Key points
- The Credit Institutions (Reorganisation and Winding up) Regulations 2004 were to be construed to ensure forum shopping was not encouraged;
- The extinguishing of a claim in Icelandic insolvency proceedings relating to one entity (Landsbanki) did not affect the ability to assert a right to set off that same claim in Scottish insolvency proceedings (Heritable).
The facts
Landsbanki Islands hf, and Icelandic bank, was the parent company of a Scottish bank Heritable Bank plc. Both were subject to national regulations implementing Directive 2001/24/EC of 4 April 2001 on the reorganisation and winding up of credit institutions (the "Directive"), which applies to EU Member States and non-EU countries in the EEA, including Iceland. The Directive was implemented in the UK by The Credit Institutions (Reorganisation and Winding up) Regulations 2004 (the "Regulations").
Landsbanki is an EEA credit institution for the purpose of Part 2 of the Regulations. Heritable is a UK credit institution for the purposes of Parts 3 and 4. Regulation 5 in Part 2 of the Regulations provides in essence that an EEA insolvency measure has effect in the UK in relation to the branches of an EEA credit institution, its property and assets, and its debts and liabilities, as if it were part of the general law of insolvency of the UK.
The Winding-Up Board of Landsbanki had submitted claims in the administration of Heritable. The administrators of Heritable submitted claims in the Landsbanki winding up. In the Heritable administration, one of Landsbanki's claims was rejected by the administrators, applying the principles of insolvency set off. However, in the Landsbanki winding up in Iceland, the Winding-Up Board of Landsbanki rejected the Heritable claims against Landsbanki and under the Icelandic regime these claims could not be pursued at all for the purposes of the Icelandic proceedings concerning the estate of Landsbanki.
The Winding-Up Board of Landsbanki brought the appeal in the Supreme Court against the rejection of their claim in the administration of Heritable. They argued that the decision rejecting the Heritable claims for all purposes in the Icelandic insolvency proceedings had effect and was binding in the United Kingdom – and so binding for all purposes of the administration of Heritable thus destroying the ability to assert a set off of such claim - under Regulation 5 of the Credit Institutions (Reorganisation and Winding Up) Regulations 2004/1045.
Simply put Landsbanki argues that Icelandic insolvency law nullified the Heritable claim, regulation 5 applied Icelandic law to the administration of Heritable and therefore no set off could properly be made involving the Heritable claim. Heritable argued that even if its claim could not be pursued in the Icelandic proceedings regulation 5 did not prevent it from being asserted in the administration of the Heritable estate under the relevant insolvency rules.
Decision
The issue was whether Heritable's claims, extinguished as a matter of Icelandic law, were to be treated as extinguished in Heritable's administration so that Heritable's administrators cannot use them to set off Landsbanki's claim. Did Icelandic law bind the administrators of Heritable?
The Supreme Court accepted that the common law in this case had to give way to the provisions of the Directive as implemented by the Regulations. The proper construction of the Regulations and in particular regulation 5 would determine the answer to the question whether the administrators of Heritable were bound by Icelandic law in this respect.
The Supreme Court held that the provisions of regulation 5 were concerned only with the winding up in Iceland in relation to Landsbanki and it is only for that purpose that the winding up is to have effect as if it were part of the general law of insolvency in the UK. In consequence regulation 5 was effective, among other things, to ensure that Landsbanki's property or assets located in Scotland were not disposed of in accordance with Scots law, and that steps by a creditor to enforce a claim against Landsbanki were to be pursued solely in the proceedings in Iceland. Furthermore, regulation 5 would ensure for the purposes of the winding up of Landsbanki, that decisions taken by the winding-up board were to be given effect in Scotland. That construction of the regulations was sufficient to maintain the integrity of the Icelandic proceedings in relation to Landsbanki.
The provisions of regulation 5 did not apply the relevant Icelandic insolvency laws – that excluded Heritable's claim in the Icelandic proceedings relating to Landsbanki - to the administration of Heritable in Scotland. The Supreme Court went on to hold that Parts 3 and 4 of the Regulations provided that the general law of insolvency has effect in relation to UK credit institutions and that matters such as the conditions under which set-off may be invoked and the rules governing, among other things, the admission and ranking of claims are to be determined in accordance with the general law of insolvency of the UK. These provisions when properly construed preserved the right of creditors to demand the set-off of their claims against the claims of the insolvent credit institution, where set-off is permitted by the law applicable to the credit institution's claim. Issues of set-off in relation to the Heritable claim were therefore to be determined as the common law of Scotland required, according to the proper law of the contract which was English law.
Comment
The decision reached by the Supreme Court resolves a clear inconsistency in the insolvency regime which is applicable to credit institutions under the Directive. One of the factors taken into account by their Lordships in arriving at their decision was that the effect of Landsbanki's argument, if successful, would have been to give universal priority to the process in which a decision happened to be made first. That would encourage forum shopping, especially where there was a prospect of inconsistent findings as to the validity of a claim in different states. The Supreme Court found it hard to believe that this was intended by the framers of the Directive. In an era where credit institutions are now much more likely to enter insolvency proceedings the complications and additional expense which forum shopping could bring to a resolution of such proceedings was to be avoided.
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