Mr Justice David Richards:
- The applications in this case raise an important point of principle in the conduct of cross-border insolvencies. Where a foreign company is in liquidation both in its country of incorporation and in England, and there are material differences in the basis of distribution of assets among unsecured creditors under the laws of the two countries, does the English court have power to direct the English liquidator to remit the proceeds of assets to the foreign liquidator for distribution by him in accordance with the law of that country?
- The applications are made in relation to four companies incorporated in Australia (the Companies). They are all companies within the HIH group, which was the second largest insurance group in Australia until its collapse in March 2001. The Companies at various times conducted business in England as well as in Australia and elsewhere. Three of the Companies were registered in England and Wales as overseas companies under the Companies Act 1985 and were authorised under the Insurance Companies Act 1982 to carry on insurance business in the United Kingdom.
- The Companies have been ordered to be wound up by the Supreme Court of New South Wales (the Australian Court). Winding-up petitions against the Companies have been presented to the High Court in England (the English Court) and joint provisional liquidators (the JPLs) have been appointed by the English Court.
- The Companies are insolvent and it is common ground that the most satisfactory way forward for the Companies and their creditors is to promote schemes of arrangement under section 411 of the Corporations Act 2001 in Australia and section 425 of the Companies Act 1985 in England. The schemes would be designed to reflect the priorities applicable to the distribution of assets among creditors if the liquidations were to run their ordinary course. On the basis of legal advice, the Australian liquidators and the JPLs considered that, in light of the differences in the legal bases of distribution in the two countries, the schemes would have to reflect those differences in the distribution of assets realised in the Australian liquidations and in the distribution of assets realised in England. There would in effect be a separate fund comprising the English assets which would be distributed in accordance with English insolvency law.
- This view has been challenged by some creditors in Australia. They argue that the English Court would direct the JPLs, and the English liquidators in the event of a winding-up order, to transmit the assets realised by them to the Australian liquidators for distribution in accordance with Australian law. Both the Australian liquidators and the JPLs consider that this issue needs to be determined and on 14 June 2005 the Australian liquidators demanded payment to them of sums realised by the JPLs after deduction of costs and expenses. This has led to the two applications which are now before this court.
- On 25 June 2005 the JPLs issued applications for directions in respect of each company. The directions sought are as follows:
1. Whether, in the event of a winding-up order being made on the petition presented against the Company on 16 July 2001 and, having regard to the operation and application of section 562A of the Australian Corporations Act 2001 (section 562A) and section 116 of the Australian Insurance Act 1973 (section 116), the liquidators appointed in England (the English Liquidators) would be directed, authorised or otherwise obliged to:
(a) remit to the liquidators appointed by the Supreme Court of New South Wales (the Australian Liquidators), all or any of the assets got in, or to be got in, by the English Liquidators (the Company's English Assets); or
(b) distribute the Company's English Assets within the liquidation in England in a manner that would give effect to the operation and application of section 562A and section 116; or
(c) distribute the Company's English Assets within the liquidation in England in accordance with the Insolvency Act 1986, and in making such distributions require any dividends received by creditors from other sources, including distributions made in the Company's Australian winding-up, to be brought into hotchpot.
2. Whether the English provisional liquidators may, in light of the conclusions reached in response to Direction Question 1, cause the Company to propose a Scheme of Arrangement pursuant to section 425 of the Companies Act 1985 having the effect of providing for:
(a) distribution of the Company's English Assets under the Insolvency Act, applying the principle of hotchpot (in substantially the form of the draft scheme of arrangement attached); or
(b) in the alternative, distribution of the Company's English Assets in a manner that would give effect to the operation and application of section 562A and section 116 to the Company's English Assets (including the possibility of specific priority for individual creditor claims as a result of any section 562A(4) orders by the Australian Court).
3. Whether any Scheme of Arrangement proposed pursuant to section 425 of the Companies Act 1985 having the effect set out in Direction Question 2(b) above, would require division of the creditors into more than one class for voting purposes.
- The other applications now before the court were issued by the Australian liquidators on 4 July 2005 under section 426 of the Insolvency Act 1986 and, pursuant to a letter of request from the Australian Court to the English Court, seeks determination of the following questions:
(a) Whether the [JPLs] should be directed to pay over to the Australian Liquidators all sums collected, or to be collected, by them in their capacity as the [JPLs], after paying or providing for all proper costs, charges and expenses of the [JPLs], pursuant to the demand of the Australian Liquidators dated 14 June 2005, so that such sums may be applied in the due course of the winding up of the [Companies] under the provisions of the [Corporations Act] or in accordance with a scheme of arrangement, if such scheme is sanctioned by the [Australian Court] under s. 411 of the [Corporations Act] and/or by the [English Court] under s. 425 of the [CA 1985]; and
(b) Whether the powers of the [JPLs] as set out in the order of [the English Court] dated 14 September 2001 should be extended and amended so as to enable them to pay over to the Australian Liquidators all sums collected, or to be collected, by them in their capacity as [JPLs], after paying or providing for all proper costs, charges and expenses of the [JPLs].
If those questions are answered affirmatively, the application also seeks, pursuant to the letter of request, a direction to the JPLs to pay the funds collected by them to the Australian liquidators and an order extending and amending the JPLs' powers to enable them to do so. However, the Australian liquidators do not seek an order and direction in these terms at this stage, but request only the determination of the above issues.
- The JPLs and the Australian liquidators have been represented on these applications. The JPLs have made submissions in order to protect the position of those creditors who would be prejudiced by a distribution of assets realised by the JPLs in accordance with Australian insolvency laws, while the Australian liquidators' submissions are directed in favour of payment to them of the relevant funds, thereby protecting the position of the creditors who would accordingly benefit. Amaca Pty Limited and Amaba Pty Limited (together Amaca) are respondents to the applications. They are Australian companies which are or claim to be creditors of HIH Casualty and General Insurance Limited. They have been represented and made submissions in support of the Australian liquidators' position. I have also received written submissions from two other Australian parties claiming to be creditors, to which I refer later in this judgment.
- The HIH Group comprised 274 companies which carried on business in many countries, including Australia, England and the United States. The holding company is HIH Insurance Limited.
- The Companies to which these applications relate are HIH Casualty and General Insurance Limited (HIH C&G), FAI General Insurance Company Limited (FAIG), World Marine & General Insurances Pty Limited (WMG) and FAI Insurances Limited (FAII). All are incorporated in Australia and the primary operations of each of them was located in Australia. HIH C&G is registered in England as an overseas company, and FAIG and FAII were so registered until 1993 and 1999 respectively. HIH C&G, FAIG and FAII were authorised to carry on insurance business in the United Kingdom under the Insurance Companies Act 1982.
- A brief summary of the business of the Companies in England is as follows:
(a) HIH C&G wrote a mixed book of marine and non-marine insurance and reinsurance between 1993 and 1999. The major classes of business were liability pro rata, liability excess of loss, property, political risk and trade credit, film finance and accident excess of loss. It operated a branch office in the United Kingdom based at 85 Gracechurch Street, London and was an active participant in the London insurance and reinsurance markets. It has a significant number of UK-based creditors who dealt with it through its London office, which are for the most part insurance and reinsurance companies and other commercial concerns. A substantial majority in value of its outstanding liabilities contracted in London relate to reinsurance.
(b) FAIG wrote only a limited amount of insurance business in the United Kingdom and mainly wrote reinsurance business. Many of the reinsureds are companies registered in and/or operating from England and Wales. The reinsurance agreements, in large part, have clauses which provide for disputes to be resolved by arbitration in London.
(c) WMG wrote a substantial amount of business in the United Kingdom through the BD Cooke Underwriting Pool during the period 1951 to 1958. Its business is managed by managing agents in England who hold money and collect reinsurance recoveries on its behalf. The business written was primarily casualty business covering asbestos, pollution and health hazard risks. The majority of creditors are large corporations and insurance and reinsurance companies.
(d) FAII wrote primarily casualty risks for policyholders in the United States through the ME Rutty Pool between 1962 and 1966 and also participated in the IAIA Underwriting Pool. The majority of creditors are large corporations and insurance and reinsurance companies.
- While a substantial majority of the assets and liabilities of the Companies are located in Australia, there are significant assets and liabilities in England. On the basis of estimates as at 31 March 2005, the approximate figures (in Aus $ millions) are as follows:
It should be noted that these figures include various assumptions and adjustments and are not put forward by the Australian Liquidators and the JPLs as a basis for estimating actual or likely distributions.
- The HIH Group ran into serious financial difficulties at the beginning of 2001. The boards of directors of 17 key companies in the Group, including the Companies, applied to the Australian Court for winding-up orders on 15 March 2001, and sought the immediate appointment of provisional liquidators. The Australian liquidators were appointed as provisional liquidators.
- On 16 March 2001, the Australian liquidators, in their capacity as joint provisional liquidators of HIH C&G, made an application to the Australian Court for the issue of a letter of request to the English Court. The relief sought in the letter of request included the appointment in England of provisional liquidators over HIH C&G pursuant to the petitions presented against HIH C&G in Australia and section 426 of the English Insolvency Act 1986. The letter of request was issued and, on an application to the English Court, the JPLs were appointed as the joint provisional liquidators of HIH C&G on 16 March 2001. The same steps were taken by the Australian and English Courts in respect of FAIG on 23 March 2001 and in respect of FAII and WMG on 10 April 2001.
- On 16 July 2001, HIH Systems International Limited, a member of the HIH Group and a creditor of each of the Companies, was granted leave by the English Court to present winding-up petitions against them. The petitions were presented on 24 July 2001. The JPLs supported this action for a number of reasons, which included the protection of creditors in the light of the different distribution regimes in England and Australia. It was envisaged that the Companies would remain in provisional liquidation and that winding-up orders would not be made while schemes of arrangement were developed and put to creditors. If approved by creditors and the court, such schemes would obviate the need for winding-up orders. This has become a conventional approach as regards insolvent insurance companies: see New Cap Reinsurance Corp Ltd v HIH Casualty & General Insurance Ltd  2 BCLC 228 at para 11 (per Jonathan Parker LJ).
- On 27 August 2001, the Australian Court made winding-up orders in respect of the companies previously in provisional liquidation and appointed the Australian liquidators as liquidators of the companies. The Australian liquidators considered that there would be a number of legal and commercial advantages to winding-up orders being made in Australia rather than keeping the relevant companies in provisional liquidation.
- On 10 September 2001, the Australian Court issued further letters of request to the English Court for the appointment of provisional liquidators in the four English petitions (the JPLs having previously been appointed pursuant solely to the letters of request from the Australian Court). On 14 September 2001, the English Court appointed the JPLs as the joint provisional liquidators of the Companies under sections 135 and 426 of the Insolvency Act 1986 and discharged the previous orders appointing the JPLs.
- The JPLs have broad powers under the orders appointing them. In particular, the JPLs have the power to get in the assets of the Companies and to propose schemes of arrangement. The orders include the following provisions:
"The Joint Provisional Liquidators shall have the following powers:
(a) to ascertain and to take possession of, collect and get in all property and assets (of whatever nature) to which the Company is or appears to be entitled, including the books and records of the Company;
(h) to consider, and if thought to be in the interests of the creditors and the shareholders of the Company, to draft with a view to implementing, a scheme of arrangement to be entered into between the Company and its creditors."
- There is no provision in the orders directing or authorising the JPLs to distribute assets or to remit assets to Australia.
- In accordance with their powers and duties, the JPLs have sought to collect the assets of the Companies where those assets are in England or relate to the business of the English branch of HIH C&G. Their activities have included the collection of reinsurance and retrocession recoveries and responding to insurance and reinsurance claims made against the Companies.
- In relation to HIH C&G, the JPLs have, to date, collected £18 million of reinsurance and retrocession recoveries and £20 million of other assets. In addition to these recoveries, the JPLs have identified £156 million of ledger balances due from reinsurers and outstanding claims that will become due from reinsurers in due course. However, this figure does not take into account reinsurance assets resulting from IBNR claims (which would increase the balance due) or any set-off or avoidance by reinsurers (which would reduce the amount collected).
The proposed schemes of arrangement
- As already mentioned, the Australian liquidators and the JPLs are proposing schemes of arrangement. The Australian and English schemes proposed in relation to each of the Companies will be interdependent, so that a scheme in one jurisdiction will only become effective if it is approved and sanctioned in the other jurisdiction. Schemes are being proposed in Australia in respect of all eight companies in the HIH Group, including the Companies, that were licensed or formerly licensed insurance companies in Australia.
- The purpose of the schemes as presently drafted is to put in place a global mechanism for collecting assets, agreeing claims and making distributions to creditors of the Companies, on a basis which reflects the relevant legal provisions in Australia and England. The schemes are also designed to take into account the position under US law including the terms of orders under Section 304 of the US Bankruptcy Code, which protect assets of certain of the Companies in the United States and impose restrictions on the removal of assets from the United States. If the schemes were not implemented in relation to the Companies, the JPLs consider that some form of separate administration of the estates of the Companies would be required in Australia and England, whether by way of separate schemes of arrangement covering only those assets within each jurisdiction or by way of separate parallel liquidations. However, the Australian liquidators and JPLs consider that any approach involving separate administrations of the estates would be detrimental to the creditors of the Companies, as this would greatly increase the complexity and cost of administering the estates.
- The schemes for each Company are in largely identical terms. They are run-off schemes, under which each Company continues to agree claims as it would in the normal course of business, allowing its insurance exposures to be determined as and when they develop and become due for payment. The scheme allows the scheme administrators appointed under the scheme to make distributions to those creditors whose claims have been agreed. The schemes also include a mechanism for conversion to an estimation procedure, in order eventually to bring to a close the administrations of the Companies. This would involve each insurance creditor being paid an actuarial estimate of the value of future claims under the policies held by it.
- Applications for leave to convene meetings of creditors to consider the proposed schemes were issued in Australia in December 2004 and in England in February 2005. The English application was adjourned pending final determination of the application in Australia.
- Shortly before the hearings in Australia and England a number of parties made clear their intention to oppose the schemes in Australia. Nine entities claiming to be creditors of one or more of the relevant companies, and the Australian Securities and Investment Commission (ASIC), were given leave to be heard in the Australian proceedings.
- ASIC and the opposing creditors made submissions to the effect that the principles as to the operation of the relevant Australian statutory provisions reflected in the structure of the proposed schemes were incorrect, in two separate respects. First, the schemes as drafted did not properly reflect the operation and effect of section 116 of the Insurance Act 1973 and section 562A of the Corporations Act 2001 in relation to assets in Australia. Secondly, the schemes failed to treat the assets in England appropriately, as it was argued that the Australian priorities under section 562A would apply to these assets if there were concurrent liquidations of the Companies in England and Australia. Therefore, the assets in England should be distributed in accordance with section 562A, notwithstanding the provisions of English insolvency law that would otherwise apply.
- The first of these issues was argued before Barrett J in the Australian Court in March 2005. In his judgment given on 29 March 2005, Barrett J held that the schemes as drafted did not properly reflect the operation and effect of section 116 and section 562A in relation to assets in Australia. He allowed the Australian liquidators to redraft the schemes to reflect his decision.
- In early May 2005 the Australian liquidators submitted the revised schemes to the Australian Court, ASIC and the opposing creditors. They continued to reflect the distribution of assets, collected by the Australian liquidators and by the JPLs, in accordance respectively with the different regimes under Australian and English insolvency law. The Australian liquidators had filed expert evidence on the English legal position in support of this approach. Objections were raised by Amaca, which filed its own expert evidence of the position under English law.
- Rather than invite the Australian Court to rule on the correct principles of English law on the basis of rival expert opinions, the JPLs and the Australian liquidators considered that it would be helpful and appropriate if the questions were submitted for decision by the English Court. This would assist the Australian Court, and would also assist the JPLs in formulating the schemes to be proposed in England. Barrett J agreed and on 3 June 2005 adjourned the applications to enable the JPLs to apply to the English Court for directions.
- The JPLs issued their application for directions on 24 June 2005. The Australian liquidators applied to the Australian Court for letters of request to the English Court which were issued by Barrett J on 4 July 2005. On the same day they issued their application to the English Court under section 426, pursuant to the letters of request.
- There has been a high level of cooperation between the parties and their advisers which has enabled the applications to be heard as soon and as efficiently as possible. I have also been greatly assisted by the evidence, including an expert report on the relevant aspects of Australian insolvency prepared by Mr Raymon Mainbridge, and by the high quality of the written and oral submissions of counsel.
Distribution to unsecured creditors: Australian and English statutory provisions
- A fundamental principle of any rational insolvency law is the distribution of available assets among creditors of the insolvent person on a pari passu basis. Significant differences may however occur between systems, both as to the assets available for particular groups of creditors and the priority given to certain groups of creditors either as to particular assets or as to the assets generally. In particular, insolvency systems may ring-fence the assets of a particular business or in a particular country for the creditors of that business or in that country. Within any particular group of creditors, a pari passu distribution may be expected to be the norm.
- Australian and English insolvency law, which share a common root, accord a central place to the pari passu distribution of assets among unsecured creditors. Traditionally, ring-fencing on national grounds has been rejected and all creditors, irrespective of their country or other characteristics, have been entitled to prove in a liquidation and share pari passu in the available assets. This applies as much to the liquidation of foreign companies as to the liquidation of an English or Australian company. In Re Azoff-Don Commercial Bank  Ch 315, a winding-up order was made precisely in order that foreign, as well as domestic, creditors could participate in the distribution of available assets. Wynn-Parry J rejected the Crown's submission that no order should be made so that the Crown could distribute the assets as bona vacantia among English creditors, describing the proposal as having no merit.
- Both systems have allowed for very limited classes of debts to be paid out of the available assets in priority to the general body of unsecured debts. In England these are now restricted principally to certain categories of employment claims: schedule 6 to the Insolvency Act 1986. Until section 251 of the Enterprise Act 2002 came into force, there were also significant categories of Crown debts in respect of tax and national insurance contributions. Likewise, under Australian law, priority is given to certain employment claims: section 556(1)(e)-(h) of the Corporations Act 2001. Crown preferences had been abolished in 1992.
- Liabilities may also be deferred. Under English law, a debt due to a person in his capacity as a shareholder of an insolvent company, such as unpaid dividends, ranks behind the general body of unsecured claims: section 74(2)(f) of the Insolvency Act 1986. The same is true in Australia: section 563A of the Corporation Act 2001.
- Subject to these limited exceptions, the general principle of both Australian and English law applicable to most types of company is that the available assets are to be distributed on a pari passu basis in payment of all debts admitted to proof.
- In Australia, the pari passu rule is now contained in section 555 of the Corporations Act 2001:
"Except as otherwise provided by this Act, all debts and claims proved in a winding up rank equally and, if the property of the company is insufficient to meet them in full, they must be paid proportionately."
- The counterparts in English law are section 107 and 148 of the Insolvency Act 1986 and rule 4.181 of the Insolvency Rules 1986. Section 107 applies to voluntary liquidations and provides:
"Subject to the provisions of this Act as to preferential creditors, the company's property in a voluntary winding up shall on the winding up be applied in satisfaction of the company's liabilities pari passu…"
In a winding-up by the court, section 148(1) requires "the company's assets to be collected, and applied in discharge of its liabilities" and rule 4.181 (1) provides:
"Debts other than preferential debts rank equally between themselves in the winding up and, after the preferential debts, shall be paid in full unless the assets are insufficient for meeting them, in which case they abate in equal proportion between themselves."
- In applying the principles set out above, both systems define provable debts by reference to liabilities, whether present, future, contingent or unascertained, existing at the date of the winding-up order or the winding-up resolution. This is consistent with the basic principle that the purpose of the liquidation of an insolvent company is to discharge the liabilities arising in or from the pre-liquidation activities of the company. Costs and other liabilities incurred in the conduct of the liquidation arise in the course of fulfilling that purpose and are, logically therefore, paid out of the assets ahead of any provable debts, including those with priority status. This does not represent an exception to the principle of pari passu distribution. Both systems also leave out of account assets to the extent that they are the subject of valid charges or other security in favour of creditors. To that extent, such assets are not the property of the insolvent company and the recognition of valid security interests again involves no derogation from the principle of pari passu distribution. I here leave out of account the statutory provisions which create a special regime for floating charges.
Special provisions applicable to insurance companies
- There are two provisions of Australian law relevant to these applications which represent departures from the general pari passu principle in the case of insurance companies.
- Section 116 (3) of the Insurance Act 1973 provides:
"In the winding up of a body corporate authorised under this Act to carry on insurance business, or in the winding up of a supervised body corporate, the assets in Australia of the body corporate shall not be applied in the discharge of its liabilities other than its liabilities in Australia unless it has no liabilities in Australia."
In his judgment delivered on 29 March 2005, reported at  215 ALR 562, Barrett J analysed section 116 as a purely prohibitory provision, although its effect is of course that assets in Australia will be applied first in the discharge of liabilities in Australia. But it is not otherwise concerned with the order of application of assets in Australia nor does the section of itself require that the company's assets in Australia are distributed pari passu in discharge of its liabilities in Australia.
- It is common ground that under Australian law, creditors who receive distributions out of assets in Australia pursuant to section 116 cannot receive further payment out of other assets until the same level of dividend has been has been paid in respect of non-Australian liabilities. This is an application of the equitable doctrine still quaintly known to lawyers in England and Australia as hotchpot. Assuming that realisations in England would not be "assets in Australia" within section 116 if transferred to the Australian liquidators, this means that by itself section 116 could not provide an argument against transfer. The position of creditors with non-Australian liabilities would not be prejudiced.
- The provision which gives rise to the substantial argument in this case is section 562A of the Corporations Act 2001. It provides as follows:
"(1) This section applies where;
a) a company is insured, under a contract of reinsurance entered into before the relevant date, against liability to pay amounts in respect of a relevant contract of insurance or relevant contracts of insurance; and
b) an amount in respect of that liability has been or is received by the company or the liquidator under the contract of reinsurance.
(2) Subject to subsection (4), if the amount received, after deducting expenses of or incidental to getting in that amount, equals or exceeds the total of all the amounts that are payable by the company under relevant contracts of insurance, the liquidator must, out of the amount received and in priority to all payments in respect of the debts mentioned in section 556, pay the amounts that are so payable under those contracts of insurance.
(3) Subject to subsection (4), if subsection (2) does not apply, the liquidator must out of the amount received and in priority to all payments in respect of the debts mentioned in section 556, pay to each person to whom an amount is payable by the company under a relevant contract of insurance an amount calculated in accordance with the formula:
Particular amount owed x Reinsurance payment Total amount owed
"particular amounts owed" means the amount payable to the person under the relevant contract of insurance.
"reinsurance payment" means the amount received under the contract of reinsurance, less any expenses of or incidental to getting in that amount.
"total amounts owed" means the total of all the amounts payable by the company under relevant contracts of insurance.
(4) The Court may, on application by a person to whom an amount is payable under a relevant contract of insurance, make an order to the effect that subsections (2) and (3) do not apply to the amounts received under the contract of reinsurance and that that amount must, instead, be applied by the liquidator in the manner specified in the order, being a manner that the Court considers just and equitable in the circumstances.
(5) The matters that the Court may take into account in considering whether to make an order under subsection (4) include, but are not limited to:
a) whether it is possible to identify particular relevant contracts of insurance as being the contracts in respect of which the contract of reinsurance was entered into; and
b) whether it is possible to identify persons who can be said to have paid extra in order to have particular relevant contracts of insurance protected by reinsurance; and
c) whether particular contracts of insurance include statements to the effect that the contracts are to be protected by reinsurance; and
d) whether a person to whom an amount is payable under a relevant contract of insurance would be severely prejudiced if subsections (2) and (3) applied to the amount received under the contract of reinsurance.
(6) If receipt of a payment under this section only partially discharges a liability to a person, nothing in this section affects the rights of the person in respect of the balance of the liability.
(7) This section has effect despite any agreement to the contrary.
(8) In this section:
"relevant contract of insurance" means a contract of insurance entered into by a company, as insurer, before the relevant date."
- In summary, section 562A provides that the reinsurance recoveries of an insurance company must be distributed to those creditors who have insurance claims against the company, in priority to other claims. It has been held that reinsurance recoveries are to be distributed among all insurance creditors, not merely those whose claims have been reinsured. In addition, subsection (4) provides a mechanism for a particular insurance creditor to obtain an order directing that a particular reinsurance recovery be applied to that creditor, thereby creating a form of super-priority in an appropriate case. It has been held, at least in part by virtue of subsection (6), that the principle of hotchpot does not apply to creditors to whom distributions are made under section 562A.
- Section 562A has no territorial limits as to the contracts of insurance or reinsurance to which it applies. Accordingly, if applied to reinsurance recoveries in England, the section will require the recoveries to be distributed first in payment of the liabilities under all contracts of insurance. All insurance creditors, including those with policies issued in England, would therefore benefit from the application of section 562A, and all other creditors would suffer a detriment. Some indication of the financial impact has been given in the evidence and is summarised later in this judgment.
- The Australian liquidators are bound to give effect to section 562A. Barrett J has held that sub-section (7) would preclude a scheme of arrangement under which they were authorised to distribute reinsurance recoveries in any other manner: see paras 127-133 of his judgment at 215 ALR 562.
- There is an uncertainty as to the construction of section 562A which could have a significant impact. The Court of Appeal of New South Wales has held in Asset Insure Pty Ltd v New Cap Reinsurance Corporation Ltd  NSWCA 225 that "contract of insurance" does not for the purposes of the section include reinsurance contracts and that "contract of reinsurance" does not include retrocession contracts. The High Court of Australia has recently given special leave to appeal against the decision. The benefit of retrocession agreements forms a material part of the assets in England of HIH C&G.
- There is no counterpart to section 562A in English legislation. The right to claim directly against an insolvent company's contracts of insurance conferred by the Third Party (Right Against Insurers) Act 1930 does not apply to contracts of reinsurance: section 1(5). Those rights involve no pooling of insurance recoveries but operate by way of subrogation to enable the injured party to make such claim on the company's insurers as the company itself could make. The counterpart in Australian legislation is section 562 of the Corporations Act 2001, which does not confer a direct right of action but requires the liquidator to pay the insurance recovery to the relevant claimant.
- There are no special provisions in English law applicable to insolvent insurers which would affect the ordinary priority debts and principles of pari passu distribution as regards the Companies. However, Regulations made since the Companies went into provisional liquidation have established a special regime for insurance companies. They do not, however, apply to companies which went into provisional liquidation before 20 April 2003. The relevant regulations are now the Insurers (Reorganisation and Winding up) Regulations 2004 (SI 2004/353), which replaced similar Regulations made in 2003. Both sets of Regulations implemented Directive 2001/17/EC of the European Parliament and of the Council of 19 March 2001 on the reorganisation and winding-up of insurance undertakings. For general insurers, regulation 21(2) provides that the debts of the insurer must be paid in the following order of priority: (a) preferential debts (falling within categories 4 or 5 in schedule 6 to Insolvency Act 1986), (b) insurance debts and (c) all other debts. Insurance debts do not include reinsurance debts. The policy underlying the Regulations is stated in paragraph 13 of the recital to the Directive:
"It is of utmost importance that insured persons, policy-holders, beneficiaries and any injured party having a direct right of action against the insurance undertaking on a claim arising from insurance operations be protected in winding-up proceedings ... In order to achieve this objective Member States should ensure special treatment for insurance creditors according to one of two optional methods provided for in this Directive. Member States may choose between granting insurance claims absolute precedence over any other claim with respect to assets representing the technical provisions or granting insurance claims a special rank which may only be preceded by claims on salaries, social security, taxes and rights in rem over the whole assets of the insurance undertaking."
The United Kingdom has adopted the second of these methods in the Regulations. The priority provisions of the Regulations would apply to HIH C&G if the provisional liquidators had been appointed on or after 20 April 2003, because it was authorised to carry on insurance business in the United Kingdom: regulations 48 and 49.
- It is worth noting that as regards insurers whose head offices are in an EEA state, including the United Kingdom, and which are authorised to carry on insurance business by their home state regulators, the Directive creates a true cross-border insolvency regime and the Regulations amend UK insolvency law to give effect to it. The place of incorporation of the insurer, whether within or outside the EEA, is immaterial. The principal features are that such an insurer may be wound up only in the state of its head office. There can be no winding-up order in the state of a branch office or any other ancillary liquidation. A liquidation or other insolvency measure has effect throughout the EEA in relation to any branch, assets or liabilities. The liquidator or other "insolvency agent" is entitled to exercise throughout the EEA any powers which he may exercise in the head office state, subject to compliance with local procedural rules. The priority given to insurance debts applies in every EEA state in one of the two ways stated in the recital cited above, but many of the other features are determined in accordance with the local insolvency law of the head office state. These are set out in Article 9 of the Directive and include set-off (subject to a special provision in Article 22).
- Special regimes therefore now exist in both Australia and England for the payment of the liabilities of insolvent insurers. The regimes are, however, markedly different. While section 562A pools reinsurance recoveries for distribution among insurance creditors on a pari passu basis, subject to the court's discretion to give priority to particular insurance creditors under sub-section (4), the 2004 Regulations pool all assets for distribution among insurance creditors in priority to other debts and contain no power to give super-priority to particular insurance creditors.
- It is at this stage impossible to give any precise figures as to the impact of the choice of English or Australian insolvency law on the distribution of assets realised in England. The parties have however for present purposes agreed on figures to give at least some indication of the relative impact on different classes of creditors. They are not estimates of actual or likely distribution outcomes and they are subject to various assumptions and adjustments. In particular, they are prepared on the basis that section 562A does not apply to recoveries under retrocession contracts and does not benefit reinsurance creditors. If the High Court of Australia reverses the decision in Asset Insure Pty Ltd v New Cap Reinsurance it will have a material effect on the figures. Out of the total assets of HIH C&G in England amounting to $205 million, retrocession recoveries account for over $115 million. As regards its liabilities in England, claims of direct insurance creditors amount to $142 million and claims of reinsurance creditors total $739 million. With the exception of approximately $1 million of general liabilities of HIH C&G, all the liabilities in England of each of the Companies are either insurance or reinsurance claims.
- On the basis of the present law as regards section 562A, the possible effect on distributions if funds were remitted to the Australian liquidators is as follows in relation to HIH C&G and WMG:
(a) The dividend to direct insurance creditors with liabilities in Australia would increase as follows:
(i) HIH C&G from 26.9 to 28.6 cents in the dollar; and
(ii) WMG from 59.0 to 63.5 cents in the dollar.
This is because they and all other direct insurance creditors would be entitled to receive distributions from reinsurance assets in England to which s562A would apply. If the English reinsurance assets are not remitted to Australia they will be distributed pro rata to all creditors, subject to hotchpot, rather than just to direct insurance creditors;
(b) The dividend to direct insurance creditors with liabilities that are not liabilities in Australia would increase as follows:
(i) HIH & C&G from 21.7 to 25.9 cents in the dollar; and
(ii) WMG from 47.0 to 63.5 cents in the dollar.
This is because those creditors would receive the benefit of the application of the provisions of s562A to the reinsurance assets in England;
(c) The dividend to other creditors (including reinsurance creditors) with liabilities in Australia would reduce as follows:
(i) HIH C&G from 21.7 to 19.2 cents in the dollar; and
(ii) WMG from 47.0 to 42.9 cents in the dollar.
This is because, if the English assets are not remitted to the Australian Liquidators, they will be distributed pro rata to all creditors, subject to hotchpot. However, if these assets are remitted to the Australian Liquidators for distribution, the provisions of s562A will apply to such of the assets which are reinsurance proceeds;
(d) The dividend to other creditors (including reinsurance creditors) with liabilities that are not liabilities in Australia would reduce as follows:
(i) HIH C&G from 21.7 to 18.4 cents in the dollar; and
(ii) WMG from 47.0 to 42.9 cents in the dollar.
This is because, if the assets are not remitted to the Australian Liquidators, these creditors would receive, on a pro rata basis, distributions from all of the assets in England and the United States, including reinsurance and non-reinsurance assets.
If the assets are remitted to the Australian Liquidators, such of the English assets which are reinsurance assets will be distributed pursuant to the provisions of s562A.
- The figures in evidence show that there would be no change as regards distributions to creditors of FAIG and FAII. The principal reason in the case of FAIG is that it has significant assets in the United States to which section 562A has not been applied. As the value of these assets is large relative to the value of non-Australian liabilities, the application of hotchpot to these assets has the effect of cancelling the Australian priorities, so that all creditors receive the same distribution. In the case of FAII, its assets are not thought to include the benefit of any reinsurance contracts to which section 562A would apply. Its assets comprise cash ($1 million) and retrocession contracts ($8.9 million). Section 562A would, however, apply to the retrocession contracts if the decision in Asset Insure Pty Ltd v New Cap Reinsurance is reversed.
- One of the assumptions on which the figures are based is that there is an equal split by value of insurance and reinsurance creditors. However, in the case of liabilities incurred in England by HIH C&G, the proportions are very different. Direct insurance liabilities are $142 million and reinsurance liabilities are $739 million. The effect of remittance of assets to the Australian liquidators and the resulting application of section 562A may therefore result in lower distributions for those reinsurance creditors than is shown by the above figures.
- Against this background the issues which arise for decision are as follows:
1. Does the English Court have power to direct the English liquidator of a foreign company to transfer the assets recovered by him to the liquidator of the company in its principal liquidation (usually in its place of incorporation), where the legal regime applicable to the distribution of those assets among creditors is materially different from the regime which applies in England? If so, would that power be exercised in the circumstances of these Companies?
2. If no transfer is ordered, would the English Court apply the principle of hotchpot as regards the claims of creditors who had received distributions under section 562A in the Australian liquidation?
3. Does it make any difference that the Australian liquidators' applications for directions requiring transfers to them are made under section 426 of the Insolvency Act 1986, pursuant to letters of request from the Australian Court?
4. Does it make any difference, in the case of these applications, that the Companies have not as yet been ordered to be wound up in England but are in provisional liquidation?
- The parties adopt different positions as to the relative importance of these issues. The first issue is raised directly by the JPLs in their applications and they regard it as largely determinative of the treatment of assets to be included in the proposed schemes of arrangement. They point out that in the case of an insolvent company, the rights of creditors against the company are to be determined, for the purposes of a scheme of arrangement which is to take effect in place of a liquidation, by reference to their rights in a liquidation: Re Hawk Insurance Co Ltd  2 BCLC 480.
- The Australian liquidators rely on the fact that the Companies are not in liquidation in England and need never be so. The English Court would have a discretion as to whether to make winding-up orders. Instead of making such orders, the English Court should give effect to the request of the Australian Court for transmission of assets realised by the JPLs to the Australian liquidators. Their applications are framed accordingly. They submit that in a winding-up the English liquidators could and would be directed to transmit the assets to the Australian liquidators, but, even if that is not correct, directions for transmission could be made at this stage without any direct conflict with the English statutory rules for the distribution of assets. These rules are applicable only if and when a winding-up order is made.
- Mr Mortimore QC for the Australian liquidators does, however, accept that the answer to the first issue is highly material to consideration of the other issues. It is appropriate, in my view, to consider it first.
ISSUE 1: TRANSFER OF ASSETS FROM AN ANCILLARY ENGLISH LIQUIDATION TO A PRINCIPAL FOREIGN LIQUIDATION
- There are certain well-established features of English insolvency law which are relevant to a consideration of these issues. First, as already indicated, all creditors throughout the world are entitled to prove in a liquidation, subject only to such claims as are as a matter of general public policy unenforceable in the English courts. Secondly, subject to the special regimes now applicable to insurance and certain other financial services companies, there is no ring-fencing of assets to satisfy the claims of particular groups of creditors. Thirdly, a distribution of assets among the general body of creditors on a pari passu basis, subject only to the special regimes just mentioned and to a very limited class of preferential claims, is a fundamental feature of English insolvency law. Fourthly, the assets of a company in liquidation are held on terms that they are to be applied in accordance with the statutory scheme set out in the insolvency legislation: see Ayerst v C&K (Construction) Ltd  AC 167. In Re Polly Peck International plc  2 BCLC 185 at 201, Mummery LJ said:
"The essential characteristic of the statutory scheme is that the liquidator or administrator is bound to deal with the assets of the company as directed by statute for the benefit of all creditors who come in to prove a valid claim. There is a statutory obligation on the administrators of [the company] to treat the general creditors in a particular way …. If … the asset is the absolute beneficial property of the company there is no general power in the liquidator, the administrators or the court to amend or modify the statutory scheme so as to transfer that asset or to declare it to be held for the benefit of another person. To do that would be to give a preference to another person who enjoys no preference under the statutory scheme."
This principle applies without qualification to the liquidation of an English company. It is its application to the English liquidation of a foreign company which arises in this case.
- The English Court has jurisdiction to wind up foreign companies and, with immaterial exceptions, all the provisions of the insolvency legislation dealing with the winding-up of English companies apply: section 221 of the Insolvency Act 1986. It is well-established that, as a matter of legal theory, the winding-up has universal application. It is equally well recognised that the status and authority of an English liquidator of a foreign company is unlikely to be recognised outside the territorial jurisdiction of the United Kingdom. The reality is therefore that an English liquidator's duty in relation to the collection of assets will be restricted to those assets within the jurisdiction. English case law and practice also recognises that, if the company is in liquidation in its place of incorporation, that will be its principal liquidation and the English liquidation will be ancillary to it. This approach enables the English court to recognise the practical limitations on the reach of English insolvency law, to promote cooperation with the liquidator and courts of the principal liquidation with a view to a coordinated approach to the overall winding up of the company in the interests of creditors and shareholders generally, and to defer, where permissible and appropriate, to the law and courts of the principal liquidation.
- The position of an English liquidation of a foreign company was summarised by Millett J in Re International Tin Council  Ch 419 at 446-447:
"Although a winding up in the country of incorporation will normally be given extra-territorial effect, a winding up elsewhere has only local operation. In the case of a foreign company, therefore, the fact that other countries, in accordance with their own rules of private international law, may not recognise our winding up order or the title of a liquidator appointed by our courts, necessarily imposes practical limitations on the consequences of the order. But in theory the effect of the order is world-wide. The statutory trusts which it brings into operation are imposed on all the company's assets wherever situate, within and beyond the jurisdiction. Where the company is simultaneously being wound up in the country of its incorporation, the English court will naturally seek to avoid unnecessary conflict, and so far as possible to ensure that the English winding up is conducted as ancillary to the principal liquidation. In a proper case, it may authorise the liquidator to refrain from seeking to recover assets situate beyond the jurisdiction, thereby protecting him from any complaint that he has been derelict in his duty. But the statutory trusts extend to such assets, and so does the statutory obligation to collect and realise them and to deal with their proceeds in accordance with the statutory scheme"
- Essentially the submission of the Australian liquidators and Amaca is that, because an English liquidation of the Companies would be ancillary to their principal liquidation in Australia, the English Court would direct the English liquidators to transmit the proceeds of assets realised by them to the Australian liquidators, after deduction only of the costs and expenses of the English liquidation and the debts payable on a preferential basis under English insolvency law. The purpose of the order would be to enable the Australian liquidators to distribute the transmitted funds as part of the overall funds, in accordance with the rules, as to priority and otherwise, applicable under Australian law to the Companies.
- This submission requires an examination of the consequences of an ancillary English liquidation. The nature and characteristics of an ancillary liquidation were analysed by Sir Richard Scott V-C in Re BCCI (No 10)  Ch 213, which is the leading English authority.
Re BCCI (No 10)
- The size and geographic spread of the BCCI group demanded a high level of cross-border cooperation between the courts and liquidators in a number of jurisdictions. The essential background for present purposes was that the holding company of the group was BCCI Holdings (Luxembourg) SA, a company incorporated in Luxembourg, which had two principal operating subsidiaries. Bank of Credit and Commerce International SA (BCCI), also incorporated in Luxembourg, carried on business in a number of jurisdictions but its head office was in London and a substantial part of its business was conducted in or directed from England. The other principal subsidiary was Bank of Credit and Commerce International (Overseas) Limited, which was incorporated in the Cayman Islands. It too carried on business in a number of jurisdictions, but not in England or Luxembourg. BCCI went into liquidation in Luxembourg and England. BCCI Holdings and BCCI Overseas went into liquidation in Luxembourg and the Cayman Islands respectively, but not in England. It was clear from orders of the English Court that the English liquidation of BCCI was intended to be ancillary to the principal liquidation in Luxembourg.
- The liquidators of the companies, with the approval of the courts in their own jurisdictions, had entered into a number of agreements designed to achieve cooperation and coordination. One agreement, the pooling agreement, provided for the pooling of worldwide recoveries with a view to creditors receiving the same level of dividend from the central pool. As BCCI was incorporated in Luxembourg, the liquidation in that country was treated as the principal liquidation of BCCI. The pooling agreement provided that the declaration of dividends to creditors and the admissibility of claims to proof, their quantification and their entitlement to participation in each distribution, was the responsibility of the Luxembourg liquidators acting in accordance with Luxembourg law.
- The pooling and other agreements were approved by Sir Donald Nicholls V-C in 1992. The order recited that it was expedient that the determination of claims by creditors and distributions to them (except for preferential creditors) should be carried out in the Luxembourg liquidation by the Luxembourg court. The order gave the English liquidators liberty to transmit realisation proceeds to the Luxembourg liquidators, subject to retention of funds to cover costs, preferential claims under English law and certain other matters.
- The terms of the pooling agreement provided in principle for the transfer of funds by the English liquidators to the Luxembourg liquidators but also expressly contemplated that it was likely to raise difficult issues, requiring prior resolution by the English Court. Two principal difficulties were raised in the application before Sir Richard Scott V-C. The first related to set-off. English law provides for a self-executing set-off between the debts of a company to a creditor against the debts of the creditor to the company, in respect of pre-liquidation dealings: rule 4.90 of the Insolvency Rules 1986. The provable debt of the creditor is the balance, if any, in his favour after set-off. It is a mandatory provision, designed to produce what English law has considered for a very long time to be a result required by justice: see, for example, Forster v Wilson (1843) 12 M&W 191 at 204 per Parke B. In contrast, Luxembourg law contained no such set-off provisions which it regarded as conflicting with the pari passu principle of distribution. The Luxembourg liquidators would be required by Luxembourg law to claim the full amount of debts owed to the company and to admit to proof the full amount of the debts owed by the company. It could fairly be said that Luxembourg law provided for a purer form of pari passu distribution than English law. There could be no variation because it was regarded in Luxembourg as a matter of public policy. The second principal difficulty arose because there were some claimants whose proofs had been admitted by the English liquidators but would or might be rejected by the Luxembourg liquidators, applying the relevant Luxembourg rules.
- It was submitted by creditors who would lose the benefit of English set-off or the benefit of the admissions of their debts to proof by the English liquidators that any transfer of funds to the Luxembourg liquidators without adequate provision for them would be contrary to the requirements of English insolvency law and that the court had no power to override those requirements. It was recognised that the Luxembourg liquidators would be required to apply Luxembourg law and, accordingly, the proposed solution was that the English liquidators should retain funds by way of provision to protect the relevant creditors. It was submitted by other creditors that the status of the English liquidation of BCCI Limited as ancillary to the principal liquidation in Luxembourg meant that the English Court had power to override the relevant provisions of English law and to direct transfer without requiring any such provisions.
- Sir Richard Scott V-C observed that it was:
"Wholly unclear whether there was any, and if so what, limits to the extent to which English liquidators in a so-called "ancillary" liquidation can decline to apply provisions of English insolvency law and procedure in deference to the insolvency law and procedure of the country in which the principal winding up is taking place."
He held that the courts have no inherent power to disapply the statutory insolvency scheme, but he examined many in the long line of cases concerned with ancillary liquidations and held that, by accretion of judicial decisions, power had become vested in the courts to disapply at discretion some parts of the statutory scheme.
- I will have to return to some of the authorities considered by Sir Richard Scott V-C for the purpose of the particular issue raised in this case, but he said at p.246 C-E:
"This line of authority establishes, in my opinion, at least the following propositions. (1) Where a foreign company is in liquidation in its country of incorporation, a winding up order made in England will normally be regarded as giving rise to a winding up ancillary to that being conducted in the country of incorporation. (2) The winding up in England will be ancillary in the sense that it will not be within the power of the English liquidators to get in and realise all the assets of the company worldwide. They will necessarily have to concentrate on getting in and realising the English assets. (3) Since in order to achieve a pari passu distribution between all the company's creditors it will be necessary for there to be a pooling of the company's assets worldwide and for a dividend to be declared out of the assets comprised in that pool, the winding up in England will be ancillary in the sense, also, that it will be the liquidators in the principal liquidation who will be best placed to declare the dividend and to distribute the assets in the pool accordingly. (4) None the less, the ancillary character of an English winding up does not relieve an English court of the obligation to apply English law, including English insolvency law, to the resolution of any issue arising in the winding up which is brought before the court. It may be, of course, that English conflicts of law rules will lead to the application of some foreign law principle in order to resolve a particular issue."
- The Vice-Chancellor was concerned to establish the limits, if any, to the power of the court to disapply parts of the statutory scheme in the case of ancillary liquidations. He rejected a submission that the court had power to disapply all or any part of the statutory scheme. He concluded at p.247F-248A that:
"The accumulation of judicial endorsements of the concept of ancillary liquidations have, in my judgment, produced a situation in which it has become established that in an "ancillary" liquidation the courts do have power to direct liquidators to transmit funds to the principal liquidators in order to enable a pari passu distribution to worldwide creditors to be achieved. The House of Lords could declare such a direction to be ultra vires. But a first instance judge could not do so and I doubt whether the Court of Appeal could do so.
But the judicial authority which has established the power of the court to give, in general terms, the direction to which I have referred has certainly not established the power of the court to disapply rule 4.90 or any other substantive rule forming part of the statutory scheme under the Act and Rules of 1986. Nor, in my opinion, has this line of judicial authority established the power of the court to relieve English liquidators in an ancillary winding up of the obligation to determine whether proofs of debt submitted to them should be admitted or to see to it, so far as they are able to do so, that creditors whose claims they do admit receive the pari passu dividend to which, under the statutory insolvency scheme, they are entitled."
- I will return to the judgment of the Vice-Chancellor in Re BCCI (No.10) as it affects the issues in this case, but it establishes the following propositions, some of which are founded on the long line of authorities to which the judgment refers, and all of which are uncontroversial on this application:
i) Where a foreign company is being wound up in the jurisdiction of its incorporation, and a winding up order is made in England, the English Court will normally treat the foreign liquidation as the principal liquidation and the English liquidation as ancillary to it.
ii) It is implicit in the concept of an ancillary liquidation that the English Court will generally direct the English liquidator to remit the proceeds of any realisations by him to the principal liquidator, after deduction of the costs of the English liquidation and the amounts needed to pay the debts which under English law have preferential status. It is the precise circumstances in which such a direction will be made that is at issue in this case.
iii) The English Court must apply English law, including English insolvency law, to the resolution of any issue arising in the winding-up which is brought before the court.
iv) The court has no power to disapply any substantive rule forming part of the English statutory insolvency scheme under the Insolvency Act and Rules 1986.
Earlier authorities establish that the ancillary nature of the English liquidation does not make the English liquidator an agent of the principal liquidator. He is an office-holder charged with duties under the English insolvency legislation and he is bound to carry out his duties in accordance with the statutory scheme.
The parties' submissions
- All the parties on this application rely on Sir Richard Scott V-C's judgment. The JPLs submit that this and earlier decisions establish that even in the case of an ancillary liquidation, the English Court is required to apply English substantive and procedural law and has no power to disapply the mandatory provisions of the English statutory insolvency scheme. Thus, while there is power to direct a liquidator to remit assets collected in the English liquidation to the principal liquidator, it cannot be used where the effect of remission would be to disapply the substance of the English rule for pari passu distribution because of the different rules in the principal liquidation. A pari passu distribution among unsecured creditors, subject only to a limited class of preferential claims, is a fundamental and mandatory feature of English insolvency law, representing a clear public policy. They point out that it would be an odd result if the English statutory scheme could not be disapplied as regards the collection of assets and dealing with proofs of debt in an English ancillary liquidation, but could be ignored in relation to the distribution of those assets.
- The Australian liquidators submit that the following propositions are established by Re BCCI (No.10). First, an ancillary English liquidation is limited to the collection and protection of local assets and the settling of the list of local creditors. Secondly, the ultimate objective of an ancillary liquidation is to pay the realisations of assets collected by the English liquidator to the principal foreign liquidator, so that the latter may declare dividends and distribute assets to the worldwide creditors. Thirdly, matters falling within the scope of the ancillary liquidation (viz the collection of assets and settling a list of creditors) will be governed by English law, while matters falling outside its scope will be governed by the law of the principal liquidation. They point out that Sir Richard Scott V-C accepted that Luxembourg law, as the law of the principal liquidation, would govern the distribution of assets.
- They submit that unless it is accepted that the law of the principal liquidation governs matters falling outside the ancillary liquidation, the result is to disregard the principal liquidation. Consistently with this approach, it is the law of the principal liquidation which is to determine the distribution of assets and the English Court is not concerned to see that it conforms to the English rules for distribution before directing funds to be transferred.
- They accept that in his judgment Sir Richard Scott V-C seems to suggest that English law does impose a requirement that the principal liquidation should observe the pari passu principle, but they point out that Luxembourg observed it in a strict form, so that it was not necessary for him to consider any variations from it. The only question for determination by Sir Richard Scott V-C, the Australian liquidators submit, was whether Luxembourg law should govern the collection of assets and the settling of lists of local creditors. He held that these issues, which fell within the scope of the ancillary liquidation, were governed by English law. Commenting on the decision in an article, Cross-Border Insolvency: The Judicial Approach (International Insolvency Review Vol 6 (1997) p.99), Sir Peter Millett wrote:
"It is difficult to see how any other conclusion could have been reached, given the traditional approach of the English courts for an ancillary liquidation; the application of the set-off rules forms part of the process of getting in debts (i.e. the collection of assets) and settling lists of creditors."
- The Australian liquidators and Amaca do not, however, argue that the English Court should have no regard to the distribution rules in the principal liquidation before directing the transfer of funds to it. They do not espouse a principle that the distribution of assets is exclusively a matter for the law of the principal liquidation. Such a principle would conflict with the approach of English law that the statutory insolvency scheme applies to the winding-up of even a foreign company in its entirety, except only to the extent that the English Court may give other directions.
- They accept that the pari passu principle constitutes a fundamental component of English law. They submit that the transfer of assets should ordinarily be authorised where the principal liquidation recognises a pari passu distribution as the underlying principle, notwithstanding the existence of exceptions which may not be identical to the English exceptions. In this context, a number of points are made. First, while generally applying a pari passu principle, many jurisdictions, including England and Australia, provide for exceptions to it. Secondly, those exemptions will represent particular public policy concerns of each jurisdiction. Both England and Australia used to give priority to a wide range of Crown debts. In England, the broad range included in section 319 of the Companies Act 1948 was significantly removed by the Insolvency Act 1986 following the recommendations of the Cork Report in 1982 and finally abolished by the Enterprise Act 2002. Priority continues to be given to a range of employment-related claims. The introduction of the special regimes for insurance and other financial services companies again reflect public policy considerations at a European level.
- The Australian liquidators submit that given that in other systems the categories of preferential debts may be greater or less extensive than in England, and in any case almost certainly different, it cannot be a matter of fundamental public policy to insist that assets cannot be remitted for distribution in the principal liquidation unless its system of distribution is identical to the English system. Rarely, if ever, could such a requirement be met. The effect would be that no transfer would ever be made from an English ancillary liquidation to a principal liquidation.
- The result is, they submit, that it is necessary to take a practical view of the pari passu principle. Remittance should be ordered if ordinary unsecured creditors are treated equally and if those who are so regarded in England are not treated worse in the principal liquidation than others who rank there as ordinary unsecured creditors. It should be no objection that some creditors who form part of the general body of creditors in England would enjoy priority status in the principal liquidation. The position would, however, be different if an ordinary creditor were to be deferred. It is not therefore an objection that the remitted funds may be used to pay expenses of the principal liquidation or to discharge priority debts. They submit that no case suggests that transferred assets should not be available to pay preferential claims in the principal liquidation. The Australian liquidators do, however, accept that the position may well be different if it is clear that the consequence of the remittance will be that those entitled to prove in England will get nothing at all.
- This last qualification is an example of a broad principle submitted by the Australian liquidators that the presumption should be in favour of remission to the principal liquidation provided that its basic principle is pari passu distribution, unless the particular rules of distribution in that liquidation would produce an unjust result. A refusal to direct transfer should be reserved for "the most egregious examples of unfair and discriminatory treatment of creditors and claims".
- Mr Adkins on behalf of Amaca put the principle slightly differently. Subject to two possible qualifications, the English Court should order the transfer of funds to the principal liquidation provided that its rules of distribution broadly correspond to the rules under English law. The formulation of the proviso is intended to permit a reasonable margin of tolerance for the different priorities which different countries will consider necessary as a matter of their own public policy. Mr Adkins described this principle as slightly wider than that advanced by the JPLs that the transfer of funds is permissible only where their distribution will be substantially in accordance with the English statutory scheme and in a manner not prejudicing a particular category of creditors. The two qualifications to the general principle as formulated by Mr Adkins are, first, that transfer would not be ordered if distribution in accordance with the law of the principal liquidation would infringe a principle of English public policy and, secondly, that such distribution would involve a manifest injustice to a creditor.
- Mr Mortimore and Mr Adkins both accepted that a scheme of distribution which gave priority to creditors who were nationals of the country of the principal liquidation would likely be regarded by the English Court as contrary to public policy or producing an unjust result. Mr Adkins submitted that the provisions of section 116 of the Insurance Act 1973 should not be treated in this way, because priority under it as regards Australian assets is not given to Australian nationals but to all creditors, whatever their nationality, whose debts were incurred in Australia. In any event, as it is subject to hotchpot, section 116 is not a major concern on these applications.
- Both Mr Mortimore and Mr Adkins submitted that the provisions of section 562A were neither contrary to English public policy nor produced injustice. It gives effect to a policy decision which is rational and legitimate and which affects a class of creditors and a class of assets, direct insurance creditors and reinsurance recoveries, throughout the world. It involves no discrimination on national or geographical grounds.
- By way of more general submission, Mr Mortimore and Mr Adkins pointed to the need for comity and judicial restraint inherent in the notion of an ancillary liquidation. The priority accorded to particular claims by way of exception to a general pari passu principle is a matter for public policy of the country concerned, for decision by its own legislature. The English Court should not comment on such matters, unless the priorities are grossly unfair or unjustifiably discriminatory. Moreover, the designation of a country as one of the relevant countries for the purposes of section 426 of the Insolvency Act 1986 demonstrates that its insolvency law is acceptable as a matter of English public policy for the purpose of receiving letters of request for assistance by the English courts.
Approach to the submissions
- In considering these submissions, it has to be recognised that some basic principles and policies of insolvency law are in play and, to some extent, in conflict. On the one hand, there is the statutory insolvency scheme which is mandatory in its application to companies in liquidation, whether they are English or foreign, and by which the court is bound. As all are agreed, the fundamental component of that scheme is the distribution of the available assets among the creditors admitted to proof on a pari passu basis, subject only to the limited class of preferential debts. On the other hand, there is a pressing need for the maximum co-operation between states and their courts in insolvencies with an international dimension. This need was recognised in the nineteenth century cases developing the idea of an ancillary liquidation. The collapse of BCCI and other large corporate groups over recent years, combined with the continuous growth in business on an international basis, has brought the need into sharp focus. There has been a strong response from courts, governments and legislatures, both in individual cases such as BCCI and in legislation and international agreements, all with a view to greater co-operation. It is an important, though not the only, part of this co-operation that the process of liquidation or reorganisation is focussed as much as possible in the lead jurisdiction and that, so far as possible, there is a pooling of assets and a single system of distribution.
- The experience in BCCI illustrates that there are limits to what courts can achieve. Necessarily this is so, because they are bound by the legislative framework in which they operate, as shown by decisions of both the English and Luxembourg courts. The statutory framework in which the English courts work makes little concession to these international considerations, with the limited exception of section 426, and the courts have developed some flexibility within the confines of that framework.
- The Australian liquidators accept that there is no English or Commonwealth authority which provides positive support for the proposition that the English Court can authorise a transfer of funds to a principal liquidation for distribution on a basis which is not substantially in accordance with the English statutory scheme. The issue is therefore whether the combination of the relevant decisions and the legislation restricts the court's power to authorise transfer to those cases where the principal liquidation will give effect to a distribution which is substantially in accordance with the English rules and thus preclude the power of transfer for which the Australian liquidators contend.
Applicable principle: Re BCCI (No 10)
- With this in mind it is necessary to go back to the judgment of Sir Richard Scott V-C in Re BCCI (No.10). As already observed he was concerned to examine what was meant by an ancillary liquidation, and whether and to what extent the court could authorise an English liquidator of a foreign company to depart from the statutory scheme. He held that the courts could not override mandatory substantive provisions but:
"do have power to direct liquidators to transmit funds to the principal liquidators in order to enable a pari passu distribution to worldwide creditors to be achieved." (p.247F)
It was that power which he held to be implicit in the various decisions that an English liquidation of a foreign company was ancillary to the liquidation in its place of incorporation and explicit in the earlier order of Sir Donald Nicholls V-C which had been approved by the Court of Appeal.
- The exercise of that power involves a disapplication of that part of the statutory scheme which relates to the payment of dividends (rules 4.179 and 4.180 of the Insolvency Rules 1986). Sir Richard Scott V-C defines the power as being one whose purpose is "to enable a pari passu distribution to worldwide creditors to be achieved". This is not an isolated reference to the pari passu basis of distribution. He noted that an objective of the pooling agreement was to enable creditors in each liquidation to receive the same level of dividend from a central pool (p.229C). In the passage at p.246 cited above, he stated that:
"Since in order to achieve a pari passu distribution between all the company's creditors it will be necessary for there to be a pooling of the company's assets worldwide and for a dividend to be declared out of the assets comprised in the pool, the winding up in England will be ancillary in the sense, also, that it will be the liquidators in the principal liquidation who will be best placed to declare the dividend and to distribute the assets in the pool accordingly." (emphasis added)
- In the passage at pp.247G-248A he said:
"Nor, in my opinion, has this line of judicial authority established the power of the court to relieve English liquidators in an ancillary winding up of the obligation … to see to it, so far as they are able to do so, that creditors whose claims they do admit receive the pari passu dividend to which, under the statutory insolvency regime, they are entitled." (emphasis added)
Mr Adkins submitted that this passage is directed only to the rejection in Luxembourg of claims which have been admitted in England. It is true that it is directed to those claims, but the Vice-Chancellor makes clear that it is not simply exclusion from a dividend which is the concern, but exclusion from the pari passu dividend to which they are entitled under the statutory regime.
- In making these repeated references to a pari passu distribution by the principal liquidator, Sir Richard Scott V-C was, I think, proceeding on the basis that a transfer of funds to the principal liquidator was the proper and efficient means by which the common requirement under English and Luxembourg law of a pari passu distribution would be achieved. Having made provision for set-off and rejected proofs, no departure from English substantive law was involved in a transfer of funds to the Luxembourg liquidators.
- In approaching the transfer of funds in this way, the Vice-Chancellor was proceeding in a way which was consistent with earlier authorities, in England and other Commonwealth jurisdictions. In all the cases of ancillary liquidations, the law of the principal liquidation has required a pari passu distribution on the same basis as the ancillary liquidation. So, for example, a number of the cases concern an ancillary English liquidation of an Australian company at a time when the relevant laws were substantially the same. The same is true of cases concerning liquidations in one Australian state which were ancillary to a liquidation in another Australian state.
- In these circumstances, a pari passu distribution would occur and it was not necessary to give it separate consideration or even to mention it. Nonetheless the cases do contain reference to the transfer of funds as being a means for a pari passu distribution. There is no explicit reference in the judgment of North J in Re Commercial Bank of South Australia (1886) 33 Ch D 174, but Sir Richard Scott V-C comments in Re BCCI (No.10) at p.240H:
"It is not entirely clear what North J envisaged would be done with the English assets once the English liquidators had got them in. It is a fair inference, however, that he had in mind that the assets and the list of creditors would be transmitted to Australia so that the Australian liquidator could pay a dividend, pari passu, to all creditors."
- The decision of Kay J in Re Matheson Brothers Ltd (1884) 27 Ch D 225 is frequently cited in this connection in subsequent cases. It was a decision on a winding-up petition against a company incorporated in New Zealand. It had carried on the main part of its business there and most of its assets and creditors were there. It had also a branch office in London, where it had done business and incurred liabilities. The court was informed that there were winding-up proceedings in New Zealand and that liquidators had been appointed. Kay J rejected the submission that the court had no jurisdiction to wind up the company and held that but for an undertaking not to remove any assets out of the jurisdiction he would have appointed a provisional liquidator, and continued:
"for I consider that I am justified in taking steps to secure the English assets until I see that proceedings are taken in the New Zealand liquidation to make the English assets available for the English creditors pari passu with the creditors in New Zealand." (p.231)
- In the Queensland case of Re Alfred Shaw and Co Ltd, ex p. MacKenzie  8 WLJ 93, a company incorporated in Victoria had carried on business in Queensland and England. It was in voluntary liquidation in Victoria and compulsory liquidation in Queensland and England. It had assets in the latter two jurisdictions, but none in Victoria. The Victorian and Queensland creditors had proved in the Queensland liquidation and the English creditors had proved in the English liquidation. The Queensland liquidator applied to the court for leave to transmit to England a sufficient sum to enable the English liquidator to pay a dividend equal to the dividend to be paid to the creditors who had proved in Queensland. Griffith CJ declined to make the order without giving the Victorian liquidators, as the principal liquidators, an opportunity to be heard. He nonetheless considered some of the issues arising in the case and said at p.95:
"Under these circumstances, the first question of substance that arises is whether Queensland assets should be applied in payment of Queensland creditors in priority to others, or whether the administration of the whole of the assets of the company in the three countries should be treated as one administration, and the creditors paid pari passu, without regard either to the local situation of the assets, or the place where the debts were contracted, or the place in which they are proved."
His answer is at p.96:
"And, having regard to the part which is played in the commerce of the world by the system of joint-stock companies, and to the doctrine that equality is equity, (which is true irrespective of positive law), I have no difficulty in holding that, in the administration of the affairs of an insolvent company the assets of which are situated in several jurisdictions, the English law requires that (subject to any positive local law) the affairs of the company should be administered in such a manner as to provide for equal treatment of all the creditors, wherever their debts were contracted and wherever they may formally make proof of their claims."
This approach would be inconsistent with a transfer of funds from Queensland to a jurisdiction where the local laws would not provide for the equal treatment of creditors and a pari passu distribution.
- In Re P. Macfadyen & Co, ex p Vizianagaram Co Ltd  1 KB 675, the English High Court confirmed that the English trustee in bankruptcy of a partnership had power to enter into an agreement with the official assignee in India of the same partnership, which provided for all creditors, whether proving in England or India, to receive a dividend at the same rate.
- In a Canadian case, Re Stewart & Matthews Ltd  10 WWR 154, a company incorporated in the province of Manitoba carried on its business in the state of Minnesota, while the bulk of its assets comprised land in the province of Saskatchewan. It was adjudicated bankrupt on its own petition in the bankruptcy court in Minnesota and a trustee in bankruptcy was appointed. Over a year later the Manitoba court made a winding-up order on the petition of a shareholder. In the meantime, all the creditors, including those in Canada, had filed their claims in the Minnesota bankruptcy and there had been no objection to the bankruptcy proceedings from creditors or shareholders. An application for a stay of the winding-up proceedings was made to the Manitoba court by eleven creditors and ten shareholders. The court held that the winding-up order had been properly made for the purpose of securing the land in Canada, but considered that the proceedings should be stayed. Whether to grant a stay was:
"a question of discretion to be exercised according to the principles of international comity. No definite rule of guidance to be followed under all circumstances can be extracted from the decided cases. The one broad principle underlying all the decisions is that the course ought to be pursued which will secure the best results for the creditors and shareholders."
In deciding to order a stay, the court had regard to a number of factors, of which the first was:
"the procedure of the Bankruptcy Court is quite as efficient for the purpose of securing an equal distribution of the Company's assets as is our procedure under the Winding-Up Act."
Provided the Canadian assets were secured, a stay was ordered. The Judge stated:
"Whatever, if anything, further is necessary to make the assets of the Company not yet vested in the bankruptcy trustee available for the Canadian creditors pari passu with the creditors in the United States should be done."
- Similar concerns were expressed in judgments in the Manitoba Court of Appeal in Re National Benefit Association Co  3 DLR 289. The company was incorporated in England and carried on insurance business in England and other countries, including Canada. It was licensed in Canada to write various classes of business and for that purpose had lodged a deposit as security under the provisions of the Canadian insurance legislation. The company was insolvent and winding-up orders were made against it in England and, later, in Canada. The Canadian liquidator had in accordance with the local legislation paid in full all claims under the licensed categories of business out of the deposit, leaving a surplus. The English liquidator sought an order for transfer of the surplus to him, but the holders of marine policies written in Canada sought an order for payment of their claims out of the deposit. It was held, on appeal, that the company had not been licensed to write marine policies and had not lodged a deposit for that class of business, and that, accordingly, marine policyholders were not entitled to preferential payment out of the deposit held by the Canadian liquidator. Subject to any further directions, the assets held by the Canadian liquidator were ordered to be remitted to England.
- The judgments are in the main directed at the issue under the relevant insurance legislation. However, in his judgment, Trueman JA commented on the ancillary nature of the Canadian winding-up and continued:
"If, in the present liquidation, the Canadian assets were retained here it would only be for the purpose of paying the Canadian creditors pari passu with the English and other creditors. The surplus would then have to be remitted to the English liquidator, unless the Court should be unreasonable enough to insist that the proceedings here were not ancillary. As there can be no apprehension that the Canadian creditors will not have equal treatment with all other creditors, there is no reason why the assets in the hands of the Canadian liquidator should not now be remitted to the English liquidator, less amount required to pay Canadian preferred creditors, and other amounts either approved by the Court or by the English liquidator, and costs of the liquidation." (emphasis added)
- The decision of the Supreme Court of Victoria in Re The Australian Federal Life and General Assurance Co Ltd  VLR 317 concerned a company incorporated in New South Wales which had also been registered and carried on business in Victoria. Winding-up orders were made in both states, with an order that the Victorian liquidation should be conducted as ancillary to the liquidation in New South Wales. A debenture created by the company was valid in New South Wales but had not been registered in Victoria and was therefore void as against the Victorian liquidator. An unconditional transfer of assets to New South Wales would result in them becoming subject to the debenture and therefore not available for distribution among unsecured creditors. An order for transfer was made but on terms that security was provided to ensure that the Victorian assets would be:
"applied to the satisfaction of the claims of the Victorian creditors pari passu with the claims of other creditors of the same class."
Lowe J said at pp.321-322:
"I think it is now clearly established that the Victorian creditors have no priority over other creditors of the same class. To enable this equal distribution to be made it may be necessary to transmit money from the situs of the ancillary winding up to the situs of the principal winding up … On the other hand, in order to effect this equal distribution, moneys may have to be transmitted from the situs of the principal to that of the ancillary winding up … There is authority for the view that in these cases the Court of the situs of the ancillary winding up has control of the assets in that winding up, and will secure the local assets until it is clear that they will be made available to local creditors pari passu with other creditors of the same class – see In re Matheson Brothers Ltd."
- A case in Western Australia, Re Union Theatres Ltd  35 WALR 89, concerned a company incorporated in New South Wales which had traded there and in other Australian states. It was wound up in New South Wales and subsequently in Western Australia. Dwyer J referred to Re Alfred Shaw and Co Ltd, ex p. MacKenzie as establishing that the liquidation in the place of incorporation of a company should be treated as its principal liquidation and that assets available for distribution from other liquidations should be transmitted to and distributed by the principal liquidator. He continued at p.91:
"The administration should be such as to provide for equal treatment of all creditors of equal degree, wherever their claims arise or are proved. There should be no preference or priority in the distribution of the assets found in any forum contrary to the statutes or laws of that forum … and, as a corollary, any preference or priority subsisting under such statutes or laws should, in the distribution of those particular assets, be preserved."
The available assets in the Western Australian liquidation were insufficient to meet the debts having priority under the law of Western Australia. Dwyer J accordingly directed that they should not be transmitted to the principal liquidators, but should be distributed among those preferential creditors.
- An interesting and slightly more recent case is the Queensland decision in Re Standard Insurance Co Ltd  Qd R 118. The company was incorporated in New Zealand and carried on insurance business in that country and in a number of Australian states. It became insolvent and winding-up orders were made against it in New Zealand and in those states. The Queensland court had ordered that the winding-up in Queensland should be ancillary to the liquidation in New Zealand. Having got in the assets in Queensland, settled a list of creditors whose debts had been incurred in Queensland and paid those debts having priority under Queensland law, the liquidator in Queensland was ordered by Stanley J to transfer the remaining balance of Queensland assets to the liquidator in New Zealand, but only on certain undertakings by the New Zealand liquidator. Two of the undertakings are relevant. First, he undertook to amalgamate the money transferred from Queensland with all other similar balances received from other jurisdictions, in each case after paying or providing for debts having priority in those jurisdictions. Secondly, he undertook to pay and apply such amalgamated sum "pari passu amongst all other proved creditors in respect of debts of the company wheresoever incurred". Similar orders were made in the other Australian states.
- The Queensland liquidator applied for directions in relation to the proceeds of the sale of land in Queensland and of other assets. Under the legislation then in force, in the event of the winding-up of a company incorporated outside Queensland, all land owned by the company in Queensland was to be applied in payment of debts contracted in Queensland in priority to other debts. Lucas J held that the proceeds of sale of land should be applied as provided by the legislation, the remaining assets should be transferred to the New Zealand liquidator subject to other preferential claims and the principle of hotchpot should be applied so that the Queensland creditors could not receive a dividend out of the amalgamated fund held in New Zealand, including funds transferred from Queensland, until other creditors had received as much as their payments from the proceeds of the Queensland land; this last order was necessary to achieve equality. Lucas J said at pp.125-126:
"It is clear that when a winding up is proceeding in different jurisdictions, the principle to be applied is that, subject to priorities secured by local law, all creditors of the company are as far as possible to be treated equally wherever they are and wherever their debts were contracted … There is no doubt that Stanley J had regard to this principle when he made the order under consideration …"
It is clear from the undertakings that the amalgamated fund to be held by the New Zealand liquidator, which would include the funds transferred from Queensland, was not to be available for payment of debts having priority under New Zealand law or any other law but was to be distributed only amongst the general body of creditors.
- These cases demonstrate, in my judgment, a clear assumption that the purpose of the transfer of assets to the principal liquidators is to facilitate the equal treatment of worldwide creditors and a pari passu distribution among them. This assumption is fully reflected in the judgment of Sir Richard Scott V-C in Re BCCI (No.10). Equal treatment and a pari passu distribution were mandatory features of the insolvency laws of the ancillary liquidations. Although some of the cases are explicitly concerned with the risk of discrimination on national grounds, I read the consistent concern as being that the basis of distribution of the remitted assets should be consistent with a fundamental feature of their insolvency law. These statements do not in my view simply reflect the fact that pari passu distribution was a feature of the law of the principal liquidation in each case. If the purpose of the transfer was not to achieve a pari passu distribution, these repeated qualifications were unnecessary surplusage. I do not read any of them in that way. In particular, I do not read Sir Richard Scott V-C's statement that in an ancillary liquidation the courts have power to direct liquidators to transmit funds to the principal liquidators "in order to enable a pari passu distribution to worldwide creditors to be achieved" as anything other than a requirement for the exercise of the power.
- This was the conclusion drawn from the authorities before Re BCCI (No.10) by Professor Philip Smart, the author of Cross-Border Insolvency (2nd ed 1998), in an article entitled International Insolvency: Ancillary Winding Up and the Foreign Corporation (1990) 39 ICLQ 827. He wrote (p.837):
"Where an ancillary winding up has been ordered, the ultimate objective is to hand over the English assets to the foreign liquidator: so that the foreign court, conducting the main liquidation, has control of all the corporation's assets; and all the creditors, foreign and English, may bring their claims pari passu in a single set of proceedings."
See similar references at pp.838, 840 and 843-844.
- Taking into account also the decision in Re BCCI (No 10), Dicey & Morris: The Conflicts of Laws (13th ed 2000) states at para 30–072:
"The making of a winding-up order terminates a company's beneficial interest in its property. Thereafter the property must be dealt with in the manner provided by the Insolvency Act 1986. In particular the liquidator must take into his custody or under his control all the property and things in action to which the company is or appears to be entitled. However the court may provide in the order that the liquidator is not to get in assets situate outside England without first seeking a direction from the court. The court may also provide in order that the liquidator should not settle a list of other than "English" creditors without first obtaining a direction. These may be convenient provisions in the case of a company incorporated outside England which is being wound up at the place of its incorporation. Subject to compliance with any such special provisions in the winding-up order, the liquidation is a liquidation of the company and not merely of its English affairs. Accordingly assets collected by the liquidator may be applied in satisfaction of "foreign" as well as of "English" liabilities; whilst where there is a simultaneous liquidation abroad the court should seek to secure that all creditors of equal priority benefit equally whether they are claimants here or in the foreign proceedings."
and at para 30–075:
"In winding up a company the courts apply English law to both matters of procedure and (subject to what is said below) matters of substance. This principle is incontestable, for matters of procedure are inevitably determined by the lex fori, and a liquidation under the Insolvency Act 1986 and the Insolvency Rules 1986 can hardly be conducted otherwise than in accordance with the provisions of that Act and those Rules. The Rule is not modified where there is a simultaneous liquidation under the law of the place of incorporation, even though in such circumstances the English winding up is expressed as being ancillary to that proceeding abroad. Thus in Re Bank of Credit and Commerce International S.A. (No 10), Sir Richard Scott V-C held that although where a foreign company was in liquidation in the country of its incorporation, a winding-up order made in England would normally be regarded as ancillary, that did not relieve the English court of the obligation to apply English law to the resolution of any issue arising in the winding up which was brought before the English court. The court had power in an ancillary liquidation of this nature to direct liquidators to transmit funds to the principal liquidators in the country of incorporation in order to enable pari passu distribution to worldwide creditors to be achieved. But the court had no power to display the English rule on set-off or any other substantive rule forming part of the statutory insolvency scheme contained in the Insolvency Act 1986 and the Insolvency Rules 1986. Further, the court had no power to relieve English liquidators of the obligation to determine whether proofs of debt submitted to them should be admitted or of the obligation to ensure the creditors whose claims have been admitted receive the pari passu dividend to which they were entitled."
- In the context of assistance under section 426 where there are concurrent liquidations, para H9–15 of Totty and Moss: Insolvency states:
"The form of assistance will be dictated by the particular circumstances of the case. The English court will sanction any sensible arrangement between an English trustee or liquidator and his foreign counterpart which will benefit English creditors.
The practice of the court indicates the application of three general principles:
(1) creditors, having priority under the insolvency law where the assets are situated, receive payment out of those assets in priority to all other creditors;
(2) all remaining assets are pooled and distributed equally among all the unsecured creditors; and
(3) any creditor who has received payments in priority under the insolvency law of one country or who has separately attached assets of the debtor will not receive a dividend until he brings the sums he has already received into hotchpot , or until the dividends paid out to the unsecured creditors equal the sums he has already received."
Applicable principle: conclusion
- The requirement for a pari passu distribution in the principal liquidation is, as I see it, not only consistent with, but the necessary result of, the decision of Sir Richard Scott V-C that the English Court has no power to disapply any substantive rule forming part of the statutory scheme. The transfer to the Luxembourg liquidators involved a disapplication of rules 4.179 and 4.180 which would otherwise have required the English liquidators to declare dividends and carry out the distribution. They were procedural rules. Because of the pari passu rule in Luxembourg law and the provisions required by the English Court to deal with set-off and the rejection in Luxembourg of claims admitted in England, the order involved no departure from any substantive rule. If, by contrast, the transfer had resulted in a distribution which was not substantially in accordance with the pari passu distribution required by English law, the order would necessarily have involved a very significant departure from a substantive rule of the statutory scheme.
- I therefore conclude that in an English liquidation of a foreign company, the court has no power to direct the liquidator to transfer funds for distribution in the principal liquidation, if the scheme for pari passu distribution in that liquidation is not substantially the same as under English law. As previously remarked there is no decision which has directly considered the transfer of assets to a principal liquidation in which the assets will not be distributed according to rules for a pari passu distribution substantially the same as the English rules. However, I do not regard my conclusion in this case as an extension of the decision and reasoning of Sir Richard Scott V-C in Re BCCI (No.10) but as an application of it. A contrary conclusion would in my view be inconsistent with an essential part of the basis of his decision. I should add that, although of course the Australian liquidators and Amaca submit that Re BCCI (No.10) does not lead to this conclusion, they do not challenge the decision or any part of the Vice-Chancellor's judgment.
- It should also be noted that the departure from the pari passu principle involved in the contribution agreement approved by Sir Donald Nicholls V-C in Re BCCI (No 3) was permissible because it was merely ancillary or incidental to an exercise of the statutory power to approve a compromise under part 1 of schedule 4 to the Insolvency Act 1986: see  BCLC 1490 at 1509-10 (per Dillon LJ). It was only by the exercise of the powers in schedule 4 part 1 or by a scheme of arrangement that there could be a departure from the pari passu principle.
- It is therefore apparent that I do not regard the reasoning in Re BCCI (No.10) as restricted to the collection of assets and the settlement of a list of creditors. It was not a decision that while those features of the statutory scheme were mandatory, other substantive rules could be set aside or ignored. The statutory scheme makes no provision for an ancillary liquidation and applies in its entirety to the winding-up of a foreign company, subject in practice to its territorial limitations. Procedural rules may be disapplied to further the interests of creditors in a single global liquidation, but no such power exists as regards substantive rules. That requires, as Sir Richard Scott V-C held, that no orders can be made which have the effect of disapplying substantive rules. An order for transfer to the Luxembourg liquidators without provisions for set-off would have had that effect. So would an order for the transfer of funds to a principal liquidation for distribution on a different basis than that under the statutory scheme.
Rights of creditors
- There is a further aspect to this issue. The statutory scheme of insolvency is not only seen as binding on liquidators and the courts but also as conferring enforceable rights on creditors. Creditors do not have a proprietary interest in the assets of the company in liquidation, but they do have a personal right to the administration and distribution of the assets in accordance with the statutory scheme. The position was explained by Millett LJ in Mitchell v Carter  1 BCLC 673 at 686:
"The making of a winding-up order divests the company of the beneficial ownership of its assets which cease to be applicable for its own benefit. They become instead subject to a statutory scheme for distribution among the creditors and members of the company. The responsibility for collecting the assets and implementing the statutory scheme is vested in the liquidator subject to the ultimate control of the court. The creditors do not themselves acquire a beneficial interest in any of the assets, but only have a right to have them administered in accordance with the statutory scheme. These principles were established in Ayerst (Inspector of Taxes) v C & K (Construction) Ltd  AC 167. They apply to all the assets of the company, both in England and abroad, for the making of a winding-up order is regarded as having worldwide effect."
- If a liquidator causes loss to a creditor by disregarding his personal rights, for example by distributing assets without regard to a claim for which the creditor has proved in time and which has not been rejected, the creditor has a personal cause of action. He has a personal claim for damages against the liquidator for breach of statutory duty, certainly if there are insufficient assets available in the liquidation to make good the default. These principles were established in Pulsford v Devenish  2 Ch 624 and James Smith & Sons (Norwood) Ltd v Goodman  Ch 216 (CA).
- Mr Mortimore for the Australian liquidators submitted that this principle is confined to cases where the company has been dissolved and that, while the company is being wound up, an aggrieved creditor must apply under sections 167(3), 168(5) or 212 of the Insolvency Act 1986 as appropriate and the court can then exercise its discretion to make an appropriate order to achieve equal treatment for creditors of the same class, having regard to what is in the best interests of the winding up as a whole. He relied in support of these submissions on the decision of the Court of Appeal in Kyrris v Oldham  1 BCLC 305, and in particular on the judgment of Jonathan Parker LJ at paras 158–160.
- It is important to distinguish between the claims made in cases such as Pulsford v Devenish and those made in Kyrris v Oldham. The former were personal claims for breach of statutory duty and the latter were class claims available to all the unsecured creditors. (In Kyrris v Oldham, claims were also made in respect of alleged equitable charges but these are not relevant in this context; it is the "alternative claim in negligence" which is in point). The relevant claims in Kyrris v Oldham related to allegations that the administrators of the partnership had sold assets at an undervalue, had wrongly compromised a partnership claim and had in other respect mismanaged the administration. The "class" character of the claims was emphasised by Jonathan Parker LJ at paras 72–77. He said at para 77:
"Thus by his alternative claim as unsecured creditor Mr Royle does not claim to have suffered any damage which has not also been suffered by all other unsecured creditors. He does not assert that he is in any special position in this respect; he claims damages as a member of the class of unsecured creditors of the partnership. His claim, in effect, is that unsecured creditors have suffered loss by reason of the loss suffered by the partnership."
- In the case of class claims such as those made in Kyrris v Oldham, the Court of Appeal held that in the absence of special circumstances an administrator (and the same would be true of a liquidator) does not owe a duty of care to creditors individually as regards management, disposal of assets and so on.
- By contrast, claims in cases such as Pulsford v Devenish are personal to the creditor and relate to a breach of statutory duty as regards that particular creditor. The appropriate procedure for seeking redress may depend on whether the company has been dissolved, but the nature of the right as a personal right of the individual creditor to have his own claim treated in accordance with the statutory scheme remains the same.
- Just as ordinary unsecured creditors have a right to have their claims treated in accordance with the statutory scheme, so also do unsecured creditors with a statutory priority. So a liquidator or other office holder who distributes assets without paying or providing for preferential claims is personally liable to those creditors for breach of statutory duty: IRC v Goldblatt  Ch 498.
- In all cases where the court has authorised a liquidator in an ancillary liquidation to transfer assets to a foreign principal liquidator for distribution, it would appear that provision has been made for the retention of sufficient funds to meet the claims of preferential creditors. The basis for such retention has not, so far as anyone in this case could find, been the subject of consideration. It has been taken for granted. In my judgment, this is not an exercise of discretion by the court, but is a recognition of the accrued right of the preferential creditors. The court has no power to discharge the liquidator from his statutory duty to pay the preferential claims out of the assets available to him.
- Similarly the court cannot deprive the unsecured creditors of their statutory right to a distribution of the available assets to them in accordance with the statutory scheme. This does not mean that all the procedural features of the Insolvency Act 1986 and the Insolvency Rules 1986 need be followed. As the authorities establish if a pari passu distribution can be more conveniently and appropriately achieved by a transfer to the principal liquidator for distribution, this will be ordered. But it involves no departure from the substantive and accrued rights of individual creditors.
- Two objections are taken to this analysis. First, there may be particular features of the law applicable to the principal liquidation which differ from the English regime and may have a detrimental impact on creditors, and yet the authorities show that the English court will order a transfer. Mr Adkins pointed to differences in the dates for determining admissible claims which could, in particular, affect the amount for which interest-bearing debts would be admissible to proof. This was a point which arose in Re BCCI (No 10), in which the Luxembourg winding-up order was made on 3 January 1992 but the English order was made on 14 January 1992. Interest-bearing claims if proved in the English liquidation would therefore accrue an additional 10 days' interest. Sir Richard Scott V-C agreed with the English liquidators that it would not be unfair for creditors to receive a dividend based on claims calculated as at 3 January 1992 and that no provision should be made: see  Ch 213 at 235 F-G. Similar considerations arise as regards the currency conversion date for claims. I think it is clear from the whole approach in Sir Richard Scott V-C's judgment that he did not regard this difference, which was unlikely to have any significant effect, as involving any material departure from the substantive rules of the English statutory scheme.
- Secondly, as Mr Mortimore pointed out, the statutory scheme includes a power in the court to stay a winding up. Rights arising under the statutory scheme are therefore subject to that power. Creditors, who have accrued rights to see their claims dealt with in accordance with the scheme, will automatically lose those rights if the court orders a stay of the winding up. This is correct as far as it goes, but it is well established that the power to order a stay will not be exercised unless the court is satisfied that the interests of creditors will not as a result be prejudiced.
- Of course, if the court is empowered to order a transfer of funds to a foreign liquidator for distribution on a basis which is not substantially the same as under English law, the rights of the creditors are subject to that power. The existence of enforceable statutory rights cannot therefore provide the answer to the issue. But their existence is in my view material to a consideration of the issue.
Impact of section 562A Corporations Act 2001
- Section 562A of the Corporations Act 2001 is a provision which ring-fences a particular category of assets for the benefit of a particular category of creditors. Most insurance companies will have a significant reinsurance programme and the effect of section 562A is to produce a materially different basis of distribution than would apply in an English liquidation. It is materially different from the scheme generally applicable to companies in liquidation, involving a pari passu distribution among the debts admitted to proof, subject to the priority debts in schedule 6 to the Insolvency Act 1986. It is also materially different to the regime under the Insurers (Reorganisation and Winding Up) Regulations 2004 and their predecessor, which would apply to the Companies if the provisional liquidators had been appointed after 20 April 2003. Under that regime all the available assets in the English liquidation would, subject to the standard preferential debts, be applied in payment of insurance debts in priority to all other debts. It was accepted for the Australian liquidators that if the Regulations had applied to the Companies, the claims of the insurance creditors over all assets in the English liquidation would have required provision before any transfer to Australia.
- The difference in treatment resulting from the application of section 562A would not be theoretical. Mr Mortimore accepted that it would not be de minimis, but said that it would not be large in the scale of things. In the case of at least HIH C&G and WMG the effect could properly be regarded as material. Some creditors would benefit, but others would suffer a detriment. It happens that because the major part of the business of the London branch was reinsurance, a substantial majority of creditors by value would suffer a detriment.
Consideration of submissions of the Australian liquidators and Amaca
- The effect of section 562A is, as I have said, to ring-fence certain assets for certain creditors. It is not a conventional priority provision, such as applies to the debts listed in schedule 6 to the Insolvency Act 1986 or section 556 of the Corporations Act 2001. As regards conventional priority debts, the Australian liquidators' submission that there is no authority that such debts in the principal liquidation are not to be paid out of transferred assets is not borne out by the comments of Dwyer J in Re Union Theatres Ltd or the undertakings required by the court in the ancillary liquidation in Re Standard Insurance Co Ltd. If the transferred assets would be entirely exhausted by priority claims in the principal liquidation, the general body of unsecured creditors who would otherwise participate in a distribution of those assets under the English statutory scheme would receive nothing from them. The Australian liquidators accepted that to be so prejudicial a result as to justify a refusal by the English Court to direct a transfer. What if the transferred assets would be largely, but not entirely, exhausted in that way, or if half the transferred assets would be used to pay preferential debts? The application of Sir Richard Scott V-C's analysis in Re BCCI (No.10) means that transferred assets are not to be applied in the payment of preferential debts in the principal liquidation, although on the facts of this case it is not an issue as regards the conventional preferential debts under Australian law.
- I do not accept the point made by the Australian liquidators and Amaca that no transfers would ever be made to a principal liquidation if there was a requirement for the assets to be distributed among the general body of creditors on a basis substantially the same as English law. As the decisions in Re BCCI (No.10) and many of the earlier cases show, there have frequently been transfers to the principal liquidation. If the Companies were not insurance companies to which sections 116 and 562A applied, there would be no difficulty in this case in directing a transfer to the Australian liquidators.
- The Australian liquidators and Amaca recognise that some limits must be placed on the transfer of assets to the principal liquidation. These are cast in terms of a broad application of the pari passu principle, but with variations being acceptable provided they do not produce an unjust result or provided there is broad correspondence with the English rules. At the same time, it was argued that it was a drawback of the JPL's submissions that they would require the English Court to comment adversely on the laws of a foreign state. Ironically, however, as Mr Trower pointed out, this concern is inherent in the approach of the Australian liquidators and Amaca to the limits on the transfer of assets. It is not a concern with the JPL's submissions which adopt an objective, non-judgmental approach.
- It was part of the Australian liquidators' submissions that no creditor has a right to any particular level of dividend, so that a transfer of assets from an ancillary to a principal liquidation which applies different rules does not cut across the rights or expectations of creditors. They point out correctly that the dividend ultimately paid will be affected by the level of realisations and disbursements. Moreover there may be claims admitted to proof in the principal liquidation, which would not be admissible in England; an example would be debts due to the tax authorities in the country of the principal liquidation. This submission, in my view, confuses the basis of distribution of assets with the actual result in a particular case. The law prescribes the former, while the latter is the product of the factual circumstances of the particular case.
- The Australian liquidators point to other practical consequences. First, the effect of a refusal to transfer assets in this case would enable all creditors, whether Australian or not, who do not stand to benefit from section 562A, to prove in the English liquidations and so obtain a share of distributions which under Australian law should have been paid to insurance creditors. This is true, and is simply a result of the universal theory of an English liquidation. It would no doubt be open to the Australian courts to apply hotchpot to such recoveries when dealing with claims in the Australian liquidation. Secondly, a refusal to transfer assets might encourage creditors of Australian insurance companies to intercept reinsurance recoveries outside Australia by initiating winding-up proceedings, thereby disrupting an efficient liquidation in Australia. This would, however, be a material factor for the English Court in deciding whether to make a winding-up order.
- It was also said on behalf of the Australian liquidators that those dealing with an Australian company should expect that their rights to payment in a liquidation will be governed by Australian law. This, as it seems to me, depends on the circumstances in which they dealt with the company. I would not consider it to be obviously correct in the case of a creditor dealing with the London branch of an Australian company which has obtained UK authorisation to carry on insurance business and has registered as an overseas company in England under the Companies Act. It would be even less obviously correct if its principal place of business were in London; in the case of an insurance company, its primary liquidation would then be in England, not its country of incorporation, under the Insurers (Reorganisation and Winding Up) Regulations.
- Many of the submissions of the Australian liquidators and Amaca were directed to policy considerations in favour of the transfer of assets to the principal liquidation. These considerations are of great importance, and they would all need to be taken into account if proposals were developed for a statutory definition of the relationship between a principal and an ancillary liquidation. There is a limit to what the courts can, or properly should, do. As I have said, that limit is the statutory scheme as presently enacted. In his article referred to earlier, Sir Peter Millett suggests as a maxim for the courts "do as you would be done by", combining co-operation and judicial restraint, but this is "pending an international insolvency convention". Earlier in the same article he acknowledges that the concept of the ancillary liquidation as developed in English law:
"falls well short of the theoretical ideal that the distribution of assets should be governed by a single law, and therefore not affected by the location of particular assets or particular creditors."
While favouring the law of the principal seat of business as the appropriate choice in contemporary conditions, he continues:
"It must, however, be accepted that identifying the appropriate law cannot be accomplished by Judges alone; it requires international agreement, which is very difficult to achieve as not all countries share the belief that local assets should not be ring-fenced."
- It would be for the framers of international conventions to consider the extent to which local priorities should be permitted and the extent to which the law of the principal liquidation could make inroads into the basic principle of pari passu distribution, whether by ring-fencing certain assets for certain creditors (as under section 562A) or creating a broad class of priority claims (as under Directive 2001/17/EC) or in permitting set-off (as in English and Australian law, but not for example in Luxembourg) or in other ways.
- It might be expected that international conventions or other arrangements, particularly within the European Union, would have made provision for the distribution of assets to be governed by the law of the principal liquidation. With the exception of the EU Directives on insurance companies and credit institutions, this is not the case.
EC Regulation on Insolvency Proceedings
- The EC Regulation on Insolvency Proceedings (Council Regulation (EC) 1346/2000) does not provide for the assets in ancillary liquidations to be remitted to the principal liquidation and distributed among creditors according to the law of the principal liquidation. The Regulation was adopted on 29 May 2000 and came into force on 31 May 2002. It is directly applicable in member states, except Denmark. It has its origins in more ambitious proposals for a Convention which would have provided for the state of the debtor's "centre of administration" to have sole insolvency jurisdiction in respect of that debtor, with such proceedings having automatic effect as regards the debtor's property in all member states. At the same time, however, those proposals sought to preserve the domestic rules of each member state on preferential payments to the extent that there were assets in each state respectively.
- The Regulation does not attempt any harmonisation of the insolvency laws of member states nor does it provide for a single insolvency proceeding. It is therefore much less extensive than the Directive on the reorganisation and winding-up of insurance companies. Article 3(1) provides that the courts of the member state in which "the centre of a debtor's main interests" is located have jurisdiction to open insolvency proceedings (main insolvency proceedings). Under article 3(2), the courts of another member state have jurisdiction to open insolvency proceedings in respect of the debtor if it has an establishment in that state (territorial insolvency proceedings). Subject to specific provisions in articles 5 to 15, each set of insolvency proceedings will be governed by its own domestic law (article 4(1)), including:
"the rules governing the distribution of proceeds from the realisation of assets, the ranking of claims and the rights of creditors who have obtained partial satisfaction after the opening of insolvency proceedings by virtue of a right in rem or through a set-off".
- Insolvency proceedings opened under article 3(1) have effect throughout all member states, subject to the qualifications in articles 5–15 and save as regards any member state in which territorial insolvency proceedings are opened: articles 16–18. Territorial insolvency proceedings therefore have effect only as regards assets within the state of those proceedings.
- The application of the local insolvency law to territorial insolvency proceedings is underlined by articles 28 and 35 which in terms apply to secondary proceedings (ie, any territorial insolvency proceedings opened after main insolvency proceedings):
28. Save as otherwise provided in this Regulation, the law applicable to secondary proceedings shall be that of the Member State within the territory of which the secondary proceedings are opened.
Assets remaining in the secondary proceedings
35. If by the liquidation of assets in the secondary proceedings it is possible to meet all claims allowed under those proceedings, the liquidator appointed in those proceedings shall immediately transfer any assets remaining to the liquidator in the main proceedings."
- The significance of the EC Regulation for present purposes is that, even within the European Union, the position has not been reached that assets collected in an ancillary or "secondary" liquidation should be transferred to the liquidator in the principal liquidation for distribution in accordance with the latter's insolvency law, although nothing in the Regulations prohibits a transfer in accordance with the local law of a territorial insolvency proceeding. It expressly preserves the local distribution rules in a secondary liquidation, for reasons which are stated in recitals (11) and (12). Stays of secondary proceedings for periods of up to three months at a time may be ordered at the request of the liquidator in the main proceedings, but the court may require the liquidator "to take any suitable measure to guarantee the interests of the creditors in the secondary proceedings and of individual classes of creditors" and the court may terminate the stay if it no longer appears justified, in particular, by the interests of creditors in the main proceedings or in the secondary proceedings. What have been narrowed are the circumstances in which there can be an ancillary or secondary liquidation. The presence of assets or some other connection to the jurisdiction is insufficient in all cases to which the Regulation applies; the debtor must have an establishment in that state.
UNCITRAL Model Code
- Section 14 of the Insolvency Act 2000 makes provision for the incorporation into English law of a separate international initiative, the Model Law on Cross-Border Insolvency prepared by the United Nations Commission on International Trade (UNCITRAL) and adopted by the General Assembly by resolution 52/158 of 15 December 1997. It is not a convention, but a set of provisions drafted to be enacted by individual states, with such local variations as may be necessary. A number of states have now incorporated it into their domestic law. The United States has done so by adding a new chapter 15 to the federal Bankruptcy Code which will come into effect on 17 October 2005. The United Kingdom intends to do so by the end of March 2006.
- The Model Law makes provision for the recognition of "main" and "non-main" insolvency proceedings, on a basis similar to that in the EC Regulations. It gives foreign liquidators and other representatives rights of access to the courts of enacting states and makes provision for co-operation and communication between courts of different states.
- As regards provisions which are relevant to the issues in this case, the Model Law distinguishes between the case where there is a liquidation or other insolvency process in a foreign state but not in the enacting state and the case where there is an insolvency process in both states. In the former case, the courts of the enacting state are required or authorised to give assistance of various types to the foreign liquidator. This includes power to transfer assets for distribution by the liquidator, as to which article 21(2) provides:
"Upon recognition of a foreign proceeding, whether main or non-main, the court may, at the request of the foreign representative, entrust the distribution of all or part of the debtor's assets located in this State to the foreign representative or another person designated by the court, provided that the court is satisfied that the interests of creditors in this State are adequately protected."
While the proviso to article 21(2) is directed to the protection of local creditors, article 22(1) requires creditors generally to be protected:
"In granting or denying relief under article 19 or 21, or in modifying or terminating relief under paragraph 3 of this article, the court must be satisfied that the interests of the creditors and other interested persons, including the debtor, are adequately protected."
Article 22(2) enables the court to grant relief under articles 19 and 21 subject to conditions it considers appropriate. Even where there is no liquidation under local law, the interests of creditors locally and generally must be "adequately protected" or, as the US legislation puts, "sufficiently protected".
- There are separate provisions dealing with assistance where there are parallel liquidations. Under article 28 of the Model Code, a local liquidation or other proceeding would be permissible after recognition of a foreign main proceeding only if the debtor has assets in the enacting state and "the effects of that proceeding shall be restricted to the assets of the debtor that are located in this state" (and other assets, in certain circumstances). Any relief granted to a foreign liquidator under articles 19 and 21 must be consistent with the local insolvency proceeding: article 29. Article 32 specifically applies the principle of hotchpot, so that creditors who have received a distribution in a foreign proceeding may not receive a payment for the same claim in the local proceeding until other creditors of the same class have received the same proportion of their claims. As with the EC Regulation, the Model Law does not provide for the transfer of assets from a non-main proceeding to a main proceeding for distribution in accordance with the latter's law.
US Bankruptcy Code
- In addition to the international arrangements mentioned above, I was also referred to provisions of United States law which provide an instructive comparison. As in this country, the basis of bankruptcy law, both individual and corporate, is statutory. It is governed by federal law and is administered by federal courts. The principal statute is title 11 of the United States Code, generally called the Bankruptcy Code.
- Chapter 3 of the Bankruptcy Code was amended by the Bankruptcy Reform Act of 1978 to include section 304, which makes express provision for assistance to foreign liquidators and others. It is in the following terms:
"§ 304. Cases ancillary to foreign proceedings
(a) A case ancillary to a foreign proceeding is commenced by the filing with the bankruptcy court of a petition under this section by a foreign representative.
(b) Subject to the provisions of subsection (c) of this section, if a party in interest does not timely controvert the petition, or after trial, the court may - -
(1) enjoin the commencement or continuation of - -
(A) any action against - -
(i) a debtor with respect to property involved in such foreign proceeding; or
(ii) such property; or
(B) the enforcement of any judgment against the debtor with respect to such property, or any act or the commencement or continuation of any judicial proceeding to create or enforce a lien against the property of such estate;
(2) order turnover of the property of such estate, or the proceeds of such property, to such foreign representative; or
(3) order other appropriate relief.
(c) In determining whether to grant relief under subsection (b) of this section, the court shall be guided by what will best assure an economical and expeditious administration of such estate, consistent with - -
(1) just treatment of all holders of claims against or interests in such estate;
(2) protection of claim holders in the United States against prejudice and inconvenience in the processing of claims in such foreign proceeding;
(3) prevention of preferential or fraudulent dispositions of property of such estate;
(4) distribution of proceeds of such estate substantially in accordance with the order prescribed by this title [11 USCS §§ 101 et seq];
(5) comity; and
(6) if appropriate, the provision of an opportunity for a fresh start for the individual that such foreign proceeding concerns."
- Orders which the court may make include an order under section 304 (b)(2) for "turnover of the property of such estate, or the proceeds of such property, to such foreign representative". In determining whether to grant relief under subsection 2 the court must be satisfied that the order is consistent with the factors listed in section 304(c) including " distribution of proceeds of such estate substantially in accordance with the order prescribed by this title" (i.e. the Bankruptcy Code). Both the House Report accompanying the bill that introduced section 304 and subsequent decisions have emphasised the discretionary nature of the powers, to be exercised on a case-by-case basis in the light of the particular circumstances of the case: see In re Treco 240F.3d at 154–155 (2nd Cir 2001).
- Accordingly, in the United States, legislation has conferred particular powers on the court and defined the criteria by which they are to be exercised, including a requirement for distribution to be substantially in accordance with US rules. The US courts consider section 304 to be the result of policy choices by Congress in areas which include the regulation of commerce with foreign states: Cunard SS Co v Salen Reefer Services AB 773 F.2d 452 (2nd Cir 1985), In re Treco (supra) and Beogradska Banka AD v Superintendant of Banks 313 BR 561 (2004, SD NY).
- In construing the requirement for distribution to be substantially in accordance with US rules, the US courts have made clear that identical treatment is not required: In re Treco (supra) at 158–159. The requirement was held on appeal not to be satisfied in that case, where a secured creditor who in a US distribution would rank ahead of the general expenses of the liquidation would, under Bahamian law, rank behind them. The expenses were so large in relation to the estate that the secured creditor would receive very little, and perhaps nothing at all. In In re Blackwell 270 BR 814 (Banks WD Tex 2001), the Bankruptcy Court observed:
"It would be a mistake to construe this provision to mean that a court must find effective congruence between the distribution schemes of the United States and the country in which the foreign proceeding is pending. The problem with such an approach is that every country has its own scheme of priorities, reflecting local public policy choices that may or may not be shared by other countries. One country may give priority to internal tax claims, priming even secured lenders. Yet a third may give special treatment to social claims enforced by governmental entities. Were one to insist on congruence, it is doubtful that any court would ever find it appropriate to grant relief under § 304(b). Congress can be fairly presumed to have been familiar with the wide variety of distributional schemes worldwide. Its provision should not therefore be construed to effectuate an intent clearly at odds with structure and overall purpose of section 304 - - to provide a mechanism for cooperation with foreign proceedings."
- With effect from 17 October 2005 section 304 is repealed and replaced by section 1507 of the Bankruptcy Code. Section 1507 forms part of a new Chapter 15 which has been added for the purpose of incorporating the UNCITRAL Model Law on Cross-Border Insolvency. Most of the sections in Chapter 15 are the provisions of the Model Law incorporated with a minimum of amendments necessary to fit with existing US law and procedure. Section 1507, however, is not part of the Model Law and represents an extension to it based on the powers previously contained in section 304. The trigger for the provision of assistance under section 1507 is the grant of recognition of foreign insolvency proceedings under chapter 15. Section 1507 does not define or give examples of the assistance which may be given, save to say that it may provide additional assistance "under this title or under other laws of the Untied States". Under section 1507(b) the court is required to consider the same matters as are presently listed in section 304(c), including a distribution substantially in accordance with the order prescribed by the Bankruptcy Code.
- The position under US law is therefore markedly different from that in England. Congress has enacted legislation to confer expressly on the courts a power to order transfer and has set out the criteria to be applied by the court in considering the exercise of the power. Those criteria include a requirement that distribution in the foreign country should be substantially in accordance with the order prescribed by the Bankruptcy Code. It is for the courts to construe that requirement and apply it in individual cases. As I understand it, the power is exercisable even if liquidation proceedings have been commenced in the United States. Insofar as an order for transfer results in a different order of distribution than under the Bankruptcy Code, it is expressly permitted by the Code.
- The present position in the United States as regards the Companies is that injunctions have been made under section 304(b)(1), but on terms that assets will not be removed from the United States without further order. These terms were offered by the Australian liquidators in response to objections from US creditors relating to sections 116 and 562A. The issue has therefore been raised as to whether, in the light of those sections (particularly section 562A, as hotchpot can counter-act the effect of section 116), distribution in the Australian liquidation would be substantially in accordance with the US rules for the purposes of section 304(c)(4). There has been no determination of this issue by the US courts, although the schemes of arrangement as presently drafted proceed on the basis that US assets will not be transferred to the Australian liquidators.
Issue 1: conclusion
- My conclusion on the first issue is that in the event of a winding-up order being made against the Companies the English Court would not direct or authorise the English liquidators to remit the assets collected by them to the Australian liquidators, having regard to section 562A of the Corporation Act 2001 and section 116 of the Insurance Act 1973, unless some means could be found of ensuring that those assets could be distributed as if in an English liquidation. In default, they would be distributed in the English winding-up, in accordance with English insolvency law. Accordingly I answer the first question raised by the JPLs in their applications for directions, in the negative for paragraphs (a) and (b) and in the affirmative for paragraph (c).
ISSUE 2: HOTCHPOT
- Paragraph (c) raises a further point, in relation to hotchpot. It asks whether the English liquidators should in distributing the assets collected by them "require any dividends received by creditors from other sources, including distributions made in the Company's Australian winding-up, to be brought into hotchpot".
- There is no dispute before me as to the basic principle of hotchpot, stated as follows in the Privy Council decision in Cleaver v Delta American Reinsurance Co  AC 328 at para 18:
"The authorities establish the principle that if a company is being wound up in an English liquidation and also in a liquidation in a foreign country, a creditor who has proved and received a dividend in the foreign liquidation may not receive a dividend in the English liquidation without bringing into hotchpot his foreign dividend."
The issue in that case was whether the principle applied also to the proceeds of foreign security, so as to require a creditor to bring the proceeds into hotchpot. It was held that it did not apply to the security proceeds, because the principle applied only to assets which under English law formed part of the estate in liquidation. If before commencement of the English liquidation the asset had been charged in favour of the creditor, the asset to the extent of the amount secured on it did not form part of the estate in liquidation. The creditor did not therefore have to bring into hotchpot the amount received by him from the realisation of his security.
- The principle is applicable to preferential payments, as much as to other distributions, received in the foreign liquidation. In ex p. Wilson, In Re Douglas  7 LR Ch App 490 at 49h, Mellish LJ said:
"… it is a case in which the same estate is being distributed, partly in Brazil and partly in England, but where the Brazilian law says that a certain class of creditors are to have a preference, and where the law of England says that all creditors are to take equally. That being the case, I am of the opinion there is nothing to prevent the application of the common rule that if the creditor comes to take the benefit of the English law and proves against the English estate, he cannot take advantage of the preference he has received under the law of foreign state."
All parties accept that, as a matter of English law, any creditor receiving a dividend out of the general assets in the Australian liquidation, including any dividend resulting from the application of section 116, would have to bring it into hotchpot before receiving a dividend in the English liquidation. The principle of hotchpot has been held in Australia to apply in relation to section 116, so that creditors with "liabilities in Australia" who receive distribution from the proceeds of "assets in Australia" will not be entitled to participate in distributions of proceeds of other assets until the same level of dividend has been paid on debts which are not "liabilities in Australia": New Cap Reinsurance Corp v Faraday Underwriting (2003) 117 FLR 52 at paras 42–44.
- As regards payments made to insurance creditors under section 562A, the Australian liquidators submit that hotchpot does not apply. They argue that section 562A operates at the time of liquidation to take the reinsurance assets out of the estate, subjecting them to a statutory charge in favour of the insurance creditors. Reliance was placed on references in the judgments in ex p. Wilson, In Re Douglas and Banco de Portugal v Waddell  5 App Cas 161 to the principle of hotchpot applying where there is a single estate or a common fund. The effect of section 562A is to create a separate fund comprising reinsurance recoveries which is administered for the benefit of insurance creditors.
- It has been held in Australia that hotchpot does not apply to proofs for the balance of claims after the application of section 562A. In New Cap Reinsurance Corp v Faraday Underwriting (supra) Windeyer J held at para 64 that hotchpot did not apply, having regard in particular to section 562A(6) which provides that:
"If receipt of a payment under this section only partially discharges a liability of the company to a person, nothing in this section affects the rights of the person in respect of the balance of liability."
As he was entitled to prove for the balance of the claim, there was no reason why in respect of the balance he should not be treated proportionately with all other creditors. Windeyer J continued:
"In other words it would be treated in a conceptually similar way to a secured creditor under s 554E, although if that were intended it could have been said."
- Barrett J considered this issue in Re HIH Casualty and General Insurance Ltd  215 ALR 562 at paras 92 – 105. After referring to section 562A(6) and the decision of Windeyer J in New Cap Reinsurance Corp Ltd v Faraday Underwriting Ltd, he continued at paras 100 – 103:
"100. But once the claim to which s562A applied had been quantified, it would enjoy a position of first priority (that is, priority over all admitted claims covered by the scale of priorities in s 556 and those afforded no priority at all) as regards access to the particular asset with which s 562A is concerned. I have suggested elsewhere (see (1990) 64 ALJ 523) that a statutory provision which, in a winding up, requires a particular class of claims to be met out of particular property in priority to all claims not within the class might be regarded as creating a charge or having the effect of a charge upon that property. The suggestion was made in relation to a now superseded provision of banking legislation directing that, if an Australian bank became unable to meet its obligations or suspended payment, "the assets of the bank in Australia shall be available to meet that bank's liabilities in Australia in priority to all other liabilities of the bank". The thesis that a statutory directive of this kind creates a charge or has the same effect as a charge recognises that the essence of an equitable charge is the creation by a debtor of a right for the creditor to resort to particular property to satisfy the debt (a notion explained, in relation to choses in action, in Rodick v Gandell (1852) 1 De G M & G 763 at 777-8; 42 ER 749 at 754).
101. Section 562A should be regarded as having this effect. It causes the admitted debt of the insured under the contract of insurance with the company in the course of being wound up to be recoverable, in priority to all other admitted claims, out of the particular asset with which it is concerned. The position of the creditor with the claim thus preferred should, in my opinion, be regarded as the equivalent of (or, at least, analogous with) that occupied by a creditor with a debt secured by a charge upon that asset.
102. In the search for guiding principle, these considerations distinguish a s 562A case from the case of proofs in concurrent windings up. In that situation, there is no suggestion of exclusive resort to particular property and the question is merely to the equitable way of accommodating the claims of creditors with claims upon the general pool of assets being administered in two segments. For reasons I have stated, a s 562A case bears a much closer conceptual similarity to the situation where a secured creditor realises the security and, after that source of satisfaction is exhausted, joins with unsecured creditors generally in seeking the balance of the debt from the common pool.
103. I therefore accept and endorse the conclusion of Windeyer J that the balance of a proved debt covered by s 562A that remains after exhaustion of the net reinsurance recoveries applicable to that proved debt "should be treated in a conceptually similar way to a secured creditor under s 554E", so that the balance is "treated proportionately with all other creditors in accordance with s 555 of the Act. ""
- The issue as to the proper treatment of payments under section 562A to insurance creditors who then sought to prove in English liquidations of the Companies would be governed by English law. Looking at the terms and legislative policy of section 562A, it would make little sense in an Australian liquidation if hotchpot were to apply. It does not follow that the same conclusion applies in an English liquidation.
- The Australian liquidator's submissions involve two related propositions. First, there is the submission that there are separate funds or estates. In my judgment this is not well-founded in the context of hotchpot. In one sense there are two funds because section 562A requires certain assets of the company to be applied for the benefit of certain creditors separately from the general assets. But they are all assets, and they are all creditors, of a single company. When reference is made in ex p. Wilson, In Re Douglas and Banco de Portugal v Waddell to separate estates or funds, the context is separate debtors, albeit with some common link. The example discussed is that of two separate partnerships carrying on separate businesses where some, but not all, of the partners in the two firms are the same. In those circumstances, the assets of the two partnerships are separate funds, so that hotchpot does not apply to recoveries from one fund when proving against the other. The effect of the decisions is that, by contrast, where the debtor is the same person, even though he may be carrying on separate businesses in different countries, there is in English law only a single estate or fund. This is the case even though under foreign law his assets may be separately administered for the benefit of local creditors in priority to other creditors, and so in a factual sense there are two funds.
- The second submission is that the reinsurance recoveries are the subject of a charge by virtue of section 562A and therefore, as in Cleaver v Delta American Reinsurance Co, hotchpot is not applicable to payments made out of them. In my judgment, this submission is not well-founded as a matter of English law. I note that Barrett J concludes that the priority created by section 562A should be regarded as the equivalent of, or at least analogous with, a charge and, for the purposes of hotchpot, bears a much closer conceptual similarity to a charge than proofs in concurrent windings-up. He does not hold that it creates a charge.
- When the Companies went into liquidation, they had certain assets which included rights under reinsurance contracts. Under Australian insolvency law, those assets are to be administered and distributed in a manner specified by statute, including section 562A. Statutory provisions for the administration and distribution of particular classes of assets in a liquidation do not create a security over those assets for the purpose of the English law of hotchpot. They remain part of the estate in liquidation. The position is the same as if Australian law contained a positive provision which required all Australian assets to be distributed in discharge of liabilities incurred in Australia. Distributions under section 562A qualify for an application of hotchpot in accordance with the statement of principle in Cleaver v Delta American Reinsurance Co.
- The remaining questions in the JPL's applications concern the basis on which schemes of arrangements for the Companies should be prepared and the appropriate division of creditors into classes for voting purposes. I shall return to these questions in the light of my answers to the issues raised by the Australian liquidators' application.
ISSUE 3: SECTION 426 INSOLVENCY ACT 1986
- The applications of the Australian liquidators are made pursuant to letters of request from the Australian Court and seek orders for the transfer of assets by the JPLs to the Australian liquidators. The purpose of the transfer, as stated in the letters of request and applications, is to ensure that the assets collected by the JPLs are distributed in accordance with Australian insolvency law, including section 562A, rather than the English insolvency law. Any scheme of arrangement proposed following such transfer would reflect the Australian distribution rules.
- At this stage the Australian liquidators are seeking orders determining as a matter of principle the issues set out in paragraphs (a) and (b) of their application but are not seeking the orders directing transfers of assets by the JPLs or amending the powers of the JPLs.
- I have held that if the Companies were ordered to be wound up by the English Court, the English liquidators would be directed not to make such transfers. The question is whether, notwithstanding that decision, this court should direct the JPLs, as provisional liquidators, to make such transfers in view of the facts that (a) the Companies have not as yet been ordered to be wound up and (b) the directions for transfer are sought pursuant to a letter of request from the Australian Court. This requires consideration of the effect of section 426 of the Insolvency Act 1986 and consideration of whether the English Court would be likely to make winding-up orders.
- Section 426 confers powers and duties on the court to give assistance to other courts in insolvency matters. There had existed in the bankruptcy legislation for many years a power for the court to make orders in aid of other courts, which was replaced and expanded by section 426.
- The relevant provisions of section 426 are as follows:
"(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 made to a court in any part of the United Kingdom by a court in any other part of the United Kingdom or in a relevant country or territory is authority for the court to which the request is made to apply, in relation to any matters specified in the request, the insolvency law which is applicable by either court in relation to comparable matters falling within its jurisdiction.
In exercising its discretion under this subsection, a court shall have regard in particular to the rules of private international law.
(11) In this section "relevant country or territory" means –
(a) any of the Channel Islands or the Isle of Man, or
(b) any country or territory designated for the purposes of this section by the Secretary of state by order made by the statutory instrument."
A limited number of countries, mainly in the Commonwealth, have been designated as relevant countries or territories. They include Australia: see the Co-operation of Insolvency Courts (Designation of Relevant Countries and Territories) Order 1986, SI 1986/2123.
- Section 426(10) defines "insolvency law" in a way which permits the English Court to apply either English insolvency law or the insolvency law of the requesting state to the extent that it corresponds to provisions falling within English insolvency law. However, Mr Mortimore made clear that the Australian liquidators are not requesting the court to apply Australian law in any way which is different from English law. The same result is achieved whether the court applies the Australian statutory provisions for the collection and distribution of assets and the Australian principle of universality, giving its liquidation worldwide effect, or English principles derived from the authorities on ancillary liquidations. The Companies are in provisional liquidation under the Insolvency Act 1986 and the court therefore already has jurisdiction to give directions to the JPLs. It is that power which the court is asked to exercise.
- The apparently mandatory language of section 426(4) has been considered at first instance in three cases and subsequently by the Court of Appeal in Hughes v Hannover Ruckversicherungs-AG  1 BCLC 497. Referring to the discretionary powers to make an administration order, Chadwick J in Re Dallhold Estates (UK) Pty Ltd  BCLC 621 at 627 said that if the statutory conditions for its exercise were satisfied, the court ought to make the administration order as requested, "unless there is some compelling reason why that should [not] be done". In Re BCCI (No.9)  3 All ER 764 at 785, Rattee J said that the court has a discretion as to how it should give assistance and that it should exercise its discretion in favour of giving the particular assistance requested by the foreign court "unless there is some good reason for not doing so". In Re Focus Insurance Co Ltd  1 BCLC 219, Sir Richard Scott V-C at p.227 accepted the guidance of Chadwick J and Rattee J and at p.230 said that there was:
"plainly some element of discretion vested in me as to whether I should or should not accede to the originating application pursuant to the letter of request, notwithstanding that sub-s(4) of s426 uses the word "shall assist"."
- In Hughes v Hannover Morritt LJ analysed the three sources of law which the English Court may apply as (a) its own general jurisdiction and powers, (b) English insolvency law and (c) so much of the requesting state's law as corresponds to English insolvency law. He considered the approach to be adopted by the English Court as to whether to give assistance at pp.517-518:
"The obligation to assist is imposed on a court, not some executive agency. It would in my view require very clear words to justify a conclusion that the court in England was not intended by Parliament to perform its normal function of seeking to do justice in accordance with the law. There is no such indication. Accordingly the function of the court under s426 must be to consider whether in accordance with the three sources of law I earlier identified as (a), (b) and (c) the assistance may properly be granted. If it may then it should be, thereby discharging the statutory duty imposed by s426. But if it may not be properly granted then it should be withheld for it must be implicit in the fact that the duty is cast on a court that the duty is qualified by reference to what the court may properly do as a court. Of course if the court in England cannot do exactly what is sought then it should consider whether it can properly assist in some other way in accordance with any of the available systems of law. Thus the reasons for withholding assistance either as sought or in any other way are not limited to reasons of public policy. Of course public policy is a reason why assistance may be impossible under (a) or (b). But it is by no means the only reason. Further, public policy might prevent assistance being given under (c) if the provision of the insolvency law of the country the court of which requested the assistance were contrary to the public policy recognised by the court in England. In my view the court must consider in all cases whether the assistance sought or any other comparable assistance may be properly granted in accordance with the laws the court is authorised to apply on the hypotheses likewise permitted.
In some cases the assistance sought is, in accordance with the system of law (sc (a), (b) and (c)) under which it is available, discretionary. Obviously the fact of the request for assistance is a weighty factor to be taken into account. Further the court in England may be expected, as Knox J did in this case, to accept without further investigation the views of the requesting court as to what was required for the proper conduct of the bankruptcy or winding up. But I do not think that the request can ever be conclusive as to the manner in which the discretion of the court should be exercised. It would be incompatible with the principle of the law which was being applied that the decision was one for the discretion of the court if the fact of the request was anything more than a factor however weighty. In my view this is the justification for the reservations expressed, in various ways, by all the judges who have been faced with requests for assistance under s426 or its statutory predecessors.
In summary therefore I would reject the submission of counsel for the joint liquidators that the only ground on which a request for assistance may be refused is public policy or that the only discretion of the court is to decide which system of law made available under sub-s(5) is to apply and how, as opposed to whether, the assistance is to be rendered. But I would also reject the submission of counsel for Hannover Re that the only obligation of the court in England is to entertain the application for assistance. The assistance should be given if, in accordance with the law to be applied, the relief sought may properly be granted. In cases requiring the exercise of a discretion the fact of the request is a weighty matter to be taken into account but it cannot outweigh all others. In my view, having regard to the circumstances of the individual cases, in none of Re Dallhold Estates (UK) Pty Ltd, Re Bank of Credit and Commerce International SA (No.9) and Re Focus Insurance Co Ltd did the judge adopt an approach not warranted by the section; contrary to the submission of counsel for Hannover Re, I would approve rather than overrule them."
- If the Companies had already been ordered to be wound up, it is, I think, clear that the English Court could not accede to the Australian Court's request for a transfer of funds. This follows from my decision on the first issue, that the substantive rules of distribution under the English statutory scheme are mandatory and the court has no power to make an order which has the effect of disapplying them. The power to make the order does not exist in English law and any power under Australian law could not be exercised by this court in a manner which was contrary to English law. In the words of Morritt LJ, it would not be assistance which "may properly be granted".
- This limitation has been recognised in a number of authorities. In Re Osborn, ex p. Trustee [1931-32] B & CR 189, an application for assistance under section 122 of the Bankruptcy Act 1914, Farwell J said at p.194:
"I think under the section it is plain that this court must give such assistance as it can, but subject of course, to the considerations which would arise if there was also a bankruptcy in this country, or to the rights of the creditors and other persons in this country."
- This passage was cited by Lord Lowry LCJ in Re Jackson (a bankrupt in the Republic of Ireland)  NI 67 at 72, where he refers to "cases of conflicting bankruptcies" as an exception to the general position that assistance will be given to the requesting court, in that case under section 122 of the Bankruptcy Act 1914. See also Re A Debtor, ex p. Viscount of the Royal Court of Jersey  Ch 384 at 402. In Re Focus Insurance Co Ltd  1 BCLC 219 at 224, which concerned an application by the liquidators of a Bermudian company for an order requiring information from an individual who had been made bankrupt in England, Sir Richard Scott V-C said:
"Section 426(4), which I have read, appears to impose on the courts of this country a mandatory obligation. The words used are "shall assist". But, of course, the subsection is silent as to the manner in which the courts of this country "shall assist" and it is easy to conclude that it could not be supposed that the courts of this country would have a mandatory obligation to provide assistance in a manner that was contrary to the proper conduct of a bankruptcy in this country."
It was the individual's bankruptcy in England which created the problem (p.225 c-d), so that at pp.228g – 229 a, the Vice-Chancellor said:
"The purpose of ordering Mr Hardy to do the various things that the originating application and letter of request propose he be ordered to do is to obtain information about his assets. But that is the function, once bankruptcy has intervened, of his trustee in bankruptcy. The judgment debt is no longer recoverable by the various processes normally available for satisfaction of judgment debts. During the currency of the bankruptcy, if the debt can be recovered at all – I have said that the proof of debt has not yet been accepted – it must be recovered by submission of a proof in the bankruptcy upon which some dividend will become payable. The amount of the dividend will depend upon the amount of the debtor's assets that the trustee has been able to realise. The purpose behind the originating application and the letter of request seems to me to be opposed to the scheme for realisation of a debtor's assets and payment of the debtor's creditors prescribed by the bankruptcy legislation in force in this country."
ISSUE 4: NO WINDING-UP ORDERS HAVE BEEN MADE: EFFECT ON SECTION 426 REQUESTS
- Winding-up orders have not been made against the Companies in England and, even in the absence of schemes of arrangement, they might never be made. The issue for the court arising on the Australian liquidator's application is whether, in these circumstances, it would be right to make the orders sought, pursuant to the letter of request from the Australian Court.
- The presentation of winding-up petitions in England represented a change in the original strategy for the Companies, which had involved the appointment of the JPLs in aid of the Australian provisional liquidations under section 426, without winding-up petitions in England and on the basis that in due course the provisional liquidations in England would be stayed. The applications for leave to present the winding-up petitions in England were supported by a witness statement dated 12 July 2001 of John Wardrop, one of the JPLs. Mr Wardrop explained the concerns of the JPLs over the operation of sections 116 and 562A, resulting in what could be a significantly different distribution regime in an Australian as opposed to an English liquidation. This gave rise to concerns as to how they as JPLs should deal with assets collected by them. He explained (at para 62):
"In the normal course (and leaving aside for the moment HIH (UK)), given that they were appointed pursuant to s426 of the Act, the English PLs would simply remit any assets gathered by them to Australia. Those assets would then be distributed according to the Australian regime. As explained above, this Australian distribution regime could result in a dividend for some creditors which would be significantly different than would be the case if the distribution had taken place under the English regime. The English PLs have not yet been able to consider in detail the impact of this from a financial perspective, but there is no doubt it might lead to significant differences. For this reason, the English PLs have not remitted any assets to Australia. This gives rise to an issue for the English PLs in relation to their duties to this Court, inter alia, to protect assets for creditors as a whole and their duty to assist the Australian PLs and the Australian winding-up".
This was one of the major issues which led the JPLs to approach the directors of HIH Systems International Limited with a view to presenting the English petitions and to support the applications for leave to present them. Notice of the applications was given to the Australian liquidators and ASIC, who raised no objection. On this evidence, leave was granted by the English Court and the petitions were duly presented. The JPLs now hold office as provisional liquidators in those petitions.
- The expectation then, as now, was that schemes of arrangement, rather than winding up, would provide the way forward for the Companies. It is, however, clear that the winding-up petitions were not presented simply with a view to ancillary English liquidations which would be limited to the collection of assets and the settlement of a list of conditions, and followed by a transfer of assets to the Australian liquidators and a stay. It was expressly contemplated that the existence of sections 116 and 562A might require a distribution in accordance with English insolvency law of assets collected and realised by English liquidators.
- The presentation of a winding-up petition, and the appointment of provisional liquidators to safeguard the assets of the company, will normally lead in due course to a winding-up order, unless a scheme of arrangement has been sanctioned. If in the case of the Companies it was clear beyond any doubt that a winding-up order would in due course be made, in the absence of a scheme, it could not in my judgment be right at this stage to order the transfer of funds to the Australian liquidators. It would as much undermine the mandatory rules of substantive law in the English statutory scheme as an order for transfer made after the winding-up order. Conversely, if it was clear beyond any doubt that winding-up orders would never be made, even in the absence of a scheme, this objection to a transfer would not be sustainable.
- It is therefore necessary, as the Australian liquidators submit, to assess whether winding-up orders would be made. There can of course be no certainty about this. The making of a winding-up order is a discretionary matter, to be decided in the light of the submissions and evidence at the time of the hearing. This is especially so in the case of a foreign company, where the existence of a principal liquidation elsewhere or even the existence of a more appropriate forum for possible winding-up are important factors to be weighed by the court: see for example Re Matheson Brothers Ltd (1884) 27 Ch D 225 at 230 – 231 and Re A Company (No.00359 of 1987)  Ch 210. If it were not for section 562A, and perhaps section 116, there would not on the face of it seem to be any strong ground for winding-up orders in England, except so far as necessary as a prelude to the transfer of assets to the Australian liquidators. The existence of section 562A itself might weigh very little with the court if the Companies had conducted no business in England and a winding-up was sought in an effort to outflank section 562A by creditors who had contracted with the Companies in Australia. To take an example given by Mr Mortimore, if the Companies' only connection with England was a large bank deposit in London, I think it highly unlikely that a winding-up order would be made, nor would it have been necessary to appoint the JPLs.
- The likelihood is that the creditors who seek winding-up orders will be those who would suffer a detriment from the application of section 562A. Of liabilities incurred by the London branch of HIH C&G they represented about 80% in value of debts. Equally it may be anticipated that insurance creditors would oppose a winding-up order. I would not wish at this stage to pre-judge the outcome of the argument, particularly as it could well be affected by many factors including the overall balance and composition of supporting and opposing creditors and the extent of any prejudice to one group or another as it then appeared on the evidence. The court would also have regard to various other factors which could create difficulties if there were concurrent liquidations in Australia and England, such as the date for conversion of foreign currency debts, proofs for interest and limitation issues, to which Mr Mortimore drew attention. I do, however, consider that the existence of section 562A with its adverse consequences for reinsurance and general creditors would be a substantial ground in favour of making winding-up orders.
- I therefore conclude that there is a significant prospect that, in the absence of schemes of arrangement, winding-up orders would be made. A principal function of provisional liquidators at this stage is to safeguard the assets of the Companies for the benefit of those interested in their distribution in the event of a winding-up. In these circumstances it would in my view be inconsistent with their present function to direct the JPLs to transfer the assets to the Australian liquidators, and it would not be proper to do so. Its effect would be to undermine the proper working-out of the statutory insolvency scheme which would be mandatory if winding-up orders were made. Mr Mortimore referred to the power of the court to stay the English winding-up after an order has been made, but that power would be exercised only if the court could and did order the transfer of assets.
- Accordingly, my answers to the issues raised by the Australian liquidators at this stage are that (a) the JPLs should not be directed to pay over to the Australian liquidators the sums collected by them and (b) their powers should not be extended to enable them to do so.
OTHER ISSUES AND SUBMISSIONS
- There are two further submissions made on behalf of the Australian liquidators which I should mention. First, whatever the position of reinsurance recoveries to which section 562A applies, all other assets should be transferred to the Australian liquidators. The reasoning is that they will be distributed among all creditors on a pari passu basis under section 555 of the Corporations Act 2001. Section 116 of the Insurance Companies Act 1973 would not apply to them because they would not constitute "assets in Australia" within the meaning of the section, although the JPLs understand that this has been challenged by parties in Australia. Creditors who had received higher levels of dividend as a result of section 116 could not participate in a distribution of the transferred assets until other creditors had received the same level of dividend. The JPLs object to this course on the ground that, if the non-reinsurance assets were transferred to the Australian liquidators, insurance creditors who have received dividends out of reinsurance recoveries pursuant to section 562A would share in the distribution of the transferred assets without bringing their section 562A dividend into hotchpot. This would run counter to the substantive English rules for pari passu distribution. In principle I think that is right, although I do not know whether it would in fact make a material difference in these cases. In any case, if the reinsurance recoveries remain in the English liquidation there are significant practical reasons for also retaining the other assets. I do not therefore propose to distinguish between these two classes of assets.
- Secondly, whatever the position as regards HIH C&G and WMG, the assets of the other two Companies should be transferred to the Australian liquidators, because the dividend payable to creditors will not be altered. I do not propose to deal with this point now but, if it is pursued, I will hear further submissions on it.
- I should mention the written submissions sent to the court by Mallesons Stephen Jaques, solicitors for two Australian firms, Hazelwood Power Partnership and Latrobe Power Partnership, which are or claim to be insurance creditors of HIH C&G. They have actively participated in the proceedings in the Australian Court, but they did not apply to be joined as parties to the applications in this court nor were they represented at the hearing. They supported the position of the Australian liquidators, and added two points. The first was that, in their submission, the Australian Court cannot, or will not, exercise its jurisdiction to sanction a scheme of arrangement that departs from section 562A, even as regards assets held by the JPLs in England. I cannot assess whether this is a good point, which, in any event, would go to the exercise of discretion by this court, not to whether the court had power to direct a transfer of the assets. Their second point, that the JPLs would not be able to collect some of the reinsurance recoveries if claims had not been made by Australian insurance creditors, also goes only to discretion. The Australian liquidators expressly did not adopt either submission.
- Finally, I return to questions two and three in the applications of the JPLs. Question 2 seeks directions as to whether the JPLs may cause the Companies to propose schemes of arrangement pursuant to section 425 of the Companies Act 1985 having the effect of providing for either (a) distribution of each Company's English assets in accordance with the statutory insolvency scheme, applying the principle of hotchpot, as provided in the current draft scheme or (b) distribution of those assets in a manner that would give effect to the operation and application of section 562A and section 116, including the possibility of specific priority as a result of orders under section 562A(4). It follows from my directions under question 1 and my answers to the Australian liquidators' applications that the JPLs may propose a scheme of arrangement providing for distribution as in (a) above. The court would have jurisdiction to sanction a scheme of arrangement providing for distribution as in (b) above, but the JPLs would have to consider whether it was appropriate to put forward a scheme on that basis. I have heard no argument directed to that point.
- The third question seeks directions as to whether a scheme of arrangement with the effect set out in (b) above would require division of the creditors into more than one class for voting purposes. As the scheme would differentiate between groups of creditors in a material way not reflected in the English insolvency scheme, enhancing the rights of some as against the rights of others, there could not be a single class of creditors.