Another case illustration is drawn from the decision of Rattee J. in Re Bank of Credit and Commerce International S.A. (No. 9) where a company forming part of the BCCI banking conglomerate was being wound up by the Grand Court of the Cayman Islands. That particular company had been incorporated in the Cayman Islands, whose companies legislation is based upon that of the United Kingdom but has not yet assimilated the fruits of the reforms of more recent times, notably in the field of insolvency law. Of particular relevance to the instant case, where enormous losses had been caused to creditors and depositors by mismanagement and fraud on the part of some directors and managers of the bank, was the absence from the statutory provisions in force in the Cayman Islands of any counterparts to sections 212, 213, 214 and 238 of the Insolvency Act 1986. It was therefore not possible for the liquidators to use local law to bring proceedings against a former director and employee of BCCI for misfeasance or for wrongful or fraudulent trading, nor to apply for orders to procure the avoidance of transactions the company had been caused to enter into at an undervalue. In considering the request from the Grand Court to assist in overcoming these lacunae in the Cayman Islands law, Rattee J. took into account the fact that the affairs of the BCCI companies were all hopelessly intertwined in such a way as to render traditional international boundaries irrelevant. The only sensible solution lay through the giving of whatever mutual assistance lay in the power of the various national courts to provide. Moreover, the operational links of BCCI with London and with England had been substantial, so that it was not inappropriate for proceedings against directors and others, and for the impeachment of prior transactions, to be conducted by the liquidators before the English court, and the requisite orders were made to enable them to do so
Other remarkable cases worth mentioning in which the scope of section 426 was greatly stressed as regarding cooperation include Re Southern Equities Corp, England V Smith, Duke Group V Carver and Re Television Trading Rentals Ltd to mention a few.
The Regulation applies to collective insolvency proceedings against individual debtors, sole traders, partnerships and most corporate entities which involve the realisation of the debtor’s assets. Applicable proceedings are listed in Annex A to the Regulation and are tailored to the national insolvency laws of each member state. For the UK these include winding up by or subject to the supervision of the court, creditors’ voluntary winding up (with confirmation by the court); administration, voluntary arrangements under insolvency legislation, bankruptcy; and sequestration.
It does not apply to schemes of arrangement under section 425 of the Companies Act 1985 (unless the scheme is part of an administration); receiverships; members voluntary liquidations; insolvency proceedings involving insurance undertakings and credit institutions; investment undertakings which hold funds or securities for third parties; and collective investment undertakings.
The objective of the Regulation is to improve the efficiency and effectiveness of cross border insolvency proceedings by regulating the jurisdiction, governing law and formalities regarding the recognition and enforcement of judgments handed down in connection with those proceedings. This aim is achieved by establishing uniform conflict of law rules which serve as a framework through which national insolvency rules can function alongside each other, whilst not replacing or harmonising the insolvency laws of member states.
The Insolvency Act 1986 and the EC Regulations 2000 have also greatly enhanced the adoption of the theory of protocols among European states in a bid to ensure a common, acceptable and efficient platform in the administration of insolvency proceedings and also throws more light on issues of jurisdiction and places of commencing insolvency actions.
In an insolvency proceeding, the assets of an insolvent debtor are collected and converted into money to be distributed among the creditors or the liabilities of an insolvent debtor are restructured in order to re-establish the debtor’s ability to meet liabilities and the proceedings can be a combination of liquidation and reorganisation
The EC Regulation further allows the court of a Member State to open "main proceedings in relation to a debtor which has its centre of main interests (COMI) in that Member State. A recital to the Regulation suggests that the COMI should correspond to the place where the debtor conducts the administration of his interests on a regular basis and is therefore ascertainable by third parties. It is possible for territorial proceedings to be opened in any state where the debtor has an establishment. An establishment is defined in the Regulation as any place of operations where the debtor carries out a non-transitory economic activity with human means and goods. The regulations have primarily as their aim, establishment of common rules on cross border insolvency proceedings based on principles of mutual recognition and cooperation and also replaces various conventions by member states especially as they relate to insolvency proceedings.
Going from the above and in as much as the Regulation provides that proceedings are to be initiated in the member state which is the ‘centre of the debtor’s main interests’, it is presumed that in the case of companies, in the absence of proof to the contrary, this will be where the registered office is located but however, this is not always easily determinable and may depend upon a number of factors. Arguably, where there is more than one state which qualifies as the centre of the debtor’s main interests this could give rise to disputes which might delay the commencement of proceedings. Since the Regulation makes no provision for resolving such disputes the matter must be resolved by the court of the member state which first considers the question.
The Regulation provides for two basic types of insolvency proceedings: main proceedings of universal scope and local proceedings of territorial scope; depending on whether they occur prior to or post commencement of the main proceedings, local
proceedings are categorised as independent territorial or secondary proceedings respectively. Article 3 of the Regulation confers the jurisdiction to open the main insolvency proceedings. Member states are free to designate the national courts that may open insolvency proceedings and these insolvency proceedings are recognised and effective in all other member states without further formalities.
Main proceedings encompass all the debtor’s assets on a worldwide basis, save where the Regulation specifies otherwise. They may take the form of either reorganisations or winding up proceedings. The appointed insolvency office holder will have the authority to act in all member states, provided that he complies with the laws of the local state. Office holders are referred to as liquidators under the Regulation. ‘Liquidator’ is a defined term under the Regulation and means any person or government body whose function is to administer or liquidate the debtor’s assets or to supervise the administration of the debtor’s affairs. The authorised persons and bodies are listed in Annexe C of the Regulation. In the UK, this includes liquidators, administrators, and supervisors of voluntary arrangements, the official receiver, trustees and judicial factors.
The Regulation introduces uniform conflict of law rules which do not seek to replace or harmonise the national insolvency laws of member states; rather, they are designed to regulate competing jurisdictions, governing law and the formalities regarding the recognition and enforcement of judgments. The Regulation provides that main proceedings are to be commenced in the member state which is the centre of the debtor’s main interests and ancillary proceedings may be commenced in any one or more member states if the debtor has assets in those member states. The main proceedings have universal scope, while ancillary proceedings are limited to assets found only in the subsequent member state and the proceedings may only take the form of winding up proceedings. The intended effect of co-ordinating insolvency proceedings is the effective realisation of the debtor’s assets, thus increasing the pool of assets available to creditors on the winding up of the company.
Due to the diversity of the liquidation process, the governing law in insolvency proceedings in main proceedings is the law of the member state in which the proceedings are commenced. However, given the differences between national insolvency laws on core issues like security rights, there are several exceptions to this rule. These are, specifically, rights in rem (largely, mortgages, liens and floating charges) of creditors or third parties in relation to assets located in another member state (Article 5), rights of set-off (Article 6), reservation of title clauses (Article 7), rights and obligations of parties to a payment or settlement system or to a financial market (Article 9) and rights under employment contracts (Article 10).
Ascertaining where the ‘centre of main interests’ lies has been the main issue in many of the cases decided to date. This has already given rise to disputes that can lead to delays in the co-ordination of insolvency proceedings. In the Daisytek-ISA SAS case, the French and German lower courts each concluded that the relevant company’s centre of main interests was in France and Germany respectively, not the UK. Thus the English court had no jurisdiction to open main proceedings. Both decisions were overturned on appeal but there were delays and serious operational uncertainties as a result. As the above example shows, in the absence of any procedure within the regulation to resolve jurisdictional disputes, they are left to be determined by the EU member state’s court that first considers the question. This can give rise to inconsistency in interpretation, as the phrase may be interpreted differently in different member states’courts. However, as each member state has an obligation to interpret the terms of the Regulation in accordance with established EU law principles of statutory interpretation, such differences should be kept to a minimum.
Although it is possible to describe the factual attributes of insolvency in terms which may be universally recognised and understood, national attitudes towards the phenomenon of insolvency are extremely variable, as are the social and legal consequences for the debtors concerned. Since, by definition, insolvency impacts upon the entire patrimony of the debtor, the range of legal interests which are in some way affected is very extensive. This ensures that there is a profound and intimate correlation between insolvency--whether individual or corporate--and the very wellsprings of policy and social order from which national law ultimately draws its inspiration. For this reason, despite numerous general resemblances, national insolvency laws and procedures differ from one another almost infinitely in ways both great and small. The variations range from such fundamental matters as the underlying philosophy of the law-including the key question of whether its sentiments are inclined towards the alleviation of the debtor's predicament, or towards the amelioration of the creditors' exposure to loss to the more specific questions of detail concerning the manner in which proceedings are conducted, and the contents of rules of substance or procedure which bear upon a particular set of facts.
It should also be noted that the conflict of laws which is eminent in the adoption by member states do not replace or harmonise the insolvency regimes of member states the laws merely regulate competing jurisdictions, governing law and the formalities regarding the recognition and enforcement of judgments and all other issues still remain a matter for the national insolvency laws of the relevant member state.
Many different factors are capable, either singly or in combination, of imparting a cross-border dimension to a case of insolvency. The debtor may have had dealings with one or more parties from other countries, or may own or have interests in property not all of which is exclusively within the jurisdiction of a single state. Liabilities may be owed to parties whose forensic connections are predominantly with a different country to that with which the debtor is associated; or the relevant obligations may be governed by foreign law, may have been incurred outside the debtor's home country, or may be due to be performed abroad. The diversified state of the debtor's affairs and activities may be such that the conditions for opening insolvency proceedings are simultaneously met with regard to more than one country, giving rise to the possibility of multiple proceedings in different jurisdictions. In any of the foregoing ways, a cross border case may come into being.
To these end therefore and due to the diversity of the liquidation process, the governing law in insolvency proceedings in main proceedings is the law of the member state in which the proceedings are commenced. However, given the differences between national insolvency laws on core issues like security rights, there are several exceptions to this rule. These are, specifically, rights in rem (largely, mortgages, liens and floating charges) of creditors or third parties in relation to assets located in another member state (Article 5), rights of set-off (Article 6), reservation of title clauses (Article 7), rights and obligations of parties to a payment or settlement system or to a financial market (Article 9) and rights under employment contracts (Article 10).
In a cross-border context, insolvency law draws upon a blend of principles, some of which are referable to the general approach to be followed in cases of insolvency, while others address the special questions that result from the international dimension within the instant case. As already stated, the traditional differences between the laws of independent, sovereign countries render it somewhat dangerous to speak in terms of concepts and principles as though they enjoyed some kind of standardised application throughout the world.
It is however further argued critically that the terms of section 426 establish a barrier to entry or which countries are recognised under the act and which can only be surmounted through the taking of positive action, on a country specific basis, by the Government itself. The power conferred by subsection (11) (b) has been used sparingly, and selectively. Since 1986, only three orders have been made pursuant to this provision. The first of these, made in 1986, designated seventeen countries and dependent territories, all but one of which was then members of the Commonwealth, for the purposes of section 426. Subsequently, three further Commonwealth members, South Africa, Malaysia, and Brunei were added to the list of designated countries. At the time of its inclusion among the designated territories in the 1986 Order, Hong Kong was still a British colony. With the restoration of Chinese sovereignty over Hong Kong from 1 July 1997, that territory became only the second non-member of the Commonwealth-the other being the Republic of Ireland--to be designated for the purposes of section 426. It is therefore apparent that, for the time being, assistance under this section is available on a very restricted basis, and that many states with which the United Kingdom enjoys close relationships, notably in the economic and commercial spheres, are presently omitted from the list of 'relevant' countries.
It should be noted that the international assistance for which provision is made by section 426(4) is limited not only in terms of the foreign countries from which requests for such assistance can be entertained, but also in terms of the authorities by which it may be requested and provided. The only form of assistance that can be obtained is on a court-to-court basis: it is not open to an office holder appointed in foreign insolvency proceedings to make a direct, personal request for assistance to an English court, nor to any other person or authority, under the auspices of this statutory provision.
Moreover, the ambit of the power to give assistance is narrowed still further, since it is expressed to be exercisable by 'the courts having jurisdiction in relation to insolvency law in any part of the United Kingdom', in response to requests for assistance submitted by 'the courts having the corresponding jurisdiction' in a country or territory which has been designated for this specific purpose, as seen above. It is therefore necessary to determine which courts are qualified to participate in the process, a question whose resolution is partly dependent on the arrangements in force, in the United Kingdom and in the other country concerned, for the allocation of jurisdiction in relation to insolvency law.
However, it should be noted that as was absent in previous treaties and conventions, the act proffers a definition for insolvency law.
On the surface the Regulation appears to do little more than recognise cross border insolvency proceedings. In certain insolvency scenarios, specifically, where a company is based in one member state and has a branch and/or assets in another member state, the Regulation is likely to promote an increase in the level of co-operation and consistency between member states, which in turn should realise an increase in the pool of assets available to creditors on the winding up of a company.
The regulation certainly improves corporate recovery, as the recognition of insolvency proceedings throughout the EC means that any moratorium will equally be recognised. On the other hand, secondary proceedings may only take the form of winding up proceedings, not the form of rescue proceedings. This means that any attempt to implement a reorganisation plan may be frustrated by creditors who consider that their interests would be better served by liquidation proceedings.
By and large and on a conclusive note, it is worthy to state that many significant provisions of the Regulation are discretionary rather than mandatory. As a result, the courts of the different member states have discretion whether or not to grant applications under the Regulation. It is difficult, therefore, to advice with any certainty as to the likelihood of success of requests under the Regulation from state to state; different member states’ courts are likely to develop different rules that govern the exercise of their discretion.
Bibliography
Books
1. Fletcher I. ‘Insolvency in Private International Law: National and International Approaches’ Oxford University Press, London 1999
2. Tolmie F. ‘Corporate and Personal Insolvency Law’ 2nd ed Cavendish Publishing London 2003
Articles
1. Cadwalader, Wickersham & Taft, Memorandum on The EC Council Regulation on Insolvency Proceedings, London, 20 May 2002.
2. Coordination in Cross Border Insolvency Cases. Cassels Brock & Blackwell LLP- Business Reorganisation Group.
3. 9949cfd9b601/Presentation/PublicationAttachment/3f7750f5-918e-44f5-99ef-a0e07134c379/BS&R_ECRegulation_Insolvency.pdf
Table of Cases and Statutes
1. Duke Group V Carver [2001] BPIR 605
2. Government of India V Taylor [1955] AC 491; Also, Peter Buchanan V Mckey [1955] AC 516
3. Hughes V Hannover Re [1997] BCC 921
4. J N Taylor Pty Ltd [1998] BPIR 347
5. Re Bank of Credit and Commerce International S.A. (No. 9) [ 1994] 3 All E.R. 764, [ 1994] 2 B.C.L.C. 636
6. Re Dallhold Estates (UK) Pty. Ltd [1992] BCC 394
7. Re Focus Insurance Co Ltd [1996] BCC 659
8. Re Southern Equities Corp, England V Smith [2000] BAR 28
9. Re Television Trading Rentals Ltd [2002] EWHC 211
Statutes
1. Companies Act 1985
2. EC Regulation 2000
3. Insolvency Act 1986
Coordination in Cross Border Insolvency Cases. Cassels Brock & Blackwell LLP- Business Reorganisation Group.
Tolmie F. ‘Corporate and Personal Insolvency Law’ 2nd ed Cavendish Publishing London 2003
J N Taylor Pty Ltd [1998] BPIR 347
Government of India V Taylor [1955] AC 491; Also, Peter Buchanan V Mckey [1955] AC 516
See also Hughes V Hannover Re 1997 BCC 921
Fletcher I. ‘Insolvency in Private International Law: National and International Approaches’ Oxford University Press, London 1999 pg 189
[ 1994] 3 All E.R. 764, [ 1994] 2 B.C.L.C. 636 ( Rattee J.).
.http://www.dlapiper.com/files/Publication/8b35caea-1309-4c4f-9920-9949cfd9b601/Presentation/PublicationAttachment/3f7750f5-918e-44f5-99ef-a0e07134c379/BS&R_ECRegulation_Insolvency.pdf
Memorandum Cadwalader, Wickersham & Taft The EC Council Regulation on Insolvency Proceeding London May 2002
Cadwalader, Wickersham & Taft, Memorandum on The EC Council Regulation on Insolvency Proceedings, London, 20 May 2002
Fletcher ‘Insolvency in Private International Law: National and International Approaches’ Oxford University Press, London 1999 pg 189
Note that this position has changed in light of the decisions cited in the above cases as courts are now more willing to cooperate.
Fletcher I. ‘Insolvency in Private International Law: National and International Approaches’ Oxford University Press, London 1999 pg 189
Tolmie F. ‘Corporate and Personal Insolvency Law’ 2nd ed Cavendish Publishing London 2003.
Section 426 (10) (a), (b), (c), (d) Insolvency Act 1986.
