article
Letter from America
17 November 2008
On 9th April 2008 the House of Lords handed down its
decision in the case of McGrath and another and others v Riddell
and others. What started out as a request for directions to the
court ended up as a major legal journey to the House of Lords to
test out the meaning and extent of section 426(4) of the Insolvency
Act 1986 and to ascertain as to whether remission to a foreign
jurisdiction was permissible even if a group of creditors may on
the face of it be prejudiced.
The case concerned the company HIH Casualty
and General Insurance Limited (“HIH”). This was an Australian
company which was also registered in England as a foreign company.
HIH operated both in the primary and re-insurance market. The
majority of the company’s assets and liabilities were in Australia,
with 20% of the assets being held in the UK.
The HIH group failed in 2001 and this company
was placed into Provisional Liquidation in Australia on
15th March 2001. On 16th March 2001 the High
Court in England also appointed Provisional Liquidators. HIH was
placed into liquidation.
In 2005 the liquidator in Australia decided to
seek the intervention of the courts of England and Wales. The
reason for this was due to the fact that the rules on distribution
in England and Australia were different. In Australia there is
different treatment depending on type of claim (insurance or
non-insurance). In addition, preferential treatment can be given on
the basis of location, for instance, whether the liabilities are in
Australia or elsewhere.
Section 116(3) of the Insurance Act 1973 in
Australia states:
“In the winding up of a general insurer,
the insurer’s assets in Australia must not be applied in the
discharge of its liabilities other than its liabilities in
Australia unless it has no liabilities in Australia.”
Therefore under Australian law there is a
clear preference for those creditors with liabilities in Australia
over those who do not. An issue therefore arose as foreign
creditors, primarily British creditors, would be adversely affected
if the distribution was conducted in accordance with Australian
law.
A letter of Request was sent by the Supreme
Court of New South Wales to the High Court in London asking that
the re-insurance monies being held in London by the provisional
liquidators be remitted to the liquidators of the company in
Australia.
The court was required to look at a number of
matters but for the purposes of this article I propose to focus on
the question of whether the assets held in the UK were to be
distributed:
- In Australia in accordance with Australian
priorities
- In England in accordance with Australian priorities.
- In England but in accordance with English priorities.
Section 426 of the Insolvency Act 1986 deals
with the issue and states:
“4. The courts having jurisdiction in
relation to insolvency law in any part of the United Kingdom shall
assist the courts having the corresponding jurisdiction in any
other part of the United Kingdom or any relevant country or
territory.
5. For the purposes of subsection (4) a
request is made... is authority for court to which the request is
made to apply … the insolvency law which is applicable by either
court in relation to comparable matters.”
For the purposes of the Act, Australia is a
relevant country.
The High Court held that the English
provisional liquidators were not to pay any monies over and refused
to extend their powers to enable them to do so. Richards J
said:
“the English Court would not direct or
authorise the Provisional Liquidators to remit the assets collected
by them to the Australian Liquidators, having regard to section
562A of the Corporations Act 2001 and section 116 of the Insurance
Act 1973, unless some means could be found of ensuring those assts
could be distributed as if in an English liquidation.”
The matter proceeded to the Court of Appeal
where the Australian liquidators appeal was dismissed. In the Court
of Appeal the focus was on section 426 and although the court held
that there was discretion to remit it would not do so in this
instance as creditors would be prejudiced.
The matter therefore went up to the House of
Lords where the previous orders were over-ruled and the order
requested was made. However, the reasoning of the various Law Lords
was divided and makes for interesting reading.
The majority of the Law Lords based their
decision on the reliance they were able to place on the power
bestowed on them by section 426 of the Insolvency Act 1986. In
effect English liquidators have to apply the assets pari passu in
accordance with English law principles unless the discretion under
section 426 applies. If the discretion applies the court found that
it could order the remittance of the assets and to a jurisdiction
which applies principles which digress from the English system.
In reaching their conclusion the court
noted:
- Most of the assets and liabilities of the
company were in Australia.
- The management of the company was in Australia.
- It was unlikely that there would be any prejudice by reason of
remitting the matter to Australia even though quite clearly a class
of people would be left worse off.
- Due to the fact that Australia is listed as a relevant country
this would suggest that there is an acceptability of the rules in
Australia.
Lord Hoffman said as follows:
“It would in my opinion make no sense to
confine the power to direct remittal cases in which the foreign law
of distribution coincided with English law”
In effect that would defeat the purpose of
having the legislation in the first place.
Further that in terms of the fact that there
was a discrepancy between English and Australian law:
“As for UK public policy, I cannot see how
it could be prejudiced by the application of Australian law to the
distribution of the English assets.”
In addition:
“In my opinion therefore, this is a case
in which it is appropriate to give the principle of universalism
full rein. There are no grounds of justice or policy which require
this country to insist upon distributing an Australian Company’s
assets according to its own system of priorities only because they
happen to have been situated in this country at the time of the
appointment of the provisional liquidators. I would therefore allow
the appeal and make the order requested by the Australian
court”.
The court also looked as to whether there was
a common law power to order remission. The court split 2:2. Both
Lord Hoffmann and Lord Walker held that there was with Lord Scott
and Lord Neuberger taking an opposing view. Lord Phillips offered
no opinion.
So why is this case important? There are a
number of reasons why this case is important going forward. It has
been argued that with The Cross Border Insolvency Regulations 2006
it will be made easier for office holders to ask for the assistance
of the English Courts.
However one has to look at the reasoning of
the court to see where that assistance might be requested.
If a country is covered by section 426 it
would appear that an application can be made and provided there is
no manifest injustice is ordering the remittal then an order may be
made even if that jurisdiction’s insolvency provisions vary from
those in the UK.
However if a country is not covered by section
426 it would appear that the court can only make such an order
where there is no infringement of the principles of English law,
although in view of the court’s split on this there is no
definitive opinion.
The decision may well have wider implications.
In effect the decision may well achieve much of what UNICITRAL and
EC Regulation on Insolvency Proceedings seek to achieve.
There may also be further implications in the
current economic climate for those in the insurance industry. For
instance if one deals with either a foreign insurer or re-insurer
in the event that the business becomes insolvent there is always
the danger that the company will be wound up in accordance with the
rules of a foreign jurisdiction.
Conclusion
The House of Lords Judgment means that if any
further cases come before the court there exists a wide power to
order remission. There also appears to be a great degree of
flexibility in dealing with such matters. Even if a group of people
may well be worse off if remission is ordered that would not
necessarily preclude an order from being made.
The fact that there has been no definitive
decision on the common law point means that this there is
uncertainty and goes against the modern day principle that there
ought to be a single, universal regime dealing with such
matters.
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