Cross-Border Insolvencies

Question 1

To what extent do the Insolvency Regimes of England and the EU States differ?

Answer 1

They follow a largely common approach, with the exception of Denmark.

P. 291.

Question 2

Under English Law, when is a Company considered Insolvent?

Answer 2

• Either when it is unable to repay its debts as they fall due;
• Its liabilities exceed its assets in value.

§123(1)(e), §123(2) – IA 1986.

Question 3

Under English Law, what are the Two Types of Insolvency?

Answer 3

• Cashflow Insolvency: Debts are unpaid as they fall due.°
• Balance Sheet Insolvency: Net liabilites exceed net assets.°°

° §123(1)(e) – IA 1986.
°° §123(2) – IA 1986.

Contingent and prospective liabilities are included in the net liability calculation.° The former are potential obligations that may arise if an uncertain future event occurs or does not, while the latter are potential obligations that are likely to arise based on current circumstances or events.

° BNY v Eurosail [2013] UKSC 28.

Question 4

What happens when a Company is Insolvent?

Answer 4

It undergoes either:
* A Winding up;
* A Restructuring;
* An Administration;
* A Scheme of Arrangement;
* A Company Voluntary Arrangement; or

Some combination thereof.

P. 292.

There is also the possibility that the Debtor comes to an entirely private arrangement with its Creditors.

Winding up is technically distinct from liquidation, which is a stage in the process of winding up where assets are sold to repay creditors.

Question 5

Under English Law, which Provisions attribute the Power to Wind Up a Company?

Answer 5

Under the Insolvency Act 1986:
* §84 allows any company to wind itself up.
* §117 allows the High Court to compulsorily wind up any company.

Question 6

What happens when a Company is Wound Up?

Answer 6

It ceases all business activities, has its assets liquidated and distributed to its Creditors, and is dissolved.

P. 292.

Question 7

What happens when a Company enters into Administration?

Answer 7

It is restructured, during which time:
* Authority is transferred from the Board to the Administrator; and
* It enjoys immunity from enforcement by its Creditors.

Think of it as a car’s engine stalling.

P. 292.

This may involve selling off certain parts, acquiring additional funding, or reaching private arrangements with Creditors.

Question 8

What happens when a Company enters into a Scheme of Arrangement (SOA) or Company Voluntary Arrangement (CVA)?

Answer 8

It and its Creditors enter into negotiations to restructure its debt.

P. 293.

Question 9

How do Schemes of Arrangement and Company Voluntary Arrangements differ?

Answer 9

Utility:
* SOAs can be used to alter constitutional documents, share capital, or debt obligations;° whereas
* CVAs can only be used to alter debt obligations.°°

Bindingness:
* SOAs are binding on all Creditors entitled to vote a priori;°°° whereas
* CVAs require court approval to bind Creditors who either abstained or dissented.°°°°

Outside Appointment:
* SOAs do not strictly require the appointment of an insolvency practitioner;°°°°° whereas
* CVAs do.°°°°°°

° Part 26 – CA 2006.
°° Part I – IA 1986.
°°° §901B – CA 2006.
°°°° §6A – IA 1986.
°°°°° §899 – CA 2006.
°°°°°° §3 – IA 1986.

Question 10

In what ways are SOAs and CVAs similar?

Answer 10

Utility: Both can be used to restructure debt.
Court Involement: Both require court approval for ratification.°

°§901B – CA 2006 | §6A – IA 1986.

Question 11

What is Receivership?

Answer 11

It is an enforcement procedure for the realisation of a single secured Creditor’s security for its own benefit.

P. 293.

In exceptional circumstances, the court may appoint a Receiver pursuant to §37(1) – Supreme Court Ac 1981.

Question 12

How does Administrative Receivership differ from ordinary Receivership?

Answer 12

It is Receivership upscaled to the whole, or substantially the whole, of a company’s assets.

§29(2) – IA 1986.

The right to appoint an Administrative Receiver is highly qualified by §72A – IA 1986.

Question 13

Can an English Court Wind up an Insolvent Foreign Company?

Answer 13

Yes,° insofar as:°°
* It has sufficient connection to the UK;
* Those issuing the Order have a reasonable possibility of benefitting therefrom; and
* At least one person interested in the assets’ distribution is within the court’s jurisdiction.

° §221 – IA 1986.
°° Re Latreefers v Latreefers [2001] 2 BCLC 116.

Also, a foreign company cannot be voluntarily wound up.°

Question 14

Are Secured Creditors Entitled to Realize their Security whenever they wish?

Answer 14

If prerequisites for enforcement are included in the contract, then no.

P. 295.

Contracts without prerequisites for enforcement are called ‘enforcement at will’ contracts.

Question 15

Does it matter whether a Creditor realises its security Before or After a Debtor enters into a Formal Insolvency Procedure?

Answer 15

Yes. Realizing the security:°
* Beforehand allows it to retain the full value thereof; while
* Afterhand obligates it to account to the Liquidator for the value, who will distribute it accordingly.

° Buchler v Talbot [2004] UKHL 9.

The idea behind Buchler is to prevent a secured Creditor from a realizing a windfall when its security’s value exceeds its debt’s value, thereby harming unsecrued Creditors.

Question 16

Is a Secured Creditor’s decision to realize its Security Qualified?

Answer 16

Yes. Secured Creditors must act in good faith and with commercial reasonableness toward the Debtor and any parties interested in the security.°

° Re Spectrum [2005] 2 AC 680.

This duty is implied into the contract.

Question 17

In case of an Upsetting Transaction between a Debtor and a Foreigner, what will the Court consider when deciding whether it should issue an Order against the Foreigner?

Answer 17

It will ask itself the following:
* Is the Foreigner sufficienty connected to the UK?
* Would an Order achieve the desired effect, and would it be just and equitable?
* Are there more viable alternatives?
* Would an Order give rise to a conflict of laws?
* What is the risk of injustice? Would the Foreigner be unfairly prejudiced, or does the Creditor have a strong case?

Re Paramount Airways [1993] Ch 223.

Question 18

How does the Principle of Hotchpot apply in the context of a Foreign Insolvency that is also taking place in England?

Answer 18

A Creditor that has proved and received a dividend in foreign proceedings must account for it in the English proceedings.

This applies equally in EU law (Arts. 8, 10, & 23 – EIR 2017).

Cleaver v Delta [2001] UKPC 6.

Accordingly, any advancements or payments received by a Creditor from a foreign Debtor before the formal distribution of its assets in England must be accounted for. In practice, however, this may be restrained by the compatability of foreign jurisdictions.

Question 19

To what extent must an English court aid a Foreign Liquidator in a Foreign Insolvency?

Answer 19

To the extent that:
* English creditors are not prejudiced by the removal of assets from England.°
* The Liquidator is acting within the bounds of its domestic law.°°
* No proposed action contravenes English Law.°

Bear in mind the existence of §426(4)-(5) for Commonwealth Countries.

° Felixstow v United States Lines [1989] QB 360.
°° Singularis v Pricewaterhouse [2014] UKPC 36.

Support includes such things as admitting proofs from Creditors, realising English assets, transferring the proceeds of said assets accordingly, etc.

Question 20

What is the Purpose of the European Insolvency Regulation 2017 (EIR)?

Answer 20

To determine which State’s law should be applied to whichever matters arise in an insolvency.

P. 302.

Question 21

Who does the EIR apply to?

Answer 21

Debtors whose Center of Main Interests (COMI) is located within a Member State.

P. 303.

Question 22

Where a Debtor’s COMI is?

Answer 22

On initial presumption, unless proven to the contrary, wherever it administrates its interests or has its registered office.

Art. 3(1) – EIR 2017.

Question 23

When is the Determination of a Debtor’s COMI Made?

Answer 23

When insolvency proceedings concerning the Debtor are opened.

Susanne Staubitz-Schreiber [2006] ECR I-701.

Question 24

Under the EIR, when are Insolvency Proceedings formally considered Opened?

Answer 24

After the appointment of a provisional Liquidiator.

This follows the presentation of the winding-up petition.

Eurofood [2006] ECR I-3813.

Question 25

How can a COMI Presumption be Rebutted?

Answer 25

It must be objectively shown, through evidence ascertainable by third parties, that the Debtor’s actual activities and management are centered elsewhere.

Recital 13 – EIR 2017 | Eurofood [2006] ECR I-3813.

Consequently, that a company carries on business in a State while being economically controlled by a foreign parent will not be sufficient to rebut the presumption.°

°P. 304.

Question 26

Practically, what is the significance of a Debtor’s COMI being in a specific State?

Answer 26

That State will have the right to open the main insolvency proceedings against it,° and its laws will govern said proceedings.°°

° Art. 3(1) – EIR 2017.
°° Art. 7 – EIR 2017. Bear in mind excepted assets described in Art. 17 – EIR 2017.

Question 27

What is ‘Forum Shopping’?

Answer 27

A Debtor deliberatly changing its COMI to a jurisdiction with more amenable laws. This is only valid if done three months prior to proceedings opening.

Art. 3(1) – EIR 2017.

Question 28

What types of Insolvency Proceedings are Considered Main Proceedings?

This question applies equally to Territorial Proceedings.

Answer 28

• CVA.
• Administration.
• Voluntary Winding Up.
• Compulsory Winding Up.

Both Receivership and SOAs are excluded, as they are not formal Insolvency Procedures.

Annex A – EIR 2017.

Question 29

Where can Territorial Proceedings be opened?

Answer 29

In any State where the Debtor has an establishment.

Art. 3(2) – EIR 2017.

If they are opened after the Main Proceedings, they are termed ‘Secondary Proceedings’.

Question 30

For the purposes of Art. 3(2), how is an Establishment defined?

Answer 30

A place of operations carrying out, “non-transitory economic activity with human means and goods.”

Art. 2(h) – EIR 2017.

Question 31

When can Territorial Proceedings be open before Main Proceedings?

Answer 31

If:
* Proceedings in the COMI State cannot be opened;
* The Creditor is connected by its registered office to a State housing a Debtor establishment; or
* The Creditor’s claim arises out of the operation of said establishment.

Art. 3(4)(b)(ii) – EIR 2017.

The Insolvency Practitioner in the main proceedings may also request the opening of secondary proceedings,° or that they be stayed for a period.°°

° Art. 29 – EIR 2017.
°° Art. 33 – EIR 2017.

Question 32

Will an English Court enforce the Revenue or Tax Claims of another State?

Answer 32

No.° However, European States must.°°

° Government of India v Taylor [1955] AC 491.
°° Chapter IV – EIR 2017.

Question 33

What is a Right in rem?

Answer 33

A right relating to a specific property or asset, as opposed to a specific person, legal or natural.

P. 312.

Question 34

Which Rights in rem does the Regulation specifically cite?

Answer 34

The rights to:
* Dipose of or liquidate an asset.
* Redeem an asset as collateral to have a claim met.
* Demand the return of an asset, or consequent restitution.
* Beneficial use or enjoyment of an asset.

Art. 8(2) – EIR 2017.

Question 35

If a Debtor has collateralised an obligation using an asset located outside the jurisdiction of the Main Insolvency Proceedings, how are the relevant Creditor’s rights affected?

Answer 35

Both its rights in rem and its ability to enforce them are unaffected.°

° P. 312 | Art. 8(1) – EIR 2017.

The provision specifically lists, “tangible or intangible, moveable or immoveable assets, both specific assets and collections of indefinite assets as a whole which change from time to time.”

Question 36

The laws of which jurisdiction are used to determine the existence, extent, and effectiveness of a right in rem?

Answer 36

The lex situs.

In other words, whichever jurisdiction the asset is located in.

Recital 68 – EIR 2017.

Question 37

If a Creditor has set-off rights against a Debtor outside the jurisdiction of the Main Insolvency Proceedings, how are they affected?

Answer 37

Both its set-off rights and its ability to enforce them are unaffected,° but only if they accrued prior to the proceedings’ opening; otherwise, they will be affected.°°

This supersedes Art. 7(d) – EIR 2017.

° P. 314-315 | Art. 9 – EIR 2017.
°° The Virgos & Schmit Report.

A similar approach is taken with the passing of title (Art. 10), immovable property (Art. 11), and obligations owed to a payment or settlement system or a financial market (Art. 12), rights subject to registration (Art. 14), community intellectual property rights (Art. 15), third-party purchasers of certain immovable assets (Art. 17), and pending lawsuits in divested assets and rights (Art. 18).

Question 38

The European Insolvency Regulation does not apply to Financial Institutions? What does?

Think credit institutions, invetsment firms, etc.

Answer 38

The Bank Recovery and Resolution Directive (BRRD).

P. 318.

Question 39

What is the UNCITRAL Model Law on Cross-Border Insolvency?

Answer 39

A framework that provides for the recognition of foreign insolvency proceedings in different countries, including the UK.

Great Britain’s version is called the GB Model Law (GBML) hereafter.

Sch. 1-2 – Cross-Border Insolvency Regulation 2006.

As the name suggests, it provides States with a model legislation they may use to amend their own, thereby increasing harmonization. In light of Brexit, this is particularly beneficial considering it largely resembles the EIR 2017.

Question 40

How does the GBML differ from the EIR?

Answer 40

• GBML makes no reference to where the Debtor administers its interests when determining its COMI.
• GBML has no rule on conflict of laws.

P. 324.

That said, similar principles are applied.°

° Re Stanford Internation Bank [2010] EWCA Civ 317.