A. DOMESTIC FAMILY OF COMPANIES
1. If insolvency proceedings must be commenced for the family of companies, does your law permit a joint proceeding, ie, a single court file, a single judge, a single list of creditors, single notice list, or must the case for each member of the family proceed separately with no practical acknowledgement of the related proceedings?
In England and Wales, each company is treated as a separate legal entity and is amenable to its own insolvency proceedings. With very limited exceptions (including, for example, the courts’ ability to pierce the corporate veil in a case of fraud) the creditors of a company can only claim against that particular company in its insolvency proceedings. It is possible for some companies in a group to commence insolvency proceedings while other solvent companies in the group continue trading. However, where insolvency proceedings are commenced for all the companies in a group, the courts can take an integrated approach and the companies’ affairs can be administered together if a pooling agreement is thought appropriate. Such an agreement would be entered into by the officeholders with court approval but it does not result in the substantive consolidation of the insolvency proceedings.
Where one or more of the companies are non-domestic, specific rules may apply. These are considered further below (Part B).
(a) What if the members of the family are organised under, or operate in, different locations within your country? Can a company from a distant location in your country commence its bankruptcy proceeding where its affiliate is located, if the affiliate has already commenced its bankruptcy proceeding?
The UK consists of several different jurisdictions: England and Wales, Scotland and Northern Ireland. There are also separate legal systems in Jersey, Guernsey and the Isle of Man. Separate rules and procedures therefore apply to companies registered in these jurisdictions, which ordinarily have to commence proceedings in the courts of their home country.
In England and Wales, the High Court has jurisdiction to wind up any company registered in England and Wales (s 117(1) of the Insolvency Act 1986 (‘IA’)). However, where a company’s paid up share capital does not exceed £120,000, the county court of the district in which the registered office is situated has concurrent jurisdiction with the High Court to wind up the company (IA s 117(2)).
From an international perspective a foreign incorporated subsidiary of an English incorporation parent may only file in England and Wales if the jurisdictional tests are met as set out below (question B.2.(a)). The fact that the company has a parent company in England may be a factor that the courts will consider.
(b) To the extent your country has different types of insolvency proceedings (such as Chapter 11 reorganisation and Chapter 7 liquidation in the US), do the members of the corporate family all have to proceed under the same type of proceeding?
In England and Wales, there are two main types of insolvency proceeding, administration and winding up (or liquidation). An administration involves the officeholder in order to achieve, for example, the survival of the company or a more advantageous realisation of its assets than on a winding up. A winding up involves the ultimate dissolution of the company with the creditors/shareholders receiving dividends in respect of their interests. A company can also enter into a company voluntary arrangement under the IA, or a scheme of arrangement under the Companies Act 1985 (‘CA’), to compromise creditors’ claims (but it need not be insolvent to do so). As each company in a corporate group has a separate personality, the companies within the group do not have to file for the same type of proceeding. This applies equally where one or more of those companies are incorporated overseas.
2. Does your law permit, or prohibit, a single administrator/trustee /receiver to administer the assets and the liabilities of the entire corporate family?
There is no specific legislative prohibition of, or procedure for, a single individual to act as liquidator, administrator or receiver of the assets and liabilities of each corporate member of a group on the insolvency of all the members. If, however, there is a conflict of interest between companies within the group, such as disputed intra-group debt, then it will not be appropriate for the same person to be appointed to all the companies, especially if the companies have different creditors.
(a) If so, is there a hearing for the court to determine whether the administration by a single party is appropriate? Are secured and unsecured creditors or other parties in interest allowed to object or be heard at such hearing?
It might be that no hearing will take place. There are procedures to allow creditors to apply to court for directions to be given in respect of the identity of the officeholders.
(b) What about joint representation by other professionals, such as law firms or accounting or auditing firms?
The position is similar for joint representation by other professionals. Law firms can represent more than one company in a group, but are unable to do so where there is a conflict of interest. If the interests of the companies are aligned, for example, where there is no disputed intra-group debt and there are common creditors, it may be possible and desirable for there to be joint representation.
3. Does your law encourage or discourage overlapping boards or management teams for separate members of a corporate family?
English company law does not prohibit similar or identical composition of the boards of directors of companies in the same group. Each company must, however, have a separate board; it is not possible to have a single board managing the affairs of more than one group company. The members of the boards owe separate duties to each of the companies they manage. This derives from the English law principle that a company incorporated in England and Wales has its own personality distinct from that of its parent, subsidiaries or sister companies. From the point of view of good corporate governance, overlapping boards and management teams are discouraged. For listed companies, the Combined Code on Corporate Governance emphasises the need for accountability of the board and for non-executive directors. Where boards overlap, conflicts of interests can produce difficulties.
In this context directors must bear in mind the duties to which they are subject under English law. A director must be sufficiently qualified or experienced to fulfil the role that he might reasonably be expected to perform. Furthermore, if a director is particularly qualified or experienced (eg a lawyer or an accountant) he must act with that high degree of skill, knowledge and experience. Directors must keep themselves regularly informed of the company’s affairs, particularly their finances. In addition, directors owe fiduciary duties and the following are the most relevant in the group context:
(a) If the directors of a parent company are not directors of the subsidiary, but they either directly or indirectly manage the affairs of the subsidiary anyway, do your country’s laws render such people de facto or ‘shadow’ directors of the subsidiary?
The concepts of de facto and ‘shadow’ directors are recognised by English law under CA s 741 and s IA 251.
CA s 741(1) defines ‘director’ as including any person occupying the position of director, by whatever name called. Thus, a person who participates in management as if a director will be treated as such. A shadow director is someone in accordance with whose directions or instructions the directors of the company are accustomed to act (CA s 741(2)). A corporate entity can be a de facto or shadow director, although more likely the latter.
Directors of a parent (including the parent itself) can be treated in law as directors of a subsidiary by virtue of the fact they are either shadow or de facto directors of the subsidiary. Thus, if the directors of the parent directly or indirectly manage the affairs of the subsidiary, they may well be treated as de facto or shadow directors.
If a company’s entire viability depends on support from its parent, it may be difficult for the parent to withdraw financial support without incurring liability as a shadow director. The directors of the parent will not, however, themselves become shadow directors of the subsidiary merely by passing board resolutions at the parent level, although they may if they individually and personally give directions to the directors of the subsidiary (see Re Hyrodan (Corby) Ltd [1994] BCC 161).
(b) Do the duties or responsibilities of officers or directors of a family of companies change when the companies become insolvent? For example does their duty shift from a responsibility to the shareholders to a responsibility to the creditors. What if only one of the companies is insolvent?
The directors of a company have a fiduciary duty to act in what they consider, in good faith, to be the best interests of the company as a whole (Re Smith and Fawcett Ltd, supra).
When the company is solvent, the interests of the company as a whole are almost always considered to be the interests of the members, ie the shareholders. The position is likely to be further affected by the provisions of the Company Law Reform Bill, currently before the House of Lords, which is not considered here.
However, in the ‘twilight’ of insolvency, it is the interests of the creditors as a whole that become paramount (West Mercia Safetywear Ltd v Dodd [1988] BCLC 250) and it is to them that the directors owe their principal duties. To the extent that shareholders are also creditors of the company then their interests will have to be considered.
The directors’ duties are, in this context, bolstered by the wrongful trading provisions of IA s 214 (considered further below) (question A.9.(b)). Under this provision, a director must take into account the interests of creditors when concluding whether or not there is a reasonable prospect that the company can avoid going into insolvent liquidation and if there is no such prospect of avoiding insolvent liquidation, he must take every step to minimise loss to the creditors.
Where only one of the companies is insolvent, only the directors (including de facto and shadow directors) of that company would have the duties described but if they are directors of several companies in the group they must consider how the insolvency of one company affects others in the group.
4. Are there rules and do they change regarding members of the corporate family transferring assets among one another (such as by way of loans, capitalisation, other transactions) when the members are insolvent?
Under the UKLA Listing Rules, which apply to listed companies, if a transaction is made transferring assets to another company that is a related party, such as a company associated with a director of the listed company, then a circular and shareholder approval are required before the transaction can proceed.
If any company transfers non-cash assets to persons connected with a director (which could include a company if it is associated with him), it could come within CA s 320 and require approval of the company in general meeting.
In other circumstances, provided the companies are solvent, such intra-group transactions would be valid. (There are numerous other restrictions such as restrictions on payment of dividends out of capital which apply to all companies.)
The directors must be satisfied that such transfers benefit the transferring company. This is required as part of their duties to the company and is also relevant to ensure that the company has the power to make such a transfer. In the absence of any corporate benefit, a transfer could be ultra vires the company’s powers.
There are additional considerations where the companies involved are insolvent or if insolvency is or ought to be anticipated. Directors’ duties to creditors increase and directors must be aware of provisions of the IA. Furthermore, if a transfer is at less than market value and is made to a connected person within two years immediately preceding the onset of insolvency, the court can, on the application of a liquidator or administrator, make an order overturning the transaction (IA s 238). The company must have been insolvent at the time of the transaction or became so as a result of it. However, no order will be made in respect of the transaction if the court is satisfied that the company entered into it in good faith for the purpose of carrying on its business and also that reasonable grounds exist for believing that the transaction would benefit the company. For this purpose, a company is insolvent if it is unable to pay its debts as defined in IA s 123 (which includes where it is unable to pay its debts as they fall due or if its assets are worth less than its liabilities, including contingent and prospective liabilities). Where the transaction is entered into with a connected person (including a director) there is a rebuttable presumption that the company was insolvent at the relevant time; in other words, it is up to the director or other beneficiary to prove solvency at the time. If there was an outstanding debt between the companies (so that any such transfer could be said to have been made to a ‘creditor’), such a transaction could also be a preference (IA s 239). Directors should also bear in mind the provisions of the IA concerning wrongful and fraudulent trading (see below) (question A.9), which could apply to such a transaction.
(a) Are cash sweep procedures allowed, that is, all cash from all subsidiaries is swept out to one account controlled by one of the family entities and then redistributed among the family members to pay bills?
Cash sweep procedures are allowed under English law. As discussed above, the directors of each company in the group owe a duty to that company and, if the company is insolvent, or of doubtful solvency, those duties extend mainly to the interests of creditors. Some benefit to the group as a whole may be regarded as a benefit to each company, but if the sweep procedures prejudice one or more companies in the group, the position will be less clear. The directors may be at risk and the transactions may be susceptible to attack under IA s 238 or 239 (there could well be a conflict of interest as described above).
(b) What if the redistribution results in a healthy subsidiary funding the shortfalls in another subsidiary that is losing money?
The directors of the funding subsidiary will have to show that this is being done for the benefit of the funding subsidiary. This may implicate the directors’ duties when the recipient company is insolvent or of doubtful solvency (and repayment is uncertain). Also, the directors may be at risk and the transactions may be overturned if the funding subsidiary becomes insolvent. Intra-group funding may avoid the premature insolvency of one of the group’s companies and this may avoid adverse effects on the rest of the group, but this benefit has to be balanced against the obvious risk to the funding company of providing unsecured lending which may never be recovered, either in full or at all. Directors must consider all the relevant information and exercise their business judgment.
5. How does your law treat claims of one member of a corporate family against other members of the corporate family?
English law treats claims from one company in a group against another company in the same group in the same way as any other claim from a third party creditor. Such claims will be valid and enforceable (unless there is any evidence of fraud or collusion).
The general principle that applies is that of pari passu distribution of assets of a company when wound up. Prima facie all creditors will receive a proportion of their claim. The order of priority is not affected where the creditor is a corporate member of the same group. Shareholders of the company (including its parent company) rank last and will only receive anything left after all creditors have been paid. If a shareholder is a creditor, its claim as creditor will rank alongside those of other creditors.
There is no automatic subordination of group debt, but this can be agreed between companies (particularly in the context of claims for equitable contribution against co guarantors or the guarantor’s rights of subrogation in relation to a guaranteed debt).
6. Does your law allow for the pooling of assets and liabilities of all members of the corporate family, so that a creditor of one member becomes, in essence, a creditor of all members sometimes referred to as ‘substantive consolidation’?
(a) If so, is such pooling automatic or does it require a factual showing and court involvement?
English law does not recognise any automatic substantive consolidation but the law does permit the pooling of assets and liabilities of all members of a corporate family, so that a creditor of one member of the group becomes, in effect but not necessarily as a matter of law, a creditor of all members of the group. This does not involve a merger of the estates, but is rather a compromise agreed by the liquidators of the companies involved. Such pooling is not automatic and requires court approval under IA s 167(1)(a) and Sch 4. The court has regard to the wishes of the creditors (IA s 195) and it has a discretion whether to approve a pooling agreement.
Pooling can also be achieved by a scheme of arrangement under CA s 425, which requires a majority in number representing three-quarters in value of the creditors to agree to the terms of the scheme and sanction by the court in order to bind all creditors.
(b) What proceedings (motion, request, trial, etc) are required for the court to order the pooling of assets and liabilities?
An application for sanction of a pooling agreement is made under IA s 167(1) or for the approval of a scheme of arrangement under CA s 425.
(c) Does your country’s law contemplate any partial pooling of assets and liabilities?
This could be achieved under a pooling agreement but, more likely, under a scheme of arrangement.
(d) If the pooling of assets and liabilities is called for, are there any protections for certain types of creditors, such as creditors with a lien or other security interest in particular assets?
Creditors with security over a company’s assets or with preferential status remain entitled to exercise their rights as secured or preferential creditors. However, such creditors could approve (most likely through a scheme of arrangement) a variation in those rights.
7. How are secured creditors treated with respect to a family of companies? For instance, if a creditor has a security interest in the assets of one member of the family, and a guarantee from another member of the family, are both such claims valid in insolvency proceedings of the entire family?
As mentioned above (question 1), there cannot be one insolvency proceeding for an entire family of companies under English law. Each company is subject to separate proceedings, with separate lists of creditors. A creditor with security over the assets of one company and with a guarantee from another company will be a creditor of both companies subject to the terms of the security documents. A creditor will not, however, be able to make a ‘double recovery’ from two or more estates but will, subject to the terms of the security and guarantee, be allowed to prove in each estate in relation to each separate debt.
8. Do your laws or courts provide for post-insolvency commencement of new financing that allows continued operation of the business and provides adequate protection to the lender who made the loan? Explain.
New lending once an insolvency procedure has been commenced is allowed under English law. An administrator has the power to borrow money and to grant security (IA Sch 1 para 3). A liquidator in a winding up also has the power to raise money and grant security (IA Sch 4 para 10).
However, there is no separate debtor in possession finance provision which gives super priority to such lending as under the US Bankruptcy Code.
An administrator can borrow money (for the purposes of carrying on the business) and such borrowing will constitute a liability under IA Sch B1 para 99(4) which is charged on the assets of the company of which the administrator has custody or control. Such a charge will rank ahead of the administrator’s fees and expenses and over any floating charge (but not fixed charge) security. A liquidator may also borrow money – although such a liability will not, at present, rank ahead of floating or fixed charge security. The Company Law Reform Bill, when enacted, will change the position so that expenses of a winding up will, if necessary, be payable out of floating charge assets in priority to floating charge holders. It should be noted that a liquidator requires the court’s sanction (except in a voluntary liquidation) before being able to carry on the business of the company so far as may be necessary for its beneficial winding up.
New lending is possible, but a little more complicated, once a formal insolvency procedure has been commenced due to the priority of existing secured debt. It is more likely for an existing lender to provide further funds in return for further security which has priority to the existing security (including fixed charge security). However, this can only be achieved with the consent of the existing secured creditors.
9. Are directors and officers subject to civil or criminal sanctions if:
(a) Fraud or misrepresentation of a company’s finances are discovered?
Directors and officers are potentially subject to criminal and civil sanctions if they are involved in fraud or misrepresentation of a company’s finances.
If directors or officers of a company are involved in fraud, they are subject to criminal sanctions. The Fraud Bill is currently proceeding through Parliament. This will modify the criminal law creating a new offence of fraud. Until this is enacted, there are several offences of deception. These include obtaining property or services by deception and conspiracy to defraud. Which offence has been committed depends upon the nature of the fraud.
Criminal liability is also imposed, for example, by:
IA s 212 creates a summary civil remedy to be pursued by a liquidator, creditor or shareholder where directors and officers may also be liable for damages if they have been guilty of misfeasance or breach of fiduciary duty in relation to the company. Civil liability for wrongful trading (where fraud need not be established) is addressed below.
Under IA s 213 a liquidator can bring a civil action against any person (not limited to a director) who was knowingly a party to the carrying on of business by a company with intent to defraud creditors, or for any fraudulent purpose, requiring that person to contribute to the company’s assets. The amount of the contribution is at the court’s discretion.
Directors may also be disqualified from being directors under the Company Directors Disqualification Act 1986 if a court takes the view that their conduct renders them unfit to be concerned in the management of a company. A court can also disqualify a director if convicted of an indictable offence, for persistent breaches of companies’ legislation or for fraudulent trading or misconduct in the course of a company winding up.
(b) They allow the company to continue to operate while knowing it does not have the ability to pay the debt being incurred?
There can be criminal and civil sanctions for fraudulent trading, described above (question A.9.(a)). There may also be civil liability for wrongful trading. Under IA s 214, if a director (including a de facto or shadow director) knew or ought to have concluded that there was no reasonable prospect that the company would avoid going into insolvent liquidation but continues to trade, a liquidator may apply to the court for an order for him to contribute to the assets of the company. The court may order the director to make such contribution to the company’s assets as it thinks proper. However, a director is not liable for wrongful trading if he ‘took every step with a view to minimising the potential loss to the company’s creditors as (assuming him to have known that there was no reasonable prospect that the company would avoid going into insolvent liquidation) he ought to have taken’ (IA s 214(3)). Insolvent liquidation here means a liquidation where the company’s assets are insufficient for the payment of its debts and other liabilities and the expenses of the winding up. In assessing the facts which a director ought to know or ascertain, the conclusions which he ought to reach and the steps which he ought to take, the courts will take into account:
(c) Same as (b) above but the directors believe that if some event occurs (eg chance to obtain new contract in prospect, new equity infusion, or new financing) it will be able to save the company and pay its bills?
A director in this situation may be able to show that he has not committed wrongful trading. The court will take into account the factors explained immediately above. Therefore, in order to protect themselves, directors in this situation must consider the prospects of the company and ensure that they are able to show why they believed that the company had a reasonable prospect of avoiding an insolvent liquidation. This is often done by ensuring that they request and receive professional advice and that they monitor the company’s financial position regularly.
B. INTERNATIONAL FAMILY OF COMPANIES
1. If one or more members of the corporate family is incorporated under or governed by the laws of another country, does that change your answers to any of the questions set forth above?
The answers to questions under A 3 to 8 above are essentially the same as regards the position of English group companies even if one or more companies in the group is incorporated overseas. (Questions 1 and 2 are not addressed under this heading.) The narrative below describes the assistance which the English court will give in respect of cross-border insolvencies.
2. If insolvency/restructuring proceedings are instituted for corporate family members in different countries:
(a) What controls as to where the case must be filed (eg, centre of main interests, principal place of business, location of parent, etc)?
Introduction
Probably the most significant legal provision affecting cross-border insolvency in Europe is Council Regulation (EC) No 1346/2000 on insolvency proceedings (as amended by subsequent Council Regulations) (the ‘EC Regulation’). This European legislation is directly applicable in all EU Member States and overrides any inconsistent domestic legal provision. (The relevant Member States are Austria, Belgium, Cyprus, Czech Republic, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden, the Netherlands and the UK. Denmark is the exception.) The EC Regulation provides a uniform framework in which corporate and individual insolvency procedures can be opened and recognised across the EU. By providing such a framework, it is designed to minimise the need for multiple insolvency procedures being opened in each Member State in which the debtor may have an interest. Instead, it allows a single Member State’s insolvency proceedings to be applied as the ‘main proceeding’ in all other EU Member States. This means that, subject to certain exceptions, the law of that Member State’s insolvency procedure, which qualifies as the ‘main proceedings’, will apply in each Member State.
The EC Regulation also provides a further framework to determine in which Member State proceedings can be opened and whether they qualify as main or secondary proceedings. It is these ‘jurisdictional’ rules which will control where the proceedings may be commenced in relation to any particular debtor.
In most cases involving an insolvency cross border element in the UK, it is likely that the EC Regulation will apply. Where it does not apply, the English domestic rules on jurisdiction will apply.
Jurisdiction under the EC Regulation
The EC Regulation creates the concepts of main proceedings and secondary (or territorial) proceedings and also creates a recognition and priority system between Member States in relation to the insolvency of a debtor. It applies on a ‘debtor by debtor basis’, not on a corporate group basis. The EC Regulation requires courts of Member States automatically to recognise insolvency proceedings opened in any other Member State, whether main or secondary, subject to certain exceptions (Art 16).
Jurisdiction to open the main proceedings depends on where the debtor’s ‘centre of main interests’ (‘COMI’) is situated (Art 3(1)). A debtor’s COMI must be within the EU (apart from Denmark) for the EC Regulation to apply. There is a rebuttable presumption under Art 3(1) that the COMI will be where the debtor has its registered office. However, in the preamble, the EC Regulation states that the COMI should correspond to the place where the debtor conducts the administration of its interests on a regular basis and is therefore ascertainable by third parties. In the context of companies which are part of a group, the European Court of Justice (‘ECJ’) held in Eurofood IFSC Ltd (Case C-341/04, judgment dated 2 May 2006) that the COMI for each company must be examined on a company by company basis. The ECJ recited the rule that COMI should correspond to the place where the debtor conducts the administration of its interests on a regular basis and is therefore ascertainable by third parties. It held that the presumption in Art 3(1) of the EC Regulation can only therefore be rebutted if factors which are both objective and ascertainable by third parties enable it to be established that the debtor’s COMI is elsewhere. The mere fact that the company in question is a subsidiary of a parent whose registered office is in another Member State does not, of itself, rebut the presumption in Art 3(1) of the EC Regulation, even where the parent company is able to control (and does control) the policy of the subsidiary in circumstances where such control is not ascertainable by third parties. Thus, for a group administration test to be satisfied, it must be apparent that the subsidiary itself is administered by a head office in another Member State, and not merely that the subsidiary is capable of being controlled (and is in fact controlled) by a parent with a registered office in another Member State.
Unless another Member State refuses to recognise the main proceedings under Art 26 of the EC Regulation on public policy grounds, there can only be one set of main proceedings in relation to a debtor, but there may be any number of secondary proceedings opened in other Member States where the debtor has an ‘establishment’. Secondary proceedings commenced after the main proceedings are limited to ‘winding-up proceedings’. If they are opened prior to main proceedings, they are not so limited, but can only be opened in certain circumstances or by creditors in that jurisdiction or creditors whose claim arises from the operation of that establishment.
Subject to certain exceptions, the law of the Member State where the main proceedings are opened determines the law applicable to the insolvency of the debtor, wherever the debtor’s assets are situate (Art 4). The effect of secondary proceedings (including territorial proceedings) is restricted to assets situated in the Member State in which those proceedings are opened.
A number of carve outs apply to the application of the law of the main proceedings – principal ones relate to rights in rem and the law of set off – these are referred to below (question B.3.(b)).
Under the EC Regulation, each company in a group must have separate proceedings. However, where all the members of a group are managed from one place which constitutes the common COMI in the EU, even though there are separate proceedings for each insolvent company, the application of the EC Regulation should result in identical main proceedings applying to each company. For example, in Crisscross Telecommunications (20 May 2003, unreported, Ch D), the companies in the group were each placed into administration under English law, even though many of the companies were incorporated in other Member States or Switzerland.
In the UK, the possible insolvency procedures that can constitute main proceedings or territorial proceedings include: winding up by or subject to the supervision of the court, creditors’ voluntary winding up (with confirmation by the court), administration (including appointments made by filing the prescribed documents with the court), voluntary arrangements under insolvency legislation and bankruptcy or sequestration. The possible insolvency procedures that can constitute secondary proceedings include: winding up by or subject to the supervision of the court, winding up through administration (including appointments made by filing the prescribed documents with the court), creditors’ voluntary winding up (with confirmation by the court) and bankruptcy or sequestration.
Jurisdiction under English Law (where the EC Regulation does not apply)
English law also recognises the separate identity of each company within a corporate group and will look at each of the group companies separately.
Liquidation Under IA s 117(1), the English court has the discretionary power to wind up any company registered in England and Wales, whether or not it has assets in the jurisdiction or whether it is a wholly-owned subsidiary of a foreign holding company. Companies registered in England or Wales can be wound up by the court (compulsory winding up) or can be voluntarily wound up by their members.
Foreign companies come within the definition of ‘unregistered companies’ although there are special rules for companies registered in Scotland, Northern Ireland, Channel Islands and the Isle of Man. Unregistered companies may be wound up by the court under IA s 221 in the following circumstances:
The court’s power to wind up an unregistered company is also discretionary. It is normally considered a sufficient nexus for the company to have or have had a place of business or branch in England and Wales or to have assets there, but other factors have been held relevant (for example, the fact that the company may have a claim in the jurisdiction or that the debt on which the petition is based was incurred there). The court must be satisfied that there is a reasonable possibility that the winding-up order will benefit those applying for it and the court must be able to exercise jurisdiction over one or more persons interested in the distribution of the company’s assets.
A company not formed and registered under the English companies legislation may not seek to be voluntarily wound up except in cases where the EC Regulation applies.
Administration:
An administrator may be appointed in relation to:
Category (3) is a reflection of the application of the EC Regulation. (The EEA comprises each Member State of the EU and also Iceland, Liechtenstein and Norway.)
Company Voluntary Arangement (‘CVA’):
A CVA may be proposed in relation to companies which fall within the same definition of company relating to administration set out above.
(b) Do the courts attempt to exercise jurisdiction over the assets of the company filing domestically no matter where located (for example, overseas), or do they limit their jurisdiction to only those assets located in your country?
The position will depend on whether the domestic insolvency proceedings trigger the application of the EC Regulation.
Proceedings opened under the EC Regulation
If the debtor has its COMI in the EU (except Denmark) then the English courts can only open proceedings in accordance with the jurisdictional rules under the EC Regulation as described above (question B.2.(a).2). However, that means that those proceedings will be entitled to recognition in each Member State. Therefore, if an English insolvency procedure was opened in relation to a debtor with its COMI in England and Wales, that English insolvency procedure (and the law applicable to it) would be entitled to recognition (and would apply) in each Member State, subject only to the opening of secondary proceedings in that other Member State and certain exceptions under the EC Regulation.
It is not possible to describe here all the exceptions to the application of the law of the main proceedings, but certain key ones apply to rights in rem and rights of set off. Others relate to reservation of title, contracts relating to immovable property, payment systems and financial markets, contracts of employment, effects on certain rights subject to registration, detrimental acts, protection of third party purchasers and effects of insolvency on law suits pending.
Under Art 5, the opening of insolvency proceedings in one Member State does not affect a creditor’s rights in rem in respect of assets situated in another Member State at the time of the opening of the proceedings, including its right by virtue of a mortgage or lien to procure the disposal of those assets and to apply the proceeds in satisfaction of his claim against the debtor. Assets are treated as situated:
Under Art 6, the opening of insolvency proceedings does not affect the right of a creditor to demand the set off of his claim against a claim of the debtor, where set off is permitted by the law applicable to the insolvent debtor’s claim.
The EC Regulation recognises that actions for voidness, voidability or unenforceability of legal acts detrimental to all creditors would fall to be determined by the law of the Member State where the main proceedings are opened, subject to certain exceptions (see Arts 4(2)(m) and 13).
Under the EC Regulation, if proceedings are designated as either ‘secondary’ or ‘territorial’ they are confined to the assets of the debtor situated within the State in which the proceedings are opened.
English domestic law (where the EC Regulation does not apply)
In general, English law has adopted the ‘universal’ approach to insolvency proceedings and has asserted that English insolvency officeholders have control of assets overseas. In theory an English liquidation or administration applies to assets situated worldwide. However, whether such proceedings have any effect abroad will depend on whether they are recognised in other jurisdictions.
(c) Would your courts enforce a court order from a foreign country that attempted to exercise jurisdiction over assets located in your country but owned by the company that is subject to the foreign insolvency proceedings?
There are currently four different sets of rules under which the English courts may be required or have jurisdiction to apply foreign law and/or assist overseas insolvency practitioners:
The EC Regulation and IA s 426 apply to certain countries only.
EC Regulation
As mentioned above (question B.2.(a).2), the EC Regulation requires courts of Member States automatically to recognise insolvency proceedings opened in any other Member State, whether main or secondary proceedings. However, the carve outs referred to above would be equally applicable in relation to any attempt to enforce a foreign main proceeding in the UK. Further, it would be open to a local creditor (or even the debtor after the main proceedings have been commenced) to initiate secondary proceedings in the UK (provided the debtor has an establishment here), so as to displace the application of the law of the main proceedings. Such proceedings, if commenced after the main proceedings, would have to be limited to winding-up proceedings (although this could include a winding up through an administration) and would be limited to the jurisdiction in which they are opened. Further, the officeholder of the main proceeding could apply to stay the secondary proceedings if the conditions in Art 33 are satisfied, and any territorial proceeding opened first could be converted into a winding-up proceeding by the officeholder of the main proceeding.
Broadly speaking, an officeholder appointed in main proceedings in one Member State who wishes to recover assets located in other Member States can either:
Secondary proceedings involve the appointment of a locally-qualified officeholder. The foreign officeholder appointed in main proceedings retains some measure of control over the secondary proceedings and there is a duty to cooperate between both officeholders.
Article 18 sets out the officeholder’s powers on automatic recognition. In essence, the officeholder in the main proceedings can exercise in all Member States those powers that he enjoys under the laws of the Member State in which the proceedings are opened, as long as no secondary proceedings have begun. In particular, the officeholder may remove the debtor’s assets from the territory of the Member State in which they are situated.
In exercising his powers, the officeholder must comply with the law of the Member State in which he intends to take action, especially regarding the realisation of assets. Furthermore, the powers do not include ‘coercive’ measures or the right to rule on legal proceedings or disputes (Art 18(3)).
Section 426 IA
IA s 426 allows the English courts to assist the courts of certain defined countries and territories (being certain present or former colonies/Commonwealth countries) in relation to insolvencies pursuant to a letter of request. (The countries and territories are Anguilla, Australia, the Bahamas, Bermuda, Botswana, Brunei, Canada, Cayman Islands, Channel Islands (Jersey and Guernsey), Falkland Islands, Gibraltar, Hong Kong, Isle of Man, Republic of Ireland, Montserrat, New Zealand, St Helena, Turks and Caicos Islands, Tuvalu, the Virgin Islands, Malaysia and South Africa.)
The types of assistance that the English courts can provide to overseas officeholders were set out by Lord Justice Morritt in the case of Hughes v Hannover Re [1997] 1 BCLC 497 as follows:
‘…there is available to the court in England when asked for assistance by the court of a
relevant country under section 426,
The English courts’ powers to assist foreign courts and officeholders under IA s 426 are very wide. For example, in Re Bank of Credit and Commerce International SA [1994] 2 BCLC 636 the English court was faced with a request for assistance from the Grand Court of the Cayman Islands asking it to exercise its jurisdiction under IA s 426 to make declarations relating to penalisation of directors and transactions at an undervalue, under IA ss 212-214 and s 238. The English court acceded to the request even though the law of the Cayman Islands had no statutory provisions comparable to the relevant English IA provisions.
In the case of Re Southern Equities Corp Ltd (in liquidation), England v Smith [2000] 2 BCLC 21, the English Court of Appeal acceded to a letter of request from the Supreme Court of South Australia to conduct an oral examination of a party in accordance with Australian insolvency law and procedures. This was ordered even though such an examination would not have been allowed had this been an entirely domestic case, since the Australian liquidator had already commenced proceedings against the proposed examinee and had therefore clearly passed the stage of investigating whether claims might be brought against that person.
The assistance by the English courts under IA s 426 is always discretionary and the court will consider all of the circumstances of the request, including whether giving assistance in the form requested would prejudice the creditors or any class of them and whether there would be any advantages in giving the assistance sufficient to counteract any prejudice. In Re HIH Casualty and General Insurance Ltd (In Liquidation) [2006] All ER (D) 65 Jun the English court’s refusal to assist the Supreme Court of New South Wales was upheld by the Court of Appeal because the requested transfer of assets under the control of the English provisional liquidators to Australia for distribution (in relation to which a different distribution regime would apply which would benefit insurance creditors under Australian law) would prejudice non-insurance creditors in any ancillary English liquidation without any counter-balancing benefit in the principal liquidation in Australia. In assessing the question of prejudice to the creditors under English law, it did not matter that there were not at present any winding-up orders over the English group companies concerned.
Common law
The common law rules apply to insolvency practitioners from all jurisdictions. However, in practice, the common law rules have been invoked by officeholders appointed in those jurisdictions to which neither IA s 426 nor the EC Regulation apply, most commonly the US.
The general rule under the common law is that the English courts will recognise the authority of an officeholder validly appointed under the law of the place of incorporation of the insolvent company. Thus, for example, a New York bankruptcy trustee appointed under Chapter 7 of the US Bankruptcy Code to liquidate a company incorporated in New York (or a company incorporated outside of New York, eg, Mexico, where the law of Mexico recognises the New York appointment) may be recognised in England and Wales. Such recognition will be granted where there is a ‘sufficient connection’ with this jurisdiction.
It must be noted that a foreign officeholder does not have recourse to the powers which would be available to a domestic officeholder under the IA. To avail themselves of the IA powers, officeholders should commence proceedings in England, either as ‘main’ proceedings or as proceedings ‘ancillary’ to those commenced elsewhere or such specific relief via a requesting court under s 426, if applicable, or under the Cross-Border Regulations (discussed below) (question B.4.1).
While the English courts have in the past shown willingness to assist foreign officeholders, the recognition of foreign proceedings is dependent on the exercise of the English court’s discretion. The courts will not provide assistance where English creditors are prejudiced. In Felixstowe Dock & Railway Co v United States Line Inc [1989] QB 360 the English court refused to grant assistance to a US company subject to a Chapter 11 reorganisation as the scheme was said to favour local creditors in the US. However, the judge did not dismiss cooperation outright and indeed favoured cooperation with the US courts in normal circumstances. This affirmation of ‘general’ cooperation is consistent with the approach of English courts in other cases. For example, the English court will approve agreements between an English liquidator and an overseas liquidator provided that such agreement reconciles the conflicting interests of the parties: see Re BCCI (No 10) [1995] 1 BCLC 362. A good example of cooperation between the UK and US courts is in the Maxwell proceedings. Here, an order and protocol defining the roles of administrators in England and an examiner in the US were approved by both the English and US courts in order to harmonise the work of the respective officeholders, thus saving time and expense.
More recently, a Privy Council decision has provided a useful precedent as to how the English court may in the future give effect to an Anglo-US restructuring process at common law. In Cambridge Gas Transport Corpn v The Official Committee of Unsecured Creditors (of Navigator Holdings plc) [2006] UKPC 26, the Privy Council ruled that the Isle of Man court had jurisdiction to recognise a US Chapter 11 plan of reorganisation involving a Manx company. Under common law the courts can only apply provisions of foreign insolvency law to the extent these are part of domestic law. In this case, recognition was appropriate because Manx law enables a company incorporated on the Isle of Man to propose a scheme of arrangement on terms virtually identical to those for a company incorporated in England and Wales or Scotland. For that reason, the Privy Council held that it was appropriate for the US plan of reorganisation to take effect on the Isle of Man. The Privy Council’s ruling is a welcome example of cooperation between the English and US courts particularly as it facilities the conclusion of a cross-border reorganisation without the need for any of the parties to commence parallel proceedings in England. (The Privy Council’s decisions are of highly persuasive authority in English courts as the judges are essentially the same as those who sit in the House of Lords.)
Cross-Border Regulations
The provisions of the Cross-Border Regulations are discussed below.
(d) Has your country adopted any procedures (such as the Model Law on Cross-Border Insolvency) to address the various issues that arise in dealing with cases of cross border insolvency?
As mentioned above (question B.2.(a).1), the EC Regulation applies with direct effect in the UK and exclusively governs EU cross-border insolvencies in the manner described above. The UK has also adopted the UNCITRAL Model Law which provides for the recognition and assistance of foreign insolvency representatives regardless of the jurisdiction in which the foreign proceedings take place, albeit subject to a public policy exception and to the application of the EC Regulation which has priority. It is intended to provide a straightforward method by which foreign officeholders can be recognised and assisted.
The Model Law has been implemented by the Cross-Border Regulations, referred to above.
Cross-Border Regulations
Under the Cross-Border Regulations recognition is available to a ‘foreign representative’ appointed under a ‘foreign proceeding’ in relation to any debtor (regardless of whether the State in relation to which a foreign proceeding relates has adopted the Model Law). These important terms are defined under the Cross-Border Regulations and reflect those used in the Model Law. The definitions would include foreign officeholders appointed in foreign insolvency proceedings supervised by a foreign court. This would include, for example, a US Bankruptcy Code Chapter 11 trustee or debtor in possession.
Consequences of recognition:
For a foreign representative of a foreign ‘main’ proceeding (that is a relevant insolvency proceeding taking place where the debtor has its centre of main interests), an automatic stay of actions against the debtor and the suspension of rights in relation to the debtor’s assets will arise.
For representatives of foreign ‘non main’ proceedings (a relevant insolvency proceeding taking place where the debtor has an establishment), such a stay is not automatic, it must be applied for, and its grant is a matter for the court’s discretion.
The stay in both cases is equivalent to that triggered by a British winding up and will not affect rights to enforce security, rights to repossess goods under a hire purchase agreement (which includes retention of title agreements), rights in relation to certain financial market transactions or rights of set off, as long as these rights can be exercised in a British winding up or bankruptcy.
Financial market transactions:
The court does not grant any relief, or modify any relief already granted, or provide any cooperation or coordination, under or by virtue of any of the provisions of the Cross-Border Regulations if and to the extent that such relief or modified relief or co-operation or coordination would:
The automatic stay is expressed not to apply to any right exercisable in accordance with the provisions referred to above.
Relief:
Further relief (including interim relief prior to an application for recognition) may be sought by a foreign representative, including a more extensive stay than that available in a winding up (including a stay equivalent to an administration moratorium under IA Sch B1 para 43) and even relief entrusting the realisation of the debtor’s assets to the foreign representative. Such relief, depending on the nature of the relief obtained, may impact on the enforcement of security, rights to repossess goods and other creditor rights. In granting such relief (or varying or even terminating such relief – including any automatic stay – on the application of an interested party), the court must be satisfied that the interests of creditors and other interested persons (including the debtor, if appropriate) are adequately protected. The court is required to be satisfied, in addition, that the interests of creditors in Great Britain are adequately protected before granting relief entrusting the realisation of the debtor’s assets to the foreign representative.
The court will only grant relief to foreign representatives of foreign non-main proceedings if it is also satisfied that the relief relates to assets that, under British law, should be administered in the foreign non-main proceeding.
A recognised foreign representative can also apply to obtain an order under various IA avoidance provisions. Examples are IA s 238 (transactions at an undervalue), IA s 239 (preferences), IA s 245 (voidable floating charges) and IA s 423 (transactions defrauding creditors). The court only grants the relief in relation to a foreign non-main proceeding if it is satisfied the condition mentioned above has been met.
Recognition (including any automatic stay) is without prejudice to the right to request or initiate the commencement of a British insolvency proceeding or to file a claim in such proceeding. The term ‘proceeding’ extends to an out of court insolvency proceeding, such as an administration commenced by the holder of a qualifying floating charge.
Cooperation and concurrent proceedings:
The Cross-Border Regulations provide that courts may cooperate with foreign courts or foreign representatives. British insolvency officeholders must cooperate with recognised foreign representatives to the maximum extent possible consistent with their duties under British insolvency law.
Provision is also made for the co-ordination of concurrent local and/or foreign proceedings.
Where concurrent proceedings are in progress, relief granted in relation to a foreign non main proceeding by the court following recognition of a foreign main proceeding must be consistent with that foreign main proceeding. Where an application for recognition of the foreign proceeding is filed while the British insolvency proceeding (whether a main proceeding or not) is taking place, any relief granted must be consistent with the British proceeding.
The Cross-Border Regulations provide that, without prejudice to secured claims, or rights in rem, a creditor who has received part payment in respect of its claims in a foreign insolvency proceeding may not receive payment for the same claim in a British insolvency proceeding regarding the same debtor. This will be the position so long as the payment to other creditors of the same class is proportionately less than the payment the creditor has already received. This reflects the position under English common law.
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