Winding Up and Foreign Assistance in Insolvency Law

Introduction

The world has tremendously increasing its trade activities with the expansion of its utilities and establishing markets in its different parts. With the emergence of new markets the economy has a tremendous boom but also the rise of unfair trade practices which has created problems in between. The company’s who are involved in trade practices in different other parts and gave a path to economy of the country to rise. Although it seems quite interesting but when those companies become insolvent gave a mind exercise to courts for judging their jurisdiction. The law of insolvency has been statute by virtue of providing basic assistance and creating an approach that will comprehensively provide legal framework to provide significant benchmark to those trade practices of the multinational corporations. The Insolvency Act 1986 has provided a uniform legal set of work by its statutes which have laid down the principles in regarding to winding up of unregistered companies under section 221 of the act. According to this section English courts have jurisdiction to wind up any unregistered corporation which is situated within the territory of U.K., whose principal place of business situated in England and Wales or Scotland. The similar provision had laid down in European regulation that the court of the member state has jurisdiction, where the command and control of the company is operated and where the centre of main interest of debtor lies, is authorized for the opening up of main proceedings against the insolvent company. According to section 426 of insolvency act which relates the co-operation between the courts exercising jurisdiction, under sub-section (4) provides the provision to the courts having jurisdiction in relation to insolvency law in any part of the U.K. shall assist the courts having the corresponding jurisdiction in any other part of the U.K. or any relevant country or territory. The similar provision present in European regulation for the recognition of secondary proceedings in the member state after the opening up of main proceedings in order to harmonize its rules according to those its member state authorized to exercise their jurisdiction. The main proceedings were insolvency proceedings and the secondary proceedings were winding up proceedings. The role of secondary proceeding is to wound up any part left of the debtor in the member state after the commencement of main proceedings in other member state. The EU regulations, which came into force 31st May 2002 provides a uniform set of rules for the Europe under the insolvency law. European regulation allows the member state to exercise their own court’s jurisdiction in insolvency proceedings i.e. if the proceedings opened in England are conducted under the English Law, if the secondary proceedings opened in Germany conducted according to German law. This course work throws light on the principles developed by courts in exercising their insolvency jurisdictions under section 221 and 426 of Insolvency Act 1986. And the positions developed and recognized by the European Regulation which are somehow similar to those sections of insolvency law.

Section 221- Winding up of Unregistered Companies.

The meaning of registered company applies to those companies which are registered under the joint stock company’s act of United Kingdom. Those no incorporated under that act are unregistered companies and so called to be foreign companies. Cross border insolvency matters greatly increased as the companies were able to register anywhere in Europe and England, will have authority to carry on business from anywhere, not necessary from the place of its incorporation and became insolvent. The freedom of trade and carry on business greatly influenced the law of the nations to be developed so that they would be able to treat increasing insolvency matters. Under section 221(5) court has got the power for winding up any unregistered company with the omission provided under the act. The winding up jurisdiction in relation to unregistered companies would be the place where the company has been carrying its business, not necessarily the place of its incorporation. Unregistered companies may be wound up under the provisions of the 1986 act in the following circumstances:

(a) If the company is dissolved, or has ceased to carry on business, or is carrying on business only for the purpose of winding up its affairs;

(b) If the company is unable to pay its debts;

(c) If the court is of the opinion that it is just and equitable that the company should be wound up.” [1]

These were the rules according to which an English court has jurisdiction to wind up an unregistered company. As such I.A. 1986 contains no rule to restrict an English court in exercising its jurisdiction for the winding up of foreign company, thereby leaving uncurtailed this potentially exorbitant power. [2]

There have been three main trends in deciding whether the court authorise to exercise jurisdiction under s.221 or not;

Ancillary proceedings.

Sufficient connection test.

Doctrine of forum non-conveniens.

Ancillary Winding Up:

Ancillary winding up order has been presented by the court in regarding to the company being under the liquidation in any other country. It means that English courts have regard with that the ancillary winding up procedure could assist the foreign court in between. Its main purpose is to reduce the overall cost in the liquidation process or appointment of the liquidator. And by that the court can be able to wound up company partly in its own jurisdiction providing full guarantee to its creditors and all.

For example: In the Case Re Commercial Bank Of South Australia [3] – The bank had been incorporated in Australia in 1878 but suspending work in 1886 and had its branch in England and assets and creditors. It was said that its main proceedings for winding up had been started in Australia with Australian Law. The petition for winding up had been presented to the English court by creditors. In that, court granted permission for winding up order declaring it to be ancillary to the Australian proceeding, by North J. The purpose of the ancillary proceeding is to satisfy the claim of creditors and get in assets here in England as it could not be done if the winding up was continued in the Australia. Thus prior to those proceeding court granted order for ancillary winding up proceedings and North J also stated that English liquidation could follow the Australian liquidator. Although it does not mean control was given to the Australian court just the aim was to assist foreign court where appropriate. [4]

Sufficient Connection Test:

In England, for winding up petition the presence of assets in the jurisdiction is necessary but by the statement of Morrit L.J. that the liquid assets could be easily moved from one place to another with the help of computers i.e. an asset test would be an insufficient test. But there is need of it also. Later on the doctrine of forum non conveniens was developed in which it was to observed that what place has said to be more appropriate for exercising winding up jurisdiction. It was considered to be the fourth requirement for winding up jurisdiction. [5]

Now the courts have moved from the requirements that a foreign company must be registered in England before an order for the company’s winding up could be made. Courts have adopted the trend of modern pattern, in exercising jurisdiction, for winding up of foreign company. The courts is satisfied when there must have a sufficient connection between the foreign company and England. The principle of that requirement was stated by Knox J that there must have three requirements for satisfying sufficient connection test. “In the case Re Real Estate Development Co. Ltd [6] .” this principle was stated.

(a) There must be a sufficient connection between the company and England, but that does not mean that assets must be situating within the jurisdiction.

(b) There must be a reasonable possibility, if a winding-up order is made, of benefit accruing to those applying for the winding-up order.

(c) One or more persons interested in the distribution of the assets must be persons over whom the court could exercise jurisdiction.

Those three above stated conditions must be seen in any case which would further recognize the winding up of that unregistered company according to s.221 IA.

In Stocznia Gdanska v Latreefers [7] ; A Latvian shipping company had used an off-the-shelf Liberian company to enter into certain shipbuilding contracts with a polish shipyard. The purpose was entering into six contracts with the yard. Company had to pay US170 million in installments for the vessels, only first installment was made and the Liberian company subsequently defaulted. They had not been able to make further payment to yard and yard presents the petition in the court in respect of the due payment of about US$11million. The court of appeal held that there were sufficient points of contract with the English jurisdiction for the English courts to assume jurisdiction to wind up the Liberian company. The default was under contracts governed by English law and the Liberian company had been controlled through agents in London. There has to be potential benefit to the creditors and there have to be some creditors present in the jurisdiction. The case had satisfied the above noted three core principles of winding up unregistered company under s.221. And it would further elaborate that it was unlikely that company would wound up anywhere else, as the interest of creditors most seemed to be here in U.K.

In Re A Company (No 00359 of 1987) [8] ; there was a Liberian shipping company registered in Monrovia but its daily business conducted by an English shipping agency, a bank lent US$13m to Liberian company for acquisition of new ship. But, it defaulted under the loan agreement and subsequently brought under proceedings on those defaulted loan conditions by the bank against company in England. It was also held that directors of the company present in the U.K. and companies bank account were also here. The company had no assets in U.K. if an order were made; the liquidator would seek to recover from the company’s directors (some of whom were residents in U.K.) for fraudulent and wrongful trading. Those amounts would be available for company’s creditors. Held; the court had jurisdiction if there was a sufficient connection between the case and the U.K. and if there was a reasonable possibility that creditors would benefit from the winding up. The connection with U.K. existed because the loan agreement was entered into and fell to be performed in U.K. and the company had carried on business in U.K. directly or through agents.

In Re A Company (no 003102 of 1991) e.p. Nyckeln Finance Co Ltd. [9] ; it was the company incorporated in the Guernsey. It had assets and shares in Portugal. The company had conducted all its actual business from a hotel in London. All directors were hold there command over the company and take their decision from U.K. that’s why that provide a sufficient connection in relation to that company even though there had no assets present here in U.K but courts have jurisdiction to appoint provisional liquidator here for the realization. Therefore the mere presence of company’s activities from London were proved sufficient in creating connection of command and power which further allow courts to exercise their jurisdiction.

In Re Harrods Buenos Aires [10] ; it was company incorporated in U.K. but conducted all its business from Argentina. All the debtors and creditors of the company were in Argentina. The command and control was hold from the directors of the company present there. Although it was an English registered company but it would not be advisable to liquidate that company here as that wouldn’t provide any benefit to its creditors and debtors and the realization of assets was not sufficiently provide benefit to its creditors. So here the courts ignore the general rule of case Lazard Brothers & Co v Midland Bank Ltd. In which the court said that the place of incorporation of company would be deemed as jurisdiction in its liquidation. But now the court have adopted the rule of doctrine of forum non-conveins according to which courts see the most appropriate place for winding up jurisdiction which provide sufficient benefits to its members and creditors.

Section 426 of Insolvency Act

In order to provide structural certainty, in cross-border insolvency matters, a number of states have enacted provisions that instruct their domestic courts. As s.426 (4) requires that the courts of England and Wales shall assist the courts of a relevant country or territory, “having the corresponding jurisdiction” in that country, if requested to do so. [11] It enables mutual assistance between the courts having insolvency jurisdiction in the different parts of the U.K. and the word “shall assist” has the effect of rendering such assistance mandatory for those courts which are subject to the authority of the crown in parliament. Sub-s (5), the duty to render assistance is invoke able by means of a request made to a court in one part of the U.K. by a court in another. The English courts retain their inherent discretion in choosing whether and how to assist the courts of other jurisdiction. [12] The authorization is coupled with the discretion that in exercising the discretionary powers, a court must have regard in particular to the rules of private and international law. Section 426(11) defines those relevant countries or territories are specified by the order of secretary of the state, included former and current commonwealth countries. [13] Additional countries could be added at discretion of secretary of state.

Re Hughes v Hannover Ruckversicherungs AG [14] ; it was the company incorporated in U.S., Electric mutual liability insurance, ’E’ to provide insurance to another incorporated company of U.S., General electric corporation, ‘GEC’. ‘E’ transferred its domiciled with assets worth GBP 75 m to its Bermudian subsidiary and whose shares held with ‘E’ itself as beneficiary. Within short period ‘E’ portioned for winding up order on the basis of its insolvency. ‘HR’, who had been reinsured part of ‘E’s liabilities, demanded arbitration in the U.S., under the terms of the contract. In this case the Supreme Court of Bermuda requested the High court in England, to lend assistance to restrain any actions or proceedings brought by ‘HR’ in all jurisdictions. The appellant ‘E’ contended that English courts have mandated under s426 (4), ‘E’ argued that the reinsurance contracts had no connection with England, an application under the US Bankruptcy Code s.304 would be more expensive and less appropriate. HR argued that the English court had an absolute discretion to refuse the request and both the absence of a connection with England and the existence of appropriate remedies in the US were sufficient reason to refuse it. The English courts did not have discretion as to whether or not any assistance could be given. The appropriate test was whether the requested assistance “may properly be granted”, and the suggestion that assistance would be refused only if there were serious public policy considerations was rejected by the court. The court have refused the appeal on the basis that there had been a change in circumstances that had removed the reason for lending assistance.

In RE Television Trade Rentals Ltd [15] ; there were two companies incorporated in Isle of Man under liquidation and their joint provisional liquidators sought assistance from English courts. To make declaration that a company voluntary arrangement procedure under insolvency act part 1 should applied to the companies although the local law did not include similar provision. The request was granted on the following grounds that (a) it was appropriate to apply compulsory voluntary arrangements to those companies as there was close connection between the companies and U.K. (b) Isle of Man was also a specified territory under the section of 426(11).

In Re Business City Express Ltd [16] ; The Irish High Court requested the assistance of the English courts under Section426 for an order that a scheme of composition of the debts of an Irish company approved by the Irish court be made binding on UK creditors. The Irish court approved the composition scheme on the condition that the English courts would assist in making the necessary co-operation order that was requested. The English court took the view that that the proper approach was to grant the assistance that had been sought unless the court was satisfied that there was good reason not to do so. In this case, the English court decided that without its assistance, the scheme could not be effective and the company would inevitably have to go into liquidation. In the circumstances, it acceded to the request on the grounds that there was no good reason why the court should not give the required assistance.

In Re England v Smith (Re Southern Equities Corp.) [17] ; This was an appeal by the liquidators of an Australian company, Bond corporate Empire ‘SEC’, whose auditors were Australian Associate Firm ‘AAA’, the accountant of Firm ‘S’ was resident of U.K. due to negligence and breach of duty in conducting audit the insolvency created and liquidation followed. The liquidator wanted judicial examination of ‘S’. In 1997 liquidator obtained an order from court for examination of ‘S’ pursuant to section 596 B of Corporation Law, and requested assistance from English courts under section 426 I.A. for an order requiring the oral examination of respondent ‘S’ living in London, in accordance with Australian law and procedure. The request was refused and liquidators appealed. The court of appeal held that the refusal was made on the wrong bases and that the lower court judge had ignored the need for comity. “Judicial comity is the starting point of any request for assistance under section 426 and court should grant a request for assistance unless there is some “extraordinary” reason not to do so”. The court considered that and the appeal was allowed. [18]

European Regulation on ‘Main’ or ‘Secondary’ insolvency proceedings

European regulation has laid down its rules and regulations under articles, according to which the member of the European community have to follow up those rules and regulations for the insolvency proceeding against the company. In order to gain uniformity in insolvency matters European regulation has made an effective statutory system which serves as the basis for providing assistance to its members state. European regulation formed a uniform code which applied to its all member’s state and to be followed by all its members’ states. In opening of insolvency proceedings member state have full jurisdiction to interpret its own rules and regulation, for liquidation of insolvent company. But, Country had to prove that it had got relevant facts not only the registration of the company there, but also the relevant characteristics which has provide by article (3) of the regulation which states that,” the courts of the member state within the territory of which the centre of a debtor’s main interests is situated shall have jurisdiction to open insolvency proceedings. In the case of a company or legal person, the place of the registered office shall be presumed to be the centre of its main interests in the absence of proof to the contrary”. [19] Incorporation or the location of the registered office is no longer the central criterion for determining the location of the company. COMI is the idea where from the command and control of the company has operated or located. The petitioner has to show command and control for the opening of insolvency proceedings. Once the main insolvency proceedings open in one EU member state would automatically recognised by all other member state with effect, and further if any proceedings started in other member state prior to those proceedings would be called secondary or territorial proceedings. The EU regulation has given permission to member state for opening of secondary proceeding or territorial proceedings, if the main proceeding were already opened in any of member state. It should be noted that main proceedings were called as insolvency proceedings and secondary proceedings were to be called as winding up proceedings and they were take effect after the opening of main insolvency proceedings, if the establishment of the debtor has been proven in the other member state, ‘establishment’ means ‘place of operation where the debtor carries out a non-transitory activity with human means and goods’. [20]

Determining where the ‘centre of main interests’ lies has been always the main issue in various cases of insolvency that have arisen in the EU member states, but it could be ascertained by those cases which were decided accordingly by following EU rules and regulation:

In Re Daisytek ISA Ltd, [21] It was a company incorporated in U.S. and it had subsidiary in England, France and Germany. The English subsidiary has its main office in Brantford and all the companies France and Germany, run all the business from that office. They were the trading companies and suffered the cash flow difficulties as a result of suppliers reducing their credit terms. As a result of financial difficulties the English, French and German subsidiary filed for administration in England for better realisation of assets. Here the question arises whether there was jurisdiction to put German and French company into administration. The COMI of company presumed to be in the member state where it has its registered office. However it had concluded that company’s main business or administrative orders run from England (Bradford). Even the company had incorporated in U.S. but it had all its activities run from U.K. and it is unregistered here but can be wound up according to section 221 I.A.1986 under ancillary winding up. The centre of main interest said to be in U.K. and the court can wound up that company because of the gravity of the facts and because of all the debtors and creditors present here in Bradford. The English court has opened the main proceedings according to the art.3 of the regulation and by that the determination of COMI is proved in that case.

Re BRAC Rent-a-Car International Inc, [22] It was the company incorporated in the U.S. Delaware, but never traded there, its business conducted from England and it traded from an address in England. The company employees and all its trading activities were carried out in contract with subsidiaries and franchisees governed by English law. The question arises that whether the regulation applied to that company or not? As the company incorporated outside EU state, so the English court have no jurisdiction as the regulation dealt with the position between the members states not with the companies registered outside world. But regulation gave jurisdiction to member’s state in relation to those companies whose “centre of main interest” found in the members states. Here in relation to that company it may be acknowledged that command and control of the company was operated from the England which further satisfies the condition of COMI. So, English courts have jurisdiction to open main proceedings according to article 3 of the EU regulations.

Decision of BRAC was endorsed in Ci4Net.Com; [23] those were two companies incorporated, one in U.S.A. and other in New Jersey. The case itself an application for administration orders in England in respect of those companies. The two companies were not working effectively and debt has to be paid to HSBC bank about 4million pound. Those companies kept on delaying payment to bank and New Jersey Company had a small no. of shares quoted in company whereas U.S.A. Company had large no of quoted shares in other companies. It was noted that directors of the company effectively were in London but not trading actively. The petition was made by HSBC for liquidation. HSBC have to show COMI of the company here in U.K. for its liquidation. As they can show by the directors were all the time in London and insurance of some part of trading from London. The centre of main interest can be found here because all the securities were traded here in U.K… HSBC they were going for administration here and third purpose was the realisation of securities of creditors in U.K. But a company can not go into administration and liquidation at the same time. Company prior to go into administration by administration receivership but at the same time it can’t go into liquidation. Administrator duties owes to creditors not to the bank whose securities traded here. As it proved for the regulation to allow the jurisdiction for the insolvency proceedings in relation to those companies as COMI has been identified in the EU members state also satisfying the principle of article 3 of EU reg.

The other relevant case is, Re AIM Underwritings Agencies (Ireland) Ltd [24] ; it was an Irish incorporated company which was wholly owned subsidiary of U.K. incorporated company. The Irish company had been established in Ireland in order to take over the parent’s business for regulatory reasons. Its financial affairs were controlled from the U.K., its directors were based in U.K. and solely responsible for underwriting business, England parent company controlled the administration and management of the Irish company. Irish company had no employees. It could be seen from the above mentioned facts that command and control of the Irish company was in the hands of English parent company which was incorporated here in U.K. That’s why COMI has to be in the member state England according to article 3 of EU reg. The England was most appropriate place for main insolvency proceedings against that Irish company and the creditors were also in the U.K. its Parent.

Conclusion

The English law of insolvency has a greater strategic approach in relation to the confirming and laying down jurisdiction for the winding up of unregistered company and giving up assistance to foreign courts in insolvency matters where ever appropriate or recognised by English courts. European Union has adopted the single set of regulatory framework which has consisted of articles for governing the member states to provide jurisdiction and assistance in insolvency matters. The principles of section 221 which described the powers of an English court for winding up of unregistered company here in U.K., has gone through developments in the past then emerged as bold statute. According to this section the court has authorised to exercise its jurisdiction for liquidation of insolvent company if there has been a sufficient connection and proved between the company and U.K. It means that a main principle business of company must be situated in U.K. or there has to be a sufficient connection with U.K. it may not necessary that asset must have to be here. Further the court must see the most appropriate forum in exercising jurisdiction over the insolvent company and gave authority to that country for the purpose, as its liquidation well suited to its members. Similar to those provisions of English courts, the European regulation had defined its powers to authorised its members states in exercising jurisdiction for insolvent companies, under article (3) the centre of opening up of main proceedings, the regulation find that the jurisdiction of that country is recognised where the command and control of the insolvent company is operated, the centre of main interest of the debtor in any country provide the basis for opening and recognition of main insolvency proceedings.

According to section 426 English courts have power to assist the foreign court (relevant country or territory) wherever appropriate and necessary on the discretion of its own, in liquidation process of insolvent company. That foreign court have requested the English courts in the insolvency matters in their own jurisdiction and that English courts have their own discretion whether assist them or not. Similar to those there have been provisions under the European regulation for the opening up of secondary proceedings in other member state as prior to those main proceedings which had already being opened in a member state. Those main proceedings are treated as main insolvency proceedings and opened in that member state where the centre on main interest of debtor lies, where the command and control of the country. The secondary proceedings were treated as winding up proceedings which start after the opening up of main proceedings. The provision for secondary proceeding is for the sake of justice because the regulation did not authorise any member state to open main proceedings if those already is being opened in any state. For the sake of justice because by secondary proceedings the wounding up of company has to be done by