The Cross Border Insolvency Regulations: Can recognition be granted for solvent overseas proceedings?

Introduction

Given what has happened globally since judgment was given in this case in January 2020, it seems something of a luxury for restructuring professionals to be considering the prospect of solvent liquidations. However, it was the issue of whether recognition could be granted in England and Wales for a solvent Bermudan liquidation under the Cross Border Insolvency Regulations 2006 (CBIR) that was considered by the High Court in London in the case of Re Sturgeon Central Asia Balanced Fund Ltd (in liquidation) sub nom: Carter v Bailey and Hutchinson [2020] EWHC 123 (Ch).

The CBIR is the legislative framework under which England, Wales and Scotland have directly incorporated the UNCITRAL Model Law on Cross-Border Insolvency (Model Law) into domestic law. It therefore provides a domestic framework under which applications for recognition can be made to the courts of England, Wales and Scotland by overseas officeholders.

It is worth pausing for a moment to consider why, in relation to a solvent winding up, recognition may be sought. Firstly, the fact that a winding up may be solvent does not necessarily mean access to assets will be non-contentious. Secondly, there may also be domestic bodies that require an officeholder to have recognition to be able to act on their instructions. Thirdly, and more controversially, there are aspects of English law – such as the extensive officeholder powers to require information or attendance at a private examination in court granted under section 236 Insolvency Act 1986 – that are not available to foreign officeholders in their own jurisdiction, but which they may want to make use of. It appears to have been those powers the officeholders wished to use in this case.

The Sturgeon liquidation

The case involved the Bermudan just and equitable winding up of Sturgeon Central Asia Balanced Fund Ltd (Sturgeon) following a shareholder dispute. Mr Hutchinson and Mr. Bailey were appointed as Sturgeon’s joint liquidators (Joint Liquidators). The Statement of Affairs for Sturgeon showed assets of around USD39 million, and the High Court in London accepted that it was solvent.

The Joint Liquidators had applied on an ex parte (or without notice) basis for recognition in England and Wales under the CBIR. At the initial application hearing, a recognition order was granted. However, Mr. Carter, who was a director of Sturgeon when it was wound up, applied for the recognition order to be reviewed and terminated (under the review procedure contained in Part 5 of Schedule 2 of the CBIR, which allows for a second hearing at which a recognition order may be modified or terminated), on the basis that the Model Law does not apply to solvent winding up proceedings. The key question is: is recognition under the CBIR available for a solvent winding up?

The Model Law, which has force of law in England and Wales as a result of the CBIR, states that it applies to “foreign proceedings.” Such proceedings are defined in the Model Law as a “collective judicial or administrative proceeding in a foreign State, including an interim proceeding, pursuant to a law relating to insolvency in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganisation or liquidation.”

So far, so clear? Apparently not. The question of whether the liquidation of Sturgeon could be recognized turned on whether that definition of “foreign proceedings” would include a solvent winding up.

At the review hearing, the judge considered in detail what this definition of foreign proceeding might mean regarding solvent proceedings. The judge conducted a wide-ranging inquiry into the subject, with reference not only to the Model Law itself but also to the 1997 Guide to Enactment, and subsequent 2014 Guide to Enactment, the papers of the UNCITRAL Working Group V (Insolvency Law), the Judicial Perspective document on the Model Law, and relevant overseas case law. The judge considered that the focus of these materials was the need to provide relief upon recognition for debtors that could not pay their debts or were struggling to pay their debts and seeking to reorganize.

Ultimately, the judge concluded that for recognition to be ordered in England and Wales, the relevant proceedings “must relate to the resolution of the debtor’s insolvency or the debtor’s financial distress.” As such, he ordered that the recognition order in respect of Sturgeon be terminated. Accordingly, this judgment restricts the “foreign proceedings” capable of recognition under the CBIR so that solvent debtors or proceedings intended to distribute a surplus to shareholders will not qualify for recognition.

An interesting aside: which version of the Guide to Enactment should be referred to in considering the interpretation of the Model Law and CBIR

When the Model Law was originally published, it was accompanied by the Guide to Enactment of the UNCITRAL Model Law (1997) (1997 Guide). The purpose of the 1997 Guide was described as being “background and explanatory information” to help make the Model Law “a more effective tool for legislators.” Primarily aimed at governments and legislators, it was also meant to “provide useful insight to other users of the text such as judges, practitioners and academics.” Almost 20 years later, it was revised and the Guide to enactment of the UNCITRAL Model Law (2014) (2014 Guide) was published. Ultimately, the 1997 Guide was removed from UNCITRAL’s website and replaced by the 2014 Guide.

The CBIR provides a list at Regulation 2 of documents to be considered in ascertaining the meaning or effect of any provision of the Model Law. Regulation 2 specifically lists the 1997 Guide but has not been updated to refer to the 2014 Guide. This is of little matter where the text of the 2014 Guide and the 1997 are the same, or substantially the same. It becomes problematic, however, where the 2014 Guide is more expansive than (or even where it contradicts) the 1997 Guide.

It is a point that has been considered in other jurisdictions in relation to their own domestic incorporation of the Model Law – and indeed the Sturgeon judgment refers to a decision of the Singapore courts on a similar point (Re Zetta Jet Pte Ltd and others (Asia Aviation Holdings Pte Ltd, intervener) [2019] SGHC). Re Zetta found that where there was any conflict, the 1997 Guide would trump the 2014 Guide, but where the 1997 Guide was silent, the 2014 Guide could be taken into account.

Counsel for the Joint Liquidators had submitted that, because only the 1997 Guide was referred to in the CBIR, it was only the 1997 Guide that was relevant when deciding matters of interpretation. However, the judge in Re Sturgeon rejected this proposition, considering that the 2014 Guide “should be used as an important tool to interpretation of the Model Law as enacted in England and Wales by the CBIR.”

It's worth noting that one of the cases the court considered in Sturgeon was a US decision, Re Betcorp Ltd (2009) 400 BR 266, in which a solvent Australian liquidation had been recognized as a foreign main proceeding under Chapter 15 of the US Bankruptcy Code. The judge in Sturgeon recognized that this judgment had been given before the publication of the 2014 Guide, and this contributed to his reasoning for departing from the Betcorp decision.

Both on the question of whether the Model Law applies to solvent winding up proceedings, and also on the question of the extent to which the 2014 Guide is to be used in interpreting the Model Law (potentially also in insolvent proceedings), Re Sturgeon is likely to be of useful application not just in England and Wales, but more widely across countries that have incorporated the Model Law into domestic law.