Citation(2008) 20 SAcLJ 35
Published date01 December 2008
Date01 December 2008

In the recent case of RBG Resources v Credit Lyonnais, the High Court held that s 377(3) of the Companies Act, which has been interpreted as requiring a ring-fencing of the local estate of a registered foreign company for the benefit of paying debts and liabilities incurred in Singapore, does not apply to an unregistered foreign company. This article discusses the case in the light of recent developments in international insolvency in English, European and American law. It is argued that at common law Singapore should not adopt a dogmatic approach on whether to ring-fence local assets or to order their transfer to the main liquidation, but should adopt a flexible approach that requires close co-operation between the Singapore and foreign liquidators in the quest to achieve practical justice.

I. Introduction

1 In an insolvent liquidation or reorganisation, the chief concern of all interested parties is with the constituency of the debtor’s estate. The liquidator or equivalent party, and the unsecured creditors, obviously benefit the greater the assets available for distribution to them. Professor Thomas Jackson took the view that the concern of creditors was similarly reflected from the vantage point of either the assets or the liabilities of the debtor since only that which was owned beneficially by the debtor formed part of the common pool for distribution amongst the general creditors.1 In other words, the assets that are reachable by the unsecured creditors consist of the residual amount after priority liabilities of the debtor are

settled. A secured party, for example, is not required to prove in the debtor’s insolvency for a dividend.

2 Bankruptcy today, however, cannot be viewed in the isolation of national boundaries. As multinational companies proliferate, we should expect more cross-border insolvencies, with the assets and liabilities mismatched not only in temporal terms (the possible cause of the insolvency in the first place), but also in terms of their geographical locations. Starting from the premise that economic efficiency requires the preservation of going concern values, or an orderly liquidation, we can see the importance of an international framework to co-ordinate the reorganisation or distribution of assets spread out all over the world. Failure to do this could see a worldwide common pool problem, with not just creditors but nation states (and their judiciary) involved.

3 The concept of unity or universality of bankruptcy is one which argues for only one set of insolvency proceedings that is given effect to elsewhere. The first step in achieving this is to recognise that there is a main insolvency forum. This has been achieved within the European Community (“EC”), where the EC Regulation on Insolvency Proceedings2 gives a member state main jurisdiction over a winding up where the company has its centre of main interests. A company cannot have more than one such centre, and it is presumed to be the company’s registered office unless the contrary is proved.3 This can be shown “only if factors that are both objective and ascertainable by third parties enable it to be established that an actual situation exists which is different from that which locating it at that registered office is deemed to reflect”.4

4 Ideally, what will happen is that ancillary proceedings in states other than the main forum freeze the assets within their jurisdiction and transfer them over to the main forum. Unfortunately, the cross-border nature of corporate insolvency today means that there may be persons recognised as secured or quasi-secured creditors in one jurisdiction and not another. For example, while it is clear that foreign creditors are entitled to prove in the winding up in the same manner as English creditors,5 the priority laws that would apply there is English law. But, under s 221 of the English Companies Act 1985, the jurisdiction of an English court to wind up a foreign company is a wide one. It was thought that while the foreign company did not have to establish a place of

business there,6 it had to have assets and creditors there,7 in order for a court here to have jurisdiction to make the winding-up order. It has, however, more recently been held that it is not necessary for a foreign unregistered company which carries on a business there to have assets present in the jurisdiction. What is important is that there is a sufficient connection between the company and England, and reasonable possibility that, if a winding-up order is made, there is benefit to those applying for the winding-up order and the court is able to exercise jurisdiction over one or more persons interested in the distribution of assets.8

5 The real difficulty is if English proceedings are ancillary, in the sense that the liquidators there can only get in and realise English assets,9 for there the question is whether the court will send over the English liquidation estate, as well as English unsecured creditors (and foreign creditors who have proved their debts in England) to the insolvency proceedings in the main forum. The latter may have significantly different insolvency provisions (either offering less protection to English creditors as in Re BCCI (No 10)10, or greater protection to its domestic creditors, which was the case recently in Re HIH11.

II. Re BCCI No 10 and Re HIH

6 The former situation was experienced in Re BCCI (No 10),12 which involved the worldwide insolvency of Bank of Credit and Commerce International SA (“BCCI”), a bank incorporated in Luxembourg and in the process of being wound up there, as well as in other countries around the world. In ancillary proceedings in England, the English liquidators applied to court for directions as to certain matters before it transferred assets obtained both from global realisations (from which the English liquidation estate was given about half), as well as $655m in English realisations, to Luxembourg. In the background was the agreement between BCCI’s liquidators around the world that the liquidation process should be a joint enterprise that created a common pool from which all creditors wherever situate would receive the same percentage dividend payout.

7 The main issue was whether the English Insolvency Rules 1986, r 4.90, providing for insolvency set-off should be applied before the assets were transmitted to Luxembourg, which did not have similar insolvency set-off rules.13 Scott VC stated three principles of international insolvency that were recently accepted by a Singapore court14 in RBG Resources v Credit Lyonnais:15

(1) Where a foreign company is in liquidation in its country of incorporation, a winding-up order made in England will normally be regarded as giving rise to a winding up ancillary to that being conducted in the country of incorporation. (2) The winding up in England will be ancillary in the sense that it will not be within the power of the English liquidators to get in and realise all the assets of the company worldwide. They will necessarily have to concentrate on getting in and realising the English assets. (3) Since in order to achieve a pari passu distribution between all the company’s creditors it will be necessary for there to be a pooling of the company’s assets worldwide and for a dividend to be declared out of the assets comprised in that pool, the winding up in England will be ancillary in the sense, also, that it will be the liquidators in the principal liquidation who will be best placed to declare the dividend and to distribute the assets in the pool accordingly. [emphasis added]

8 Scott VC thought that the US courts, in contrast, usually ring-fenced assets for domestic creditors, which as we shall see was probably a mistaken assumption even at that time.16 Yet, this nod to comity in international insolvency was immediately followed by a fourth proposition, in which Scott VC held on some forum mandatory statute basis, that he had no jurisdiction to disregard r 4.90 but, in the event he had, also declined to exercise his jurisdiction in that regard.

9 In contrast, in Re HIH, the English court felt that English creditors would have been disadvantaged if the proceeds of HIH, a large insolvent Australian insurer with three companies registered as overseas companies (on the assumption that these, and a fourth, which was not registered, were being wound up in England17), were remitted to Australia for distribution in accordance with Australian law. Here, there were statutory provisions applicable to insolvent insurance companies in Australia that would have prejudiced English creditors.18 At first instance,19 Richards J rejected the letter of request from the Supreme Court of New South Wales for the transfer of assets on the basis that the extended principle drawn from Re BCCI (No 10) was that the court had no power to order a transfer if the pari passu rule of the principal jurisdiction were not substantially the same as that under English law. While the Court of Appeal agreed with the decision below,20 Sir Andrew Morritt C thought that Richards J had wrongly limited the jurisdiction given to the court by the s 426 of the Insolvency Act 1986 (applicable to a “relevant country”, which included Australia but not Luxembourg).21 Rather the test for the exercise of the court’s discretion was simply one of balancing the advantages and disadvantages to the creditors in the ancillary jurisdiction resulting from a transfer to the principal place of bankruptcy. Here, the advantage for some insurance and reinsurance creditors resulting from a transfer did not outweigh the prejudice suffered by the other creditors. There was thus no countervailing advantage to the

estate as a whole that could justify an interference with the statutory scheme of distribution imposed under the Insolvency Act 1986.

III. Singapore cases

10 We have had some experience with cross border insolvencies in Singapore. In Tohru...

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