UK: Cross-border insolvencies: conflict of laws and transfer of proceeds

A recent decision of the High Court has addressed the issue of how an English court deals with the application of English insolvency law where that law is mandatory but is inconsistent with the laws of the country where principal insolvency proceedings are conducted.

In this case, Re HIH Casualty and General Insurance Ltd and other companies (2005) EWHC 2125 (Ch), the joint provisional liquidators, in England, made an application for directions on whether the English court would have the power to direct an English liquidator to remit the proceeds of assets to a foreign liquidator for distribution in the foreign proceedings.

The High Court ruled that where a scheme for distribution in a foreign insolvent liquidation does not afford substantially the same pari passu treatment for unsecured creditors as under English law, an English court has no power to direct a liquidator in the English insolvency proceedings to remit the proceeds of assets to the foreign liquidator for distribution.

The High Court recently ruled that where a scheme for distribution in a foreign insolvent liquidation does not afford substantially the same pari passu treatment for unsecured creditors as under English law, an English court has no power to direct a liquidator in the English insolvency proceedings to remit the proceeds of assets to the foreign liquidator for distribution.

The case, Re HIH Casualty and General Insurance Ltd and other companies (2005) EWHC 2125 (Ch), involved four Australian insurance companies that were also registered as overseas companies in England and Wales. Proceedings for winding up were issued in both jurisdictions; liquidators were appointed in Australia and joint provisional liquidators were appointed in England.

The liquidators of the Australian company and the joint provisional liquidators of the English company agreed that the best way forward would be to promote schemes of arrangement, which would be designed to reflect the method for a distribution of assets if the liquidations in each company were to run their course. This view was challenged by some of the Australian creditors. They argued that the English court would direct the joint provisional liquidators, or the English liquidators in the event of a winding up order being made, to transmit the assets realised by them to the Australian liquidators for distribution in accordance with Australian law.

The joint provisional liquidators, therefore, made an application for directions on whether the English court would have the power to direct an English liquidator to remit the proceeds of assets to a foreign liquidator for distribution in the foreign proceedings.

In Bank of Credit and Commerce International SA (No 10) (1996) 4 All ER 796, where the main liquidation was in Luxembourg and the creditors and debtors would be deprived a right of set-off if obliged to prove their debts in Luxembourg, it was decided that:

1. the English liquidation would be an ancillary liquidation; and
2. the liquidators could be ordered to transmit funds to the principal liquidators (in Luxembourg) to enable a pari passu distribution to worldwide creditors to be achieved.

Nevertheless, the Court ruled that the provisions of English law relating to set-off in liquidation were mandatory and an English Court did not have the power to disapply this substantive rule of the statutory insolvency scheme. Consequently, the English liquidators were ordered to make appropriate provision, before remitting sums to the Luxembourg liquidator, to compensate the creditors that would be prejudiced by set-off being unavailable in the Luxembourg liquidation.

The law relating to the insolvency of insurance entities in Australia prohibits any assets located in Australia from being applied other than to certain Australian liabilities. Consequently, the English court, in the HIH case, decided that it had no power to direct the liquidator to transfer funds for distribution in the principal liquidation, as the scheme for pari passu distribution in that liquidation was not substantially the same as under English law. The court would not direct or authorise the remittance of the proceeds of assets to the Australian liquidators, unless some means could be found of ensuring that those assets could be distributed as if in an English liquidation. If this was not possible, the proceeds would need to be distributed in the English winding up, in accordance with the rules of priority under English insolvency law.

This issue of whether proceeds should be remitted by an English liquidator to a foreign liquidator would not arise in the case of insurance companies authorised to write direct business in the European Union.

Under the Insurers’ Reorganisation and Winding-Up Directive 2001 (the "Directive"), which came into effect in the UK in April 2003, the reorganisation and winding up of insurance undertakings authorised to write direct business can only take place in the member state where that undertaking is authorised. These proceedings then apply automatically throughout the EU, and any reorganisation or winding up of a branch of that company, located in another member state, will also be dealt with under these principal proceedings.

As there will be only one set of proceedings, it would unnecessary for any proceeds of assets to be transferred between jurisdictions.

The HIH case has once again addressed the issue of how an English court deals with the application of English insolvency law where that law is mandatory and is inconsistent with the laws of the country where principal insolvency proceedings are conducted.

Cases of this kind produce a difficult position, as neither English law nor the law of the principal proceedings can prevail without prejudicing some of the parties. With its recent decision, the High Court has confirmed that it is crucial to preserve the overreaching principles of English insurance insolvency law and policy and, to this end, has gone one step further in stating that an English court does not have the power to remit the proceeds to the principal liquidator in circumstances where the insurance insolvency laws of the two jurisdictions are irreconcilable and appropriate provision cannot be made to compensate the creditors.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

The original publication date for this article was 25/10/2005.