Netting assets

The statutory prohibition on litigating against a company in liquidation or administration '“ without the leave of the court '“ might be thought to have worldwide effect; but does it? The Court of Appeal has shed interesting light on the question in its decision in the case of Bloom v Harms Offshore AHT 'Taurus' GmbH & Co KG [2009] EWCA Civ 632.

No matter where in the world they are situated, the assets of a company which is in liquidation or administration in England are caught by the net of the insolvency regime. Section 144 and paragraph 67 of schedule B1 of the Insolvency Act 1986 require the liquidator and the administrator (respectively) to take into his custody or under his control all the property to which the company is or appears to be entitled. Section 436(1) of the Act defines 'property' in very wide terms, including 'every description of property wherever situated'.

To achieve an orderly pari passu distribution of assets among unsecured creditors, section 130(2) of the Act prohibits creditors from taking proceedings or enforcement action against a company in liquidation or the assets of such a company without the prior leave of the court. Paragraph 43(6) of schedule B1 of the Act contains a similar prohibition in relation to companies in administration, designed to give the company breathing space while the administrators see if they can achieve the object or objects of the administration.

It might be thought, therefore, that to be effective the Act's statutory moratoria on proceedings against an insolvent company and its assets should extend to protect all of the assets which the liquidator or administrator of an insolvent company may have to get in, no matter where in the world they may be, but they do not. The moratoria certainly extend to cover UK assets and, by virtue of article 16 of the EC Regulation on Insolvency Proceedings, their effect can also protect assets within the European Union, which came into force on 31 May 2002. They do not, however, extend to affect proceedings in non-EU jurisdictions because, in the ordinary course of events, the reach of UK legislation is not long enough to have extra-territorial effect. As stated by Mellish LJ in Re Oriental Inland Steam Co (1874) LR 9 Ch App 557: 'Of course, Parliament never legislates respecting strictly foreign courts.'

The only protection that a company in administration or liquidation may have in respect of its assets outside the EU is that afforded by the local law of the place in which they are situated. Absent recognition proceedings being taken by a UK liquidator abroad, creditors are not therefore prohibited by the Act from taking action in a non-EU jurisdiction against a company which is in liquidation in the UK or, in our view, in administration in the UK.

In addressing this issue in Bloom, the Court of Appeal did not find that the German creditors of a UK company, Oilexco North Sea Limited, which was in administration, were prohibited by the Act from commencing maritime claims in New York in respect of their pre-administration debts or from applying, on an ex parte basis within those maritime claims, for Rule B attachment orders. The effect of the Rule B attachment orders was to attach in favour of the German creditors any sum which passed to or from Oilexco through New York (including through the main clearing banks, on whom the orders were served).

These territorial limits to the statutory moratoria appear to present an opportunity for unsecured creditors of an English company which is in liquidation or administration to obtain full satisfaction of their debts, outside the insolvency regime, by pursuing foreign proceedings against a company's non-EU assets. Although such a strategy would be contrary to the spirit of the English insolvency regimes, there does not seem to be any statutory prohibition against it. Does that mean that the English court will allow it?

Anti-suit is the answer

The English court has decided that in appropriate cases it will not allow, as it sees it, the object of its insolvency process to be defeated by creditors taking proceedings abroad, without its permission, notwithstanding the apparent gap left by the territorial limits of the statutory moratoria. Therefore, if the English court can establish jurisdiction over the creditor who is proceeding, or is threatening to proceed, abroad against the company in liquidation or administration, it may be persuaded to exercise its inherent jurisdiction to protect its processes from abuse and grant an anti-suit injunction to restrain the creditor from commencing or continuing with litigation in another jurisdiction and/or to require the creditor to take positive steps before a foreign tribunal to obtain reversals of any orders which it may have already obtained. An anti-suit injunction is a personal order made against the creditor. It does not bind or seek to direct the foreign court itself.

The court's reasoning has evolved over time. In the late 19th century and early 20th century, the English courts were faced with a series of cases in which creditors were proceeding against the foreign assets of companies which were in liquidation in England. While recognising the territorial limits of the statutory moratorium, the courts nevertheless effectively stepped in to fill the apparent gap left by statutes of the time (which were, for the purposes of this article, in substantially similar terms to those of the Act). The courts based their analysis of the footing upon which they could properly intervene on the fact that, upon liquidation, all of a company's assets, wherever they may be situated, become fixed with a statutory trust for equal distribution between itscreditors. The courts' supervisory power over the administration of trusts could therefore justify the grant of an anti-suit injunction against a creditor who, by pursuing proceedings against the foreign assets of a company, effectively sought to gain a priority over other creditors.

Avoiding the trap

It seems difficult to us to extend such an analysis and justification to companies in administration because the statutory scheme contained in the Act does not create or give rise to any form of trust of the assets of a company in administration. In Bloom, the Court of Appeal was nevertheless willing to look past this difficulty to prevent, as the court saw it, the German creditors in the case from keeping the fruits of, what it saw as, a trap which the creditors had laid for the unassuming administrators.

Neither the German creditors nor Oilexco and its administrators had any connection with New York or the US. The German creditors did not disclose to the New York court, when they sought the attachment orders, that an administration order had been made against Oilexco in England, nor did they serve on the English administrators, or otherwise notify them of, the ex parte attachment orders they had obtained in New York. In ignorance of the existence of these orders, the administrators made a substantial payment of a post-administration debt in US dollars. Being a US dollar payment, it had to, and did, go through one of the New York clearing banks, whereupon it was caught by the net of the attachment orders which Harms Offshore had obtained. This was, in Sir John Chadwick's eyes, a trap. This justified the English court's intervention to protect the administrators from the effects of the trap once it had been sprung.

It was in these circumstances that the Court of Appeal held that the trust analysis in Oriental Inland Steam Co was a legal construct created to achieve the equitable distribution of the proceeds of the realisation of the assets of the company wherever situated. Looking past this construct, it therefore found that the jurisdiction of the English court to grant anti-suit injunctions was not restricted by the territoriality of the statutory prohibition and its application was not confined to companies in liquidation. Rather it had the jurisdiction, in appropriate cases, to grant an anti-suit injunction to protect against an obstruction of the proper discharge of the functions of an officer of the court (whether that officer is a liquidator or an administrator).

The Court of Appeal's decision in Bloom can be seen as indicative of an increasing willingness by the English courts to do whatever may be necessary to assist officeholders in the efficacious discharge of their duties, particularly in insolvencies with an international flavour. The courts are, however, always keen to point out that the exercise of the jurisdiction to grant anti-suit injunctions must be tempered by considerations of comity and a natural judicial reluctance to interfere, in effect if not in form, with proceedings before a foreign court.

In Barclays Bank v Homan [1993] BCLC 680, Hoffman J said anti-suit injunctions are, 'however disguised and indirect, an interference with the process of justice in that foreign court'. In Mitchell v Carter [1997] 1 BCLC, Millett LJ added: 'There must be a good reason why the decision to stop foreign proceedings should be made here rather than there. The normal assumption is that the foreign judge is the person best qualified to decide if the proceedings in his court should be allowed to continue. Comity demands a policy of non-intervention.'

Stanley Burnton LJ in Bloom suggests that it will not always be so easy for the courts to castigate a creditor's conduct 'as oppressive, vexatious'¦ or otherwise unfair or improper' where a creditor is pursuing proceedings outside the EU against a company's foreign assets. In such circumstances there must be a risk that the English court may be at least more reluctant than it was in Bloom to take action to restrain the creditor's pursuit of its foreign proceedings.

To avoid both this risk and the difficulty faced by the Oilexco administrators, it is therefore prudent for administrators and liquidators of companies with assets in or which may pass through foreign jurisdictions both (a) to seek local advice as to the susceptibility of assets within those jurisdictions to attachment proceedings or other similar claims from unsecured creditors; and (b) when appropriate to take such steps as may be available in that jurisdiction to have their appointment recognised by the local courts (such as, for example, pursuant to Chapter 15 of the US Bankruptcy Code in the US).

So, how long is 'insolvency's arm'? The answer seems to be 'not long enough', but the English court can and will step in to lend a hand when it is appropriate to do so to prevent obstruction or abuse of its processes.