The credit crunch is hitting mainland Europe, raising insolvency rates, according to Legal Week's recent article NautaDutilh launches 20-strong Benelux team.
Most UK insolvency practitioners felt the economy starting to bite in midsummer and all the signs here are that, despite the oil price receding, corporate insolvency will loom for many this autumn.
For some thoughts on avoiding insolvency, try our earlier post Find a Business Angel.
In some jurisdictions not only may a bankrupt's mail be redirected to his trustee or insolvency administrator but so may his e-mails (eg Article 99 German Insolvency Code).
I'm not aware of this happening in England & Wales because s371 Insolvency Act 1986, which enables the court to order re-direction, does not extend to electronic communication.
But if as an insolvency administrator you have obtained a local court order that e-mails arriving in the bankrupt's e-mail account are bcc'd to you, how do you implement it, particularly for webmail or other accounts hosted outside your jurisdiction? Who would you serve the order on - does it have to be the entity with whom the bankrupt contracted for the provision of e-mail services or could it be his local internet service provider?
I don't have an answer, so please comment or otherwise let me know if you do!
A unanimous appeal verdict but a divergence of reasoning characterise the Law Lords' speeches in McGrath and another v Riddell and others [2008] UKHL 21.
The significant point of the judgement is not the result of English assets being remitted to Australia, but the absence of majority support for the proposition that it is English common law or judicial principles, rather than section 426 Insolvency Act 1986, that allow the result.
Commentators suggesting that the judgement paves the way for foreign liquidators to seize English assets in cross-border insolvency disputes (eg Norton Rose, who acted for the Australian liquidators, and Accountancy Age) may therefore have overstepped the mark.
In the liquidations of four HIH insurance group companies, the Australian court sought the assistance of the English High Court through s426 Insolvency Act 1986 in directing that the English provisional liquidators, who had been appointed over the companies' English assets - mostly reinsurance claims, should remit the assets to the Australian liquidators for distribution rather than distributing them through an English liquidation.
Under the Australian regime an insurance company's assets are applied first to Australian debts and reinsurance proceeds are applied to the reinsured liabilities, whereas under the English regime at the time of the provisional liquidators' appointment (which was therefore applicable in this case although insurance insolvency priorities have since been changed) such assets would be distributed pari passu among insurance, reinsurance and other unsecured creditors.
The appeal was allowed and the assets are to be remitted, but there was disagreement in the judgements over how the decision could be reached.
Lord Hoffmann (with Lord Walker agreeing) analysed the doctrine of ancillary liquidation, noting that:
"the judicial practice to which I have referred . . . is inconsistent with the broad proposition that creditors cannot be deprived of their statutory rights under the English scheme of liquidation."
He went on to say that allowing the appeal and directing remittal of the assets to Australia was exercising a power established under English common law, and he concluded:
"this is a case in which it is appropriate to give the principle of universalism full reign."
Lord Phillips declined to support this view, saying:
"I do not propose to stray from the firm area of common ground [allowing the appeal on the basis of s426] onto the controversial area of whether, in the absence of statutory jurisdiction, the same result could have been reached under a discretion available under the common law."
Lord Scott was very clear in his opposing view:
"The proposition that the assistance and directions sought . . . could be given under an inhernet power of the court . . . is unacceptable . . . [and] would constitute the usurpation by the judiciary of a role expressly conferred by Parliament on the Secretary of State."
"It would, in my opinion, as I hope I have made apparent, have been sufficient [to justify a refusal] if the country of the principal winding up had not been a "relevant country or territory" for section 426 purposes."
"I would allow this appeal but repeat that I would do so on the footing that the power to accede to the Australian liquidators' request derives from section 426 and not from any inherent jurisdiction of the court."
Lord Neuberger similarly disagreed with Lord Hoffmann:
"I take the view that it would not have been open to an English court to make the order sought by the Australian liquidators in the absence of section 426(4) and (5) of the 1986 Act."
Under s426 it has always been open to the English courts to choose to apply the law of a "relevant country or territory" designated as such by the Secretary of State. This judgement clarifies the exercise of the court's discretion under s426 but it does not extend the geographical boundaries.
It has been suggested that this judgement will make it easier for foreign office-holders to obtain the assistance of the English courts under The Cross-Border Insolvency Regulations 2006. I would observe that the cross-border regulations restrict the court's discretion rather more than does s426, for example in Article 21(2):
"Upon recognition of a foreign proceeding, whether main or non-main, the court may, at the request of the foreign representative, entrust the distribution of all or part of the debtor's assets located in Great Britain to the foreign representative or another person designated by the court, provided that the court is satisfied that the interests of creditors in Great Britain are adequately protected."
and Article 22(1):
"In granting or denying relief under article 19 or 21, or in modifying or terminating relief under paragraph 3 of this article or paragraph 6 of article 20, the court must be satisfied that the interests of the creditors (including any secured creditors or parties to hire-purchase agreements) and other interested persons, including if appropriate the debtor, are adequately protected."
How do you see universalism developing in the response of English courts to requests from foreign liquidators and courts for assistance and directions?
Reorganisation, creditor empowerment and faster proceedings are the highlights of the new Czech Bankruptcy Act, in force from 1 January 2008.
A local perspective is given in Czech Business Weekly, emphasising strict deadlines on courts, debtors and creditors - the court has two hours to publish a petition for insolvency and has to declare bankruptcy or otherwise within 10 days. This should reduce the length of the average Czech insolvency proceeding from its current 5 years.
There has been a shift in philospophy as regards creditors:
"The new law grants power to creditors, and the administrator in bankruptcy is more the 'executor' of the will of creditors in insolvency proceedings."
The new reorganisation procedure, which has shades of the US Chapter 11, is limited to businesses with turnover above CZK100m (c. EUR3.3m) or more than 100 employees. A stay provides 120 days for the submission of a reorganisation plan. Further details are available in a Clifford Chance briefing paper here.
The Northern Rock crisis has prompted Alistair Darling, Chancellor of the Exchequer, to announce proposals for a special insolvency regime for banks in the UK. Following the publication of a consultation paper in October 2007, “Banking reform – protecting depositors”, and consideration of its results, the Chancellor revealed in an interview with the Financial Times, reported here on 3 January, some hints about his intentions.
Details are patchy – perhaps deliberately – with the Chancellor planning to release more information to the Treasury Select Committee on Thursday 10 January.
It seems that the FSA (Financial Services Authority) would have a role to step in at the beginning of one or more “trigger events” such as the provision of emergency funding by the Bank of England.
A debatable observation from the Chancellor was that “Insolvency laws make it actually quite difficult to move quickly if you need to take action”. He also appeared to criticise the US system, where he said a healthy bank could find itself being restructured, while he suggested that there may be ideas worth following in the Canadian and Belgian systems.
What special insolvency regime does your experience suggest will work for banks?
The credit crunch of August-September 2007 has disturbed the economic equilibrium - and may continue for a while yet. Debates about illiquidity or insolvency abound, but are we really facing a swing from boom to bust?
The underlying UK economy is strong, but we now have corporate transactions stalling through lack of funding, hedge fund failures, a sub-prime lender in administration and the Northern Rock bailout. What many considered a strange US phenomenon (had many people heard of sub-prime before this summer?) has become a real domestic issue. No wonder business and consumer sentiment is waning:
For a reminder of how the credit crunch derived from the US sub-prime contagion via risk reappraisal amongst lenders and hedge funds, how CDOs, CLOs and SIV-lites were ideal vectors to spread the disease around the world, and the impact on bank lending, read "While you were away - fear and loathing in the markets" from The Times.
Other recent indications of the state and direction of the economy are:
So what does all this mean? Yes the capital markets are in turmoil, banks are lending much more cautiously and some high risk investment vehicles are failing, but essentially this is only a liquidity problem. Its effect though is that stressed businesses will no longer be able to borrow their way out of trouble as they have become hard-wired to do over the last 3 years.
Crisis cash management and operational and corporate restructuring will come back into vogue as refinancing becomes passé. Only if stressed businesses fail to seek appropriate and timely assistance will the business insolvency statistics really start to rise.
In a judgement here, published on 30 August 2007, Judge Burton Lifland in the US Bankruptcy Court (Southern District of New York) declined to recognise the Cayman Islands provisional liquidations of two Bear Stearns' Hedge Funds as foreign main proceedings.
Although registered in the Cayman Islands, the two companies' Centres of Main Interest were in the USA so the provisional liquidations could not be main proceedings.
Neither could they be foreign non-main proceedings as neither company had an establishment in the Cayman Islands.
The decision specifically uses the UNCITRAL Model Law and the European Insolvency Regulation to interpret the provisions of Chapter 15 of the US Bankruptcy Code. It also disagrees with parts of the Sphinx decision. Eurofood is cited.
Late July 2007's market shocks, when the Dow, FTSE and other indices slipped 5% or so on the back of the US sub-prime collapse spreading to prime homeloans and - some feared - into the corporate bond and credit markets, suggested that the wall of cash fuelling the recent credit boom was subsiding.
Such an outcome was not entirely unforseen, as reported here by Reuters in early June in an article highlighting a dramatic switch in worldwide corporate insolvency levels, from a 17% reduction in 2006 to 7% growth in 2007.
The last few days have seen faltering LBOs and a reluctance amongst banks to participate in recently planned syndications. The covenant-lite loan is said to be history and rising interest rates and oil prices encouraged market jitters.
Alongside this, investment banks, turnaround boutiques, lawyers and accountants are busy hiring restructuring talent and experience.
Will there be an insolvency boom? Not in my judgement. But there will be enough of an uptick to keep the skilled, flexible and client-oriented restructuring professional busy.
David Wood's new blog, Insolvency Consultant and Bankruptcy Trustee, offers a Canadian perspective on the insolvency and restructuring world. Visit it and see what you think! David's firm, Boale, Wood & Company, is an insolvency boutique based in Vancouver.
Bob Eisenbach's post at In The (Red) is a great overview of Chapter 15, the US implementation of the UNCITRAL Model Law on Cross-Border Insolvency.
As Bob says:
On October 17, 2005, as part of the Bankruptcy Abuse Prevention and Consumer Protection Act (known as "BAPCPA"), a new Chapter 15 of the Bankruptcy Code went into effect governing ancillary and other cross-border cases. (For those already familiar with ancillary proceedings, Section 304 of the Bankruptcy Code, which previously governed those proceedings, was repealed although many of its concepts have been retained in Chapter 15.)"
Chapter 15 is used:
A really useful feature of Bob's post for those who want detailed analysis is the chart comparing Chapter 15 and the Model Law's provisions, prepared by his partner Adam Rogoff.
GILD , the Global Insolvency Law Database, is a resource dedicated to all aspects of credit and debt, including debtor and creditor rights, the creation and enforcement of security interests, corporate restructuring, bankruptcy, reorganization and liquidation.
At the heart of the World Bank's Insolvency Initiative, GILD is designed to promote understanding and awareness of best practices by presenting information on the latest developments and systems adopted or proposed in countries and regions throughout the world. GILD contains reports on cutting edge innovations, the World Bank Principles and Guidelines for Effective Insolvency and Creditor Rights Systems, explanatory overviews by experts in the field, and excerpts from relevant legislation.
The UNCITRAL Model Law on Cross-Border Insolvency should enhance cross-border assistance for non-EU officeholders and creditors in British insolvency proceedings.
Introduced in England and Wales, and Scotland, on 4 April 2006 it was first applied in the English High Court on 23 November 2006 in Re Rajapakse (unreported) when a US Chapter 7 Trustee sought the court's assistance to recover assets in England.
Cooperation in cross-border insolvency proceedings within the EU is governed by the European Insolvency Regulation.
Chapter 15 of the US Bankruptcy Code similarly introduces the UNCITRAL Model Law into US law.
Richard Howard's post Global Bankruptcy Mutual Assistance addresses the question in relation to Great Britain by outlining the core provisions of The Cross-Border Insolvency Regulations 2006.
We address foreign creditors' rights in the UK in a previous post here, and you can find out more about the UNCITRAL Model law here.
Conflict of Laws .Net reports here that Look Chan Ho of Freshfields Bruckhaus Deringer has posted Navigating the Common Law Approach to Cross-Border Insolvency on SSRN.
Just when legislations are being put in place around the world to cope with cross-border insolvency (such as the implementation of the UNCITRAL Model Law on Cross-Border Insolvency), the UK Privy Council in Cambridge Gas Transport Corporation v Official Committee of Unsecured Creditors of Navigator Holdings [2006] UKPC 26; [2006] 3 WLR 689 reminds us that the common law remains essential and is capable of development.
In summary, the Privy Council held that the Isle of Man court, having recognised a US Chapter 11 proceeding, had a broad discretion to assist in the implementation of that Chapter 11 plan, notwithstanding that this involved the transfer of shares in an Isle of Man company.
While the spirit of cooperation demonstrated by the Privy Council is commendable, its approach seems novel and may have significant implications for the management of cross-border insolvencies and for the general law. This commentary reviews the Privy Councilís approach and contrasts it to an alternative approach adopted by the Canadian courts, in particular the decision of the Ontario Court of Appeal in Re Cavell Insurance Company (23 May 2006)("Cavell").
In short, Ho argues for development of the rules on recognition of foreign judgements along the lines of Cavell. In concluding that the Privy Council reached the right result for the wrong reasons, he quotes from In re SPhinX Ltd:
To rule otherwise would delay and frustrate those with the real economic stake.
and .
In November 2006 Euler Hermes, the credit insurer, reported:
Economic outlook: global insolvency to increase in 2007
The UK forecast is also 3%, but with this week's figures from Experian showing 10.7% UK corporate insolvency growth in 2006, posted here, that 3% forecast may be light.
Although he describes Judge Drain's decision in In re SPhinX Ltd as pragmatic and commercial, Chris Mallon of Weil, Gotshal & Manges uses the case in an article entitled:
Bankruptcy Blunder
I think the benefits of legislation encouraging cooperation between insolvency regimes far outweigh the risks of forum shopping. Of course parties will seek to gain advantage from any perceived uncertainty and some courts may react less predictably than others, but the COMI concept and its interpretation is becoming familiar to most practitioners.
Certainly in Europe the debate has moved beyond COMI to considering how to manage cooperation between main and secondary proceedings, particularly in relation to creditors' rights to claim in either or both, or whether secondary proceedings are better avoided altogether by recognition of creditors' local rights in main proceedings.
In a review of the first year of enactment of Chapter 15 of the US Bankruptcy Code (which is based on the UNCITRAL Model Law on Cross-Border Insolvency) Mark Douglas of Jones Day considers the concepts of main and non-main proceedings and of COMI (centre of main interests) by reference to In re SPhinX Ltd and In re Tri-Continental Exchange Ltd under the title:
Chapter 15 Turns One: Ironing Out the Details.
Although occurrences remain rare, judicial scrutiny of liquidators' fees is increasing in common law jurisdictions where traditionally the courts have only become involved to resolve disputes.
A recent Privy Council decision is reported at the Cayman Islands Heaven news site and the judgement is available in full here from the British and Irish Legal Information Institute.
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