Isle of Man: Isle Of Man Court Clarifies International Insolvency Law

Last Updated: 18 February 2008

The Isle of Man recently played its part in concluding a long running case in respect of an insolvent group of companies. In doing so the Manx Court (in the guise of the Privy Council) has rendered a landmark decision in the field of cross border insolvency.

In its judgment of 16 May 2006, relating to an appeal by Cambridge Gas Transport Corporation ("Cambridge"), the Privy Council set out the boundaries by which courts can give common law assistance in insolvency situations at the request of a foreign court.

The Privy Council judgment arose out of Chapter 11 proceedings originally commenced in January 2004 in the US Bankruptcy Court Southern District of New York (the "US Court") by the Manx incorporated Navigator Holdings plc and its six subsidiaries (the "debtor companies"). The debtor companies, which owned and operated five semirefrigerated gas tankers, were heavily insolvent with combined debts of over US$300m. The majority of the debtor companies' creditors were located in the US.

Chapter 11 of the US Bankruptcy Code allows insolvent companies a period of protection in which they may seek to negotiate a plan for reorganisation with their creditors. The debtor companies proposed a plan whereby their assets would be sold to an associated entity. This proposal was unacceptable to the majority of creditors who, through a committee appointed to represent their interests, applied successfully for the right to submit their own plan. The plan proposed by the creditors' committee was to transfer the ownership of the debtor companies to the principal creditors in satisfaction of the debts due to them.

After a process in which interested parties were given the opportunity to vote upon the competing plans, on the 17th March 2004 the US Court ordered the implementation of the creditors' committee's plan (the "US Court's Order").

Under the US re-organisation the shares in the immediate parent company, Navigator Holdings plc, were to be transferred to certain interim shareholders to be held on behalf of the principal creditors. This would enable the creditors to control Navigator Holdings plc and hence the other debtor companies. To achieve this the US Court issued a Letter of Request seeking the assistance of the Manx Court in transferring the shares in question.

Proceedings to pursue the transfer of the shares on behalf of the creditors commenced on the Isle of Man on 24th March 2004. The Isle of Man has no statute, nor is it party to any convention, which would have allowed the Manx Court to implement the US Court Order and the creditors' plan for reorganisation. The creditors' committee submitted that the Manx Court had a common law jurisdiction to recognise the US Court's Order and grant the relief sought.

Cambridge, the owner of the majority of the shares in Navigator Holdings, objected to the share-transfer arguing that the US Court had no jurisdiction to make orders relating to the ownership of the shares in Navigator Holdings plc. At first instance the Manx Court found that the US Court's Order was a judgment in rem purporting to change the title to property outside the jurisdiction. The general rules of private international law provide that judgments can only affect property within a court's own territorial jurisdiction. Applying such principles the judge at first instance concluded that the US Court's Order could not, therefore, be recognised so as to require the shares in Navigator Holdings to be transferred pursuant to the Letter of Request.

The Manx Appeal Court (the Staff of Government Division) however held that the US Court's Order was a judgment in personam and as such the Manx Court did have the ability to accede to the request from the US Court to order the transfer of the shares and hence assist in the re-organisation of the Navigator Companies for the benefit of the creditors. It was this decision that was the subject of the appeal by Cambridge to the Privy Council.

Cambridge founded its appeal to the Privy Council on the argument that the US Court's Order should not be recognised as the same was either in rem, in which case it could not affect the title to shares in the Isle of Man, or if in personam it did not bind Cambridge as it had never submitted to the jurisdiction of the US Court.

In its judgment, delivered by Lord Hoffman, the Privy Council held that the US Court's Order did not fall to be treated as either in personam or in rem. Instead the Privy Council stated that bankruptcy and insolvency proceedings constituted a separate category of case to which the usual rules of private international law concerning the recognition and enforcement of judgments do not apply. This was because bankruptcy and insolvency proceedings did not determine or establish the existence of rights, as would be the case in most judgments, rather they provided a mechanism for enforcement against the property of the debtor.

By recognising the US Bankruptcy proceedings, the Privy Council found that the Manx Court was empowered to give assistance in the implementation of the reorganisation. The Privy Council stated that the recognition of the US Court's Order was sufficient to allow the Manx Court to give assistance by ordering the transfer of the shares without the need of having to start separate parallel insolvency proceedings on the Island. The purpose of recognition was to enable the foreign office holder or the creditors to avoid such parallel litigation and to give them "the remedies to which they would have been entitled if the equivalent proceedings had been taken in the domestic forum."

As to te possible limits upon the assistance the court could give, the Law Lords decided that as long as the Manx Court would have had the domestic ability to grant the relief sought in the Letter of Request, assistance could be provided. Under Manx law shares in companies can be transferred or otherwise affected pursuant to a scheme of arrangement, thus the Manx Court had the domestic power to transfer the shares.

The Law Lords considered that it would not be unfair for the US reorganisation to be carried into effect; there being no discretionary reason for withholding such assistance. It followed that it be right to assist in the transfer of the shares to the creditors so as to enable them to re-launch the debtor companies. In reaching its decision the Privy Council has gone some considerable way to clarifying what it described as the "underdeveloped state of the common law" with regard to the circumstances in which courts can assist in the area of international insolvency. It remains to be seen whether practitioners will utilise the Letter of Request/common law route in the future in preference to the instigation of parallel insolvency proceedings.

The successful creditors committee was represented by Dickinson Cruickshank (Isle of Man), Freshfields Bruckhaus Deringer (England), Paul Weiss Rifkind Wharton & Garrison (US) and by Ewan McQuater QC.

Dickinson Cruickshank have been elevated in the rankings of eminent legal directory the Legal 500. The rankings released this week have moved the firm into the 1st tier in Commercial law and Pensions and Insurance work, to join their other top tier rankings which include Dispute Resolution, Private Client, Trusts and Tax and Commercial Property Dickinson Cruickshank have been elevated in the rankings of eminent legal directory the Legal 500. The rankings released this week have moved the firm into the 1st tier in Commercial law and Pensions and Insurance work, to join their other top tier rankings which include Dispute Resolution, Private Client, Trusts and Tax and Commercial Property, creating a top tier ranking across all disciplines. They are the only Manx law firm to have achieved this all round recognition.

The rankings are composed by the Legal 500, after they have conducted independent research involving interviewing clients and industry peers about the expertise and services provided by firms.

As the directory research is independent, clients can be assured that the rankings are objectively written, and reviewed and amended on an annual basis. The Dispute Resolution team were described as showing 'commitment and ability' with partners Paul Morris, Robert Long and Christopher Cope all recommended in their field.

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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