A potential hiccup to cross-border insolvency cooperation

February 2013 | SPOTLIGHT | BANKRUPTCY & RESTRUCTURING

Financier Worldwide Magazine

On 24 October 2012, the UK Supreme Court ruled on two foreign insolvency proceedings and their enforceability in the UK. In summary, the Court ruled that foreign insolvency judgments could not be enforced in the UK under common law, primarily, if an English defendant had not participated in a US Chapter 11 or similar insolvency process, or submitted to jurisdiction under the Cross-Border Insolvency Regulations. The effect of these rulings is a departure from the recent trend towards cross-border insolvency cooperation.

Prior ruling

During 2006, the Privy Council in the UK had ruled in the case Cambridge Gas Transportation Corp. v. Official Committee of Unsecured Creditors of Navigator Holdings plc that a US Chapter 11 plan could be enforced in the Isle of Man without any local ruling in the UK. In the Cambridge Gas case, the defendant, a Cayman company, had not participated in the Chapter 11 process. The Court of Appeal held that bankruptcy judgments were different from judgments enforced against a particular person, because bankruptcy judgments were providing mechanisms to collect or enforce against the property of a debtor for the benefit of creditors.

Current cases at issue

Below are the facts surrounding the two cases at issue.

Rubin v. Eurofinance [Rubin]. Eurofinance S.A. created The Consumers Trust, which sought bankruptcy protection in the Southern District of New York in the US. The New York bankruptcy court appointed Rubin to serve as the representative to pursue recoveries. Rubin commenced adversary proceedings in New York seeking to recover fraudulent conveyances. The defendants in this action were English, were not New York residents, did not submit to the jurisdiction, and did not defend themselves. A default judgment was entered against them.

New Cap Reinsurance Corporation v. Grant [New Cap]. New Cap was an Australian reinsurer which provided reinsurance to a Lloyd’s Syndicate (the syndicate). When New Cap went into insolvency in Australia, the liquidator obtained a judgment in Australia to recover preferential payments made to the syndicate. The syndicate did not appear in the Australian proceedings and a default judgment was entered against them.

Court of Appeal

Although a departure from the traditional stand, the Court of Appeal agreed with the recent Cambridge Gas decision, and in the Rubin case ruled that insolvency proceedings were a special category. The Court of Appeal held that insolvency judgments by foreign jurisdictions may still be enforced in avoidance-type litigation, whether or not the defendant had been present at the proceedings or had submitted to the jurisdiction. The Court of Appeal’s rationale was to further the trend for the universal application of insolvency decisions. The Court of Appeal, in its ruling in the New Cap case, stood by the Rubin decision, although ruled that the syndicate had submitted to jurisdiction by corresponding with the liquidator’s attorneys and commenting on the Independent Expert Report.

UK Supreme Court (the Supreme Court)

On 24 October 2012, the Supreme Court overturned the Court of Appeal’s decisions in the Rubin and New Cap cases. The Supreme Court felt that there were two main issues to be addressed: (i) recognition and enforcement of foreign judgments in insolvency proceedings; and (ii) whether enforcement can be assisted by the provisions of the Cross-Border Insolvency Regulations.

The Supreme Court rejected the Cambridge Gas ruling, stating that this decision had been wrongly decided and that this type of a decision should be made by the legislature rather than the courts.

The Supreme Court stated that there was no reason to treat default judgments pursuant to an insolvency proceeding any different than any other type of judgment. Therefore, the Supreme Court disagreed with the Court of Appeal and ruled that insolvency judgments were not in a special category, and the United Nations Commission on International Trade Law (UNCITRAL), which was incorporated into English law in the Cross-Border Insolvency Regulations, did not address the recognition or enforcement of foreign judgments against third-parties.

Not only did the Supreme Court rule that certain insolvency judgments will not be treated differently, they also reaffirmed that insolvency proceedings must meet the test pursuant to the common law Rule 36 of Dicey, Morris & Collins, Conflicts of Law (1896) – the foreign plaintiff, having received a judgment, will have to show that the debtor: (i) was present in the foreign jurisdiction at the time proceedings were commenced; (ii) was the claimant or the counter-claimant in the foreign proceedings; (iii) had voluntarily submitted to the foreign proceedings by appearing; or (iv) had submitted to the jurisdiction before the commencement of the proceeding.

Conclusion

The Supreme Court seems to have reversed the trend for universal acceptance of insolvency proceedings furthered by the UNICTRAL Model Law. This will create additional hurdles for pursuing and enforcing default judgments and avoidance-type litigation recoveries in foreign territories. The most immediate high profile case that will be affected by the Supreme Court’s decision will be the Madoff case. The Madoff trustee seeks to enforce over $1bn of judgments in Gibraltar and the Cayman Islands on behalf of the Madoff Estate.

Peter Whalley is head of Restructuring and Insolvency at James Cowper LLP and Charles Berk is co-practice leader – Corporate Recovery Services at CBIZ MHM, LLC. Mr Whalley can be contacted by email: pwhalley@jamescowper.co.uk. Mr Berk can be contacted by email: cberk@cbiz.com.

Peter Whalley

James Cowper LLP

Charles Berk

CBIZ MHM, LLC