Bundeszentralamt Für Steuern v Heis & Ors (as the Joint Special Administrators of MF Global UK Ltd)

The English High Court agreed to stay English insolvency proceedings in order that proceedings by the German Federal Tax Office could be dealt with by German Tax Courts. Similar applications for a stay brought by Deutsche Bank were however refused.

This case concerned appeals by German Federal Tax Office (“GTA”) and Deutsche Bank AG (“DB”) following the decision of the Joint Special Administrators of MF Global UK Limited (“MFG”) to reject their respective proofs of debt, with both applicants seeking a stay of their appeals pending the outcome of proceedings in the German tax courts.

The stay was sought in order that proceedings could be dealt with in Germany which would clarify their claims to be creditors. The proceedings related to withholding tax refunds which had already been paid to MFG. GTA maintained these were part of illegitimate tax avoidance schemes known as Cum/Ex schemes specifically designed to obtain withholding tax refunds from the German treasury in excess of the withholding tax that has been paid over to it. GTA’s position is that refund claims in respect of more than one hundred transactions were false and wrongfully made and claimed over €50m.

MFG went into Administration in 2011. GTA were compelled to submit a proof in MFG’s Administration to preserve its rights in light of the hard bar date for CVA proposals, which ultimately did not proceed (as discussed in our previous article).

GTA maintained that its claim should be determined by the German tax courts. GTA regarded the matter as particularly important and of systemic significance. Cum/Ex schemes have been much used in Germany, have caused very large losses to the German treasury, and have become a matter of considerable public and German governmental concern. GTA regarded it as tax evasion.

DB made two claims against MFG. The first being the DB mirror claim for an indemnity in the event GTA brought a claim against DB as they acted as MFG’s agent when submitting claims for withholding tax. The second being the DB €127m claim for an indemnity in respect of other possible liabilities from MFG’s creditors in relation to its involvement in the scheme. DB also applied for a stay so that matters could be dealt with in Germany.

The High Court did not consider the German court to have exclusive jurisdiction to determine the GTA claim, the decision to stay was therefore discretionary. The court noted that there were complex issues of German tax law which were the subject of controversy in Germany.

The claim would be adjudicated in Germany in any event, if no stay was granted in England then broadly the same issues would be considered in the German courts. The High Court considered cost and convenience, as well as the obvious risk of inconsistent and conflicting judgments if the same matters were dealt with in England and Germany.

A later refund claim brought by MFG would have to be determined in Germany in any event and the Administration could not be brought to an end until the other matters were concluded. The Administration was therefore likely to be kept open for a number of years, even if a stay was granted. Creditors had received 90p/£ and all client money and assets had been dealt with.

In exercising its discretion, the High Court granted the stay and held that the issues should be determined by the German Fiscal Courts, provided that undertakings were given to ensure the resolution of matters as expeditiously as possible.

In relation to DB’s claims, the court carefully considered the rule of double proof. Whilst refraining from a definitive decision as to whether the rule applied to the DB mirror claim, the Court held that it was arguable that it did. The Court therefore declined to grant a stay in respect of DB mirror proof.

In relation to the DB €127m claim, the Court held that it was counter-intuitive to grant a stay to a party against whom no proceedings have been brought. It was also held that there was no possibility of the DB €127m claim being determined ultimately other than by the High Court, as it would not be determined by the German Court.

For more information please contact Olivia Reader from our Restructuring and Insolvency Team.