Judgment was handed down in the High Court this morning, in a case where recognition of a winding-up of a solvent foreign investment fund was granted under the Cross-Border Insolvency Regulations 2006 ("CBIR").
This is the first time that the English Court has examined in detail the UNCITRAL Model Law on insolvency and the interplay with its Guides to Enactment, as well as case law from various jurisdictions concerning its application to solvent scenarios. Mrs Justice Falk found that:
- Recognition under the CBIR was available for entities subject to just and equitable winding-up;
- Insolvency was not a pre-requisite for recognition under the CBIR; and,
- The Court was not required, and should not, conduct a factual assessment of the solvency of a relevant entity as part of a recognition application.
Summary of the facts
Sturgeon Central Asia Balanced Fund Ltd ("Fund"), was a closed-ended investment fund, incorporated in Bermuda. After protracted and contested winding-up proceedings, an order was made for the Fund to be wound up on just and equitable grounds by the Court of Appeal for Bermuda on 23 March 2018. Roy Bailey and Keiran Hutchison of EY were appointed joint provisional liquidators ("JPLs") of the Fund on 22 January 2019.
There is no question that the Fund is solvent. The JPLs made an application for recognition under the CBIR on 25 March 2019.
The issue confronting the court in this case was that the most recent Guide to Enactment to the Model Law (2014) – which is designed to assist its interpretation – provides that:
"...as used in the Model Law, the word "insolvency" refers to various types of collective proceedings commenced with respect to debtors that are in severe financial distress or insolvent... A judicial or administrative proceeding to wind up a solvent entity where the goal is to dissolve the entity and other foreign proceedings not falling within article 2 subparagraph (a) are not insolvency proceedings within the scope of the Model Law. Where a proceeding serves several purposes, including the winding up of a solvent entity, it falls under article 2, subparagraph (a) of the Model Law only if the debtor is insolvent or in severe financial distress."
Decision of Falk J
Falk J was persuaded, despite the terms of the Guide to Enactment and further academic commentary, that the CBIR and case law was clear that recognition was available in instances of just and equitable winding up, being a law relating to insolvency, but that insolvency was not a pre-requisite for recognition. The determinative issue is whether the law of the foreign proceedings relates to insolvency, not whether the entity subject to those proceedings is insolvent.
Falk J also noted that to decide otherwise had the potential to open the court to the requirement that it determine the financial status of a given entity on each recognition application when "it is [...] wholly unclear how financial distress might be determined, or what the threshold is". This would go against the purpose of the CBIR "of allowing recognition on an efficient basis, because of the factual enquiry that would be required".
The decision provides welcome clarification on the question of the applicability of the CBIR to solvent just and equitable liquidations and solvent processes more generally. This judgment will smooth the way for subsequent recognitions of this nature and bring much needed certainty to the cross-border insolvency regime and industry.
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