Isle of Man: Is Insolvency Different? - October 2015

Last Updated: 10 November 2015
Article by Kevin O'Loughlin

A discussion of the decision of the Judicial Committee of the Privy Council in Singularis Holdings Limited v PwC [2014] UKPC 36

Introduction

During oral submissions in the hearing before the Privy Council in Cambridge Gas1 Counsel argued that "insolvency is different", and the Privy Council in that case appeared to depart from established principles of private international law. The Supreme Court in Rubin2 considered that insolvency is insufficiently different to upset established principles of private international law, which it said would be to legislate. The Privy Council in Singularis considered that insolvency is sufficiently different for the common law to uniquely confer wide investigatory powers on insolvency practitioners.

The difference of approach between the Privy Council and the Supreme Court may stem from the impoverished statutory framework for cross border co-operation in corporate insolvencies in certain jurisdictions, including the Isle of Man, in comparison to the United Kingdom where a wide jurisdiction to co-operate is conferred by statute. The Privy Council therefore seeks to find common law powers to take the place of the statutory powers which exist elsewhere and which the relevant legislatures should, having regard to modern commercial conditions, but have not, conferred.

In the absence of such statutory intervention, it is submitted that the Isle of Man judiciary must do their best to fill the void, including boldly developing common law powers to assist in cross border insolvencies which in other jurisdictions are conferred by statute. Isle of Man law is in need of such development and, if the legislature disapproves, it can arrest such development by legislation.

Background to Singularis

The Isle of Man courts are internationalist in outlook. This is inevitable given the global nature of commercial activity that operates in and through the Island, and the movement of individuals to and from the Island. The Isle of Man courts endeavour to assist the courts of foreign friendly nations, provided the Isle of Man court has jurisdiction to do so. The question of jurisdiction goes to the heart of the limits to assist in relation to foreign corporate insolvency proceedings. In the United Kingdom powers to assist foreign courts in corporate insolvencies have been conferred by statute since 1986. But the Isle of Man does not have equivalent statutory provisions. English decisions are persuasive authority as to Isle of Man law, but the fact that statutory powers to assist exist in England means that the common law power has stultified there. This in turn means that there is little English common law authority to guide the Isle of Man courts.

The Isle of Man courts have statutory jurisdiction to assist courts having bankruptcy jurisdiction in certain countries3, however this only applies to individual (not corporate) insolvencies.

The Isle of Man courts have endorsed the principle that bankruptcy (whether personal or corporate) should be unitary and universal; there should be a unitary bankruptcy proceeding in the court of the bankrupt's domicile which receives worldwide recognition and it should apply universally to all the bankrupt's assets4. A corollary of this principle is that the court with jurisdiction over the bankruptcy should be assisted by courts in other jurisdictions. The limits to the assistance which the court can give at common law is the subject of several recent cases, which start with Deemster Doyle's decision in re Impex, travel though Cambridge Gas and Rubin, and at present rest with Singularis.

Re Impex

In re Impex Services Worldwide Limited 5 the English court had appointed liquidators of an English company suspected of fraud and had issued a letter of request to the Isle of Man court requesting that two Isle of Man companies which had traded with Impex be ordered to produce all documents relating to that business and requiring that a director of the companies submit to oral examination before the Manx court. The Isle of Man court decided, guided by English common law prior to statutory intervention, that it had power at common law to assist by making these orders. The court decided that at common law the court should recognise the appointment by foreign courts of insolvency officers in corporate insolvencies, that with such recognition comes a wide and discretionary common law jurisdiction to assist other courts in relation to insolvency matters, though in exercising such discretion the Isle of Man court would in particular have regard to the rules of private international law.

Cambridge Gas

Cambridge Gas concerned an Isle of Man company Navigator Holdings plc ("Navigator") which had filed 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 had no economic value) in the creditors' representatives. The committee of creditors petitioned the Isle of Man High Court for an order vesting the Navigator shares in their representative. CGTC as shareholder opposed this on the grounds that it had never submitted to the jurisdiction of the New York court and therefore on the basis of established private international law rules the order of that court was not enforceable against it in the Isle of Man.

The Privy Council (sitting as the Isle of Man final court of appeal) 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 assets. It considered that the principle of universality underlay the common law principles of judicial assistance in international insolvency, and those principles were sufficient to confer jurisdiction on the Manx court to assist by doing whatever it could have done in the case of a domestic insolvency. Because the Privy Council considered that the Manx court could have given effect to the Chapter 11 plan through a court sanctioned scheme of arrangement, in order to avoid parallel proceedings the court had a common law power to give effect to the plan as if such a scheme had been implemented.

The decision appeared to indicate that insolvency proceedings were indeed different, and that the normal private international law enforceability rules did not apply. However, six years later, in Rubin, the Supreme Court was to have its say.

Rubin

Rubin concerned The Consumers Trust ("TCT")established in the United Kingdom by Eurofinance SA a company incorporated in the British Virgin Islands. Eurofinance SA was the beneficiary in default under TCT and as such received payments from TCT. TCT became insolvent; its receivers caused it to apply to the US Bankruptcy Court for relief under Chapter 11; the receivers then obtained default judgment in the US Bankruptcy Court against Eurofinance SA for about US$10m in relation to the avoidance of amounts paid by TCT to Eurofinance SA within one year prior to the commencement of the TCT bankruptcy. The receivers sought to enforce the default judgment at common law in England. Eurofinance SA opposed enforcement on the principle of private international law that a foreign judgment in personam is only enforceable in England 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 (the "Dicey Rule").

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 bankruptcy avoidance proceedings and that the judgment was enforceable in England. The Supreme Court disagreed. Lord Collins giving the majority judgment in the Supreme Court considered Cambridge Gas at length. He said the question was whether as a matter of policy, the court should, in the interests of universality of insolvency proceedings, devise a rule for the recognition and enforcement of judgments in foreign insolvency proceedings which is more expansive, and more favourable to liquidators and other office-holders, than the traditional common law rule embodied in the Dicey rule, or should it be left to legislation. He noted 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 to develop the law in this way would not be an incremental development of existing principles but a radical departure from substantially settled law which 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.

Singularis

The Privy Council reconsidered Cambridge Gas in Singularis6, a case similar to re Impex. In Singularis, a liquidator was appointed by the Cayman Islands court to wind up Singularis Holdings Limited, a company incorporated in the Cayman Islands. The liquidator applied to court in Bermuda to order PwC, as former auditors of the company, to provide information and documents. The Privy Council (sitting as the Bermuda final court of appeal) unanimously considered that:

  1. Cambridge Gas is correct in so far as it constitutes authority for the principle of modified universalism, namely that a domestic court has a common law power to assist foreign winding up proceedings so far as it properly can;
  2. Cambridge Gas is incorrect as authority for the proposition that this includes a common law power to do (subject to its own law and public policy) whatever the domestic court could by statute have done in a domestic insolvency "as if" that statutory provision applied to international insolvency; and
  3. Cambridge Gas is incorrect as authority for the proposition that the common law power referred to in (a) above is itself the source of the court's jurisdiction over those affected and that the absence of jurisdiction in rem or in personam according to ordinary common law principles is irrelevant. Rather, the domestic court must act within the limits of the statutory and common law powers which it otherwise has, including any proper development of the common law.

A majority of the Privy Council considered that there is a power at common law to assist a foreign court of insolvency jurisdiction by ordering the production of information in oral or documentary form which is necessary for the administration of a foreign winding up, subject to several limitations. Two of those limitations are that the power is available only to assist the officers of a foreign court of insolvency jurisdiction and would not be available to assist a voluntary winding up; and that the power does not enable foreign officeholders to do something which they could not do even under the law by which they were appointed. On the basis of the latter limitation, the Privy Council decided that the Bermuda court should exercise its discretion by declining to make the order sought by the liquidator.

Binding effect of Singularis

Decisions of the Supreme Court in England are not binding but are highly persuasive in the Isle of Man courts, and should generally be followed if there is no Isle of Man legislation or clear case law to the contrary, unless exceptionally local conditions justify divergence7. Decisions of the Privy Council sitting other than as an Isle of Man appellate court, although again not binding on Isle of Man courts, are of even more persuasive authority than decisions of the Supreme Court8. Although the decision in Singularis is therefore not strictly binding on the Isle of Man courts, it is unlikely that the Privy Council sitting as the Isle of Man final court of appeal will depart from that decision. That said, the precise scope of the Singularis decision is narrow.

Strictly, the decision in Singularis was that if there is a common law power to assist as outlined above, then it is subject to the limitation that the power does not enable foreign officeholders to do something which they could not do even under the law by which they were appointed. So expressed, the decision is quite narrow, and this limitation seems uncontroversial. It is therefore quite certain that the Isle of Man courts will follow the decision at least in this respect, though it is submitted that it would be open to them not to follow the decision in other respects.

Discussion

It is clear that the Isle of Man courts have a common law power to recognise the appointment of insolvency officers in foreign corporate insolvencies, and to assist in relation to insolvency matters, but the scope of the power is still being developed. Based on the decision in Singularis, the power may be subject to a number of limitations.

First, there is no jurisdiction to do whatever the court could have done in a domestic insolvency, "as if" the foreign insolvency was a domestic insolvency. In Cambridge Gas the Privy Council held that the court could give effect to the Chapter 11 plan "as if" a scheme of arrangement had been entered into. In the light of subsequent decisions that does appear to be a step too far. In Rubin Lord Mance disavowed the wider interpretations of Cambridge Gas saying that the Board concluded that the Manx court's order could be regarded as doing no more than facilitating or enabling collective execution against Navigator's property, given the nature of shares in an insolvent company.

Second, it is clear from Singularis that the power does not enable the Isle of Man court to assist foreign officeholders to do something which they could not do even under the law by which they were appointed. This seems uncontroversial; the common law power should be in support of their powers under the law by which they were appointed rather than conferring new freestanding powers.

Third, the Privy Council in Singularis considered that the power is available only to assist the officers of a foreign court of insolvency jurisdiction and would not be available to assist a voluntary winding up. The reason given by Lord Sumption for this limitation was that a voluntary winding up is essentially a private arrangement and although subject to the directions of the court is not conducted by or on behalf of an officer of the court. However in cases of insolvency there is a public interest in facilitating investigation of wrongdoing and collection of assets, whether the insolvency practitioner is appointed by a court or voluntarily. In most jurisdictions an insolvency practitioner in an insolvent voluntary winding up will be able to invoke the assistance of his local courts in relation to the winding up, including seeking assistance from foreign courts. On this basis, it is submitted that the Isle of Man common law power to assist should also extend to cases involving an insolvent voluntary winding up where the foreign court has requested such assistance.

Fourth, the common law power itself does not confer additional jurisdiction on the Isle of Man court, which must act within the limits of the statutory and common law powers which it otherwise has, including any proper development of the common law. It is in this latter respect, developing the common law, that it is submitted that the Isle of Man courts should be "bold spirits" rather than "timorous souls"9. If the legislature does not legislate where it is clearly needed, it is submitted that the judiciary are justified in seeking where they properly can to fill the gap.

That the common law may develop to meet the needs of the local and international community has been recognised in many decisions of the Isle of Man courts10. To do so is not to usurp the legislature, even if the effect of developing the common law may be to replicate statutory law elsewhere. By way of example, Re Barr11 concerned the Isle of Man law of contempt. In England, though not in the Isle of Man, the common law in relation to contempt had been changed by statute in a number of respects. The Staff of Government said that it should not be assumed that the Isle of Man court would follow English common law decisions which had been abandoned by Parliament. In Drower v Gubay12 the Staff of Government having referred to the above passage in Barr held that the Isle of Man common law ought not to be influenced by or reflect statutes of another jurisdiction even England, the reason given being that "Tynwald could have enacted similar legislation but has seemingly elected not to do so". It is submitted, however, that this fails to recognise that inaction does not necessarily imply a conscious decision to that effect, and therefore it should not be inferred from an absence of legislation that the legislature decided not to develop the law in a particular way, or would be against such development by the courts.

Conclusion

Insolvency is different in many ways. Creditors know the risks associated with limited liability conferred on companies by statute, but deserve protection from abuses of that privilege. Such protection necessitates investigation into the affairs of the insolvent company and remedies against wrongdoers, which today will inevitably have cross border implications. That insolvency is different justifies the Isle of Man courts boldly developing the common law in this area in a manner deserved by a sophisticated and internationally connected jurisdiction such as the Isle of Man.

Footnotes

[1] 2005-06 MLR 297.

[2] Rubin v Eurofinance SA [2013] 1 AC 236

[3] Bankruptcy Act 1988. The countries are the United Kingdom, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Iceland, Italy, Leichtenstein, Luxembourg, Malaysia, Netherlands, Norway, Portugal, South Africa, Spain and Sweden.

[4] For example, Interdevelco v Waste2Energy 2012 MLR 521 at paragraph 65.

[5] 2003-05 MLR 115.

[6] Singularis Holdings Limited v PwC [2014] UKPC 36

[7] Frankland v R (Privy Council) 1987-89 MLR 65.

[8] Frankland v R (SoG) 1978-80 MLR 275.

[9] See Deemster Doyle in Lombard Manx v Spirit of Montpellier (judgment of 11 December 2014) referring to Lord Denning's famous dissenting judgment in Candler v Crane Christmas & Co [1951] 2 KB 164 at 178.

[10] Re Impex 2003-05 MLR 115; R v Parton 2009 MLR 370; most recently in Lombard Manx v Spirit of Montpellier above.

[11] 1990 - 92 MLR 398

[12] 2003-05 MLR 531

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