Supreme Court's controversial ruling on English approach to foreign insolvency orders
In a highly anticipated judgment, which has significant and potentially detrimental consequences for global cross-border insolvency and restructuring, the English Supreme Court had to consider the assistance that can be offered by the English courts in enforcing foreign insolvency orders (ie how far would the English courts recognise the universality of insolvency proceedings and, potentially, apply foreign insolvency laws in England).
It was held that the standard English common law rules for the recognition and enforcement of foreign judgments in England and Wales apply to orders connected to foreign insolvency proceedings. There was no justification, in the interests of universality of insolvency proceedings, for a different, wider set of rules to apply.
This decision does not affect insolvency proceedings which fall within the EC Insolvency Regulation (those proceedings where the debtor's centre of main interests is in the EU) or the specific legislation concerning the insolvency of EEA insurers or credit institutions.
What did the Supreme Court decide?
The Supreme Court heard two appeals (Rubin and New Cap) which, together, necessitated the need to consider the whole canon of English cross-border insolvency law outside the EU/EEA context. In both appeals the essential question for the court was a determination of the rules under which a judgment obtained in foreign insolvency proceedings concerning the avoidance of prior transactions can be recognised and enforced in England. In response, as a matter of policy, the court held that it should not, in the interests of universality of insolvency proceedings, devise a rule for the recognition and enforcement of judgments in foreign insolvency proceedings, which was more expansive and more favourable to insolvency officeholders, than the standard common law rule. The standard common law rule broadly provides that a judgment of a foreign court made against an identified entity (known as a judgment in personam) is not enforceable in England unless the defendant was present within the foreign jurisdiction at the time the litigation was instituted, was claimant or counterclaimed in the litigation, appeared in the litigation or in some way submitted himself to the jurisdiction of the foreign court.
The Supreme Court also held that neither the Cross-Border Insolvency Regulations 2006 (CBIR) nor section 426 of the Insolvency Act 1986 provided for the recognition and enforcement of judgments handed down in the course of foreign insolvency proceedings.
Previous English case law of the highest authority (Cambridge Gas Transportation Corp v Official Committee of Unsecured Creditors of Navigator Holdings [2006] UKPC 26; [2007] 1 AC 508) had held that the standard common law rules concerning the recognition and enforcement of judgments do not apply to insolvency proceedings. This was because the purpose of insolvency proceedings is not to determine or establish the existence of rights, but to provide a mechanism of collective execution against the property of the debtor by creditors whose rights are admitted or established in the insolvency proceedings.
Essentially insolvency proceedings fell into their own distinct category of judgment. Relying on this prior case law the Court of Appeal in Rubin held that judgments handed down by a foreign insolvency court, which were part and parcel of the foreign insolvency proceedings, were capable of recognition and enforcement in England in circumstances where the defendants to the action had not submitted themselves to the jurisdiction of the English court (ie outside the standard common law rules). This resulted in the indirect application of foreign insolvency law in England. In New Cap Reinsurance Corp & anr v Grant & ors [2012] UKSC 46 the Court of Appeal followed Rubin.
The Supreme Court held that this prior case law did not justify the result which the Court of Appeal reached. The Supreme Court did not agree that the Court of Appeal had incrementally developed existing principles but, had instead, radically departed from the substantially settled law on when a foreign judgment is capable of recognition and enforcement in England. Such a change was a matter for legislation and not judicial innovation. Given the above, in assessing whether or not a judgment handed down in the course of foreign insolvency proceedings is capable of recognition and enforcement in England, the crucial question becomes whether the conditions for recognition and enforcement under the standard common law rules have been satisfied.
In this regard, the Supreme Court held that the filing of a proof of debt in foreign insolvency proceedings by a creditor amounts to submission to the jurisdiction of the foreign court in respect of the insolvency proceedings and, crucially, orders made in the insolvency proceedings. This was on the basis that a creditor should not be allowed to benefit from the insolvency proceedings (ie by receiving a dividend in those proceedings) without the burden of complying with the orders made in those proceedings. This begs the question as to which orders will be categorised as made in the insolvency proceedings.
Comment
This decision has narrowed the scope for English courts to recognise and enforce judgments connected with foreign insolvency proceedings and, unfortunately, leaves the question of what assistance can be provided by the English courts in future cases in a state of flux and uncertainty. The uncertainty created is likely to make cross-border insolvencies and restructurings with a connection to England more costly to implement. For an in-depth analysis of this decision please see www.allenovery.com