shorter
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JUDICIAL PERSPECTIVE ON CROSS-BORDER INSOLVENCIES
John Mummery
This
article discusses the recent case of HSBC Bank plc v
Tambrook Jersey Ltd and whether there is
a need for a purposive approach to the issue of assistance in cross-border
insolvency.
Introduction[1]
1 A bank lends money on the basis that the
loan will be duly repaid to it in accordance with the terms agreed with the
customer. When the customer does not repay the loan or otherwise defaults the
bank can invoke contractual remedies and judicial enforcement procedures.
Insolvency law is also available to deal with the more serious situation of a
customer who does not remedy the default and is apparently without the means of
discharging liabilities to the bank in respect of a loan which has become
repayable. The purpose of this part of the law is to ensure that the insolvency
procedure invoked results in an orderly and efficient management of the
insolvent’s estate: collecting in debts, realising assets and paying
creditors, all to be done, as far as possible, with the minimum of difficulty,
delay and expense.
2 Reform of insolvency law is necessary
from time to time in order to improve the prospects of achieving those
objectives. The innovation of administration orders was an improvement in the
law of corporate insolvency in the UK. “Rescue culture” is the
dominating theme of the new administration regime. The procedure was designed
to be less drastic and aggressive than the full scale liquidation of a company.
The purpose of administration is to achieve better outcomes all round for the
company and its creditors. Administrators may be appointed, provided that
specified conditions are satisfied, in order to rescue a company from an
insolvency situation. The aim is to avoid putting an end to the company and its
business and to secure their survival by finding a purchaser for the
company’s business as a going concern, or by selling off assets, or by
other measures less extreme than a total winding up.
3 Cross-border insolvencies are more likely
than others to involve jurisdictional complications, particularly in the
sensitive area of the territorial jurisdiction of national courts. The recent
judgments in HSBC Bank PLC v Tambrook
Jersey Ltd explore lesser known aspects of the jurisdiction of the High Court
in England to make an administration order against an insolvent Jersey company.
4 An administration order could not be
obtained from the High Court on an application by the bank in the ordinary way.
The High Court had no power under the relevant UK legislation: the Insolvency
Act 1986 (“1986 Act”) to make an administration order against a
Jersey company on an application made directly to the High Court. The High
Court was only brought into the frame as the result of a letter of request sent
to it by the Royal Court of Jersey to perform its duty to co-operate under
general assistance provisions in s 426(4) of the 1986 Act. The particular
request in this case was to assist by making an order putting an insolvent
Jersey company, Tambrook, into administration.
5 The letter of request was triggered by
three circumstances: first, both the bank and the company preferred
administration to a Jersey liquidation (a désastre);
secondly, there was no Jersey insolvency legislation conferring jurisdiction on
the Royal Court to make administration orders against Jersey companies; and,
thirdly, it was considered that Tambrook’s cross-border situation was one
in which the Royal Court could properly call on the High Court to perform its statutory
duty of assistance by making an order of a kind that could not be made in
Jersey.
6 The cross-border flavour was strong. At
the Jersey end, Tambrook was incorporated in Jersey, had its centre of
interests there and its sole director was resident there. At the English end,
the sole business of the company was investing in property in England for
residential development and that property was subject to a charge governed by
English law securing the very substantial indebtedness of Tambrook
to a UK bank. The jurisdiction issue turned on statutory interpretation: did
the assistance provisions in s 426(4) confer on the High Court
jurisdiction to assist by making an administration order against Tambrook? The
decision of the High Court held that there was no jurisdiction. The decision of
the Court of Appeal held that there was jurisdiction.
The rulings
7 Parties to litigation are usually in a
dispute of some kind or other between themselves at most stages in the progress
of the case. A different situation can sometimes arise when there is a
preliminary question of jurisdiction. The court itself must always be satisfied
that it has legal power to do what it is being asked to do, even when there is
no dispute between the parties about what they want the court to do or about
the power of the court to do what they want. In this instance, the parties were
in agreement on the overall advantages of putting Tambrook into administration
rather than declaring the company en désastre.
The advantages of an administration order, if the conditions specified for
making one are satisfied in a particular case, are, as already explained, well
known.
8 The differences in this case about the
jurisdiction of the High Court to make an administration order were not between
the parties: they were between them and the High Court, and then between the
High Court and the Court of Appeal. At first instance, a highly experienced
Chancery judge, Mann J, rightly pointed out that, even though the making of the
order was not opposed, he had to resolve a preliminary question of whether the
High Court could make the administration order as requested. Jurisdiction turns
on a short (but by no means easy) point of interpretation of the 1986 Act,
which not only confers jurisdiction to make administration orders in certain
cases, but also contains the provision in s 426(4) imposing on the High
Court, as the insolvency court in England, a duty, in defined circumstances, to
assist the insolvency court of another country or territory. In this instance
the territory was Jersey and the court was the Royal Court of Jersey. Mann J concluded
that, although the merits of making an administration order in this case were
undisputed, the High Court had no jurisdiction to make such an order by way of
assistance. It was being asked to make an order in circumstances that fell
outside the assistance provisions of the 1986 Act.
9 The main objection was that there was no
insolvency proceeding, either existing or proposed, in the Royal Court for
which assistance from the High Court could be requested under s 426(4):
there was no application for a declaration en
désastre, which the Royal Court would have jurisdiction to order but the
parties did not want, and, as the bank and the company recognised, the Royal
Court could not itself grant the order which they wanted a court to make. The
Court of Appeal did not agree with Mann J’s ruling. It held that his
interpretation of the 1986 Act was too narrow in the light of the language and
purpose of the assistance provision and the general principle of
“modified universalism” mentioned below. It reversed his decision
and itself made an order appointing administrators of Tambrook.
A letter of request
10 The crucial point is that, on the
application to the Royal Court to send a letter of request to the High Court
for it to take insolvency action in the form of an administration order, it was
clearly established that a cross-border insolvency situation existed in the
case of Tambrook and that the assistance of the High Court, if available, was
needed in order to deal with it in a way that would be in the interests of all
concerned. It should be emphasised that this was not a case of the Royal Court
of Jersey requesting the High Court to make an administration order in respect
of a Jersey company where there were no English connecting factors, but simply
on the basis that Jersey law contained no provision for administration orders
against Jersey companies in any circumstances.
11 In this case, in addition to the land
owned by Tambrook in Margate and the development business carried on by it in
England, by far its biggest creditor was HSBC Bank, the holder of security
documentation governed by English law. The bank preferred to put Tambrook into
administration rather than into a désastre. The insolvency had arisen from
Tambrook’s inability to repay its debt to the UK bank, which wanted the
English properties sold in order to recover an indebtedness exceeding £8m
at the time of the hearing. There would be a major shortfall for the bank and
nothing left for unsecured creditors. The sole director did not oppose
administration, nor did any other creditors.
12 The absence from Jersey law of any
insolvency procedure for making administration orders necessitated the adoption
by the bank of the roundabout route of first applying to the Royal Court for a
letter of request to be sent to the High Court asking it to make an
administration order in accordance with its powers of assistance under s 426(4).
The Royal Court acceded to the application and made that request for assistance
to the High Court. This was not the first time that the letter of request
procedure had been invoked in similar cross-border situations. The procedure
followed by the Royal Court in this case had been used in earlier cases without
any jurisdictional objection being taken at the High Court end. There were,
however, no reported or reasoned decisions given in the earlier cases of the
High Court appointing administrators in accordance with a letter of request.
The 1986 Act
13 Mann J made it clear that, if that
assistance procedure were available in this case, there was no dispute about
the merits of an administration order. The only potential problem was one of
jurisdiction. That jurisdictional issue turned on the interpretation of s 426(4),
which provides for co-operation between insolvency courts of different parts of
the UK and of different countries and territories in the following terms—
“The court having jurisdiction in relation to
insolvency law in any part of the United Kingdom shall assist the courts having
the corresponding jurisdiction in any other part of the United Kingdom or any
relevant country or territory.”
Uncontroversial points
14 Some uncontroversial points on the
structure, wording and application of the sub-section are worth noting at this
stage—
(1) The
assistance provision is mandatory. The
UK court having insolvency jurisdiction “shall assist” specified
courts having corresponding jurisdiction. The exact form that the assistance
takes in a particular case would, however, seem to be a matter of discretion
for the High Court.
(2) The
assistance to be provided is cross border. That includes assistance to courts
in any relevant country or territory, not just to courts in another part of the
United Kingdom. Jersey is not part of the United Kingdom, but it is a
“relevant territory” within the sub-section.
(3) The
court providing the assistance must be one “having” insolvency
jurisdiction, in this case the High Court.
(4) The
court to which assistance is to be provided must be one “having”
the corresponding jurisdiction in insolvency law in a relevant country or
territory. The Royal Court is the court “having” insolvency
jurisdiction in Jersey, though that jurisdiction does not extend to the making
of administration orders against companies.
(5) An
important general principle permeates the culture of cross-border insolvencies.
The sub-section implements the general principle of “modified
universalism” and co-operation between insolvency courts, which—
“requires
that English courts should, so far as is consistent with justice and UK public
policy, co-operate with the courts in the country of the principal liquidation
to ensure that all the company’s assets are distributed to its creditors
under a single system of distribution.”
The judgments
15 The excellent judgments at both levels
of decision are of interest both on cross-border insolvency law, and, more
generally, on the approach to statutory interpretation.
Mann
J in the High Court
16 In holding that the English court did
not have jurisdiction under s 426(4) to make the order pursuant to the
request of the Royal Court for assistance, Mann J explained that the sub-section
contained three requirements in relation to a request for assistance: a UK
court exercising jurisdiction; a foreign court exercising a similar
jurisdiction; and assistance of the latter by the former. The sub-section
existed “to improve co-operation between actual processes”, but it
did not exist to fill gaps in the insolvency law of another jurisdiction, such
as that of the Royal Court in Jersey.
17 Mann J said that he afforded full
respect to the fact that the Royal Court had requested assistance and that
other judges had acted on such requests in the past. However, he had to apply
the sub-section. The jurisdictional difficulties could not be ignored. The High
Court did not acquire jurisdiction to make an order merely because the Royal
Court requested the court to make it. There had to be existing or planned
insolvency proceedings in Jersey which the High Court could assist. There was
none. The High Court could not “assist” a court that was not
actually doing or intending to do anything. The application was to provide a
substitute for insolvency proceedings in Jersey. It was an attempt to fill a
gap in the jurisdiction of the Royal Court under Jersey insolvency law. This
was not a case of assistance to a court exercising a corresponding insolvency
jurisdiction. The request fell outside s 426(4). It could not be acted on
by the High Court.
Court of Appeal
18 Davis LJ gave
the leading judgment with which McFarlane and Longmore
LJJ agreed. The Company did not appear and was not
represented at the hearing, having decided not to oppose the appeal. No amicus curiae or advocate to the court
had been appointed to assist the court, such as by advancing contrary arguments
on the jurisdiction point. The Court of Appeal allowed the appeal on the ground
that Mann J’s interpretation of s 426(4) was too narrow. It favoured
a broader interpretation giving effect to the purpose of the assistance
provisions i.e. to provide mutual
cross-border co-operation between insolvency courts and to aim at one set of
insolvent proceedings.
19 On its precise wording, the sub-section
referred to the UK court “having” jurisdiction and to the courts
“having” corresponding jurisdiction in insolvency law, not to
courts “exercising” insolvency jurisdiction, as concluded by Mann J
on his interpretation. Both the High Court and the Royal Court satisfied the
requirement of “having” insolvency jurisdiction. Further, there was
no need for there to be separate formal insolvency proceedings in Jersey and in
England. One set of insolvency proceedings was what was contemplated by the
legislation. The English courts had jurisdiction to make the order requested by
the Jersey court, as it would “assist” the Royal Court, which was
unable to make the order.
20 What the Royal Court was able to do in
the cross-border insolvency situation facing Tambrook was to make the request
to the High Court for assistance. The making of the request itself was, in any
event, a sufficient exercise of its insolvency jurisdiction of the Royal Court
to invoke the procedure under s 426(4) for obtaining the assistance of the
High Court in its insolvency jurisdiction.
Some points arising
21 I would select three main points for
special emphasis.
22 First, from the practical point of view,
the judgment of Mann J was bound to cause concern to financial institutions
which had made loans to Jersey companies. They had probably received advice
based on orders made by the High Court in earlier cases that they would have
the option of applying for administration orders using the letter of request
procedure. If they could no longer do that there was a concern that financial institutions
might be less willing to lend to Jersey companies in the future.
23 Precedents of orders made in the
apparent exercise of jurisdiction are not in themselves proof of the existence
of jurisdiction. There have been other instances of the High Court making
orders which were later held to have been made without jurisdiction e.g. orders for the variation of trusts
before the Variation of Trusts Act 1957 and, as discussed at the 2013
conference organised by the Jersey Institute of Law on “Futter and Pitt: Mistakes by Trustees”, orders made by the High
Court upon a supposed, but mistaken, jurisdiction originating in Re Hastings
Bass. In my view, Mann J was not prevented by judicial precedent from
reaching his conclusion he did on the interpretation of s 426(4). It was
for him to reach his own interpretation of s 426(4) in accordance with
normal principles of statutory interpretation.
24 Secondly, as a general rule, I would
adopt the cautious approach of Mann J. Caution on jurisdictional questions is
always advisable, especially in relation to affairs involving other countries
or territories. This was a case of a company incorporated in Jersey where it
had its main interests. Further, the Royal Court had an insolvency jurisdiction
under which it could have made an insolvency order, i.e. an order to wind up the company if the bank had asked it to do
so. That particular jurisdiction had neither been invoked by the bank nor did
it propose to do so. It is certainly not a usual procedure for an English court
to exercise its jurisdiction to grant a remedy simply because the appropriate local
court in another jurisdiction is unable to grant it.
25 Thirdly, for understandable reasons
neither the bank nor the company wanted the extreme measure of a Jersey law declaration
en désastre. It would have
been counterproductive to the bank’s interests as a secured creditor and
the interests of the company and those interested in it. A proposed pre-pack
administration would serve their interests better. Thus the problem facing the
Royal Court and the High Court was that the preferred insolvency procedure of
those affected did not exist in Jersey law.
26 In those circumstances was it
permissible for the High Court to make an administration order? The key points
were that s 426(4) gave it jurisdiction to make an order to assist the
Royal Court on request and that assistance would in fact be given in the
insolvency of Tambrook by making the administration order. The fact that the
Royal Court could not make an administration order in this cross-border case
meant that assistance was needed in the insolvency. That was relevant in
considering the scope and application of s 426(4). The fact that the Royal
Court made the request in the absence of a formal existing or planned
insolvency proceeding for a désastre
did not take the case outside the scope of the provision of assistance.
Concluding comments
27 Finally, three general comments are
offered in the overall context of asset security, insolvency and the
enforcement of creditors’ rights in the Channel Islands. Insolvency
specialists may think that the comments are all so obvious that they are not
worth the effort, but, as has been wisely said, “There are great
strengths to be derived from not being afraid of the obvious”. That is,
in general, a sound approach in giving legal advice, making submissions to a
court, reaching decisions and giving judgments.
The merits and their relevance
28 First, a comment on the underlying
merits of the case and their relevance to the judgments on jurisdictional
points. It will be obvious to any lawyer that, whatever the merits of an
application, a court cannot properly hand out an order simply because it is
requested by a court in another country or territory to co-operate with it by
making an order it cannot itself make, or because the parties agree that an
order should be made, or because no-one opposes the making of the order.
Jurisdiction to make the order must be established before the court can
consider the exercise of a judicial discretion. This is not always appreciated
by the parties, who are sometimes under the misapprehension that in insolvency
matters the court should be able to make any order that it thinks fit and just
in all the circumstances.
29 I would agree that, if an unopposed
application is made to a court for an order which seems sensible and just, the
courts will not usually go out of their way to find legal reasons for refusing
to make it. Subject to clarifying the legal position on jurisdiction, this case
presented no difficulty at all about the kind of order the court should make.
An administration order was unopposed by the company, its sole director or
other creditors. The appointment of administrators was in the best interests of
them all as well as the bank. Everything pointed to the desirability of
granting the assistance requested by the Royal Court to make an administration
order. Where, however, as here the jurisdiction is statutory, the High Court
must interpret the relevant legislation according to the established
principles, which focus on the meaning of the words used in the light of the
purpose of the provision rather than the merits of the particular case.
Statutory interpretation: the purposive approach
30 The purpose of cross-border assistance
under s 426(4) is clear: to secure co-operation between insolvency courts
so that, within one insolvency proceeding, the best interests of all parties
and the public can be served. The Court of Appeal judgments correctly focus on
the importance and value of cross-border co-operation in a case such as this
where a company may be incorporated in one country, but have assets in another
which can be realised to greater advantage by a procedure available in the
other country.
31 The interpretation adopted by the Court of
Appeal was one open to it on the
wording of the sub-section. It was also one which promoted rather than defeated
the self-evident purpose of s 426(4). Mann J had interpreted
“having” the corresponding jurisdiction as meaning actually
“exercising” jurisdiction. The Royal Court fitted the description
of the court “having” a corresponding jurisdiction in insolvency in
Jersey, even though it could not exercise it by making the particular form of
order sought by the bank and even though there was no formal insolvency
proceeding in existence or contemplation in that court. Section 426(4) made
available to the parties via the
Royal Court the procedure of seeking the assistance of the High Court. The
Royal Court had exercised its insolvency jurisdiction in relation to Tambrook
so far as it could in the circumstances by acceding to the bank’s
application for the letter of request.
32 The procedure under s 426(4) could
in a sense be described as having the effect of filling a “gap” in
Jersey law by achieving for the bank indirectly an insolvency remedy that could
not be obtained directly from the Royal Court in the ordinary way. The
assistance procedure did not, however, fill a gap in Jersey law in the sense of
changing Jersey law by introducing administration orders into Jersey law, or
circumventing Jersey law by some kind of legal device. The Royal Court enlisted
the assistance of the High Court allowed by the procedure under s 426(4)
in a cross-border insolvency situation. There was nothing legally objectionable
about that in the circumstances, as there were connecting factors with England
and the insolvency jurisdiction of the High Court.
Procedural law and sensible outcomes
33 Finally, and by way of general comment
on procedural law, it is perhaps surprising to find that the bank was entitled
to invoke procedures first in the Royal Court and then in the High Court to
obtain indirectly from the High Court an order of a kind (an administration
order) that it could not obtain by application to either court in the ordinary
way.
34 The explanation is to be found in the
unusual, mandatory and special character of s 426(4) and its objective of
securing cross-border co-operation and mutual assistance between courts in
sorting out problems arising in an insolvency. That procedure is subject to
important limitations. It is not available to insolvency courts in all overseas
countries and territories, but only between courts in other parts of the UK and
in relevant countries and territories. As between those courts the assistance
procedure cannot be used to change the local insolvency law administered in
those courts nor is it available in cases where there are no valid reasons for
assistance by the High Court, such as where there are no relevant cross-border
connecting factors.
35 Thus, to take an example cited earlier,
it is difficult to see on what basis the assistance procedure could be properly
invoked to obtain an administration order from the High Court where there is
nothing to connect the Jersey company with England and the sole reason for
invoking the procedure is to obtain an administration order against the
company, which cannot be obtained from the Royal Court under Jersey Law. In
those circumstances there would be no valid reason for imposing on the High
Court a mandatory obligation to co-operate with the Royal Court or indeed any
valid reason for the Royal Court to request co-operation.
36 In the case of Tambrook, it was possible to reach a sensible result in the
interests of all concerned because there were sufficient connecting factors present
to establish the special jurisdiction of the High Court under s 426(4) and
to impose on it the duty to assist the insolvency court of Jersey by putting
Tambrook into administration. There will be a sigh of relief from some banks
and their advisers.
The Rt. Hon. Sir John Mummery was a judge of
the High Court of Justice (Chancery Division) of England and Wales 1989–1996
and a Lord Justice of Appeal 1996–2013.