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Focus: Insolvency – October 2005

'Not known at this address': the limitations of letters of request in cross-border insolvencies

In brief: Partner Michael Quinlan (view CV) and Overseas Practitioner1 Elliot Norton examine a decision handed down by the English High Court of Justice earlier this month that has serious implications for the consideration of letters of request in complex cross-border insolvency proceedings. The decision also has significant implications for the efficacy of section 562A of the Corporations Act 2001 (Cth) where Australian insurers are reinsured in London.

Introduction

A ruling of the High Court of Justice of England and Wales (English court) on 7 October 2005 that involves the insolvency proceedings of HIH Casualty and General Insurance Ltd (HIH) considers the approach to be followed by an English court that has received a letter of request from an Australian court.

The judgment calls into question the efficacy of this means of procuring that an English court apply Australian insolvency law, where the principal liquidation is in Australia and the English liquidation is only ancillary.

In Australia, the Corporations Act 2001 (Cth) (Corporations Act ) provides for courts to act in aid of, and be auxiliary to, each other in all external administration matters. Section 581 provides that, where a letter of request from a court of a country other than Australia, requesting aid in an external administration matter, is filed in an Australian court, the court may exercise such powers with respect to the matter as it could exercise if the matter had arisen in its own jurisdiction.

Reciprocally, the Australian court may request a court of a foreign country that has jurisdiction in external administration matters to act in aid of, and be auxiliary to, it in an external administration matter.

The judgment that we consider in this article follows our recent examination of two decisions: Independent Insurance Company Ltd2 and Fourie v Le Roux (No.2)3, in the Supreme Court of New South Wales (NSWSC) and the English court respectively, which considered letters of request from foreign Commonwealth countries and the principles to be applied in their consideration (AAR Focus: Insolvency, September 2005).

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The Re HIH Casualty and General Insurance Ltd judgment
Background

An originating process to wind up HIH and three associated companies was presented to the NSWSC in March 2001 and liquidators of HIH were appointed in August 2001. Also in March 2001, the NSWSC issued a letter of request to the English court for the appointment in England of provisional liquidators over HIH under section 426 of the UK Insolvency Act 1986. The English provisional liquidators were duly appointed to HIH, the liquidation of which in the UK was ancillary to the principal Australian liquidation.

It subsequently became clear in Australia that, unless the sums collected by the English provisional liquidators were remitted to Australia for the Australian liquidators to apply in the due course of winding up HIH or in accordance with a scheme of arrangement, insurance creditors of HIH would lose the benefit of s562A of the Corporations Act. At the relevant time, English law contained no equivalent to this statutory provision. 

While the provision is complicated, in essence s562A of the Corporations Act gives insurance creditors the right to participate in reinsurance recoveries in priority to other creditors. Like most Australian insurers, much of HIH's reinsurance was written by London-based reinsurers. If those reinsurance proceeds were not remitted to Australia and English law were applied to their distribution, insurance creditors would lose out.

In June 2005, the Australian liquidators demanded the assets be remitted by the English provisional liquidators to Australia for distribution. The English provisional liquidators resisted, instead seeking directions from the English court as to the appropriate distribution of the assets collected in England. Accordingly, the Australian liquidators applied to the NSWSC for a letter of request to the English court to be issued to this effect.

Letter of request

On the application of the Australian liquidators, Justice Barrett ordered on 4 July 2005 the transmission of a letter of request to the English court.

What is interesting is that the letter of request did not directly ask the English court to direct the English provisional liquidators to pay over to the Australian liquidators the sums collected in their official capacity. Instead, the letter of request asked the English court to assist, act in aid of and be auxiliary to the NSWSC 'by hearing and determining an application by the Australian liquidators for directions to the English provisional liquidators' to pay over the relevant sums collected. It can be inferred that this attenuation of the request was made in the interests of comity between jurisdictions and reflecting Australian judicial respect for the equivalent court in England.

English proceedings

On the same date that Justice Barrett issued the letter of request in Australia, Justice Hart in the Companies Court in the Chancery Division of the English court ordered that the application for directions and the request application be expedited. Justice Richards accordingly heard the matter as English summer vacation business and handed down judgment on 7 October 2005.

Decision against transfer of assets to Australia

Justice Richards held that, if the companies in question were ordered to be wound up by the English courts, the English liquidators would be directed not to transfer assets to Australia, as those assets would not be distributed in Australia according to rules for a pari passu distribution substantially the same as the English rules. The next question was whether, notwithstanding that decision, the English court should direct the English provisional liquidators to make such a transfer in view of the fact that the directions for transfer were sought under a letter of request from the NSWSC.

Relevant UK insolvency legislation

The answer depended on the court's interpretation of the effect of s426 of the UK Insolvency Act. Section 426 confers powers and duties on the English court to provide assistance to other courts in insolvency matters. The following provisions are the relevant ones:

(4) The courts having jurisdiction in relation to insolvency law in any part of the UK shall assist the courts having the corresponding jurisdiction in any other part of the UK or any relevant country or territory.

(5) For the purposes of sub-s(4) a request made to a court in any part of the UK by a court in any other part of the UK 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 statutory instrument.

A restricted number of mainly Commonwealth countries, including Australia, were designated to be relevant countries or territories in the Cooperation of Insolvency Courts (Designation of Relevant Countries and Territories) Order 1986.4

Section 426(10) defines 'insolvency law' in a manner that allows the English courts to apply either English insolvency law or the insolvency law of the requesting state to the extent that it corresponds to English insolvency law provisions.

First instance case law on section 426

The prima facie mandatory language of s426(4) was considered in three English first-instance cases in 1992, 1994 and 1997 respectively and by the Court of Appeal in 1997. In Re Dallhold Estates (UK) Pty Ltd5, Justice Chadwick referred to the court's discretionary power to make an administration order, and stated that if the statutory prerequisites for its exercise were fulfilled, the court should make the order 'unless there is some compelling reason why that should [not] be done.'6

In Re BCCI (No. 9)7, Justice Rattee stated that the court has a discretion as to how it should provide assistance and that it ought to exercise its discretion in favour of providing the particular assistance requested by the foreign court 'unless there is some good reason for not doing so.' 8

Re Focus Insurance Co Ltd9 related to an application by the liquidators of a Bermudan company for an order requiring the giving of information by a person who had been bankrupt in England. Sir Richard Scott VC stated:

Section 426(4) ... appears to impose on the courts ... a mandatory obligation. The words used are 'shall assist'. But ... the subsection is silent as to the manner in which the courts ... 'shall assist' and it is easy to conclude that it could not be supposed that the courts ... would have a mandatory obligation to provide assistance in a manner that was contrary to the proper conduct of a bankruptcy in this country.

The objective underlying the originating application and the letter of request was contrary 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 the UK. Sir Richard Scott VC accepted10 the guidance of Justice Chadwick and Justice Rattee.  He stated 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 words 'shall assist'.11 

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The English Court of Appeal judgment in Hughes v Hannover

In the 1997 judgment of Hughes v Hannover Rückversicherungs-AG12, Lord Justice Morritt broke down the sources of law that the English court may apply into three categories: (a) its own general jurisdiction and power, (b) English insolvency law, and (c) those provisions of the requesting state's law that correspond to English insolvency law. He outlined the English court's approach to the question of whether to provide assistance as follows:13

  • It would require clear words to justify a conclusion that the English court was not intended by Parliament to perform its normal function of seeking to do justice in accordance with the law.
  • The function of the court under s426 is to consider whether in accordance with the three sources of law identified as (a), (b) and (c) the assistance may properly be granted.
  • If it may, then it should be, thereby discharging the statutory duty under s426.
  • If it may not be, then it should be withheld, as the duty is qualified by reference to what the English court may properly do as a court.
  • If the English court 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.
  • The reasons for withholding assistance are not limited to reasons of public policy.
  • Public policy may 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 English court.
  • The English court may be expected to accept without further investigation the views of the requesting court as to what was required for the proper conduct of the winding up.
  • The request is not conclusive as to the manner in which the discretion of the court should be exercised.
  • The fact of the request for assistance is a weighty factor to be taken into account, but it cannot outweigh all others.

In the HIH case under consideration in this Focus, Justice Richards had decided that the substantive rules of distribution under the English statutory insolvency scheme are mandatory and that the English court has no power to make an order that would have the effect of disapplying them. It therefore followed that the English court could not accede to the NSWSC's request for a transfer of funds to Australia. His Honour held that the power to make such an order does not exist in English law and any power under Australian law could not be exercised by the English court in a way contrary to English law. In the words of Lord Justice Morritt, it would not be assistance that 'may properly be granted'.

Conclusion

The decision of Justice Richards is a conservative view of the letters of request procedure in English insolvency law.  It reflects a leaning towards the territorial side of the spectrum of ways to approach cross-border insolvency matters, as opposed to a more international approach.

As so much reinsurance of Australian insurance risks is, and has historically been, written out of London, Justice Richards' decision effectively denudes s562A of the Corporations Act of its effectiveness, at least whenever an Australian insurer goes into liquidation and an ancillary liquidator is appointed in the UK. On the basis of this decision, reinsurance proceeds recovered in England in those circumstances will not be remitted to Australia for distribution in accordance with Australian law.

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Footnotes
  1. Admitted in England and Wales only.
  2. [2005] NSWSC 587, judgment dated 22 June 2005.
  3. [2005] EWHC 922 (CH), [2005] All ER (D) 263, judgment dated 18 May 2005.
  4. SI 1986/2123.
  5. [1992] BCLC 621.
  6. ibid., at 627.
  7. [1994] 3 All ER 764.
  8. ibid.,  at 785.
  9. [1997] 1 BCLC 219 at 224.
  10. ibid., at p.227.
  11. ibid., at p.230.
  12. [1997] 1 BCLC 497.
  13. ibid., at pp.517-518.

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