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Focus: No special treatment for foreign insolvency recovery judgments in the UK

1 November 2012

In brief: No special rule exists for the enforcement of foreign judgments relating to insolvency proceedings, according to a UK Supreme Court ruling that has important implications for those dealing with the assets of an insolvency in the UK. Partner Michael Quinlan and Law Graduate Dana Beiglari report.

How does it affect you?

  • In New Cap Reinsurance Corporation (In Liquidation) and another (Respondents/Cross Appellants) v A E Grant and others as Members of Lloyd's Syndicate 991 for the 1997 Year of Account and another (Appellants/Cross Respondents)1, the UK Supreme Court held that there should not be special rules for avoidance judgments made by a foreign court.
  • This case indicates that the UK Supreme Court is departing from the principle of universalism2 (previously seen in Rubin, New Cap and Cambridge Gas) that favoured the English courts assisting the courts in the country of the principal insolvency to ensure that all of the company's assets are distributed to creditors under a uniform distribution system.
  • The UNICTRAL Model Law does not refer to the enforcement of foreign judgments against third parties.

Background

These proceedings concern appeals from the decisions in Rubin v Eurofinance SA3 and New Cap Reinsurance Corpn Ltd v Grant4.

In Rubin, a judgment of the US Federal Bankruptcy Court for the Southern District of New York in default of appearance for approximately US$10 million under state and federal law regarding fraudulent conveyances and transfers was enforced in England at common law.

In New Cap, the UK Court of Appeal felt itself bound by the prior decision in Rubin. A default judgment of the New South Wales Supreme Court for approximately US$8 million in respect of unfair preferences under Australian law was enforced by the UK Court of Appeal under the UK Foreign Judgments (Reciprocal Enforcement) Act 1933 (the 1933 Act), and, alternatively, pursuant to powers under section 426 of the UK Insolvency Act 1986.

The decision

The key issues addressed by the UK Supreme Court are whether:

  • the rules at common law or under the 1933 Act regulating foreign courts apply to judgments in avoidance proceedings in insolvency, and, if not, what rules are to apply;
  • in the Rubin appeal, enforcement may be regulated through the assistance provisions of the Cross-Border Insolvency Regulations 2006, or, in the New Cap appeal, s426 of the Insolvency Act;
  • the judgments are enforceable as a result of the submission by the judgment debtors to the jurisdiction of the foreign courts; and
  • in the New Cap appeal, if the judgment is enforceable, whether enforcement is at common law or under the 1933 Act.
No special rule

The UK Supreme Court held that there is no separate rule for enforcement of foreign judgments in personam regarding insolvency proceedings, nor is it necessary or appropriate for the judiciary to establish a separate rule in this context. An in personam judgment is a judgment which, like a judgment for the payment of money in an unfair preference case, imposes a personal obligation on the defendant. It can be contrasted with an in rem action, which affects title or interest in property.

The relevant common law rule is that a foreign judgment in personam is capable of enforcement if the person against whom the judgment was given:

  • was present in the foreign country at the time the proceedings were instituted;
  • was claimant or counterclaimant in the proceedings in the foreign court;
  • submitted to the jurisdiction of the foreign court by voluntarily appearing in the proceedings; or
  • agreed to submit to the jurisdiction of the foreign court, prior to the commencement of the proceedings.

By refusing to adopt a more liberal rule for avoidance judgments, the Supreme Court departed from the principle of universalism that favoured the English courts providing assistance to the courts in the country of the principal insolvency to ensure that all of the company's assets are distributed to creditors under a single system of distribution.

Submission to jurisdiction of foreign courts

In New Cap, Lord Collins noted that the Syndicate objected to the jurisdiction of the Australian court and that Justice Barrett accepted that, as a result, the judgment of the Australian court would not be enforceable in England. Nevertheless, Lord Collins considered whether the steps taken by the Syndicate in the liquidation (namely, the Syndicate's submission of a proof of debt claim and its participation in some creditors' meetings) constituted a submission for the purposes of the rules relating to foreign judgments.

In considering this question, his Lordship relied on a 19th century English decision, Ex parte Robertson, In re Morton5. The court, in Ex parte Robertson, found that orders may be made against a foreign creditor who lodges a proof of debt claim in an English liquidation on the basis that, by making the claim, the foreign creditor submits to the jurisdiction of the English court. Drawing on this authority, Lord Collins held that the Syndicate's participation in the liquidation amounted to a submission to the jurisdiction of the Australian court such that the judgment is enforceable in England.

The English court simply noted that Justice Barrett did not deal with the question of whether the lodgment of a proof of debt in the liquidation and voting at a creditors' meeting could amount to a submission to jurisdiction and then relied on Ex parte Robertson to find that those facts amounted to a submission. Ex parte Robertson has never been referred to in any Australian decision, so whether an Australian court would follow it is a matter of conjecture. It was not referred to in Justice Barrett's judgment in New Cap, which dealt with the question of submission to the court by reference to more conventional steps – such as the absence of the filing of a Notice of Appearance – and did not deal with the question of submission to the jurisdiction by reference to the Syndicate's participation in the liquidation by way of proof.

Regarding Rubin, Lord Collins held that as the appellants did not appear in the adversary proceedings and, as it was not argued that Eurofinance SA had submitted to the jurisdiction of the US Bankruptcy Court in any other way, the judgment is not enforceable in England. Lord Clarke dissented on this point, arguing that avoidance orders made by a foreign court in bankruptcy proceedings were enforceable if it could fairly be said to have been made in personam or in rem.

Application of UNICTRAL and the Insolvency Act

In deciding whether the court has power to grant relief enforcing the relevant parts of the judgment in Rubin under the Cross-Border Insolvency Regulations 2006, their Lordships held that the UNICTRAL Model Law does not refer to the enforcement of foreign judgments against third parties. Similarly, the majority concluded that s426 of the Insolvency Act was not concerned with the enforcement of foreign judgments.

Conclusion

Although this case demonstrates the UK Supreme Court's view of the importance of territorial limits of foreign jurisdiction in the context of insolvency proceedings, it suggests that the UK Supreme Court is retreating from its previous embrace of universalism in insolvency matters and suggests that any changes to the law in this area in the UK should be made by the legislature rather than by judges.

Footnotes
  1. [2012] UKSC 46
  2. For a discussion on universalism and other historical approaches to cross-border insolvency, see Cross border developments in Australia – an update.
  3. [2010] EWCA Civ 895.
  4. [2011] ECW Civ 971.
  5. (1875) LR 20 Eq 733.

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