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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58.  The reason why the Chancellor concluded that the court’s power under section 426 to direct the provisional liquidators to remit the English assets to Australia ought not to be exercised appears from paragraph 52 of his judgment. He held that, on the authority of Hughes v Hannover Ruckversicherungs-Aktiengesellschaft [1997] 1 BCLC 497 and England v Smith [2001] Ch.419, the court should comply with the Letter of Request issued by the Australian Court “if it may properly do so” and went on to say this -

“That will involve a consideration of all the circumstances including whether the transfer sought will prejudice the creditors or any class of them and whether there would be other advantages sufficient to counteract such prejudice. In relation to the facts of this case it is quite clear that the transfer sought would prejudice all creditors of each of the Companies except FAIG and except Australian Insurance and Reinsurance Creditors of HIH, WMG and FAII and non-Australian Insurance and Reinsurance Creditors of FAII. The advantage to the latter classes of creditor cannot counteract the prejudice suffered by all the other classes. Nor can those advantages and any benefit obtained from avoiding duplication enable the court to conclude that a transfer would be for the benefit of the estate as a whole.”

The last sentence in this citation was a response to a submission made by the Australian liquidators that the remission of the English assets should be directed if it would be for the benefit of the estate or the creditors as a whole (see para.51 of the Chancellor’s judgment).

59.  The Chancellor’s reasoning does not, however, seem to me to explain why the identification of disadvantage to creditors other than the insurance and re-insurance creditors referred to should require the conclusion that the English assets should not be remitted to Australia. The exercise of the section 426 power so as to direct the remission of the assets to Australia would not constitute the disapplication of the English insolvency scheme. Section 426 is part of the English insolvency scheme. To hold that the power under the section to direct the remission of assets from the country where an ancillary liquidation is being conducted (England) to the country where the principal liquidation is being conducted (Australia) cannot be exercised if the effect would be to reduce the amount of dividends receivable in England by any class of creditors, or, I suppose, by any individual creditor, would be to deprive the section, at least in relation to remission of assets from an ancillary to a principal liquidation, of much of its intended potential to enable a single universal scheme for insolvency distribution to be achieved. If an ancillary liquidation is being conducted in England under an insolvency scheme that does not include section 426, e.g. where the country of the principal liquidation is not a United Kingdom country and, has not been designated a “relevant country or territory"; the position seems to me quite different. The English courts have a statutory obligation in an English winding-up to apply the English statutory scheme and have, in my opinion, in respectful disagreement with my noble and learned friend Lord Hoffmann, no inherent jurisdiction to deprive creditors proving in an English liquidation of their statutory rights under that scheme. I expressed that opinion in Re BCCI (No 10) and remain of that opinion. Luxembourg was not a “relevant country or territory". Australia, however, is and, accordingly, section 426 is part of the statutory scheme applicable under the 1986 Act to these four Australian companies. I do not think it would be proper for the courts of this country, in reliance on an inherent jurisdiction, in effect to extend the benefits of section 426 to a country that had not been designated a “relevant country or territory” by the Secretary of State, and thereby to deprive some class of creditors of statutory rights to which they would be entitled under the English statutory insolvency scheme. There is no case law that supports the proposition that the inherent jurisdiction can be used so as to bring about such deprivation.

60.  Indeed, the case law is to an entirely contrary effect. Vaughan Williams J in re English, Scottish and Australian Chartered Bank [1893] 3 Ch.385 said at 394 :

“One knows that where there is a liquidation of one concern the general principle is - ascertain what is the domicile of the company in liquidation; let the court of the country of domicile act as the principal court to govern the liquidation; and let the other courts act as ancillary, as far as they can, to the principal liquidation. But although that is so, it has always been held that the desire to assist in the main liquidation - the desire to act as ancillary to the court where the main liquidation is going on - will not ever make the court give up the forensic rules which govern the conduct of its own liquidation.“(My emphasis)

In Re Suidair International Airways Ltd [1951] Ch.165 Wynn-Parry J, having cited the passage from the judgment of Vaughan-Williams J in re English, Scottish and Australian Chartered Bank cited above, said at 173

“It appears to me that the simple principle is that this court sits to administer the assets of the South African company which are within its [i.e. the English court’s] jurisdiction, and for that purpose administers, and administers only, the relevant English law; that is, primarily, the law as stated in the Companies Act 1948 looked at in the light, where necessary, of the authorities. If that principle be adhered to, no confusion will result. If it is departed from, then for myself I cannot see how any other result would follow than the utmost possible confusion.”

I cited these authorities, and others, in Re BCCI (No.10) [1997] 1 Ch 213 in coming to the conclusion at 246 that

“… the ancillary character of an English winding up does not relieve an English court of the obligation to apply English law, including English insolvency law, to the resolution of any issue arising in the winding up which is brought before the court.”

61.  It is, of course, desirable as a general proposition that there should be one universally applicable scheme of distribution of the assets of an insolvent company. And it is also obvious that, in general, where a company is being wound-up not only in its place of incorporation but also in other countries where it carried on some of its business the winding-up process in the latter countries should be regarded as ancillary to the principal winding-up being conducted in the country of its incorporation. In such a case there is, therefore, a potential conflict between, on the one hand, the desirability of that general proposition and, on the other hand, the undesirability of the confusion to which Wynn-Parry J referred in the Suidair case coupled with the obligation of English courts to accord to claimant creditors in an English winding up the statutory rights to which they are entitled under English insolvency statutes. This conflict has been resolved by Parliament in enacting section 426. Section 426 has become part of the statutory scheme. But the resolution achieved by section 426 does not apply to all countries. It does not apply where the principal winding up is being conducted in a country which is neither part of the United Kingdom nor has been designated by the Secretary of State as a “relevant country or territory". The proposition that the assistance and directions sought by the Australian court and the Australian liquidators in the present case could be given under an inherent power of the court without reliance on section 426(4) and (5) is, in my respectful opinion, unacceptable. It would mean that the assistance and directions could be given in relation to a winding up being conducted in a foreign country that had not been designated a “relevant country or territory” by the Secretary of State. It would constitute the usurpation by the judiciary of a role expressly conferred by Parliament on the Secretary of State. Moreover, the issue is one that does not arise in the present case. If the assistance and directions sought cannot, on a proper exercise of the court’s discretion, be given pursuant to section 426(4) and (5), they could hardly be given as a proper exercise of the court’s inherent power. Exactly the same considerations would come into play. And, as I understand it, your Lordships all agree that the directions sought should be given.

62.  If the country of the principal winding up is a “relevant country or territory” for section 426 purposes and the liquidators in that country have requested English liquidators to remit to them the assets collected in England so that they (the principal liquidators) can, pursuant to the insolvency law of that country, implement a universal scheme of pari passu distribution to ordinary unsecured creditors, the request is one to which, in principle, the English liquidators ought, in my opinion, to accede. I agree, as I think is common ground, that the English liquidators should first discharge the debts of those creditors who, under the English insolvency scheme, are entitled to preferential payment. There may be other circumstances in which a refusal to remit assets pursuant to such a request might be justified. It has been suggested that a refusal would be justified if it would give rise to “manifest injustice to a creditor". So indeed it might. But reliance simply on the fact that under the insolvency scheme applicable to the principal winding-up there would be a significant class or classes of preferential creditors whose debts would not have priority under the English insolvency scheme is not, in my opinion, sufficient to justify a refusal. It would, in my opinion, as I hope I have made apparent, have been sufficient if the country of the principal winding up had not been a “relevant country or territory” for section 426 purposes. These four companies are Australian companies whose principal place of business, as well as their place of incorporation, was Australia. The Australian statutory scheme allows insurance and reinsurance creditors of insolvent insurance companies to be paid in priority to ordinary creditors. There is nothing unacceptably discriminatory or otherwise contrary to public policy in these statutory provisions. The general acceptability by English law standards of the Australian insolvency scheme is confirmed by the designation of Australia as a “relevant country or territory” for section 426 purposes. I can see no sufficient reason why the Australian liquidators’ request for the remission of the English assets should not be acceded to. I would allow this appeal but repeat that I would do so on the footing that the power to accede to the Australian liquidators’ request derives from section 426 and not from any inherent jurisdiction of the court.

LORD WALKER OF GESTINGTHORPE

My Lords,

63.  I have had the privilege of reading in draft the opinion of my noble and learned friend Lord Hoffmann. I am in full agreement with his opinion, which dispels several obscurities on the authorities and clarifies the nature of the court’s powers under section 426 of the Insolvency Act 1986. I too would allow this appeal and make the order requested by the Supreme Court of New South Wales.

LORD NEUBERGER OF ABBOTSBURY

My Lords,

64.  This appeal concerns the English assets of four insolvent Australian insurance companies, in compulsory liquidation in Australia and in provisional liquidation in England, pursuant to the Australian liquidators’ request. The question is whether those assets should be remitted to the Australian liquidators for distribution in accordance with the Australian insolvency regime, or whether they should be distributed here in accordance with the English insolvency regime.

65.  Your Lordships all agree that the answer is that the assets should be remitted for distribution in accordance with the Australian insolvency regime, albeit that the Australian liquidators and the English provisional liquidators have very sensibly agreed what the practical consequences are to be in either case, as my noble and learned friend Lord Hoffmann explains in para 12 of his speech (which I have had the opportunity of seeing in draft), so that there will be no need for any formal remittal. However, there is disagreement as to the basis upon which the assets can be distributed in accordance with the Australian insolvency regime. Accordingly, I shall give my reasons for allowing the appeal, albeit that they can be expressed relatively shortly, as the relevant facts, statutory provisions, case law and the relevant principles are comprehensively covered in the preceding speeches.

66.  The question I shall primarily address is whether the remittal of the English assets to the Australian liquidators for distribution in accordance with the Australian insolvency regime can be effected pursuant to the established judicial practice described in paras 8 and 9, or whether it can only be effected pursuant to section 426 of the Insolvency Act 1986. I have come to the conclusion that, while remittal of assets can be effected pursuant to established judicial practice, the power to do so where the distribution will not be in accordance with the English insolvency regime derives from section 426.

67.  The main substantive features of the English insolvency regime in relation to unsecured creditors can be broadly summarised as follows. First, preferential creditors (listed in schedule 6 to the 1986 Act) enjoy priority on a pari passu basis as between themselves (sections 175 and 386 of the 1986 Act). Secondly, all other creditors rank behind them, also on a pari passu basis as between themselves (rule 4.181 of the 1986 Rules). Thirdly, there is a mandatory set-off requirement (rule 4.90 of the 1986 Rules) as explained by Lord Hoffmann (albeit in a bankruptcy context) in Stein v Blake [1996] 1 AC 243.

68.  As a matter of general principle, it seems to me that, at any rate in the absence of section 426(4) and (5), where a company is wound up in this country, its assets are held on terms that they must be applied in accordance with that statutory insolvency regime: see Ayerst v C & K (Construction) Limited [1976] AC 167 at 176E to 177F. As Millett LJ put it in Mitchell v Carter [1997] 1 BCLC 673 at 686, “the making of a winding-up order divests the company of the beneficial ownership of its assets which cease to be applicable for its own benefit. They become instead subject to a statutory scheme for distribution among the creditors and members of the company.”

69.  This principle applies in the case of an English liquidation of a foreign company. In particular, section 221(1) of the 1986 Act confirms that the provisions of that Act “about winding up” apply to “unregistered companies", which includes foreign companies, in the same way that they apply to English companies. That is confirmed by the judgment in Re International Tin Council [1987] Ch. 419 at 446G - 447B. As Millett J there explained, the application of the English insolvency regime applies in theory to all the assets of the foreign company, and in theory and practice to its assets within the jurisdiction. In the absence of a provision such as section 426, I therefore find it difficult to see on what basis an English court could have jurisdiction to disapply the English insolvency regime to assets in this jurisdiction of a company subject to a winding up order made by an English court.

70.  Of course, in this case the companies have not been the subject of a winding up order in England, although winding-up petitions have been presented and provisional liquidators appointed. Further, as David Richards J said in para 184 of his judgment at first instance ([2005] EWHC 2125 Ch), there is “a significant prospect that, in the absence of schemes of arrangement, winding-up orders would be made” by the High Court in respect of each of the four companies. He went on to say, it was “a principal function” of the provisional liquidators “to safeguard the assets of the companies for the benefit of those interested in their distribution in the event of a winding-up.” Accordingly, he considered that he should not authorise them to do anything whose “effect would be to undermine the proper working out of the statutory insolvency scheme which would be mandatory if winding-up orders were made".

71.  That appears to me to be right. It seems clear that the companies are insolvent, and that the only reason that the English court has accepted jurisdiction is because the Australian courts have ordered them to be wound up because of their insolvency. Although no formal winding up orders have been made, provisional liquidators have been appointed ultimately because of the companies’ insolvency. In those circumstances, I consider that the court’s powers should not be more flexible or wider in connection with the remitting or distribution of assets than if formal winding up orders had been made. Accordingly, I approach the issue, as the parties and the courts below did, on that basis.

72.  There appears to be no suggestion in any of the earlier authorities cited to your Lordships that the court, when exercising its jurisdiction to remit to another jurisdiction for distribution the assets of a company subject to a winding up order in this country, could authorise the distribution of those assets other than in accordance with the English insolvency regime. However, there are judicial observations which emphasise the mandatory nature of the English regime, although they are not directly concerned with the question of remittal, in relation to foreign insolvent companies. I have in mind the observations of Vaughan Williams J (whose decision was upheld by the Court of Appeal) in Re English Scottish and Australian Chartered Bank [1893] 3 Ch. 385 at 394 and of Wynn-Parry J in Re Suidair International Airways Limited [1951] Ch. 165 at 173-174, as applied by Sir Richard Scott V-C, as he then was, in Re Bank of Credit and Commerce International SA (No 10) [1997] Ch. 213 at 246D - E. The relevant passages are quoted by my noble and learned friend, Lord Scott of Foscote (whose speech I have had the opportunity of seeing in draft) in para 60.

73.  In paras 95 to 107 of his excellent judgment at first instance, David Richards J considered a number of cases in this jurisdiction, Canada and Australia, in which courts were invited to remit to foreign liquidators local assets of a foreign company which was being wound up. In all those cases, it was made clear that the court had to be satisfied that the foreign liquidators would distribute pari passu, in accordance with the domestic insolvency regime. Of course, it can be said that those cases merely emphasise the importance of the pari passu principle, but they appear to me to indicate that the courts concerned were seeking to ensure that the principles of their local insolvency regime were honoured.

74.  I accept that in no case where the court has been asked to exercise its power to remit assets to liquidators in another jurisdiction has it refused to do so on the grounds that the categories of preferential creditors, or other aspects, of that other jurisdiction’s insolvency regime differed from those in this country. However, I do not consider that that argument goes anywhere, because, so far as I am aware, that point has not been raised in any case where the court has been invited to remit assets. Even if the court would have had power to remit in such circumstances at some point in the past, it seems to me that, absent section 426 of the 1986 Act, it would not have such power now.

75.  I accept that, on this basis, the value of the English court’s inherent ancillary liquidation power is very much more circumscribed than if it could effectively disapply, or authorise the disapplication of, the English insolvency regime. However, the fact that the English court has an inherent power to relieve an ancillary liquidator in this country from the duty of distributing the assets himself, and to order that the assets be remitted to be distributed by a foreign liquidator does not mean that it necessarily follows that those assets can then be distributed other than in accordance with the English insolvency regime. The fact that English assets are bound to be distributed in accordance with certain principles does not prevent the assets being passed to someone else so that they can be distributed in accordance with those principles, but it would prevent the passing on of those assets for distribution in accordance with different principles. If this is right, it means that the court’s inherent power to remit assets is, I accept, of much more limited value than if the law were otherwise, but the power would nonetheless not be valueless: it could assist in achieving administrative convenience.

76.  The notion that the court has inherent jurisdiction to remit English assets to liquidators in another jurisdiction on the basis that the insolvency regime of that jurisdiction would apply, seems to me to sit uneasily with the provisions of section 426(4) and (5), at least in relation to remittal of assets. The inherent jurisdiction to remit must be exercisable in relation to any other country whereas section 426 only applies to a “relevant country or territory", i.e. one designated by the Secretary of State. If the courts had an inherent power to remit to a country with a different insolvency regime, either the courts could exercise that power in relation to a country which was not so designated, or section 426 impliedly restricts the inherent jurisdiction to designated states. The former possibility renders the significance of designation questionable in a case where remittal is sought; indeed it can be said to involve the inherent jurisdiction almost thwarting the statutory purpose. The latter possibility not only involves an implication as to the effect of section 426 which is not exactly obvious: it would mean that the inherent power (if it ever existed) had very little, if any, further purpose.

77.   Accordingly, in agreement with Lord Scott, were it not for section 426, I would have been of the view that this appeal should be dismissed.

78.  I should add that I agree with Lord Hoffmann when he says that “the common law power to remit is about choice of jurisdiction, whereas section 426 is about choice of law", at least in relation to the present type of case. What section 426(5) says in terms is that an English court, to which an appropriate request is made, may “apply…the insolvency law which is applicable by [the foreign court making the request]". Whether the English court does that in the present case by ordering the English provisional liquidators to distribute in accordance with the Australian regime, or whether it orders remittal of the assets to Australia in accordance with its common law powers, to enable the Australian liquidators to distribute in accordance with the Australian regime, is a decision for the English court in each case. However, the questions whether to remit assets to another country and whether to apply, or to permit the application of, the distribution law of that country are two different issues, although resolution of the latter question will no doubt often dictate the answer to the former question. I consider that the first of those questions is governed by the common law and the second is governed by section 426 of the 1986 Act.

79.  That leads me to the second aspect which I should deal with, namely the ultimate issue in this case: should the English court accede to the Australian liquidators’ request to remit the English assets for distribution in accordance with the Australian insolvency regime? This aspect can be disposed of more quickly, as I agree with all your Lordships that this would be an appropriate case for remission of the English assets to Australia for distribution by the liquidators in accordance with Australian law. It is true that this will mean that some of the creditors will be worse off than under a distribution in accordance with the English insolvency regime, but, by the same token, it will mean that some of the creditors will be better off. That is almost inevitable where one applies any regime which differs in any way from the English regime.

80.  More importantly, I do not consider that any fundamental principle of English insolvency law would be offended, or any unfairness would be perpetrated, by the application of the Australian insolvency regime. Under Australian law, preferential treatment is accorded to certain creditors of insurance companies, who would not have been given such treatment in English law. However, that does not in itself mean that the application of Australian regime should be rejected. Further, as my noble and learned friend, Lord Phillips of Worth Matravers (whose speech I have read in draft) points out, the companies are, and always have been, Australian insurance companies, and Australia has been designated as a “relevant country or territory” for section 426 purposes. Clearly the fact that Australia has been so designated cannot be the end of the matter, but it does indicate, at least in general terms, that the Secretary of State considers that the insolvency law of Australia is acceptable in principle in this jurisdiction.

 
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