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On appeal from [2011] CSIH 61

On 27 February 2013, the Supreme Court unanimously upheld a decision of the Inner House of the Court of Session in Scotland, dismissing the appeal of the winding-up board of Landsbanki Islands (“Landsbanki“). The case concerned the question of how cross-claims between two credit institutions are to be dealt with in insolvency proceedings in two different member states of the European Economic Area (EEA). The Court applied the Credit Institutions (Reorganisation and Winding Up) Regulations 2004 (“Regulations“).

Background

The reorganisation and winding-up of certain credit institutions in EEA insolvency proceedings is governed by a European Directive (2001/24/EC of 4 April 2001) (the “Directive”) which was implemented into UK law by The Credit Institutions (Reorganisation and Winding Up) Regulations 2004 (the “Regulations”). Both the UK and Iceland are EEA member states.

The Regulations apply to credit institutions (effectively, deposit-taking banks) that are incorporated in one EEA state, but have assets, liabilities or carry on business in another EEA state. The aim of the Regulations is to ensure that the reorganisation and winding-up of such institutions in insolvency proceedings takes place in their state of incorporation. Therefore, the general principle contained in the Regulations is that any reorganisation or winding up proceedings commenced elsewhere in the EEA over an EEA credit institution are to be recognised in the UK in relation to any branch of an EEA credit institution.

Facts

Landsbanki is a bank incorporated in Iceland. Heritable Bank plc (“Heritable“), a bank incorporated in Scotland, is its wholly owned subsidiary. As a result of the failure of Iceland’s banking system in 2008, both companies became insolvent. Heritable went into administration in Scotland in 2008 and Landsbanki entered winding-up proceedings in Iceland in 2009.

There were a number of intercompany debts between the parties. Landsbanki filed four claims in the administration of Heritable and Heritable submitted four claims in Landsbanki’s winding-up. The winding-up board of Landsbanki rejected Heritable’s claims in Iceland and Heritable later withdrew them, with the effect that they were extinguished under Icelandic law.

The claim at issue in this case was Landsbanki’s claim for approximately £86 million in respect of a revolving credit facility governed by English Law. The administrators of Heritable rejected this pursuant to a rule of Scots law on the balancing of accounts in bankruptcy by which Landsbanki’s claim could be set off because Heritable had claims that equalled or exceeded Landsbanki’s claim. Landsbanki appealed against this decision to the Court of Session on the basis that Heritable’s claims had been rejected in Iceland and that this decision had effect in Scotland under the Regulations. Landsbanki argued that Heritable’s claims did not, therefore, equal or exceed Landsbanki’s claim.

The Court of Session: First Instance and Appeal

The Outer House of the Court of Session ruled in favour of Landsbanki at first instance. The court held that the Regulations left no room for doubt that the ruling of a home Member State should be recognised and given effect elsewhere and, accordingly, a ruling in winding-up proceedings by an EEA member state should, to the extent that the ruling was final and binding in that country, be recognised and given effect in the United Kingdom.

This decision was overturned on appeal to the Inner House of the Court of Session, which held that Landsbanki had wrongly interpreted regulation 5 (reorganisation measures and winding-up proceedings in respect of EEA credit institutions effective in the United Kingdom) of the Regulations. Contrary to the decision of the Outer House, regulation 5 did not render decisions made in insolvency proceedings in one EEA state automatically binding in all other states. In this case specifically, a foreign decision would not prevent the disposal of property or assets of an insolvent UK company under UK insolvency law. Landsbanki appealed to the UK Supreme Court.

Decision

The Supreme Court unanimously dismissed the appeal, with Lord Hope of Craighead giving the leading judgment. Landsbanki’s appeal was entirely based on their interpretation of regulation 5(1) of the Regulations, and the Court agreed with the Inner House of the Court of Session that this interpretation was incorrect. The aim of the Regulations, like the Directive that they implement, is to ensure that the insolvency law applicable to an EEA credit institution is that of its home member state. To the extent that a credit institution’s home state has full jurisdiction over its insolvency proceedings, a decision rendered by a court in that home state is to be recognised in all other EEA member states.

However, regulation 5 (in Part 2) of the Regulations only applies to jurisdiction in relation to EEA credit institutions, not to UK insolvency proceedings of a UK company. For the purposes of the Regulations, Landsbanki is an EEA credit institution other than a UK institution and Heritable is a UK credit institution (regulation 2). Regulation 5 is therefore relevant to Landsbanki’s insolvency proceedings in Iceland, which are to have effect in the UK as if they were part of the general law of insolvency of the United Kingdom, irrespective of whether Landsbanki has assets in the UK.

This does not, however, apply to Heritable, which is a Scottish company. The appropriate provisions of the Regulations are those applying to UK credit institutions – Parts 3 and 4 of the Regulations. These provide that matters such as the conditions under which set-off may be invoked and the rules governing, among other things, the admission and ranking of claims are to be determined in accordance with the general law of insolvency of the UK. The Icelandic decisions do not, therefore, extinguish Heritable’s right to set-off in Scotland and such issues are to be determined as the common law of Scotland requires.

The court also mentioned, obiter, that Landsbanki’s argument would produce an arbitrary and unprincipled outcome. By the logic of its argument, Heritable’s claims against Landsbanki in Scotland would have been extinguished even if Heritable had been a wholly solvent company. Heritable would not have been able to set off Landsbanki’s claim in Scotland unless it successfully lodged a claim in Landsbanki’s winding-up in Iceland, even if there was no prospect of recovery, as in this case. This would not only be a waste of time and money, but it would also give universal priority to the process in which a decision happened to be made first, which would encourage forum shopping and could not have been intended by the framers of the Directive.

Comment

The decision is a sensible one, not least because it has avoided the scope for parties to engage in forum shopping in certain insolvency situations. This case demonstrates that claims may not be equally valid within different EEA member states, and forum shopping at a moment of distress to determine which jurisdiction will likely treat your claims most favourably would only increase costs and introduce additional complications into what would be an already fraught process.

Nevertheless, although it was recognised in the judgment that the intention of the drafters was unlikely to have produced the opposite result, the decision arguably leaves the foreign credit institution somewhat adrift in cross-border insolvency proceedings (no doubt the winding-up board of Landsbanki are not pleased with this decision). With this in mind the possibility of further challenge in Europe remains open, most likely in the form of a challenge to the UK’s implementation of the Directive. Indeed, other commentators have noted that the Court’s decision relied heavily upon the structure and headings of the Regulations as a means to interpret them, in circumstances where the Directive is not structured in this way.

(JUSTICES: Lord Hope (Deputy President), Lord Walker, Lord Kerr, Lord Reed, and Lord Carnwath)

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