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| Judgments - McGrath and another (Appellants) and others v Riddell and others (Respondents)
McGrath and another and others (Appellants) v Riddell and others (Respondents) (Conjoined Appeals)
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HOUSE OF LORDS SESSION 2007-08 [2008] UKHL 21 on appeal from: [2006] EWCA Civ 732
OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT IN THE CAUSE McGrath and another (Appellants) and others v Riddell and others (Respondents) McGrath and another and others (Appellants) v Riddell and others (Respondents) (Conjoined Appeals) Appellate Committee Lord Hoffmann Lord Phillips of Worth Matravers Lord Scott of Foscote Lord Walker of Gestingthorpe Lord Neuberger of Abbotsbury Counsel Appellants: Jonathan Sumption QC Simon Mortimore QC Tom Smith (Instructed by Norton Rose LLP) Geoffrey Vos QC Peter Arden QC (Instructed by Clifford Chance LLP) Respondents: William Trower QC Jeremy Goldring (Instructed by Freshfields Bruckhaus Deringer) Hearing dates: 11-12 DECEMBER 2007 ON WEDNESDAY 9 APRIL 2008 HOUSE OF LORDS OPINIONS OF THE LORDS OF APPEAL FOR JUDGMENT IN THE CAUSE McGrath and another (Appellants) and others v Riddell and others (Respondents) McGrath and another and others (Appellants) v Riddell and others (Respondents) [2008] UKHL 21 LORD HOFFMANN My Lords, 1. This appeal arises out of the insolvent liquidation of the HIH group of Australian insurance companies. On 15 March 2001 four of them presented winding up petitions to the Supreme Court of New South Wales. Some of their assets - mostly reinsurance claims on policies taken out in London - were situated in England. To realise and protect these assets, provisional liquidators were appointed in England. In Australia, the court has made winding up orders and appointed liquidators. The Australian judge has sent a letter of request to the High Court in London, asking that the provisional liquidators be directed, after payment of their expenses, to remit the assets to the Australian liquidators for distribution. The question in this appeal is whether the English court can and should accede to that request. The alternative is a separate liquidation and distribution of the English assets in accordance with the Insolvency Act 1986. 2. The English and Australian laws of corporate insolvency have a common origin and their basic principles are much the same. The general rule is that after payment of the costs of liquidation and the statutory preferred creditors, the assets are distributed pari passu among the ordinary creditors: see section 107 of the 1986 Act and section 555 of the Corporations Act 2001 (Cth). But Australia has a different regime for insurance companies. I need not trouble your Lordships with the details. It is sufficient to say that, in broad outline, it requires assets in Australia to be applied first to the discharge of debts payable in Australia (section 116(3) of the Insurance Act 1973 (Cth)) and the proceeds of reinsurance policies to be applied in discharge of the liabilities which were reinsured (section 562A of the Corporations Act 2001 (Cth)). It is agreed that if the English assets are sent to Australia, the outcome for creditors will be different from what it would have been if they had been distributed under the 1986 Act. Some creditors will do better and others worse. Approximate figures are given in para 17 of the judgment of the Chancellor in the Court of Appeal. Generally speaking, insurance creditors will be winners and other creditors will be losers. 3. The Australian court made its request pursuant to section 426(4) of the Insolvency Act 1986: “The courts having jurisdiction in relation to insolvency law in any part of the United Kingdom shall assist the courts having the corresponding jurisdiction in…any relevant country…” 4. The Secretary of State has power under subsection (11) to designate a country as “relevant” and has so designated Australia. Subsection (5) describes the assistance which a UK court may give. A request from the court of a relevant country 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.” 5. This provision was introduced into insolvency law in consequence of a recommendation in fairly general terms by the Cork Committee in 1982 (see Report of the Review Committee on Insolvency Law and Practice (Cmnd 8858) chapter 49.) The Committee drew attention to the inadequacy of the statutory provisions for international co-operation in personal bankruptcy and their complete absence in the law of corporate insolvency. 6. Despite the absence of statutory provision, some degree of international co-operation in corporate insolvency had been achieved by judicial practice. This was based upon what English judges have for many years regarded as a general principle of private international law, namely that bankruptcy (whether personal or corporate) should be unitary and universal. There should be a unitary bankruptcy proceeding in the court of the bankrupt’s domicile which receives world-wide recognition and it should apply universally to all the bankrupt’s assets. 7. This was very much a principle rather than a rule. It is heavily qualified by exceptions on pragmatic grounds; elsewhere I have described it as an aspiration: see Cambridge Gas Transportation Corporation v Official Committee of Unsecured Creditors of Navigator Holdings plc [2006] UKPC 26; [2007] 1 AC 508, 517 at para 17. Professor Jay Westbrook, a distinguished American writer on international insolvency has called it a principle of “modified universalism": see also Professor Ian Fletcher, Insolvency in Private International Law (2nd ed 2005) at pp. 15-17. Full universalism can be attained only by international treaty. Nevertheless, even in its modified and pragmatic form, the principle is a potent one. 8. In the late nineteenth century there developed a judicial practice, based upon the principle of universalism, by which the English winding up of a foreign company was treated as ancillary to a winding up by the court of its domicile. There is no doubt that an English court has jurisdiction to wind up such a company if it has assets here or some other sufficient connection with this country: Re Drax Holdings Ltd Re InPower Ltd [2003] EWHC 2743 (Ch), [2004] 1 WLR 1049. And in theory, such an order operates universally, applies to all the foreign company’s assets and brings into play the full panoply of powers and duties under the Insolvency Act 1986 like any other winding up order: see Millett J in Re International Tin Council [1987] Ch 419, 446-447: “The statutory trusts extend to [foreign] assets, and so does the statutory obligation to collect and realise them and to deal with their proceeds in accordance with the statutory scheme.” 9. But the judicial practice which developed in such a case was to limit the powers and duties of the liquidator to collecting the English assets and settling a list of the creditors who sent in proofs. The court, so to speak, “disapplied” the statutory trusts and duties in relation to the foreign assets of foreign companies. This practice was based partly upon the pragmatic consideration that any foreign country which applied our own rules of private international law would not recognise the title of an English ancillary liquidator to the company’s assets. But it was also based upon the principle of universalism. In Re Matheson Brothers Ltd (1884) 27 Ch D 225 Kay J appointed a provisional liquidator, as in this case, to protect the English assets of a New Zealand company which was being wound up in New Zealand. He said, at pp 230-231: “[What] is the effect of the winding up order which it is said has been made in New Zealand? This court upon principles of international comity, would no doubt have great regard to that winding up order and would be influenced thereby [but there was nevertheless jurisdiction to make a winding up order, and therefore to appoint a provisional liquidator, to protect the English assets]…I consider that I am justified in taking steps to secure the English assets until I see that proceedings are taken in the New Zealand liquidation to make the English assets available for the English creditors pari passu with the creditors in New Zealand.” 10. It seems clear from the last sentence that Kay J envisaged the English assets being distributed in the New Zealand liquidation, provided that English creditors shared pari passu with New Zealand creditors. It was on the authority of this and similar statements in other cases that Sir Richard Scott V-C held in Re Bank of Credit and Commerce International SA (No 10) [1997] Ch 213, 247 that an English court had power in an ancillary liquidation (provisional or final) to authorise the English liquidators to transmit the English assets to the principal liquidators. The basis for the practice could only be what Kay J called principles of international comity, the desirability of a single bankruptcy administration which dealt with all the company’s assets. 11. It is this jurisdiction, reinforced by the provisions of section 426, which the Australian liquidators (supported by two Australian insurance creditors who stand to gain from the application of Australian law) invite the court to exercise. But David Richards J, in a judgment which carefully examined all the arguments and authorities, held that the jurisdiction did not extend to authorising the assets to be remitted to principal liquidators for distribution which was not pari passu but gave preference to some creditors to the prejudice of others. The Court of Appeal (Sir Andrew Morritt C, Tuckey and Carnwath LJJ) held that there was such a jurisdiction, which might be exercised if distribution in the country of the principal liquidation produced advantages for the non-preferred creditors which counteracted the prejudice they suffered. But the present case offered no such advantages. The appeal was therefore dismissed. 12. My Lords, I would entirely accept that there are no administrative savings to be gained from remitting the assets to Australia. In order to avoid delay in distributing the available assets, the English provisional liquidators and the Australian liquidators have co-operated in securing the approval of two alternative schemes of arrangement, one based on the outcome which would occur if all the assets were distributed according to Australian law and the other on the outcome of separate liquidations in England and Australia. Depending upon your Lordships’ decision, one or the other will be carried into effect. All that remains is to press button A or button B. So the question is whether an order for remittal should be made, not to achieve any economies in the winding up, but simply because it is the right thing to do. Is it what principle and justice require? 13. The judge denied the existence of a power to order remittal to Australia on two grounds. The first was the absence of a power in the English court to disapply any part of the statutory scheme for the collection and distribution of the assets of an insolvent company. That included the provision in section 107 for pari passu distribution. The second was the weight of authority, in the specific context of an ancillary winding up, which laid emphasis upon the fact that the co-operation of the English court was given on the assumption that there would be a pari passu distribution in the principal liquidation. 14. In my opinion there is force in both of these reasons but the judge carried them too far. There is no doubt that , at least until the passing of section 426, an English court and an English liquidator had no option but to apply English law to whatever they actually did in the course of an ancillary winding up. As Wynn-Parry J said of an ancillary winding up in Re Suidair International Airways Ltd [1951] Ch 165, 173: “[T]his court sits to administer the assets of the South African company which are within its jurisdiction, and for that purpose administers, and administers only, the relevant English law…” 15. Similarly Sir Richard Scott V-C decided in Re Bank of Credit and Commerce International SA (No 10) [1997] Ch 213 that in settling a list of creditors, the English court was bound to apply English law. It could not disregard rule 4.90 of the Insolvency Rules 1986 (SI 1986/1925), which requires that the amount owing by the company to the creditor or vice versa shall be determined after setting off mutual debts against each other. 16. However, my noble and learned friend went further and directed the English ancillary liquidators not to remit the assets in their hands to the principal liquidators in Luxembourg (which did not recognise rights of set off) without making provision to ensure that the overall distributions to English creditors were in accordance with English law. 17. On the facts of the case I think, if I may respectfully say so, that the decision was correct. The mutual debts which were set off against each other appear to have been entirely governed by English law, which regards set off as a matter of substantial justice between the parties: see Forster v Wilson (1843) 12 M & W 191, 204. The court of the principal winding up in Luxembourg had made it clear that it was going to apply its lex fori and disallow the set off, notwithstanding the close connection of the transactions with England. In the circumstances, I think that justice required that a remittal of the assets should have been qualified by a provision which ensured that the English set off was given effect. Luxembourg has not been designated a “relevant country” under section 426 and there was accordingly no jurisdiction to apply Luxembourg law, but, as at present advised, I think that even if there had been, I would not have thought it appropriate to do so. The mutual debts were too closely connected with England. 18. Where I respectfully part company with my noble and learned friend is in relation to the reason which he gave, and maintains in his speech in this appeal (which I have had the privilege of reading in draft) for deciding that he should not remit the assets to Luxembourg without protecting the position of creditors who had proved in England. In my opinion he was right to do so as a matter of discretion. But he says that he had no jurisdiction to do otherwise because creditors in an English liquidation (principal or ancillary) cannot be deprived of their statutory rights under English law. 19. In my opinion, however, the judicial practice to which I have referred and which my noble and learned friend approved in Re Bank of Credit and Commerce International SA (No 10) [1997] Ch 213 is inconsistent with the broad proposition that creditors cannot be deprived of their statutory rights under the English scheme of liquidation. The whole doctrine of ancillary winding up is based upon the premise that in such cases the English court may “disapply” parts of the statutory scheme by authorising the English liquidator to allow actions which he is obliged by statute to perform according to English law to be performed instead by the foreign liquidator according to the foreign law (including its rules of the conflict of laws.) These may or may not be the same as English law. Thus the ancillary liquidator is invariably authorised to leave the collection and distribution of foreign assets to the principal liquidator, notwithstanding that the statute requires him to perform these functions. Furthermore, the process of collection of assets will include, for example, the use of powers to set aside voidable dispositions, which may differ very considerably from those in the English statutory scheme. 20. Once one accepts, as my noble and learned friend rightly accepted in Re Bank of Credit and Commerce International SA (No 10) [1997] Ch 213, that the logic of the ancillary liquidation doctrine requires that the court should have power to relieve an English ancillary liquidator from the duty of distributing the assets himself but can direct him to remit them for distribution by the principal liquidator, I think it must follow that those assets need not be distributed according to English law. The principal liquidator would have no power to distribute them according to English law any more than the English liquidator, if he were doing the distribution, would have power to distribute them according to the foreign law. 21. It would in my opinion make no sense to confine the power to direct remittal to cases in which the foreign law of distribution coincided with English law. In such cases remittal would serve no purpose, except some occasional administrative convenience. And in practice such a condition would never be satisfied. Almost all countries have their own lists of preferential creditors. These lists reflect legislative decisions for the protection of local interests, which is why the usual English practice is, when remittal to a foreign liquidator is ordered, to make provision for the retention of funds to pay English preferential creditors. But the existence of foreign preferential creditors who would have no preference in an English distribution has never inhibited the courts from ordering remittal. I think that the judge was inclined to regard these differences as de minimis variations which did not prevent the foreign rules from being in substantial compliance with the pari passu principle. But they are nevertheless foreign rules. The fact that the differences were minor might be relevant to the question of whether a court should exercise its discretion to order remittal. But any differences in the English and foreign systems of distribution must destroy the argument that an English court has absolutely no jurisdiction to order remittal because it cannot give effect to anything other than the English statutory scheme. 22. The other ground relied upon by the judge was based upon a number of statements by eminent judges (including Sir Richard Scott V-C in Re Bank of Credit and Commerce International SA (No 10)) to the effect that the object of an ancillary liquidation was to ensure that all the company’s assets world-wide were made available for distribution pari passu to all its creditors. One example is the passage I have quoted from the judgment of Kay J in Re Matheson Brothers Ltd (1884) 27 Ch D 225 (see para 9 above) in which he said that he would continue the provisional liquidation “until I see that proceedings are taken in the New Zealand liquidation to make the English assets available for the English creditors pari passu with the creditors in New Zealand.” That, said David Richards J, showed that pari passu distribution in the principal liquidation was a sine qua non for the assistance of the ancillary liquidator. 23. In my opinion, however, such observations have to be read in their context. Kay J was plainly anxious to secure that English creditors were treated equally with New Zealand creditors. He never directed his mind to the question of whether it would matter if New Zealand law gave preferences on grounds unrelated to the residence or nationality of the creditor. And your Lordships have not been referred to any case in which this question has been considered. In my opinion the authorities relied upon by the judge do not justify limiting the court’s jurisdiction. 24. It follows that in my opinion the court had jurisdiction at common law, under its established practice of giving directions to ancillary liquidators, to direct remittal of the English assets, notwithstanding any differences between the English and foreign systems of distribution. These differences are relevant only to discretion. 25. Even on the question of whether the court should make the kind of provision for protecting rights of set off which Sir Richard Scott V-C made in Re Bank of Credit and Commerce International SA (No 10) [1997] Ch 213, much will depend upon the degree of connection which the mutual debts have with England. If the country of principal liquidation does not recognise bankruptcy set off and the mutual debts arise out of transactions in that country, it is hard to see why an English court should insist on rights of set off being preserved in respect of claims by the foreign creditors against assets which happen to be in England. The English court would be entitled to exercise its discretion by remitting the assets to the principal jurisdiction and leaving it to apply its own law. (Compare Re Paramount Airways Ltd [1993] Ch 223, discussing the discretion not to apply the English law on voidable dispositions). 26. It was submitted by the appellants that the argument for the existence of such a jurisdiction under section 426 was even stronger, because it expressly gives the court power to apply the foreign insolvency law to the matter specified in the request. As Sir Andrew Morritt C said (at para 49), section 426 is “itself part of the statutory scheme", no less than section 107. The court therefore has power to apply the Australian law of distribution. It may be that it does, but in my opinion that is not what a court directing remittal of the assets is doing. It is exercising its power under English law to direct the liquidator to remit the assets and leave their distribution to the courts and liquidators in Australia. It is they who apply Australian law, not the English ancillary liquidator. As Morritt LJ said in Hughes v Hannover Ruckversicherungs-Aktiengesellschaft [1997] 1 BCLC 497, 517, a court asked for assistance under section 426 may exercise “its own general jurisdiction and powers” as well as the insolvency laws of England and the corresponding laws of the requesting state. The power to direct the remittal of assets collected in an ancillary liquidation falls within the former category. 27. This point highlights, I think, the difference between my noble and learned friend Lord Scott and myself. In relying upon section 426, Lord Scott holds that a court which directs remittal of the English assets to the Australian principal liquidator is applying the insolvency law of Australia. My own view is that the order cannot be characterised in this way and that the court is exercising a power, established well before the 1986 Act, under the insolvency law of England. 28. The power to remit assets to the principal liquidation is exercised when the English court decides that there is a foreign jurisdiction more appropriate than England for the purpose of dealing with all outstanding questions in the winding up. It is not a decision on the choice of the law to be applied to those questions. That will be a matter for the court of the principal jurisdiction to decide. Ordinarily one would expect it to apply its own insolvency laws but in some cases its rules of the conflict of laws may point in a different direction. Section 426, on the other hand, extends the jurisdiction of the English court and the choice of law which it can make in the exercise of its own jurisdiction, whether original or extended. For example, section 426 can confer jurisdiction to make an administration order in respect of a foreign company when that jurisdiction is ordinarily confined to UK companies: Re Dallhold Estates (UK) Pty Ltd [1992] BCLC 621. Or it may enable the court to apply a foreign law when, as in Re Suidair International Airways Ltd [1951] Ch 165, it would otherwise be obliged to apply only English law, as in England v Smith [2001] Ch 419 (Australian law applied to examination of accountant connected with insolvent Australian company). But the present case involves neither an extension of the English jurisdiction or an application by the English court of a foreign law. 29. I therefore agree with the Court of Appeal that the court has jurisdiction, even if not for precisely the same reasons. But the Court of Appeal nevertheless decided that the jurisdiction should not be exercised because the outcome for some creditors would be worse than if the English assets were distributed according to English law. There was, said Carnwath LJ at para 72, no “rule of private international law or any other countervailing benefit” which would require the court to disregard the principles applicable under English insolvency law. |
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