Insolvency: cross-border clashes

Multi-jurisdictional insolvency is not the easiest of concepts. What happens if a Scottish company (with its business and assets based elsewhere, and subject to its own foreign insolvency proceedings) is in administration in Scotland?

Hooley Ltd v Victoria Jute Co Ltd [2016] CSOH 141

In this case, three companies incorporated in Scotland but carrying on business in India, were subject to Indian insolvency proceedings (instigated years ago). Space does not permit the detail of the full extent of these proceedings, but they involved each company being subject to an order of the Indian Employees’ Provident Fund (“the Indian authority”), which seized assets in connection with a failure to meet payments to employers’ contribution funds. One company was also ordered to be wound up, a liquidation petition continued on another, and shares in two companies had already been sold off by the Indian authority. Liquidation proceedings continue in India.

Years later, the companies were placed into administration in Scotland by Hooley Ltd, the assignee of rights under certain floating charges. The administrator purported to sell the companies’ assets to Hooley, which then asked the Court of Session for declarator concerning its rights under Scots law. The Indian creditors contested the application. Lord Tyre decided the case in the Outer House.

To summarise, the court needed to consider: first, whether the Scottish administration would be limited by the Indian proceedings (this involved consideration of the principle of “modified universalism”); and secondly, whether the administrator had been validly appointed under paras 14 and 16 of sched B1 to the Insolvency Act 1986 (this involved the court reviewing whether it needed to consider whether the floating charges were valid and effective in India, before they could be used in Scotland to appoint an administrator).

“Modified universalism”

The principle of modified universalism had not been scrutinised by a Scottish court before; however Lord Tyre deemed that there was “nothing new in a Scottish court lending assistance to foreign winding up proceedings”, citing Queensland Mercantile & Agency Co Ltd v Australasian Investment Co Ltd (1888) 15 R 935. In recognising its application, Lord Tyre further cited Lord Sumption in Singularis Holdings Ltd v PricewaterhouseCoopers (Bermuda) [2014] UKPC 36, who stated: “The principle of modified universalism… is founded on the public interest in the ability of foreign courts exercising insolvency jurisdiction in the place of the company’s incorporation to conduct an orderly winding up of its affairs on a worldwide basis notwithstanding the territorial limits of their jurisdiction.”

Following Singularis, the court concluded that the Indian proceedings were ancillary to the insolvency proceedings in Scotland, and the Scottish administrator’s powers could not be limited by Indian law.

Validity of administrator’s appointment

Administrators can be appointed by a holder of a floating charge over a company. Paragraph 14 of sched B1 to the 1986 Act states the various grounds on which a floating charge can be created, and also when a person can be constituted or considered the holder of a “qualifying” floating charge. Paragraph 16 states that an administrator cannot be appointed while a floating charge on which the appointment relies is unenforceable.

The court considered the provisions and determined that there was no need for inquiry into the practical enforceability of the floating charge. Whether a person was entitled to make an administrative appointment required consideration of whether the terms of the floating charge empowered the charge holder to appoint an administrator, and whether the charge covered substantially the whole of the company’s property (para 14); and whether or not a default or other event had occurred which entitled the charge holder to make that appointment (para 16).

Comment

This decision provides useful guidance on the meaning of paras 14 and 16, and help in relation to insolvencies of Scottish companies involving foreign assets. In this case, the foreign jurisdiction was outwith the European Union, so it must be borne in mind that it is possible a different result could have occurred had the foreign jurisdiction been a member state (MS). The EC Regulation on Insolvency Proceedings (Council Regulation (EC) 1346/2000) provides useful conflict of law rules where debtors are based in the EU with business in more than one MS, tending to give priority to the MS where the debtor has its “centre of main interests” and allowing main proceedings to be taken in that centre. These and other European provisions have allowed the UK to take advantage of large scale insolvencies in the past. This regulation is due to be replaced in June 2017.

With Brexit still on the horizon, it remains to be seen what will happen in relation to cross-border insolvency proceedings and whether a suitable replacement will emerge. Although there are some lesser-used international frameworks, such as in relation to the Commonwealth, these are unlikely to provide a suitable substitute.