Recognition of Solvent Proceedings: Dilemma in International Insolvency Law

[By Daksh Aggarwal]

The author is a second year student of Campus Law Centre, Faculty of Law, University of Delhi.

Prefatory

The unification of markets and interconnected commercial transactions has necessitated significant need for common law governing business deals. The United Nations Commission on International Trade Law (“UNCITRAL”) Model law on Cross-Border Insolvency (“Model Law”), adopted in 1997, is designed to harmonise insolvency laws of various jurisdictions of the world and is internationally accepted as a unified restructuring framework by a number of states, including sophisticated economies. The Model Law is applied when the assets of the Corporate Debtor (“CD”) are located in foreign states or where the creditors of the CD reside in states other than the jurisdiction, in which the main insolvency proceedings are taking place against the CD. The major objective of the Model Law is to promote cooperation and coordination between courts and other competent authorities in cross-border parallel insolvency proceedings. The Model Law was substantially implemented in the United Kingdom through the Cross-Border Insolvency Regulations 2006 (“CBIR”). The CBIR, in consonance with Chapter III of the Model Law, intends to provide for the coordination of a British insolvency proceeding and foreign proceedings concerned with the same debtor.

Recently, in Michael carter v. Roy Bailey and Keiran Hutchison (as foreign representatives of Sturgeon Central Asia Balanced Fund Ltd) (“Sturgeon Central Asia Case”), the Hon’ble England and Wales High Court (“Court”) interpreted the stated purpose and object of the Model Law and opined that solvent proceedings do not fall within the category of ‘foreign proceedings’ as defined under the CBIR. Apparently, the judgment contrasts with the approach adopted by the United States court which implemented the Model Law and recognised Australian solvent liquidation proceeding under Chapter 15 of the US Bankruptcy Code. The English court deviated from the well settled international judicial dictum and demonstrated divergence of the United Kingdom and the US on abstruse question of law dealing with cross-border recognition of solvent proceeding as a foreign proceeding.

In this blog piece, the author aims to dissect the ‘legally unsound reasoning’ of the UK judgment and its troublesome interpretation of the international insolvency law.

Legal scrutiny of the judgment

The baffling conundrum that the Court in the Sturgeon Central Asia Case faced was whether a just and equitable winding-up of a solvent company would fall within the scope of a ‘foreign proceeding’ for the purposes of the Model Law and the CBIR. According to Article 2(a) of the Model Law, ‘foreign proceeding’ refers to a collective judicial or administrative proceeding in a foreign State pursuant to a law relating to insolvency, for the purpose of reorganization or liquidation.[i] It must be noted that the Model Law is set out in Schedule 1 to the CBIR and hence the same definition of ‘foreign proceedings’ substantially applies to Great Britain. The perspicuous explanation to Article 2(a) insists that the entity would fall under the said article of the Model Law only if the debtor is insolvent or in severe financial distress.[ii]

The true meaning and connotation of ‘foreign proceeding’ has been interpreted by various judicial pronouncements. In In Re Stanford International Bank Ltd Case [2010] Bus LR 1270, the English and Wales Court of Appeal (Civil Division) categorically held that the winding-up of a company on the just and equitable grounds includes insolvency in conventional terms. The court, while considering the liquidation of an Antiguan corporation, also opined that the ultimate purpose of the law governing the process of recognition of ‘solvent proceedings’ as ‘foreign proceedings’ is liquidation. The court also observed that the liquidation of a solvent entity incorporated with the objective to carry on international trade or business on just and equitable grounds would be termed as a foreign proceeding. An even wider interpretation was adopted by the US Court in In Re Betcorp Ltd (2009) 400 BR 266. The court, impliedly, held that even solvent companies could fall within the scope of ‘financial distress companies’. The court also elucidated that the voluntary liquidation of an Australian company under the Australian Corporation Act was a collective proceeding, in that it considered the rights and obligations of all creditors and hence recognised the collective proceeding as a ‘foreign main proceeding’.[iii] However, the Court in the Sturgeon Central Asia Case conflicted with the aforementioned precedents and restricted the scope of foreign proceedings. The Court explicitly held that since Sturgeon (Bermudan incorporated investment corporation) was not insolvent or in financial distress, the solvent liquidation of the company cannot be identified under the wide umbrella of ‘foreign proceedings’ as per the Model Law and the CBIR. The Court, indubitably, employed the purposive approach and narrowed the purview of previously existing “universal rule of recognizing voluntary insolvency proceedings as foreign proceedings”. In May 2019, Hon’ble Mrs. Justice Falk assessed the application made by the liquidators of Sturgeon Central Asia Balanced Fund Ltd and held that recognition of proceedings as foreign proceedings was intended to be made available in circumstances where the insolvency of an entity has not yet been established. However, in January 2020, the Hon’ble Insolvent and Companies Court (“ICC”) Judge Briggs overruled the judgment delivered by Mrs Justice Falk and concluded that the voluntary solvent proceeding which does not aim to restructure the financial affairs of an entity, but is more focused in dissolving the legal status of the concerned entity cannot be recognized as a foreign proceeding for the purpose of Article 2 of the Model Law. The Hon’ble ICC judge passed the judgment without mulling over severe legal consequences. The UK courts now also shoulder responsibility for defining an ambiguous term- ‘financial distress’ or its threshold. The judgment delivered by the Hon’ble ICC Judge raises an essential question of whether the English courts would take up an inquisitorial legal system and investigate into the insolvency of companies when considering future applications for recognition of foreign proceedings to draw a visible line between ‘financial distress’ and ‘solvent liquidation’. The judgment brings up a perplexing problem of law in case of group proceedings, where all the CDs may not be insolvent. The Court, by not adopting the least restrictive approach in addressing the issues related to cross-border insolvent proceedings, opens up a Pandora box of concerns associated with non-recognition of solvent proceedings on an efficient basis.

Consistency of approach over uniformity: A flawed contention

Relying on the Guide to Enactment of UNCITRAL Model Law 2014, the Hon’ble ICC Judge Briggs advocated for consistency and standardisation in addressing the instances of cross-border proceedings concerning debtors experiencing severe financial stress or insolvency. In the same breath, the Hon’ble judge opined that the restrictive approach endorsed by him is consistent with the paragraphs of the Legislative Guide on Insolvency Law 2004 and hence accordingly remarked that “consistency of approach and not uniformity is the goal”. It must be noted that free choice of insolvency law would render the interaction of the insolvency laws redundant. Harmonising different aspects and rules of cross-border insolvency has become a desideratum. Article 8 of the Model Law, headed ‘Interpretation’, calls from promotion of uniformity in the interpretation of law and in its application, and the observance of good faith.[iv] In the world of insolvency, one-size-fits-all approach cannot be followed, however, balancing the desirable result of international insolvency proceedings and application of substantive domestic insolvency laws should be the topmost priority.

Conclusion

The ‘Judicial Perspective’ produced in the Sturgeon Central Asia Case clearly asserts that the Model Law was deliberately drafted to include insolvency (liquidation) or severe financial distress (reorganisation), and does not encompass voluntary solvent proceedings for the purpose of Article 2 of the Model Law. The Court, in the Sturgeon Central Asia Case, departed from its earlier legal stance taken in In re Agrokor dd [2017] EWHC 2791. The English and Wales High Court (Chancery Division) had earlier advocated for a wider approach of the Model Law and the CBIR. The English court, while considering the “extraordinary administration proceedings” of a Croatian company, held that “the insolvency, actual or threatened, of one company which triggers the proceeding, and the law under which the proceeding is brought is accordingly in principle a relating to insolvency” for the purpose of Article 2 of the Model Law. However, the Court differed from the standard analysis of the concerned provisions and aspects of cross-border insolvency law. The Court, by deploying the doctrine of purposive construction and interpreting the CBIR at the same time, could not logically arrive at the definition of ‘severe financial distress’. The Court failed to comprehend that it is imperative to conduct a factual inquiry / investigation to ascertain whether the concerned debtor is ‘insolvent’ or is just ‘under the threat of insolvency’. Surprisingly, the terms– ‘debtor’ and ‘insolvency’ are not defined in the Model Law. The question that now needs to be answered is whether the purposive approach permits a degree of liberty to the court to define ‘insolvency’ in accordance with the domestic law. The aggrieved party i.e. Sturgeon Central Asia Balanced Fund Ltd can file an appeal with the Court of Appeal and the concerned court must aim to promote uniform approach to cross-border insolvency by defining some relevant terms in the broadest sense possible.

 End Notes

[i] Article 2(a) of the Model Law provides that “Foreign proceeding” means 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 reorganization or liquidation.

[ii] See Guide to Enactment and Interpretation of the UNCITRAL Model Law on Cross-Border Insolvency, paragraph 24.

[iii] Article 2(b) of the Model Law provides that “Foreign main proceeding” means a foreign proceeding taking place in the State where the debtor has the centre of its main interests.

[iv] Article 8 of the Model Law provides that in the interpretation of this Law, regard is to be had to its international origin and to the need to promote uniformity in its application and the observance of good faith.

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