The long arm of insolvency proceedings
17 November 2010
Rubin & anr v Eurofinance SA & ors  EWCA Civ 895 - Whether the English court can recognise and give effect to a judgment given by a foreign insolvency court is one of the most burning and unsettled questions in cross-border insolvency law. Giving some but not complete guidance on the matter, the Court of Appeal has held that, on the specific facts, judgments handed down by the US bankruptcy court, pursuant to US transaction avoidance provisions, were to be enforced against individuals who had not submitted themselves to the jurisdiction of the US bankruptcy court.
There are two routes by which the English court may recognise and give assistance to US bankruptcy proceedings.
The first is pursuant to the Cross-Border Insolvency Regulations 2006 (the CBIR) which implement the UNCITRAL Model Law on Cross-Border Insolvency (the Model Law) in Great Britain. Upon recognition the only relief which is automatically obtained is a moratorium on creditor action in Great Britain ; other appropriate relief may be granted at the court's discretion to protect the assets of the debtor or the interests of the creditors . Further, with recognition can come judicial co-operation; the CBIR provides that a court of Great Britain may co-operate to the maximum extent possible with the foreign court .
The second is pursuant to the common law. The key decisions provide that, ideally, there should be a unitary insolvency proceeding in the court of the debtor's domicile which receives worldwide recognition and which should apply universally to the debtor's assets (known as universalism). Further, recognition of insolvency proceedings in England carries with it the active assistance of the court, which should include assistance by doing whatever the English court could have done in the case of a domestic insolvency . However, it is unclear what role the common law has to play in cases where the CBIR are capable of applying. In a leading House of Lords decision (where the matter to be decided arose before the CBIR came into force) Lord Hoffmann relied on the inherent jurisdiction of the English court (i.e. the common law) when authorising the remission of assets from English provisional liquidators to Australian liquidators. The existence of a statutory process for assistance (in this case section 426 of the Insolvency Act 1986, which allows the English court to provide assistance to relevant countries of which the US is not one) was seen as a reinforcement of the English court's common law jurisdiction. However, Lord Scott viewed the matter as governed solely by section 426. If section 426 had not applied then he would not have allowed the remission of assets to the Australian liquidators. Accordingly, there remains a question whether the common law is of relevance where there are specific statutory provisions in place to deal with the question at hand.
Under private international law a judgment of a foreign court is not enforceable in England unless the defendant was present within the foreign jurisdiction or in some way submitted himself to the jurisdiction of the foreign court. However, the rules of private international law concerning the recognition and enforcement of judgments do not apply to insolvency proceedings. This is 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 . Accordingly, a key question is what precisely is encompassed by the insolvency proceedings? Is it only the proceedings themselves, or can they encompass proceedings against third parties brought by the insolvency officeholders?
TCT was a trust fund (classified as a business trust in the US) and was placed into chapter 11 proceedings in the US. A plan of liquidation was approved by the US bankruptcy court (the US Bankruptcy Proceedings). Following the approval of the liquidation plan, a judgment was obtained from the US bankruptcy court against several parties, based on, among other things, US transaction avoidance provisions available in chapter 11 proceedings (the Judgment).
At first instance, the English court recognised the US Bankruptcy Proceedings but, while recognising the transaction avoidance proceedings, refused to enforce the Judgment against parties who had not submitted themselves to the jurisdiction of the US court. An appeal and a cross-appeal were filed in which both the decision to recognise the transaction avoidance proceedings and the decision to refuse to enforce the Judgment were challenged.
Recognition of the transaction avoidance proceedings
The transaction avoidance proceedings were recognised under the CBIR on the grounds that: (i) they were "part and parcel" of the US Bankruptcy Proceedings which had already obtained recognition; and (ii) the US and English transaction avoidance provisions were strikingly similar (i.e. similar actions could have been brought in English insolvency proceedings).
Ward LJ, giving the leading judgment (with which both Wilson LJ and Henderson LJ agreed), assessed the question as to what is encompassed by insolvency proceedings by reference to Lord Hoffmann's statement in HIH that "bankruptcy, whether personal or corporate, is a collective proceeding to enforce rights and not to establish them". The issue turned on whether transaction avoidance provisions, which could only be brought by the insolvency officeholder before the insolvency court, were to be characterised as part of the US Bankruptcy Proceedings (i.e. were the transaction avoidance proceedings part of the collective process of enforcing rights in insolvency?). Ward LJ held that transaction avoidance provisions were part of the collective process of enforcing rights in insolvency and therefore were part of the US Bankruptcy Proceedings.
In reaching this decision Ward LJ took into account: (i) guidance from UNCITRAL on the Model Law which provided that provisions dealing with avoidance powers were designed to support the collective goals of the insolvency proceedings; (ii) academic texts which indicated that avoidance provisions are an essential aspect of the insolvency process as they are dictated by a common policy of protecting the general body of creditors against a diminution of the assets available to them by a transaction which confers an unfair or improper advantage on the other party – avoidance provisions thus being necessary to ensure the equality of distribution among creditors; and (iii) the relevant provisions of European law and their interpretation by the European Court of Justice (ECJ) and the English courts, which provide that transaction avoidance actions derived directly from liquidation proceedings and therefore were "bankruptcy proceedings relating to winding-up of insolvent companies or other legal persons…" for the purpose of the Brussels Regulation. Furthermore, Ward LJ found reinforcement for this conclusion in HIH where Lord Hoffmann said "the process of collection of assets will include, for example, the use of powers to set aside voidable dispositions, which may differ very considerably from those in the English statutory scheme".
An argument that the transaction avoidance proceedings should have been viewed as simply establishing the rights of the debtor against third parties and therefore had nothing to do with enforcing rights of creditors against the debtor (i.e. were not "part and parcel" of the US Bankruptcy Proceedings) was rejected.
Unfortunately, the Court of Appeal's decision contained no detail on the assessment it had employed in coming to the conclusion that the US and English transaction avoidance provisions were strikingly similar and it could be argued that this is not actually the case.
Enforcement of the Judgment
Having recognised the transaction avoidance proceedings, the court held that, applying Cambridge Gas and HIH, the Judgment should be enforced under the common law against the individuals who had not submitted themselves to the jurisdiction of the US courts.
The rules of private international law for enforcing foreign judgments in personam did not apply to insolvency proceedings. Insolvency proceedings included the English transaction avoidance provisions and their equivalent provisions in US bankruptcy law which allow the insolvency officeholder to bring actions against third parties for the collective benefit of all creditors. Although the Judgment was indicative of a judgment in personam, it was nonetheless a judgment in and for the purposes of the collective enforcement regime in the US Bankruptcy Proceedings. Accordingly, the enforcement of the Judgment was governed by the private international laws relating to insolvency proceedings and was not subject to the private international law rules which would have prevented the enforcement of the Judgment in England (on the basis that the defendants had not been subject to the jurisdiction of the US court).
Ward LJ held that it was appropriate to enforce the Judgment against the individuals. Applying Cambridge Gas and HIH it was held that insolvency proceedings should be unitary and universal (i.e. there should be a unitary insolvency proceeding in the court of the debtor's domicile which receives worldwide recognition and which should apply universally to all the debtor's assets) and that recognition carries with it the active assistance of the court which should include assistance by doing whatever the English court could have done in the case of domestic insolvency proceedings. The purpose of recognition is to give the foreign officeholder the remedies to which they would have been entitled if the equivalent proceedings had taken place in the domestic forum. Accordingly, assistance extended to enforcing the Judgment against the individuals who had not submitted to the jurisdiction of the US bankruptcy court. Enforcing the Judgment did not require the court to do something it could not have done in an English insolvency proceeding as, in equivalent English insolvency proceedings, similar actions could have been commenced.
Furthermore, there was no unfairness in this approach as the individuals were fully aware of the claims brought against them and after taking advice chose not to participate in the transaction avoidance proceedings.
Having enforced the Judgment under the common law the court did not need to decide whether it could have been enforced under the CBIR. No concluded view was expressed on whether judicial co-operation pursuant to the CBIR could include enforcing a judgment of a foreign insolvency court. However, the court noted that, on the one hand, the specific forms of cooperation provided for in the CBIR did not include enforcement of judgments, but that, on the other hand, ""co-operation to the maximum extent possible" should surely include enforcement, especially since enforcement is available under the common law". There was no discussion at all as to whether a judgment of a foreign insolvency court could be enforced by the English courts by way of granting "appropriate relief" pursuant to Article 21 of the CBIR.
Where does Rubin leave us?
Rubin has confirmed that the recognition of court proceedings (which are "part and parcel" of the insolvency proceedings) under the CBIR is obtained pursuant to the provisions relating to the recognition of the insolvency proceedings. Once the insolvency proceedings are recognised that recognition encompasses all other proceedings which are "part and parcel" of the insolvency proceedings. It is not necessary to consider whether proceedings which are "part and parcel" of the insolvency proceedings can be recognised under the CBIR as part of the court's discretionary relief which can be granted once the insolvency proceedings are recognised. It remains unanswered whether proceedings which are not "part and parcel" of the foreign insolvency proceedings could be recognised pursuant to the discretionary relief provisions in the CBIR.
Under the EC Insolvency Regulation judgments deriving directly from insolvency proceedings and that are closely linked to them benefit from automatic recognition . Guidance from the ECJ on what "directly derived" and "closely linked" means indicates that, broadly, if the claim is one that only an insolvency officeholder can bring and which only arises once insolvency proceedings have been commenced, then it will be directly derived from and closely linked to the insolvency proceedings. It is likely that similar guidance will be used by the English courts in deciding whether proceedings in a foreign insolvency court obtain recognition as part of the insolvency proceedings under the CBIR. It should, however, be noted that both the CBIR and the EC Insolvency Regulation contain a public policy exception which would allow the English court to refuse recognition if to do so would be "manifestly contrary to public policy".
However, Rubin casts no light on the discretionary relief available under the CBIR once the insolvency proceedings (and any proceedings which form "part and parcel" of those proceedings) have been recognised. While the US transaction avoidance proceedings were recognised under the CBIR, the enforcement of the Judgment from those proceedings was under the common law. The recognition of proceedings which are "part and parcel" of the insolvency proceedings does not mean that any judgment pursuant to those proceedings is recognised and it certainly does not mean that the judgment should be enforced – these are separate questions for the court. Under the CBIR (apart from the moratorium that arises upon the recognition of foreign main insolvency proceedings) any further relief is entirely at the court's discretion. Accordingly, the recognition of proceedings which are "part and parcel" of the insolvency proceedings under the CBIR does not carry with it any substantive effect and can be seen purely as a gateway to obtaining further relief from the English courts.
It is also questionable whether the Court of Appeal was correct in enforcing the Judgment. While transaction avoidance actions are generally only available to insolvency officeholders once insolvency proceedings have been commenced, these are actions commenced against third parties. The common law concept of universalism (which was relied on to a large extent by the Court of Appeal in reaching its conclusions to allow enforcement of the Judgment) was viewed by the court at first instance in Rubin as simply ensuring so far as possible a uniform and fair system for distributing the assets of an insolvent estate with assets in more than one jurisdiction and having nothing to do with how or in what jurisdiction a possible asset of the insolvent estate consisting of a claim against third parties is to be established. There is significant power to this analysis in restricting how far universalism can be taken to recognise the effects of claims brought in the context of foreign insolvency proceedings. Furthermore, it is arguable that the correct approach, upon recognising proceedings which are "part and parcel" of the insolvency proceedings, is to seek relief, pursuant to the CBIR, to bring an "equivalent" action before the English courts. This argument is especially powerful in the context of transaction avoidance proceedings as the CBIR specifically grants the power to the foreign insolvency officeholder to make an application before the English court under the English transaction avoidance provisions.
Rubin did not specifically comment on Lord Hoffmann's and Lord Scott's divergence of opinion on the applicability of the common law where there is a statutory provision in place to deal with the issue. However, the implication of the decision is that the common law can be applied: (i) by way of guidance as to what can be done under the statutory provisions (the court looked closely at Cambridge Gas when deciding whether to recognise the transaction avoidance proceedings under the CBIR); and (ii) independently of any statutory provisions covering the matter (enforcement was solely pursuant to the common law; the court held that it did not need to consider the CBIR). This reflects the judicial trend that has emerged since Lord Hoffmann and Lord Scott made their comments, whereby the statutory provisions are seen to co-exist with the common law principles (see for example In the matter of Stanford International Bank Limited and ors  EWHC 1441 and In the matter of Swissair Schweizerische Luftverkehraktiengessellschaft  EWHC 2099 (Ch)).
The Court of Appeal's decision in Rubin,while offering some limited guidance, has left many questions unanswered. In this respect we understand that permission to appeal to the Supreme Court has been given.
 This relief is automatic in the case where the debtor has its centre of main interests in the State where the foreign insolvency proceedings have been commenced (foreign main proceedings). Where the debtor only has an establishment in the State where the foreign insolvency proceedings have been commenced (foreign secondary proceedings) all relief is at the discretion of the court.
 Article 21 of the CBIR.
 Articles 25 to 27 of the CBIR.
 Cambridge Gas Transportation Corporation v Official Committee of Unsecured Creditors of Navigator Holdings Plc  UKPC 26 and In Re: HIH Casualty and General Insurance Ltd  UKHL 21. Cambridge Gas concerned an application for assistance from the Isle of Man courts to give effect to a chapter 11 plan of reorganisation. HIH concerned an application that English provisional liquidators remit assets to the Australian liquidators of the same company (the English provisional liquidation was ancillary to the Australian proceedings). In both cases the courts acceded to the requests.
 Cambridge Gas.
 Article 25 of the EC Insolvency Regulation.