Isle of Man: Is Insolvency Different?

Last Updated: 15 January 2013
Article by Kevin O'Loughlin

Rubin v Eurofinance SA; New Cap v A E Grant and others as Members of Lloyd's Syndicate 991 for the 1997 Year of Account [2012] UKSC 46

Background

Although not on appeal from an Isle of Man court, the Supreme Court in these two cases dealt with principles very relevant to Manx lawyers.

The Rubin case is of interest in two practical respects and also academically. To reach the aspects of practical interest (which are expressed in the Conclusions section below), one must first explain the academic aspects. Rubin relates to the enforcement in England under common law of judgments of foreign courts which adjust or set aside prior transactions in relation to an insolvent person (for example preferences or transactions at an undervalue) ("avoidance proceedings"). Although a decision of the UK Supreme Court the judgments are distinctly Manx, Simcocks having acted in the two main authorities considered by the Supreme Court, and a third Manx decision having also been reviewed by the Court.

Summary of the decisions

In summary the Supreme Court decided that (i) the Privy Council decision (on appeal from the Manx courts) in Cambridge Gas, that foreign judgments in bankruptcy cases were not subject to the normal common law rules in relation to enforcement in the Isle of Man (potentially making it easier for such judgments to be enforced in the Isle of Man), was wrongly decided and that the normal common law rules applied and (ii) that proving in a foreign bankruptcy proceeding constitutes a submission to the jurisdiction of the court supervising such proceedings including for the purpose of avoidance proceedings.

Enforcement of foreign judgments at common law

The basic rules as to enforcement of foreign judgments at common law differentiate between a judgment "in personam" and a judgment "in rem". A judgment in personam is, briefly, a judgment against a person requiring him to do, or refrain from doing, a particular thing (e.g. the payment of money). A judgment in rem broadly determines property in a thing or the status of a person. It can be very difficult in some cases to distinguish between these two cases, but for present purposes little turns on the distinction.

In the case of a judgment in personam the common law rule is that the judgment will be enforced by the English (and Manx) courts if the foreign court had jurisdiction to give such judgment against the debtor, and the rule referred to in Rubin as "Dicey's Rule" is that the foreign court will have such jurisdiction if the judgment debtor was present in the foreign country when the proceedings were commenced, or if the judgment debtor submitted or had agreed to submit to the jurisdiction. In the case of a judgment in rem, the court of a foreign country will broadly only have jurisdiction if the subject matter of the proceedings was situate in that country when the proceedings were commenced.

Cambridge Gas

The Privy Council decision in Cambridge Gas Transport Corporation v. Official Committee of Unsecured Creditors (of Navigator Holdings plc) 2005 - 06 MLR 297 was an appeal from the Isle of Man courts, in which Simcocks acted for the appellants.

Navigator Holdings plc ("Navigator") was an Isle of Man incorporated company which had filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in New York, thereby submitting to the jurisdiction of that court. Cambridge Gas Transport Corporation ("CGTC") was a company incorporated in the Cayman Islands and was the majority shareholder in Navigator but had not submitted to the jurisdiction of the New York court. The New York court confirmed a Chapter 11 plan which essentially involved the assets of Navigator being taken over by the creditors. The mechanism which the plan used to vest the assets in the creditors was to vest the shares in Navigator (which were worthless) in the creditors' representatives. The committee of creditors petitioned the High Court for an order vesting the Navigator shares in their representative. CGTC opposed this on the grounds that it had never submitted to the jurisdiction of the New York court and therefore the order of that court should not be enforced against it.

The Privy Council decided that if bankruptcy proceedings fell into either category of judgments in rem or in personam, CGTC would have succeeded. However it decided that bankruptcy proceedings fell into neither category but existed to provide a collective mechanism of execution against the debtor's property by creditors whose rights had already been established or, if challenged, could be established summarily within the bankruptcy proceedings, and that these principles afforded the Manx court jurisdiction to assist the committee of creditors to give effect to the Chapter 11 plan and register the Navigator shares in the creditors' representative.

The decision in Cambridge Gas appeared to open the way to enforce at common law foreign in personam judgments which were outside Dicey's Rule, provided they were part of bankruptcy proceedings.

Rubin and New Cap

Rubin concerned whether judgments of a foreign court (here the New York bankruptcy court) in respect of avoidance proceedings will be recognised and enforced in England.

Briefly, the facts were that Eurofinance SA was a company incorporated in the BVI and had established The Consumers Trust ("TCT") in the UK to carry on a sales promotion scheme in the USA and Canada under which trust Eurofinance SA was the beneficiary in default and as such received payments from TCT. Eventually TCT became insolvent; Mr Rubin and Mr Lan were appointed as receivers of TCT by the English court and then caused TCT to present a voluntary petition to the US Bankruptcy Court for relief under Chapter 11 which was granted. Proceedings were commenced by Messrs Rubin and Lan in the US bankruptcy court against Eurofinance S.A. (among others) to recover pursuant to US State and Federal bankruptcy laws amounts transferred to Eurofinance SA within one year prior to the commencement of the TCT bankruptcy. Eurofinance SA did not defend, or participate, in these proceedings and default judgment was entered against it by the US Bankruptcy Court for about US$10mwhich Messrs Rubin and Lan sought to enforce at common law in England.

The Court of Appeal considered that Eurofinance SA not having been present when the avoidance proceedings were instituted, and not having submitted to the jurisdiction of the New York court, at first blush had an impregnable defence. However the Court of Appeal decided on the basis of the decision of the Privy Council in Cambridge Gas that the Dicey Rule did not apply to foreign judgments in avoidance proceedings because such proceedings were central to the collective enforcement regime in insolvency, that jurisdiction in insolvency cases was governed by special rules, and that the judgment was enforceable in England.

The Supreme Court disagreed. Lord Collins giving the majority judgment considered Cambridge Gas at length. He said that, since the judgments in Rubin were in personam, the principles in Dicey'sRule are applicable unless the court holds that there is, or should be, a separate rule for judgments in personam in insolvency proceedings, and that prior to Cambridge Gas there had been no suggestion that there might be a different rule for judgments in personam in insolvency proceedings and other proceedings. He considered that the dicta in Cambridge Gas did not justify the decision which the Court of Appeal had reached; that to develop the law in this way would not be an incremental development of existing principles but a radical departure from substantially settled lawwhich had all the hallmarks of legislation; and that this should be a matter for the legislature and not for judicial innovation. It followed he said that Cambridge Gas had been wrongly decided.

Lord Mance agreed with the decision, although not subscribing to Lord Collins' observation that Cambridge Gas was necessarily wrongly decided as this was not argued before the Supreme Court and Cambridge Gas was distinguishable. Lord Mance considered that as the shares in Navigator had had no value, CGTC had no interest of any value to protect, and therefore the transfer of such shares to the creditors was doing no more than giving effect to a transfer of Navigator's assets to the creditors, which had been the object of the Chapter 11 plan and which the New York court clearly had jurisdiction to do.

The Rubin case was heard by the Supreme Court with the New Cap case as both involved similar issues. In New Cap the foreign judgment in question related to avoidance proceedings in Australian insolvency proceedings, to recover (as unfair preferences) from the Lloyds Syndicate certain payments made under reinsurance contracts. The Syndicate had submitted proofs of debt in the insolvency proceedings in relation to unsettled claims and outstanding premiums (although not to the reinsurance contracts which were the subject of the avoidance proceedings) and attended and participated in creditors' meetings, although did not take any steps in the avoidance proceedings. The question was whether the steps taken by the Syndicate in the insolvency proceedings constituted a submission for the purposes of the avoidance proceedings and the rules relating to foreign judgments. Lord Collins said that in English law there is no doubt that orders may be made against a foreign creditor who proves in an English liquidation or bankruptcy on the footing that, by proving, the foreign creditor submits to the jurisdiction of the English court. Therefore the Supreme Court accepted that by having chosen to submit to the Australian insolvency proceedings, the Syndicate should be taken to have submitted to the jurisdiction of the Australian court responsible for the supervision of that proceeding, and should not be allowed to benefit from the insolvency proceeding without the burden of complying with the orders (including in avoidance proceedings) made in that proceeding.

Conclusions

There are academic and practical points to be extracted from the Rubin/New Cap cases. At an academic level, the legal position in relation to the enforceability in England at common law of judgments of foreign courts in insolvency proceedings is established to be that pre-Cambridge Gas and a change will it seems require legislation.

So far as Isle of Man law is concerned, Isle of Man courts below the Privy Council are bound by the decision in Cambridge Gas, but it may be some time (if ever) before the issue again reaches the Privy Council from the Isle of Man courts. It seems unlikely to us that the Privy Council would develop Manx law differently to English law in this respect. Our initial view therefore is that the Isle of Man courts will follow Lord Mance in distinguishing Rubin and Cambridge Gas and will follow the former, however judicial clarification must be awaited.

At a practical level, there are two points. First, a person in England or the Isle of Man served with proceedings in a foreign bankruptcy has a choice to make. Is it better protected by submitting to that jurisdiction so as to defend itself in those proceedings, or should it let judgment be entered in default and risk that default judgment being enforceable against it in England or the Isle of Man. After Cambridge Gas it appeared that since the default judgment may anyway be enforceable at common law in England or the Isle of Man, it would be better to submit because at least then the person could defend the proceedings. Following Rubin/New Cap however it appears that (unless other considerations apply, for example the person has assets vulnerable in other jurisdictions) it seems better not to submit at all because a judgment may not be enforceable in England or the Isle of Man.

Secondly, in such cases a creditor of the foreign insolvent should consider carefully before proving in the foreign insolvency, because by doing so it will render judgments given against it in the insolvency proceedings, including associated avoidance proceedings, enforceable at common law in the Isle of Man and England. Whether to prove will be a decision based on the amount due to the creditor as against the amount which might be recovered from it by avoidance proceedings in relation to past transactions.

Such complex decisions will require much thought and the legal position, at least in the Isle of Man, is not wholly clear. Lord Hoffman in the course of the Privy Council hearing in Cambridge Gas said that "insolvency is different"; in England it is now clear that insolvency is not very different after all, but in the Isle of Man exactly how different (if at all) remains to be worked out.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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