Judicial cooperation in international insolvency- swings and roundabouts?
22 August 2014
This summer, all eyes are on the Privy Council and its much-anticipated decision in Re Saad and Singularis, an appeal from Bermuda. It is likely to close a chapter in the debate on the permissible extent of judicial cooperation at common law that was opened by Cambridge Gas case in 2006. At the time, Cambridge Gas looked like being only the latest in a long line of decisions dating back to the 1700s in cases such as Solomons v Ross (1764), in which the judges explored how assistance was to be forthcoming in the situation of a foreign proceeding involving a debtor with links to this jurisdiction.
From simple beginnings (first seen in the law of bankruptcy), recognising the existence of foreign proceedings and the office holder’s title and capacity to act on behalf of the estate, increasingly complex forms of assistance have been developed. These have included staying or discharging local proceedings, restraining creditors from pursuing recovery actions, and requiring debtors and third parties to be examined and produce documents. Often, these developments have also rested on principled approaches to comity, including theories of unity and universality espoused by the judges.
As such, the judges have long believed that there should ideally be a single efficient insolvency procedure, and in this light have also permitted the remittance of funds to overseas proceedings for distribution and given effect to a foreign reconstruction scheme approved by creditors. Assistance developed by the judges was supplemented at an early stage by specific cooperation provisions within the law enabling courts to address requests for assistance directly to each other. The first of these was Section 220 of the Bankruptcy Act 1849, whose most recent legislative descendant is now Section 426 of the Insolvency Act 1986.
In their transition to dealing with corporate entities, the judges were able to apply the types of assistance first seen in bankruptcy, but also to develop the novel concept of ‘ancillary’ assistance through opening ‘light-touch’ liquidation procedures to deal with issues that could not simply be solved by the making of the above orders. These procedures were carefully governed, usually by reference to the need to protect creditors, but also to avoid coming into conflict with the ‘main’ procedure occurring elsewhere.
Ancillary liquidation has now also come to be regulated by statute in what are now Sections 221 and 225 of the Insolvency Act 1986. Together with the cooperation provisions, the statutory framework these form has allowed the judges to continue making orders in aid of overseas proceedings as well as to develop new forms of assistance - for example, by authorising the bringing of vulnerable transaction actions under domestic law and to allow claims against directors to recover deficiencies in the estate attributable to them. Finally, under the umbrella of the cooperation provisions, the judges have also creatively interpreted the law to facilitate the extension of domestic rescue regimes to foreign companies.
Judge-led assistance and cooperation have come to be overtaken in many jurisdictions by the development of domestic statutory frameworks. These in turn have often been sidelined by the move towards creating international insolvency frameworks, such as through regional treaties (eg, the Montevideo and Copenhagen Conventions) and other supranational texts (eg, the United Nations Commission on International Trade Law Model Law on Cross-Border Insolvency 1997; the EU Insolvency Regulation 2000). However, for jurisdictions not in the fortunate position of having autochthonous provisions or being able to subscribe to an international text, judge-made law appears to be the only possibility.
It is in this context that the advent of the decision in Cambridge Gas seemed to give new impetus to the development of judicial assistance at common law. The facts of the case seem innocuous enough. The creditors of a failed shipping venture in the gas transporting business asked in Chapter 11 proceedings in New York for the shares of the debtor company to be vested in them to attempt a reconstruction. The shares were held by a parent company that failed to appear in proceedings, although the common investors in both companies were represented. As the shares were in an Isle of Man company, the Manx court was asked for help in effecting the transfer. No cross-border cooperation mechanism was available, leaving only the common law. Both the lower courts decided against assistance.
However, when the case reached the Privy Council, despite arguments that to recognise the judgment and to give effect to it would breach the traditional common law rules on recognition and enforcement (also known as the ‘in rem’ and ‘in personam’ rules), the court said that a presumption of ‘active assistance’ should exist in the case of judgments arising in insolvency in furtherance of the principle of universality. Two simple caveats should govern the process in relation to such judgments: the existence of a domestic statutory rule militating to the contrary and the possibility of prejudice to the creditors.
In giving the decision, the Privy Council traced the development of ‘active assistance’ in a number of instances, although it relied principally on a formula appearing in an early South African case called Re African Farms (1906). Although the facts may have been unremarkable, the decision seemed to tap into the zeitgeist, to the great surprise of commentators. It was rapidly taken up as precedent in Australia, Bermuda, the Cayman Islands, Ireland, Jersey, New Zealand and the United Kingdom.
The point may be made that not all of these countries have the Privy Council at the apex of their judicial hierarchy and its decisions are at most persuasive precedent for them. In fact, in the United Kingdom, a judge in Re Phoenix (2012) went so far as to suggest that the common law, in light of the approach in Cambridge Gas, should develop in tandem with any domestic cooperation provisions, so that the same remedies and forms of assistance could be provided.
The wide and expansive treatment of assistance seemingly inaugurated by Cambridge Gas did not, however, remain unquestioned. In Ireland and in the United Kingdom, the Supreme Courts of these jurisdictions decided in 2012 in Re Flightlease and Rubin v Eurofinance (respectively) that ‘active assistance’ could not override the traditional common law rules on in personam and in rem jurisdiction. For the judges in both cases, judicial rule making could not be a substitute for parliamentary legislation and/or international efforts at improving cross-border cooperation.
However, echoes of the Cambridge Gas approach continue to be heard, even in those jurisdictions. In 2013, an attempt in Tambrook to limit the assistance forthcoming under Section 426 to those situations where there were pre-existing proceedings in the requesting jurisdiction was rejected with the Cambridge Gas articulation of the ‘active assistance’ principle receiving mention. This would be interpreted so as to allow proceedings to be opened in the United Kingdom to avoid unnecessary duplication of effort in the requesting jurisdiction, which would only be purposeless and wasteful of costs. In Ireland also, courts have continued to speak approvingly of Cambridge Gas - in one instance, Mount Capital Fund (2012), also attempting to preserve greater discretion for the courts as far as assistance is concerned.
It is, however, the reliance in Re Phoenix (2012) on the principle of ‘active assistance’ that has come to cause Cambridge Gas to be revisited before the Privy Council. How so? Re Phoenix was, of course, the case that suggested the common law should develop in tandem with any domestic statutory provisions. In that case, without opening either a domestic or ancillary proceeding, the judge held that the common law could extend a domestic statutory power to enable a claim for transaction avoidance to be brought by the foreign office holder within the jurisdiction.
Re Phoenix was taken up, as persuasive precedent, in two 2013 decisions in the Cayman Islands and Bermuda: Picard v Primeo and Re Saad and Singularis (respectively). The judges at first instance in both cases used the principles of which they approved to permit, respectively, the pursuit of transaction avoidance claims by the foreign office holder and the summons of persons to be examined and to order the production of documents. The steps in each case were to be achieved, just as in Re Phoenix, by the extension of domestic statutory rules to a situation in which neither an ancillary nor a domestic liquidation was envisaged.
However, the repudiation in Rubin v Eurofinance of Cambridge Gas also caused both courts some difficulty. This was because, although bound by the Privy Council which sits at the apex of their judicial hierarchy, the jurisdictions also apply English common law as the basis of their common law. In that regard, the courts in both jurisdictions would naturally respect the pronouncements of the UK courts. For that reason, both courts attempted a reconciliation between the cases, although the judicial enthusiasm appears palpably for the views expressed in the Privy Council.
Appeals in both cases were subsequently brought, the Bermudian appellate court later that year holding the expansive views of the judge at first instance to be wrong. However, the Cayman appeal court, hearing the matter in early 2014, reversed the judge below, holding that the domestic statutory provision he rejected as the foundation of assistance did indeed confer the necessary powers to assist that the judge found instead at common law. A decision on whether the judge was right to source those powers in the common law was stayed, as the Bermudian case had by then been the subject of a further appeal to the Privy Council, which heard arguments at the end of April 2014.
It is this judgment that is currently awaited. The Privy Council will have the task of determining whether its views in Cambridge Gas should stand in light of the criticisms that have been emitted in Ireland and the United Kingdom and whether there are any natural boundaries to the principle of ‘active assistance’. Since Cambridge Gas, however, the judges comprising the UK Supreme Court and the Privy Council have been drawn from the same (limited) constituency. In fact, the lead judge (and author of the majority judgment: Lord Collins) in Rubin v Eurofinance was present on the panel hearing the Re Saad and Singularis appeal. Whether this means that the views of the panel as a whole will take a different direction remains to be seen.
For that reason, the outcome of the case is very much anticipated and commentators are already poised to analyse the decision. In any event, whether Cambridge Gas stands or falls, the future direction of ‘active assistance’ will, in all probability, continue to be debated in the courts in years to come.