomenon of international insolvencies. Given the consideration also shown by many of these countries to the adoption of the UNCITRAL Model Law, this might result in having the benefit of introducing a comprehensive system for dealing with insolvencies across national boundaries affecting commercial arrangements between European states and their principal trading partners. For states elsewhere, the UNCITRAL Model Law is considered one of the clearest models of international cooperation and has in fact been actively considered by a number of countries for incorporation into domestic law. In any event, whatever the solution chosen, it remains clear that international harmonisation of rules in the field of insolvency is a desirable objective so as to avoid the pitfalls arising from the strict application of either territorial or universal principles.

the general desire to assist in cross-border matters that has long been a feature of court practice in the jurisdiction. Despite the highs and lows of such co-operation, the general conclusion that may be drawn here is that English courts continue to find creative ways of furthering that assistance and that, consequently, cross-border insolvency cases involving the jurisdiction of English courts will be well served by resourceful practitioners presenting arguments to the courts that will inspire judicial ingenuity in finding a resolution to these often complex matters.