Out-Law / Your Daily Need-To-Know

UK ruling on solvent liquidations conflicts with US approach

Out-Law Legal Update | 27 Jan 2020 | 10:57 am | 5 min. read

Foreign solvent liquidations and other solvent procedures will not be recognised in the UK under UNCITRAL's Model Law on cross border insolvency, the High Court has ruled.
  • The English High Court has interpreted the UNCITRAL Model Law for cross border insolvency as not applying to solvent liquidations.
  • Officeholders specialising in cross border estates need to be aware that their office in relation to solvent liquidations may not be recognised by foreign courts.
  • Carter v Bailey and Hutchinson (as foreign representatives of Sturgeon Central Asia Balanced Fund Ltd)

This decision clarifies that UK courts will not recognise foreign proceedings that have appointed officeholders to solvent estates under the Model Law, such as a just and equitable winding up of a solvent company or a members' voluntary liquidation. Practitioners dealing with large solvent estates should be aware of this decision as it may affect the strategy for realising assets in the UK.

The decision highlights the inherent difficulties associated with harmonising the approach to insolvency proceedings in different jurisdictions. In some jurisdictions it may seem natural that any just and equitable winding up or members' voluntary liquidation are insolvency proceedings and should be recognised under the Model Law. However, the English view now appears to be that one must actually ask whether the company itself is insolvent or experiencing severe financial difficulties for the Model Law to apply.

The case concerned a Bermudan incorporated investment company, Sturgeon Central Asia Balanced Fund Ltd, which was wound up by the Bermudan Supreme Court in January 2019 on just and equitable grounds. Roy Bailey and Keiran Hutchinson were appointed as the joint provisional liquidators of Sturgeon. Sturgeon was not insolvent and was wound up in Bermuda on the application of its contributories.

The liquidators applied to the English court for a recognition order under the Cross Border Insolvency Regulation 2006 (CBIR), which applies the UNCITRAL's Model Law on cross border insolvency in the UK. The recognition order they sought from the English court would effectively ratify their appointment as the liquidators of Sturgeon in the UK, giving them the powers that liquidators hold in the UK under the Insolvency Act 1986.

Initially, the application for recognition was made without notice to any other party. At the ex parte hearing in England, Mrs Justice Falk made an order recognising the liquidators' appointment as liquidators of Sturgeon.

The liquidators then sought to compel former Sturgeon director Mr Carter, who was based in the UK, to provide documents and attend questioning by relying on their powers as liquidators under the Insolvency Act 1986.

Carter applied for review of the recognition order made by Mrs Justice Falk on the basis that the Model Law should not apply to demonstrably solvent companies, such as Sturgeon. That application for a review of the order was successful. Pinsent Masons acted for Carter.

The competing views on the application of the Model Law to solvent liquidations

For recognition of their appointment as liquidators of Sturgeon by the English court, the liquidators had to show that the just and equitable winding up proceeding in Bermuda was a "foreign proceeding" under the CBIR. This term is defined in Article 2(i) of Schedule 1 "as a collective judicial or administrative proceeding in a foreign State, including an interim proceeding, pursuant to a law relating to insolvency in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganisation or liquidation".

The liquidators argued that the UNCITRAL had purposefully not limited the application of the Model Law to companies that were actually insolvent. They said that a deliberate drafting decision had been made so that the "insolvency" requirement was tied to the law under which the proceeding was opened, not that the relevant company was insolvent. It was argued that just and equitable winding up proceedings in Bermuda clearly related to insolvency, and therefore the Bermudan proceeding was a "foreign proceeding" and recognition should be ordered by the UK court.

Mrs Justice Falk was convinced of this assertion at the without notice hearing. She concluded that "recognition is intended to be available in circumstances where insolvency has not been established as well as in cases where an entity is obviously insolvent". This same conclusion was also reached by the US court in re Betcorp Ltd (2009) 400 BR 266, where an Australian solvent voluntary liquidation was recognised by the US under the Model Law. However, Carter had not been given notice of the hearing before Mrs Justice Falk.

Carter argued that the definition of "foreign proceeding" requires that the relevant company is insolvent or in severe financial distress, not simply that the proceeding itself relates to insolvency. It was argued that the history of the drafting of the Model Law and the recent explanatory materials associated with the Model Law supported the proposition that the relevant company had to be insolvent or in severe financial distress.

Particularly, Carter argued that various guides explaining the Model Law's drafting and purpose highlighted that the Model Law sought to create a harmonised and fair framework to address cross border proceedings concerning companies experiencing severe financial distress or insolvency.

The review of Mrs Justice Falk's recognition order was decided by Chief Insolvency and Companies Court Judge Briggs sitting as a deputy High Court judge.

The decision

ICC Judge Briggs agreed with Carter's position that the solvent winding up of Sturgeon by the Bermudan court was not a "foreign proceeding" within the scope of the CBIR, and therefore should not be recognised by the UK court under the Model Law. He ordered that Mrs Justice Falk's recognition order be reversed.

In the reasoning for his decision, ICC Judge Briggs conducted a thorough review of the history of the drafting of Model Law and concluded that it was an essential element of "foreign proceedings" that the company itself is insolvent or suffering severe financial distress or is seeking to restructure its debts. He disagreed with the approach of the US courts in re Betcorp.

ICC Judge Briggs highlighted that the UNCITRAL draftsmen of the Model Law had grappled with the concept of "insolvency", explaining that it is difficult to define. This difficulty stems from the concept of "insolvency" being treated very differently across various countries, languages, cultures and legal systems. Against this backdrop, the UNCITRAL did not actually define "insolvency" in the Model law, as to do so would perhaps have excluded certain insolvency procedures particular to certain jurisdictions.

Nonetheless, ICC Judge Briggs explained that in his view it was clearly the intention of the Model Law to provide a harmonised framework for cross border proceedings concerning only companies experiencing severe financial distress or insolvency or seeking to restructure their debts. ICC Judge Briggs did not agree that the Model Law was drafted to apply to proceedings that simply related to insolvency, even if the company the subject of the proceeding was itself demonstrably solvent.

Nick Pike and Sebastian Jensen are restructuring experts at Pinsent Masons, the law firm behind Out-Law.