Ruling threatens existence of international insolvencies

by Rachael Singh

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06 Nov 2012

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INTERNATIONAL COOPERATION on corporate collapses has been left in tatters following a recent Supreme Court judgement, but given how resourceful the profession is, will it really make a world of difference?

The Supreme Court handed down a judgment that foreign court rulings on insolvency matters cannot be enforced in other jurisdictions and vice versa where a foreign ruling bears no authority in the UK.

Although practitioners are a skilled bunch, more than capable of recovering funds for creditors wherever they are hidden, the world has become a smaller place and international asset chasing is now a norm in most corporate collapses.

For years, there has been a movement towards a unified model law, to ease the burden of legal costs and delays, known as UNCITRAL – an agreement which unifies about 60 member states including European, US, Asian and African States. All jurisdictions which signed up to the model law essentially agreed that they would allow insolvency practitioners (IPs) to chase assets in their jurisdiction.

The latest ruling seems to have set that unified approach back by at least a decade, with many claiming the profession is back in the dark ages. The UK currently stands alone, isolated.

Practitioners will have to bring legal proceedings in each jurisdiction, meaning a business that collapses in the UK could see IPs having to start several legal claims in each country they are chasing assets. While it is not impossible to to retrieve funds on an international basis, it will take a bite out of the creditor repayment pot.

How did it all go wrong?

Two cases were joined together and appealed in the Supreme Court in order to bring clarity on a unified approach to cross-border insolvencies.

'One half' of the case involved practitioners from David Rubin & Partners using a ruling in a US bankruptcy court to pursue funds in the UK. The other 'half' saw liquidators representing Australian business New Cap Re using a ruling to pursue funds owed to entities in Australia from UK debtors.

For Rubin, the loss means the receivers are having to walk away from $10m (£6.26m) of funds because of the time and cost already associated with the legal case.

"It would cost too much to start litigation again," explains David Stephenson, partner at David Rubin & Partners.

"We would have to recommence litigation again in the UK and we just don't have the funds."

The receivers were appointed in 2005 and went through the US courts under a Chapter 11 bankruptcy process. They submitted evidence that $10m of funds were owed to US creditors from UK-based assets. However, several years later following the latest ruling, the evidence and authority given to the receivers from the US court now has no bearing in the UK.

Although New Cap Re may have lost the war on universalism in insolvency, it won the battle to retrieve funds from the UK-based Lloyds syndicate.

The syndicate had said that if the Australian liquidators wanted to pursue funds from it, they would have to start legal proceedings in the UK against it.

But the syndicate was also owed funds from New Cap Re. The judge ruled that because the syndicate had itself already submitted a claim to recoup funds in Australia, it had effectively given authority to Australian liquidators to chase it.

The ripple effect

IPs are critical of the results. Many argue they will have to walk away from pursuing some cross-border debts because of the increase in costs for separate legal proceedings per jurisdiction – and the fees they will have to charge to undertake more work.

"We live in a different world now – money moves around the world. If there is an international collapse and no universal principle to enforce a judgment, then you're going to get a lot more costs and delays," said Stephenson.

But there is the added problem of uncertainty. What one country regards as a collapsed business – or agreed debt – another may not.

"Some jurisdictions may come to different conclusions," warns Kristy Zander, restructuring partner at Mayer Brown, which represented New Cap Re.

The ruling could also make UK companies appear unattractive in the export and trade markets to credit insurers – meaning less inbound investment – warns Nick Hood, an insolvency practitioner and business rescue analyst from Company Watch.

"Credit insurers could say that recovering debts overseas is relatively easy but now they may have to be careful. There's a potential restriction on international trading that could come from this judgment," he said.

However, IPs have worked on international collapses without UNCITRAL in the past. If they've done it before, they can do it again.

"There is always more than one way to skin an international cat," said Hood.

Harsh but true

Although the judgment has raised concerns, IPs seem to grudgingly appreciate the sentiment behind the ruling when it comes down to the nitty-gritty of it.

The judges found that although they believe a universal law is needed, common law and the courtroom is no place for a solution of this magnitude to be thrashed out. If there's enough dedication to the cause, then statute law will be made.

In order to achieve that, campaigning from the profession, recognised professional bodies and the governing Insolvency Service need to come together to create a new law.

However, with administrations and liquidations likely to increase as we stumble out of recession, can the UK realign itself with UNCITRAL? Will IPs find ways to hurdle the UK stumbling block?

A spokesman for the Insolvency Service said: "The Insolvency Service is aware of the ruling and we are considering the implications of it."

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