UK: Airline Insolvency

Flightline commenced an action for damages against SwissAir in January 2002 obtaining a freezing order on 16 January 2002 which was discharged on payment by SwissAir of £4,260,747.06 into an escrow account in the names of the parties’ solicitors. SwissAir undertook that it would not withdraw or in any way dispose of or deal with any of its interest in the monies in the account up to a limit of £3.325 million pending an order of the court or written consent of both parties’ solicitors.

On 4 April 2002, provisional liquidators were appointed to SwissAir. Flightline sought the court’s permission under Section 130(2) of the Insolvency Act 1986 to continue its damages claim against SwissAir. The application was opposed by the provisional liquidators who argued that the sums in the escrow account were SwissAir’s property and should be remitted to the provisional liquidators.

As a matter of general law, a freezing order does not confer any proprietary rights on the claimant. The claimant remains unsecured. On liquidation the injunction is discharged and the insolvent company’s property is passed to the liquidator to be realised and distributed to unsecured creditors rateably.

The authorities are clear that if monies were paid into court either as a result of conditional leave to defend or as a Part 36 Offer, then those monies were effectively security for the claim whether or not the money was paid in involuntarily or voluntarily. If monies were paid into an escrow account in lieu of payment into court, then the money in that escrow account would have the same status as if it had been paid into court.

However, since a freezing injunction would not give a creditor a proprietary interest in the company’s assets, could the payment of cash to discharge the injunction give rise to a proprietary right in those funds? The judge decided that it could. The key conditions which must be met were (i) the funds had to be under the control of the court such that they could not be paid away without a court order or with the parties’ agreement and (ii) there were proceedings on foot.

In the event that a claimant agrees to the discharge of a freezing injunction on payment of funds into an escrow account held by solicitors, the terms of the agreement must be clear so that the funds are held pending the determination of the claim by the court or the agreement of the parties and that the funds can not be utilised, charged or otherwise dealt with by the defendant pending that determination. If such restrictions are put in place, then the creditor should be secured in the event of the defendant’s liquidation and can pursue his claim to judgment regardless of the defendant’s insolvency. The same principles would also apply in an administration.