Insolvency litigation update - October 2014

30 October 2014

Our dedicated insolvency litigation team bring you their monthly update on the cases and issues affecting the insolvency and fraud investigation industry.

In our October update Ian Weatherall, Alex Jay and Kanika Kitchlu-Connolly look at cases which confirm:

  • The courts in England and Wales will not have jurisdiction to hear a winding up petition in respect of foreign companies, where the order sought would be 'in vain'
  • A freezing injunction will not be continued where a parent company guarantee is offered and accepted by the applicant in respect of the respondent's obligations
  • The court will be willing to approve the appointment of receivers by way of equitable execution over certain assets of the defendants, where it is just and convenient to do so
  • We also point you in the direction of an alert issued by our Employment team which highlights the 'higher stakes for insolvency practitioners when making redundancies'.

The courts in England and Wales will not have jurisdiction to hear a winding up petition in respect of foreign companies, where the order sought would be 'in vain'

In the case of Re Buccament Bay Resort Limited / Re Harlequin Property (SVG) Limited [2014], the Chancery Court considered whether to hear winding up petitions based on largely undisputed debts, when neither of the companies in question were incorporated in England and Wales.

The respondents were two companies, incorporated in Saint Vincent and the Grenadines (SVG), which developed and operated luxury Caribbean resorts. The petitioners were all investors who were seeking repayment of outstanding deposit monies and/or repayment of money due under a finance agreement.

The petitioners contended that the Chancery Court had jurisdiction because, among other things,

  • The test under S221 Insolvency Act 1986 relates to the principal place of business - and there was a sufficient connection to England and Wales here;
  • Both companies acted via their sole director to sign all contracts in England;
  • All monies payable under the investor contracts were routed via another company in the Harlequin group in the UK;
  • SVG operates under the Commonwealth structure of law with the Privy Council as the last resort of appeal - as a result the system and judicial approach will be the same;
  • The sole director lives in Essex and has current proceedings in the UK High Court relating to this matter.

The respondent companies contended that the court should not accept jurisdiction because SVG was the more appropriate forum;

  • The companies were incorporated in SVG, key management decisions were made in the Caribbean and almost all of their staff were employed there;
  • The sole director split his time between SVG and England;
  • All assets were located in SVG;
  • An English winding up order would not be enforced under SVG local laws;
  • SVG laws did not facilitate cross border enforcement;
  • A liquidator appointed by an English court would face difficulties in recovering assets because his authority may not be recognised in SVG.

The court held that there was no justification at all for a winding up order here. There was a reasonably substantial connection with England and Wales but there was no possibility the petitioners would benefit from the winding up. SVG was the most appropriate forum by far.

It was clear that the companies' assets were in SVG and SVG has its own satisfactory process available. An English liquidator would face difficulties gaining control of the companies' assets. Quite simply there was no advantage in granting a winding up order here and the court would not act in vain.

The petitioners had also raised an alternative argument that the companies' centre of main interest (COMI) was in England by virtue of the EU regulation on Insolvency Proceedings. If that was correct, the constraints on the court's exercise of its jurisdiction were not applicable. The court did not accept that the companies' COMI was in England but in any event it did not accept that the constraints on the exercise of its discretion would not apply. The court would have reached the same conclusion.

Things to consider

This is a good example of how the court will exercise its discretion on winding up petitions in cases where the company is incorporated outside England and Wales, but has a connection to the jurisdiction. The key is that the court is less likely to grant a winding up petition in England where there is likely to be little or no advantage to the creditors in doing so, even if there is a reasonably sufficient connection to England.

In this particular case, since all the assets and majority of the employees were based in SVG, it is unclear why it was thought that it would be better to proceed here. The position may have been different if, for example, there were assets spread across multiple different jurisdictions, and appointing in England would have assisted a global recovery effort. However, that was not the case.

A freezing injunction will not be continued where a parent company guarantee is offered and accepted by the applicant in respect of the respondent's obligations

The Court of Appeal has upheld a decision by the Commercial Court that a freezing injunction obtained in arbitration proceedings should not be continued in circumstances where a parent company guarantee (PCG) had been accepted by the applicant in respect of the respondent's obligations under any arbitral award made or settlement agreed.

In IOT Engineering Projects Limited v (1) Dangote Fertilizer Ltd (2) IDBI Bank Limited [2014] the applicant was an Indian company and the first respondent was a Nigerian company - which had entered into two contracts relating to works at a fertilizer plant in Nigeria. The contracts were subject to English law and any disputes were to be referred to arbitration in London under LCIA Rules.

Under the contract, Dangote made advance payments in the sum of approximately US$ 19 million. In respect of its obligation to repay those advance payments IOT procured bank guarantees, issued by the second respondent bank. Disputes subsequently arose between the parties and the contract was terminated - each party alleging the other had repudiated the contract.

IOT sought urgent assistance from the Commercial Court:

  1. to restrain Dangote from making a demand under the advance payment guarantees (APGs); and
  2. to require the second respondent bank to pay the sums demanded into a London bank account to the order of the court (the 'freezing order relief').

In support of the application for freezing order relief, IOT argued that if the money was paid to Dangote it might be 'paid away' by Dangote 'other than in the ordinary course of business to another company or companies within the Group'. Furthermore it would also be very difficult to enforce any award against Dangote in Nigeria.

At the return hearing the court refused to continue (except on an interim basis pending the appeal) the freezing order (i) freezing the assets representing rights under the APGs and (ii) directing that any payments made pursuant to demands on the APGs be to the client account of IOT's solicitors.

Dangote had denied that any payment received as a result of the APGs would be paid away other than in the ordinary course of business, but in any event a PCG was offered to address IOT's concerns. The PCG provided a guarantee as to Dangote's obligations under any arbitral award or settlement in favour of IOT - up to the amounts received by Dangote under the APGs.

IOT subsequently accepted the PCG in those terms and - so said the Court of Appeal - that rendered pursuit of the appeal quite hopeless. IOT's concerns with the PCG - that although it was subject to English law and jurisdiction it was a guarantee given by a Nigerian company against whom IOT would have to seek enforcement in Nigeria - were not enough to allow the freezing order to remain in place.

Lord Justice Tomlinson did not consider that a party who contracts with a Nigerian company can legitimately 'pray in aid' as justifying freezing order relief the difficulties routinely encountered by those who seek to enforce judgments or awards in that jurisdiction. The PCG offered completely undermined the applicant's case as to dissipation of assets and frustration of enforcement and the freezing order was not continued.

Things to consider

A PCG from a financially sound parent company will often be sufficient to minimise the risk of dissipation of assets, such that a freezing order would no longer be regarded as just and necessary. The fact that the parent company is outside the jurisdiction and there may, as a result, be problems with any subsequent enforcement will not be enough to warrant the freezing order remaining in place. This will be particularly so where the parent company is located in the same jurisdiction as the company with whom a voluntary contract was entered into.

The court will be willing to approve the appointment of receivers by way of equitable execution over certain assets of the defendants, where it is just and convenient to do so

In the case of Cruz City 1 Mauritius Holdings v Unitech Ltd & others [2014], the claimants (Cruz) sought the appointment of receivers by way of equitable execution over certain assets of the first and second defendants - Unitech and Burley.

In earlier arbitration proceedings Cruz obtained an award against the defendants for almost US $300 million. The first defendant was one of India's largest real estate and investment companies with very substantial assets; well in excess of the sums awarded against it. The second defendant was a subsidiary of Unitech and is based in Mauritius.

Cruz had taken steps in an attempt to seek enforcement of the arbitration award, including commencing enforcement action in India, obtaining a final charging order in the Isle of Man over Unitech's shareholding in Unitech Overseas Limited (UOL), starting enforcement proceedings in Cyprus and obtaining a worldwide freezing order in Mauritius. The court noted that Unitech had made it clear by words and conduct that it would do whatever it could to avoid having to meet its liabilities.

Cruz sought the appointment of receivers to assist it in securing recovery from the defendants. It argued the appointment was necessary because Unitech held its assets through multiple chains of companies but there was no visibility as to the nature and location of those assets and Cruz would face difficulties in identifying and realising their value. Cruz would also face difficulties in enforcing the award locally in India, as well as in Cyprus and the Isle of Man - both in following the local enforcement processes and in the length of time enforcement (if in fact possible) could take.

The defendants argued that the appointment of a receiver by way of equitable execution - especially over the assets of a foreign company - was a remedy of last resort which should only be available when no other form of execution was possible. That was not the case here.

Section 37 of the Senior Courts Act 1981 gives the court jurisdiction to appoint a receiver in all cases where it is 'just and convenient to do so'. The jurisdiction is not unfettered; it has to be exercised in accordance with established principles, although these could be developed over time.

A receiver would not be appointed unless there was some difficulty using the normal process of execution, although the extent and manor of the difficulty was not rigidly defined. A receiver would be appointed if it would assist in the enforcement of a judgment or award - but not if the appointment was fruitless.

The court found that this was a classic case where receivers should be appointed - there was no doubt that it was just and convenient in the circumstances:

  • It was difficult to identify Unitech's assets - any available processes of legal execution would "at best be a blunt and ineffectual instrument" as a result;
  • Recovery by other processes of execution in the countries where the defendants had assets was not practicable, at least in a reasonable timetable - the defendants had made clear they would do everything they could to prevent and/or delay enforcement;
  • The appointment of receivers would not be fruitless. It was likely to be a highly effective remedy and there was a real prospect it would side-step the 'multiple obstacles' the defendants were determined to place in the way of other means of enforcement;
  • The defendants were aware of the consequences non-compliance with the receivership order - particularly where they had accepted the court had jurisdiction to preside over this matter.
  • The appointment of receivers was a valuable support for the freezing order already obtained. With the appointment of a receiver any breach of the freezing order would be apparent - where otherwise it may have gone undetected.

The court also rejected the defendants' argument that the order sought went too far in requiring them (a) not to impede the receivers from acting and (b) to appoint the receiver as their representative for the exercise of shareholder rights - which would put the defendants in the position where they were either in contempt of court or could not resist enforcement with arguments that were open to them in foreign jurisdictions.

The position might have been different if acting in this way would have exposed the defendants to criminal liability in India, but that was not the case.

Things to consider

This case applies settled principles, but it is a clear example of the court exercising its discretion (where it can do) to appoint a receiver, and make the necessary ancillary orders, where the interests of justice require it.

The defendants here made no secret of their willingness to thwart possible enforcement of the arbitration award in local jurisdictions. The court was therefore willing to appoint a receiver, and grant ancillary orders to make the appointment effective. The appointment would not be fruitless and it was clearly in the interests of justice.

And finally...

Our Employment team has issued an alert highlighting the 'Higher stakes for insolvency practitioners when making mass redundancies'. We think it includes some helpful information, so in case you missed it first time round we include another link to the alert.


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