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Cross Border Restructuring and Insolvency Update - November 2015

Official Receiver v Norriss [2015] EWHC 2697

Section 236 Insolvency Act ("IA") 1986 enables the Court power to summon persons with information about the affairs of a company to appear before it and / or to produce documents. In our August bulletin we considered the decision of the English High Court in Re MF Global [2015] EWHC 2319 when it was held that s236 does not have extra-territorial effect. However, having looked at the issue again in Official Receiver v Norriss [2015] EWHC 2697, the High Court has departed from the position in Re MF Global.

Norriss concerned a Liquidator's application under s236(3) IA 1986 for an order requiring a respondent resident in Hong Kong to produce a witness statement exhibiting documentation relating to a transfer of funds from the company in liquidation to a trust in Hong Kong.

Earlier this year, the Court in Re MF Global held that, whilst section 236 IA could not have extra-territorial effect, the Court could order examination outside the UK under s237(3) if the appropriate procedural mechanisms were in place in that jurisdiction. The Court had felt bound to follow the decision in Re Tucker [1980] Ch 148 which considered the extra-territorial applicability of s236's predecessor, s25 of the Bankruptcy Act (BA)1914.

Having looked at the issue again, whilst the High Court in OR v Norriss considered that it had to give 'considerable weight' to Re MF Global, the Judge felt that there was a difference between s25 of the old BA 1914 and the new ss236 and 237 IA 1986. Unlike under s236 IA 1986, the power under s25 BA 1914 to order the production of documents was ancillary to the principal power to summon a respondent to attend for examination before the Court. The Court gave weight to the structure of s236 IA 1986, and particularly the existence of subsections, which it held conferred a 'freestanding' and 'independent' power to order a respondent to submit an account of his dealings and produce documentation.

The Court accepted that the Official Receiver had discharged the burden set out in British and Commonwealth Holdings plc v Spicer and Oppenheim [1993] AC 426 and reiterated in Re Mid East Trading Ltd [1998] 1 BCLC 240, which provides that the Liquidator must reasonably require to see the documents, and it must not impose an unnecessary and unreasonable burden on the Respondent. However, the Judge was surprised that the Court in Re MF Global had left Re Mid East Trading Ltd out of its "impressive citation of authority", as in that case the Court had found that an order could be made for the production of documents outside the jurisdiction as it did not impose an unnecessary and unreasonable burden on the Respondent. The Judge in Re MF Global had also failed to appreciate the structural differences between the old and existing provisions and therefore failed to distinguish between the requirement to attend examination and be cross-examined, and the requirement to produce documentation, the latter of which is considerably less burdensome.

With some hesitation, the Court declined to follow the decision in Re MF Global and held that s236(3) of the IA 1986 does have extra-territorial effect. Provided that the test in Commonwealth Holdings is satisfied the Court has the power to order the production of documentation relating to the company in whose liquidation the application is made under s236 IA 1986, but in this case the production of information from the Trust's bank account would be limited to that relating to the transactions from the Company to the Trust.

Nike European Operations Netherlands BV v Sportland Oy

The ECJ has issued a preliminary ruling on the use of Article 13 of Council Regulation (EC) No 1346/2000 on insolvency proceedings ("the Regulations") as a defence to clawback claims by an insolvency office holder.

In this case Sportland, a Finnish company, sold goods supplied by Nike European Operations Netherlands BV ("Nike"), a Dutch company, under a franchise contract governed by Dutch law. Sportland owed Nike approximately €200,000 and repaid their debts in ten instalments very shortly before insolvency proceedings were opened in Finland.

The Finnish officeholder of Sportland brought an action against Nike seeking to set aside the payments, based on Finnish insolvency law provisions regarding the recovery of assets.

Article 4 of the Regulations set out the provisions that governs insolvency proceedings, and in particular Article 4(2) states that the law of the state in which insolvency proceedings are opened governs 'the rules relating to voidness, voidability, or unenforceability of legal acts detrimental to all creditors.'

Article 13 of the Regulations relates to avoidance actions, and provides that Article 4(2) be disapplied if 'the person who benefited from an act detrimental to all the creditors provides proof that: (1) the said act is subject to the law of a Member State other than that of the State of the opening of proceedings, and (2) the law does not allow any means of challenging that act in the relevant case.'

Nike argued that the payments were governed by Dutch law, and under Article 13 sought to rely on Article 47 of the Dutch Bankruptcy Act, arguing that there was no means for the payments to be set aside. Article 47 requires a claimant seeking to set aside a pre-insolvency payment to prove that, when the recipient received the payment, he was aware that an application to commence insolvency proceedings had been lodged or was pending, or alternatively that there was an agreement between the creditor and the debtor in order to give credit the creditor priority over the other creditors.

The defence failed before the Finnish Court and Nike appealed. The Court of Appeal referred the matter to the ECJ for a preliminary ruling.

The ECJ ruled that where an officeholder brought an action to undo an avoidance action, the burden of proof is on the defendant when alleging that a local law defence applies under Article 13. The Court stated that the defence should take into account 'all of circumstances of the case' when putting forward an argument under Article 13 and it is for the defence to show that no other local law provisions or principles could allow for the act to be challenged. Where the defence relates to an act only being challenged in certain circumstances, it is for the Defendant to prove those circumstances do not exist.

The ECJ also ruled that Article 13 must be interpreted as meaning that the expression 'does not allow any means of challenging that act' applies, not just in relation to the insolvency laws of the member state governing that act, but also to general provisions and principles of the laws of that state.

The Court further ruled where the Defendant has first proven that the act cannot be challenged under relevant local law, the claimaint may rebut that defence and establish the existence of local law under which the act can be challenged.

This ruling provides useful clarification on the application of Article 13 as a defence to clawback proceedings.

Short stories:

Re Sahaviriya Steel Industries UK Ltd, Official Receiver v Sahaviriya Steel Industries Public Company Ltd [2015] EWHC 2877 (Ch)

The English High Court has for the first time directly addressed the question of the extra-territorial application of s233 of the Insolvency Act 1986. The Official Receiver as Liquidator of Sahaviriya Streel Industries UK Ltd sought an order to restore access to an IT system provided to the Company by its parent company in Thailand. In granting permission to the Official Receiver to serve the application out of the jurisdiction, the Court was persuaded by the reasoning in the recent cases of Jetivia and Re Paramount Airways which concerned other provisions of the Insolvency Act 1986. The full judgment (Re Sahaviriya Steel Industries UK Ltd, Official Receiver v Sahaviriya Steel Industries Public Company Ltd [2015] EWHC 2877 (Ch)) provides a useful commentary on the factors a Court should consider when deciding which jurisdiction is the "appropriate forum" to hear an application in insolvency proceedings.

Hong Kong Court of Final Appeal judgment on s30A(10)(a) of Bankruptcy Ordinance

In a judgment given on 5 November 2015, the Final Appeal Court in Hong Kong held that s30A(10)(a) of the Bankruptcy Ordinance, which prevents the period of bankruptcy running from the date the Bankruptcy Order if the bankrupt is outside of Hong Kong, is unconstitutional. The Court found that the provision, which provides that upon returning to Hong Kong the Bankrupt must inform his Trustee and the period of bankruptcy runs from that date, is a disproportionate infringement on an individual's right to travel. Petitioning creditors will be concerned that Bankrupts may leave Hong Kong and enjoy automatic discharge after the bankruptcy period has elapsed, without having to cooperate with their Trustee. Whilst their concerns should be relatively short-lived, as the Bankruptcy (Amendment) Bill 2015 is to include a provision allowing a Trustee to apply for a non-commencement order, the Bill is not expected to become an Act until Autumn 2016.

UK: Increase in the Official Receiver's deposit in bankruptcy and winding up petitions

The costs of presenting a bankruptcy or winding up petition in the UK have increased from 16 November 2015, under the Insolvency Proceedings (Fees) (Amendment) Order 2015. The Official Receiver's deposit, which is paid to the Insolvency Service to cover a proportion of the OR's fees in the event a Bankruptcy Order or Winding Up Order is made, will rise for creditors' bankruptcy petitions from £750 to £825 and for compulsory winding up petitions from £1,250 to £1,350. The deposit will remain unchanged for debtor's own bankruptcy petitions.

 

This update was jointly written by Alan Bennett, Bethany Parr and Olivia Bridger.

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