Last week a five-judge bench consisting of Lords Walker, Mance, Clarke, Sumption and Collins heard an appeal in what is likely to become a landmark case in private international law and, specifically, cross-border insolvency.  The Supreme Court’s judgment will determine whether the rulings in respect of insolvency matters made in overseas courts can be enforced in England and Wales.

The Facts

Eurofinance S.A. created The Consumers Trust, an English law trust, which was part of a sales promotion run in the US known as the “Cashable Voucher Scheme”.  Customers who participated in the scheme were offered a voucher that would give them a full rebate on their purchase, contingent to following conditions so obscure and difficult to fulfil that the chance of actually obtaining the rebate was extremely unlikely.

The scheme ran into trouble when the Attorney General of Missouri issued proceedings against the scheme under the state’s consumer protection legislation, and it soon became clear that other similar proceedings would inevitably follow.  TCT decided to seek protection by entering into insolvency proceedings.

The Respondents, who were appointed as receivers of TCT by the High Court of England and Wales, caused TCT to present a voluntary petition for relief in New York under Chapter 11 of the United States Bankruptcy Code and TCT was placed into insolvency proceedings in New York on the basis that (i) nearly all of TCT’s 60,000 creditors were located in Canada or the US; and (ii) TCT as a trust was treated as a separate legal entity under US law.  Under the approved plan of liquidation, the Respondents were appointed legal representatives of TCT, with exclusive authority to prosecute all causes of action against potential defendants.

The Respondents brought proceedings, known as “the adversary proceedings”, against the appellants in New York.  However, the appellants decided not to enter an appearance or submit to the jurisdiction of the New York court.  As a result, default and summary judgment was entered against the appellants.  The Respondents then applied to the High Court of England and Wales under the Cross-Border Insolvency Regulations 2006 for an order recognising the US insolvency proceedings as a “foreign main proceeding” and the enforcement against the appellants of the orders made by the US Bankruptcy Court.

First Instance

It was held by Nicholas Strauss QC, sitting as a deputy judge of the Chancery Division of the High Court that the UNCITRAL Model Law on Cross-Border Insolvency (the “Model Law”) would not lead to an automatic recognition of foreign judgments if such recognition required a departure from established principles of private international law, namely in this case the principle that enforcement of a foreign judgment is not possible where the defendant is not subject to that foreign court’s jurisdiction.  On that basis, the High Court found that a default judgment awarded in insolvency proceedings in a foreign court was not directly enforceable in the High Court.

The Court of Appeal

On appeal by the receivers, the Court of Appeal considered the following issues, as set out in Lord Justice Ward’s judgment:

(1) Should foreign bankruptcy proceedings be recognised as a foreign main proceeding in accordance with the UNCITRAL Model Law on Cross-Border Insolvency (the “Model Law”) and the appointment therein of the Respondents, as foreign representatives be similarly recognised?

(2) Should the judgment or parts of the judgment of the U.S. Bankruptcy court of 23 July 2008 against the appellants for payment of various sums of money in excess of $8 million be enforced as a judgment of the English court?

In answering the issues, the Court of Appeal relied upon the (minority) judgment of Lord Hoffman in Cambridge Gas Transportation Corporation v Official Committee of Unsecured Creditors of Navigator Holdings [2006] UKPC 26, and Re HIH Casualty and General Insurance Ltd [2008] UKHL 21, finding that foreign court proceedings could in fact be recognised in this case under the Model Law.

It was found that the ordinary rules regarding the enforcement of foreign judgments in personam were not applicable to bankruptcy proceedings.  Bankruptcy proceedings were held to be distinct from other proceedings in rem and in personam in that rather than determining or establishing the existence of rights, they are merely a mechanism designed to enable a creditor whose rights have already been admitted or established to enforce those rights against their debtor.  A defendant debtor should not be allowed to avoid proceedings by refusing to submit to the court’s jurisdiction.  Neither the receivers nor the creditors should be forced to commence parallel insolvency proceedings.

Accordingly, on that basis, the principle of modified universalism was found to be applicable, and the English court required, where consistent with justice and public policy, to recognise the appointment of a foreign liquidator and to provide assistance wherever possible to the US court in the matter of the bankruptcy proceedings.  The Court of Appeal therefore unanimously allowed the appeal and found that the US insolvency proceedings were to be held as “foreign main proceedings”.

The decision indicated the Court of Appeal’s belief that international law should be applied in such a fashion that enables universal recognition of bankruptcy proceedings, and that this principle does not conflict with the usual treatment of proceedings in rem and in personam, but forms a separate and distinct class of action.

Issues before the Supreme Court

The issues that were before the Court of Appeal will now be considered by the Supreme Court.  If the Supreme Court upholds the judgment of the Court of Appeal, it is likely to lead to greater efficiency in cross-border bankruptcy cases and possibly an increase in insolvency proceedings being launched in London due to its jurisdictional reach.