Alex Rogan Partner
Restructuring update: Recognition not available for solvent winding-up proceedings under the Cross-Border Insolvency Regulations 2006
- The court held that it would be contrary to the stated purpose of the Model Law to interpret “foreign proceeding” to include solvent debtors and more particularly include actions that are subject to a law relating to insolvency but have the purpose of producing a return to members not creditors. Recognition under the CBIR is only available where the foreign procedure relates to the resolution of insolvency or severe financial distress.
- The court considered the US decision in re Betcorp Ltd (2009) 400 BR 266 to represent a “wrong turn” in its grant of recognition for a solvent, rather than an insolvent, liquidation of an Australian company under chapter 15 of the U.S Bankruptcy Code (which implements the Model Law in the US).
- The court considered whether by restricting the application of "foreign proceeding" every court would have to make an investigation into insolvency. This concern was dismissed by the court on the basis that the vast majority of cases would be obvious.
Joint provisional liquidators were appointed by the Supreme Court of Bermuda to wind-up a Bermudan investment company, Sturgeon Central Asia Balanced Fund Ltd, on just and equitable grounds. The provisional liquidators sought recognition of the winding-up proceedings as a ‘foreign main proceeding’ in England under the CBIR. The CBIR provides for cross-border recognition of proceedings in foreign jurisdictions. Recognition allows foreign liquidators equivalent powers to a liquidator appointed in the UK. These powers include investigatory powers under Section 236 of the Insolvency Act 1986.
The initial application for recognition was granted at an ex-parte hearing in May 2019. Following which the liquidators sought to use their powers under Section 236 of the Insolvency Act to question and seek documents from one of Sturgeon’s former directors who was based in the UK. The director challenged the recognition order on the basis that the CBIR does not govern recognition in relation to procedures for solvent companies.
The matter hinged on whether the just and equitable winding up proceeding in Bermuda was a "foreign proceeding" for the purposes of the CBIR. Article 2(i) of Schedule 1 defines a foreign proceeding "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 contentious element of this definition being whether (i) the last limb of this definition – “for the purpose of reorganisation or liquidation” – had the effect of limiting the scope of proceedings so as not to include solvent companies, as contended by the director or (ii) the "insolvency" requirement was linked to the nature of the law under which the proceeding was opened rather than the solvency of the company, as contended by the liquidators.
The court undertook a detailed review of the Working Group papers and reports, the explanatory memorandum to the CBIR, the Model Law Guide to Enactment 2014 and the 1997 Guide, as well as case law and commentary, and found that the final limb of the definition should be construed as meaning “for the purpose of insolvency ([in construing] liquidation) or severe financial distress ([in construing] reorganisation)” (emphasis added). As such, assistance is not available under the Model Law where the foreign proceedings relate to a solvent company that is not in severe financial distress.
This is yet another example of diverging approaches between jurisdictions in their interpretation of the Model Law and demonstrates the inherent challenge to harmonising different approaches when underlying concepts differ. In certain jurisdictions, such as the US, insolvency is not a prerequisite to accessing core restructuring tools such as Chapter 11. It will remain to be seen how obvious a debtors’ insolvency need be in order to access the Model Law and whether this decision creates any barriers to the efficient resolution of cross-border restructurings or the realising of assets for solvent estates.