Supreme Court shines a light on cross-border insolvency

by Devi Shah, Mayer Brown

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15 May 2012

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THIS MONTH the Supreme Court will hear the joined appeals in two cases - New Cap Re and Rubin - with the judgment expected to have far-reaching implications on the ability of insolvency practitioners around the world to conduct cases under a universally recognised process.

Crossing borders today

In the current market, few companies are based within the borders of a single country's jurisdiction, with globalisation transforming the way business is done.

A company of a certain size is likely to have assets and/or creditors outside of the country in which it is 'domiciled' (that is, where it has its principal place of business) and will have contracts with and make payments to, parties in other jurisdictions.

If such a company were to enter an insolvency proceeding, issues likely to arise include whether the assets in other jurisdictions can be collected in and distributed through a single insolvency process, or if there should be several in each country where there are assets or outstanding payments, also how should creditors outside that area be treated?

There have been important developments in cross-border insolvency law over the last 20 years which seek to answer such issues including: the introduction of European Commission legislation for countries within the EC on how administrators should deal with insolvencies across EC borders; and the drafting of a "model law" for countries to adopt, set up by the United Nations (UNICITRAL).

Such developments are similar in their aim to reduce the complexity and cost of cross-border insolvency proceedings - providing for a unitary process in the insolvent's home jurisdiction, which is recognised and given authority in other countries (known as the principle of "modified universalism").

At the heart of the two appeals currently working their way through the Supreme Court is the question of how far the English courts will go to enforce this principle.

New Cap appeal

One of the two appeals has been brought by the liquidator of New Cap Reinsurance Corporation Limited. It is an Australian reinsurance company with which the appellants, two Lloyd's Syndicates, had reinsured.

The company made some payments to the appellants just four months before it entered an insolvency process in Australia.

The liquidator (as would be the case in the UK) brought proceedings against the appellants in an Australian Court seeking to reclaim those payments. The liquidator believed the payments were "unfair preferences", meaning that payment should go into a pot to be equally divided among the creditors, rather than to the syndicates.

In the Australian courts without the appellants present, the Judge found in the liquidator's favour.

The syndicate put their position forward in correspondence to the court and argued that the case pursuing the funds should be made in their jurisdiction, the UK. But, the Australian court issued a letter of request to the High Court in England seeking assistance to require the appellants to pay the relevant amounts to New Cap Re.

Meanwhile

In the second appeal (which will be heard at the same time as New Cap) Rubin, receivers obtained judgments in the course of Chapter 11 bankruptcy proceedings in the United States. They sought recovery against the appellants, who were based in the UK, for payments they had received for the collapsed company which amounted to preference payments or fraudulent transfers under US bankruptcy law.

The appellants did not attend the proceedings and the judgments were made in their absence. An application, just as in the Australian courts in New Cap, was issued to the English High Court seeking its assistance in enforcing the US judgment.

Supreme decision

Both Appeal Courts found in favour of the insolvency practitioner and receiver in these cases. They ruled that the type of claim brought was part of the insolvency proceedings taking place in the country where the collapsed business was domiciled and should be allowed to be effective in the UK as a result.

There are different legal bases on which the two cases are argued. Briefly, in the appellants' camp it is argued that claims to recover money by insolvency practitioners should only be capable of being brought where the target (in this case appellant), and not the insolvent business, is based.

Unless they have entered into a contract with a company that proceedings will be held in the country the business is domiciled in or otherwise taken active steps in the proceedings. The insolvency practitioners argue the courts were right in ruling that those principles do not apply in these types of cases.

Provisions in insolvency law giving power to a practitioner to seek assets and recover payments, or challenge transactions entered into in the lead up to an insolvency process, are common in many countries. Foreign officeholders considering where to bring such proceedings, in cases where the targets are in the UK, should take advice on this complex issue, and indeed may be best advised to await the outcome of the two appeals.

Devi Shah is a partner and joint head of restructuring, banking and insolvency at international law firm Mayer Brown

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