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Note by Stuart Preston and Julie Tait as joint administrators of Signal Real Estate Opportunities (Court of Session) [2024] CSOH 91 (26 September 2024)
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[2024] CSOH 91
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OUTER HOUSE, COURT OF SESSION
[2024] CSOH 91
P584/24
OPINION OF LORD SANDISON
in the Note by
(FIRST) STUART PRESTON and (SECOND) JULIE TAIT
as joint administrators of
SIGNAL REAL ESTATE OPPORTUNITIES (LUX) INVESTCO IX S.À.R.L
(IN ADMINISTRATION)
Noters
for directions pursuant to paragraph 63 of Schedule B1 of the Insolvency Act 1986
Noters: DM Thomson KC, Boffey; DLA Piper Scotland LLP
26 September 2024
Introduction
[1]
By this Note, the joint administrators of a company registered in Luxembourg but
having its principal asset in the form of property situated in Scotland seek directions from
the court as to whether it would be appropriate for them to enter into a contract (called a co-
operation protocol) with a receiver to the company appointed by the Tribunal
d'arrondissement de Luxembourg. Neither the receiver nor the company's principal and
secured creditor has raised any objection to that course of action. The matter came before
the court for a hearing on a motion to grant the prayer of the Note.
2
Relevant Statutory Provisions
[2]
The Insolvency Act 1986 provides inter alia as follows:
"426.-- Co-operation between courts exercising jurisdiction in relation to
insolvency.
...
(4) 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
other part of the United Kingdom or any relevant country or territory.
(5) For the purposes of subsection (4) a request made to a court in any part of the
United Kingdom by a court in any other part of the United Kingdom or in a relevant
country or territory 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."
[3]
Schedule B1 to the 1986 Act contains inter alia the following provisions:
"3
(1) The administrator of a company must perform his functions with the objective
of--
(a) rescuing the company as a going concern, or
(b) achieving a better result for the company's creditors as a whole than
would be likely if the company were wound up (without first being in
administration), or
(c) realising property in order to make a distribution to one or more secured
or preferential creditors.
(2) Subject to sub-paragraph (4), the administrator of a company must perform his
functions in the interests of the company's creditors as a whole.
(3) The administrator must perform his functions with the objective specified in sub-
paragraph (1)(a) unless he thinks either--
(a) that it is not reasonably practicable to achieve that objective, or
(b) that the objective specified in sub-paragraph (1)(b) would achieve a better
result for the company's creditors as a whole.
3
(4) The administrator may perform his functions with the objective specified in sub-
paragraph (1)(c) only if--
(a) he thinks that it is not reasonably practicable to achieve either of the
objectives specified in sub-paragraph (1)(a) and (b), and
(b) he does not unnecessarily harm the interests of the creditors of the
company as a whole.
...
42
(1) This paragraph applies to a company in administration.
(2) No resolution may be passed for the winding up of the company.
(3) No order may be made for the winding up of the company.
(4) Sub-paragraph (3) does not apply to an order made on a petition presented
under--
(a) section 124A (public interest),
(aa) section 124B (SEs), or
(b) section 367 of the Financial Services and Markets Act 2000 (c.8) (petition
by Financial Conduct Authority or Prudential Regulation Authority).
(5) If a petition presented under a provision referred to in sub-paragraph (4) comes
to the attention of the administrator, he shall apply to the court for directions under
paragraph 63.
...
63
The administrator of a company may apply to the court for directions in connection
with his functions.
...
79
(1) On the application of the administrator of a company the court may provide for
the appointment of an administrator of the company to cease to have effect from a
specified time.
(2) The administrator of a company shall make an application under this
paragraph if--
4
(a) he thinks the purpose of administration cannot be achieved in relation to
the company,
(b) he thinks the company should not have entered administration, or
(c) the company's creditors decide that he must make an application under
this paragraph.
(3) The administrator of a company shall make an application under this
paragraph if --
(a) the administration is pursuant to an administration order, and
(b) the administrator thinks that the purpose of administration has been
sufficiently achieved in relation to the company.
(4) On an application under this paragraph the court may--
(a) adjourn the hearing conditionally or unconditionally;
(b) dismiss the application;
(c) make an interim order;
(d) make any order it thinks appropriate (whether in addition to, in
consequence of or instead of the order applied for)."
Background
[4]
Signal Real Estate Opportunities (Lux) Investco IX S.À.R.L. (in Administration) ("the
Company") is a private limited liability company incorporated under the laws of the Grand
Duchy of Luxembourg. Its registered office is in Luxembourg and it is entered in the
Luxembourg Trade and Companies Register, but also registered with the UK Registrar of
Companies as an overseas entity.
[5]
On 15 February 2024, I appointed the Noters as joint interim managers of the
Company on the petition of Amber Green Spruce 2 LLP ("Amber Green"), a limited liability
partnership registered in England. On 13 March 2024, I further appointed the Noters as
5
joint administrators of the Company. It is thought that the only secured creditor of the
Company is Amber Green, which was owed £14,772,346.37 by it as at 13 February 2024, and
that the Company's assets would be exhausted in the satisfaction of its claim. There are a
number of unsecured creditors whose claims are thought to amount in aggregate to a few
hundred thousand pounds. The Company's principal (and effectively sole) asset is its
interest as tenant in a 125-year commercial lease of office premises in the International
Financial Services District of Glasgow at 55 Douglas Street there. The Company has one
sub-tenant at the property, which occupies approximately 15% of the available floor space,
the remainder being unlet and empty.
[6]
On 12 March 2024 the directors of the Company submitted an application to the
Tribunal d'arrondissement de Luxembourg seeking its admission to bankruptcy (faillite). That
application was granted on 15 March 2024 (two days after this court appointed the Noters as
joint administrators) and Ms Natalia Zuvak, advocate, was appointed as its bankruptcy
receiver (curateur). It is not clear whether the Luxembourg court was aware of the existence
of the Scottish administration order when it granted the application before it, although given
that the Noters had been installed as interim managers of the Company for a month at that
point, it is to be expected that the Company's directors were aware, at least, of the prospect
of an administration order being granted here. The Noters became aware of the actions of
the Luxembourg court on 19 March 2024. There are two concurrent insolvency processes, in
two separate jurisdictions, in dependence in respect of the Company. Neither has been
declared ancillary to the other.
[7]
In order to avoid potential conflict between those processes, the joint administrators
and the bankruptcy receiver have negotiated an agreement or draft co-operation protocol
(described in its own terms as having "a fully binding effect" upon them) designed to enable
6
them to work together to realise the Company's assets for the benefit of its creditors. In
terms of the protocol, the Noters would market and sell the Company's property in Scotland
with some oversight by the receiver, but some aspects of the proposed arrangement would
represent deviations from the statutory position provided in this jurisdiction in terms of the
Insolvency Act 1986 and the Insolvency (Scotland) (Company Voluntary Arrangement and
Administration) Rules 2018. In particular, any net sale proceeds from the sale of the
Company's Scottish property after deduction of the remuneration, costs and outlays of both
the administrators and the receiver up to the date of completion of sale, and a substantial
interim distribution to Amber Green, would be transferred to a Luxembourg escrow account
and distributed by the receiver in accordance with the order of priority prescribed by
Luxembourg law, which would have the effect of prioritising payment of sums believed to
amount to around 100,000 owed by the Company to the Luxembourg tax authorities, ahead
of Amber Green's ranking.
[8]
The judge supervising the bankruptcy process in Luxembourg has intimated that the
receiver does not need his permission to enter into the protocol. Amber Green is said
strongly to favour the management and sale of the Company's Scottish property being
conducted by the Noters within the administration process, and under this court's
supervision, but beyond that does not object to the protocol being entered into. It is
acknowledged that the costs of the administration are likely to be higher than would have
been the case had the appointment of the receiver not taken place.
[9]
In those circumstances, the Noters make this application to the court for directions in
terms of paragraph 63 of Schedule B1 of the Insolvency Act 1986 as to whether it is
appropriate for them to enter into the protocol, or such other direction as seems to the court
7
to be in the best interests of the creditors of the Company and the fulfilment of the purposes
of its administration.
Submissions for the Noters
[10]
On behalf of the Noters, senior counsel noted under reference to Goode's Principles
of Corporate Insolvency Law (5th ed) at para 16-63 that it was common to have concurrent
insolvency proceedings in different jurisdictions, sometimes but not necessarily with one set
of proceedings ancillary to another. In the present case, neither set of proceedings had been
declared ancillary to the other, and it could not be regarded as clear whether or not the
subsequent Luxembourg winding-up proceedings had implicitly rendered the Scottish
administration ancillary to them or, if they had, what the nature of the ancillary office-
holder's rights and duties might be in such a situation. Indeed, counsel's researches had not
revealed any judicial recognition of the idea that administration proceedings could ever be
regarded conceptually as ancillary to a winding-up in another jurisdiction.
[11]
Counsel referred to the observations of Sir Richard Scott V-C in Re Bank of Credit and
Commerce International SA (In Liquidation) (No. 10) [1997] Ch 213 at 242A B,
[1997] 2 WLR 172 at 193C D that in English law an ancillary winding-up involved that:
"The liquidators must get in and realise the company's assets as best they may
whatever may be the country in which the assets are situated. But, if the company is
incorporated abroad, English liquidators' ability to get in and realise the company's
foreign assets will be very limited. It follows that, if a foreign company has a
winding up order made against it in its country of incorporation and a winding up
order made against it in England, the English liquidators' role is likely, perforce, to
be limited to getting in, realising and distributing the English assets."
and to the conclusions drawn from the authorities by the Vice-Chancellor at
[1997] Ch 246C F, [1997] 2 WLR 197C F:
8
"This line of authority establishes, in my opinion, at least the following propositions.
(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. (4) None the less, 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. It may be,
of course, that English conflicts of law rules will lead to the application of some
foreign law principle in order to resolve a particular issue."
[12]
Reference was further made to the discussion in Goode at 16-65 of the practice of
agreeing protocols between insolvency office-holders in different jurisdictions and having
them approved by the respective supervising courts, including the observations that such
protocols commonly contained provisions inter alia confirming the sovereignty and
independence of the two courts involved; recording that each office-holder was subject only
to the jurisdiction of his own court; and directing the office-holders to submit to their
respective courts reorganisation plans in substantially the same form.
[13]
Counsel further noted the observation in Lightman & Moss on The Law of
Administrators and Receivers of Companies (6th ed) para 12.048, made under reference to
"In appropriate (albeit rare) circumstances, the court may also direct the
administrator to disregard otherwise mandatory requirements of the Insolvency Act
1986 and the 2016 Rules where it is necessary to ensure the convenient, economical
and sensible management of the company's affairs."
9
[14]
I highlighted to counsel certain aspects of the draft co-operation protocol which
appeared to me to give rise to potential matters of concern. These included:
1.
A provision that the administrators bound themselves not to request or
exercise any clawback action or remedy available under the Insolvency Act or
(Luxembourg) Code de Commerce or at common law including but not limited to any
payments or acts made, or to be made by the receiver in the exercise of her function
since her appointment.
2.
An acceptance that the admission of claims (reddition des comptes) against the
Company, together with the distribution of assets, would be carried out in
accordance with Luxembourg law and procedure, subject only to a right of
"consultation" on the part of the Noters in relation to the adjudication of the claims
of the local tax authorities and Amber Green before they were accepted.
3.
A provision that the Noters would require to seek the consent of the receiver
before incurring any costs in excess of £25,000, entering into any tenancy agreement
of the Company's Scottish property, or accepting any offer for its sale which was
recommended by the appointed marketing agents, with no provision as to how these
matters were to be resolved in the event that the receiver refused so to consent.
4.
A requirement for the approval of the Luxembourg supervisory judge to any
proposed sale of the Scottish property, with no corresponding involvement of the
Scottish court and no provision for what should happen if the requisite approval
from the Luxembourg judge was not forthcoming.
5.
An agreement to remit the net sale proceeds of any sale of the Scottish
property to Amber Green after making provision for the remuneration, costs and
expenses of the administrators, for the remuneration of the receiver, for the amount
10
of any salaries owed by the Company and for any social security contributions and
Luxembourg tax liabilities owed by it, but not for the claims of any other secured or
unsecured creditors.
6.
An agreement that the disposal of any assets of the Company other than its
property in Scotland be carried out by the receiver and according to Luxembourg
law.
7.
Provision that the administrators' fees and expenses be treated as costs and
expenses (dettes de la masse) in the Luxembourg bankruptcy process and be subject to
the approval of the supervising judge there.
8.
A stipulation that the agreement and any non-contractual obligations arising
out of or in connection with it were to be governed by the laws of the Grand Duchy
of Luxembourg and that any dispute arising out of or in connection with it would be
subject to the exclusive jurisdiction of the courts of Luxembourg city.
9.
A provision that the agreement might be supplemented, modified or replaced
in any manner by the written agreement of the administrators and the receiver, with
the approval of the superintending courts required only if the administrators and
receiver considered that necessary.
10.
A rather curious statement that the administrators and receiver were all
entering the agreement on behalf of the Company, which was apparently designed to
exclude any personal liability for any of them, but which seems to result (at least
from the point of view of Scots law) in the agreement being one essentially entered
into by the Company with itself, coupled with a stipulation that the agreement was
to be binding on "respective successors representatives, executors, administrators,
trustees, receivers, custodians or curators".
11
[15]
Those aspects of the draft protocol appeared to me to raise three types of concern,
albeit the demarcation lines between those groups may not in every case be very clearly
defined. Firstly, there are the provisions which seem in practice to render the administration
a mere adjunct to the Luxembourg liquidation process, without that having been the
intention of the court when it appointed the administrators and without any subsequent
order of the court to that effect having been sought or obtained (e.g. points 2, 5 and 6
above). Secondly, the provisions which effectively remove from this court any sensible
power of oversight in relation to the administration (e.g. points 4, 7 and 8 above). Thirdly,
provisions which raise doubts about the workability or (even allowing for the wide
discretion conferred at least in the first instance on administrators in matters of
commercial and managerial judgment) the justification for certain aspects of the protocol
(e.g. points 1, 3, 9 and 10 above).
[16]
Counsel acknowledged the force of some if not all of those concerns, but in general
terms submitted that the terms of the protocol reflected the outcome of negotiation between
the administrators and the receiver which unavoidably involved compromise. The
administrators continued to regard what was proposed as the most sensible way forward in
order to minimise or avoid the tensions which would otherwise arise out of the existence of
competing insolvency processes, but had approached the court with an open mind as to
what it might determine.
Decision
[17]
The present application undoubtedly raises a suitable issue for the direction of the
court. Indeed, it would have been preferable had directions been sought under
paragraph 63 of Schedule B1 to the Insolvency Act 1986 as soon as reasonably practicable
12
after the administrators became aware of the competing insolvency proceedings in
Luxembourg. Although this is not a case which would have fallen under the terms of the
(now repealed) section 124B of the 1986 Act relating to the winding up of certain categories
of Societas Europaea during an administration, where application for directions was
mandatory in terms of paragraph 42 of Schedule B1, it is sufficiently analogous to that
situation to render such an application highly desirable at the first opportunity. In the event,
an application which could have been made in the third week of March 2024, once the
administrators had become aware of what was happening in Luxembourg, was not made
until about four months later, by which time a great deal of work had been done by them
and arrangements had been made and implemented, in particular in relation to interim
funding from Amber Green, which would be hard satisfactorily to undo. Had an
application for directions been made more promptly, it appears to me to be highly likely, for
the reasons set out in Münchener Hypothekenbank eG, Noters, Re Seventeen Yellow Crowns SÀRL
[2023] CSOH 36 (and despite the fact that things happened in a slightly different order in
that case) that the administrators would have been invited or directed by the court to make
an application under paragraph 79 of Schedule B1 with a view to ceding control of the
realisation of the Company's Scottish property to the receiver, or otherwise regulating
comprehensively at that early stage the relationship between the respective processes.
However, although there have been instances where facilitative directions which would
otherwise have been given have been refused because of unreasonable delay in applying for
them (e.g. Re Consumer & Industrial Press Ltd (No. 2) (1988) 4 BCC 72) the situation in this
administration plainly requires the court to provide some input towards the resolution of
the difficulties which would otherwise confront it.
13
[18]
A primary question which arises is whether it is competent, and if so appropriate, for
the Scottish administration to be recognised as ancillary only to the Luxembourg winding-
up. If so, that might well serve to redefine the way in which the object of the administration
can be achieved and render lawful what would otherwise represent departures from
mandatory provisions of the insolvency legislation.
Ancillary liquidations
[19]
The concept of an ancillary liquidation has long been recognised in Scots law. In
Marshall, Petr (1895) 22 R 697, the First Division ordered a company incorporated in the State
of Iowa to be wound up under the provisions of the Companies Acts 1862 to 1890, a receiver
having been appointed to it in that State. The law report notes that the court expressed the
view that the proceedings here should be ancillary to those in Iowa, the proper domicile of
the company. The winding-up was placed under the supervision of a nominated
Lord Ordinary, with the court ordering that no proceedings were to be taken under its order
without his leave. No previous Scottish authority in point could be found, but amongst the
English cases cited to the court was Re Commercial Bank of South Australia (1886) 33 ChD 174,
of which more will shortly be said.
[20]
Bank of Credit and Commerce International SA, Noter) was an application for directions and
other orders from the Court of Session thought to be useful and advantageous in order to
close a liquidation process in Scotland. Lord Drummond Young observed that the noter had
been appointed joint liquidator of BCCI, which was incorporated in Luxembourg, following
letters of request made to the Court of Session under section 426 of the Insolvency Act 1986
by the High Court in England, on the application of the ancillary liquidators who had been
14
appointed to the company by that court. His Lordship noted that the Scottish winding up
had been an ancillary one in the sense that the only functions of the Scottish liquidators had
been to realise the assets of the company's Scottish branch and to make up a list of, and
adjudicate upon, the claims of its creditors in Scotland, adding that in practice the
adjudication of the claims of the Scottish creditors had been performed through the agency
of the English liquidators. A pooling arrangement had been entered into between the
English and Luxembourgish liquidators which recognised rights to set-off and other
preferential rights available in English and Scots law but not under the law of Luxembourg,
and judicial co-operation in the form of letters of request passing between the English and
Scottish courts had authorised the Scottish liquidators to transfer the proceeds of their
realisation of the company's assets in Scotland to the English liquidators, for the Scottish
creditors' claims to be filed in the English winding up, and for them to obtain distributions
from that winding up and from the principal liquidation process in Luxembourg. The case
well illustrates the great degree of flexibility which can be achieved by judicial co-operation
in this sphere.
[21]
The work of the Scottish liquidator had been completed and his accounts and
remuneration approved by the court. He sought a direction that in the circumstances he
was not obliged by section 146 of the 1986 Act to summon a final meeting of the company's
Scottish creditors. The question which thus arose was whether the apparently mandatory
terms of section 146 were indeed mandatory in an ancillary winding up. The court
confirmed, under reference to Marshall, that the concept of an ancillary winding up was
recognised in Scots law, although it was not mentioned expressly in the 1986 Act or any of
its predecessor statutes, and had this to say about the rationale for, and the principal
features of, such a winding up, at [9]:
15
"The reason for making one winding up ancillary to another is reasonably clear. It is
obviously desirable in the winding up of a company that one court should have
overall control in order to ensure that the fundamental objectives of insolvency law
are realised on a consistent basis. Those objectives, at least as recognised in Scotland
and the remainder of the English-speaking world, are to pay the expenses of the
liquidation, to pay any creditors with a preference or security duly recognised by the
appropriate system of law, and otherwise to divide the company's assets pari passu
among the ordinary creditors. In addition, in countries that recognise rights of set off
on insolvency, those rights must be given effect; in the present case that was the
reason for the qualifications relating to the Scottish and English winding up
proceedings. It is obviously important that the fundamental objectives of insolvency
law should be achieved consistently, especially as their primary objective is securing
the equal treatment of creditors of each class. That is why a single jurisdiction,
normally that of the country or state of incorporation, should have overall control.
Nevertheless, if the company has carried on business in other jurisdictions it is likely
that there will be significant assets and liabilities there. The realisation of the assets,
in particular, is likely to depend on the local legal system, and the rights of creditors
will probably also be governed by that system. In those circumstances it is preferable
that a local liquidator should be appointed because he will best be able to deal with
rights and obligations that arise under the local legal system. In order to secure the
primacy of the jurisdiction that has overall control, however, the winding up
proceedings in the local jurisdiction must be made ancillary to those in the former
jurisdiction."
[22]
Lord Drummond Young observed that the reasons for making one winding up
ancillary to another were compelling, and that he would be reluctant to impose any legal
requirement that would threaten the possibility of such procedure. The general conclusions
arrived at by the Vice-Chancellor in BCCI (No. 10) set out above were referred to with
approbation, with one caveat. Whereas the Vice-Chancellor had stated that the ancillary
character of an English winding up did not relieve an English court of the obligation to
apply English law, including its insolvency and conflict of law rules, to the resolution of any
issue arising in the winding up which was brought before the court, Lord Drummond
Young observed that he considered that that statement applied only to the resolution of
issues of substantive law, and not to rules of procedure, which might be subject to important
modifications in an ancillary winding up. His Lordship considered that his conclusion in
this regard was also supported by the judgment (then at first instance only) in Re HIH
16
fundamental policy objectives in the passage in Morris already set out should always be
recognised by the court conducting an ancillary winding up, and that subject to that, rules of
procedure might be modified in such a way as best achieved the objectives of the ancillary
winding up. After reviewing the facts of the application before him, Lord Drummond
Young concluded that, because of the ancillary nature of the winding up, no useful purpose
would be served by a Scottish final meeting, and that he could dispense with the apparently
mandatory requirement of section 146 as a procedural provision that would not serve any
useful purpose in such a winding up.
[23]
Doubt is cast on the relative clarity which one might have thought to exist after the
decision in Morris by two considerations. Firstly, it is perhaps not entirely clear in the
judgment of the Vice-Chancellor in BCCI (No. 10) that there exists in it the distinction
between substantive and procedural matters which Lord Drummond Young was able to
identify, and secondly, the basis for that judgment may in certain regards have been
overtaken by the decision in the House of Lords to overturn the first-instance and Court of
Appeal judgments in Re HIH Casualty and General Insurance Ltd. I thus turn to the English
authorities.
[24]
In the BCCI (No. 10) case, Sir Richard Scott V-C discussed the nature of an ancillary
winding up at [1997] Ch 238F 248B, [1997] 2 WLR 190B 199A. His Lordship set himself
the task of ascertaining from the existing judicial authorities "whether there are any, and if
so what, limits to the extent to which English liquidators in a so-called `ancillary' liquidation
can decline to apply provisions of English insolvency law and procedure in deference to the
insolvency law and procedure of the country in which the principal winding up is taking
place." ( [1997] Ch 239A B, [1997] 2 WLR 190 D - E). It will be noted that his Lordship
17
framed the question as relating to issues of both law and procedure. At [1997] Ch 239F,
[1997] 2 WLR 191A the Vice-Chancellor stated as an initial conclusion that "The courts have,
in my judgment, no more inherent power to disapply the statutory insolvency scheme than
to disapply the provisions of any other statute." and added that there was no "clear source
of the alleged power of the court to authorise or direct liquidators in an English winding up
to disapply parts of the statutory insolvency scheme" ( [1997] Ch 240D, [1997] 2 WLR 191G
H).
[25]
In a comprehensive and useful examination of the authorities, his Lordship noted
that in Re Commercial Bank of South Australia (which, it will be recalled, was cited in the
earliest Scottish case of Marshall), North J had observed in the context of what would
nowadays be recognised as an ancillary winding up that his goals would be to avoid conflict
between the two supervising courts, to have regard to the interests of all the creditors and all
the contributories, and to keep down the expenses of the winding up so far as possible,
noting that the liquidator should not without special direction act otherwise than to get in
the English assets and to settle a list of the English creditors, presumably (although this was
not expressly said) with a view to transmitting the assets and the list of creditors to the
principal liquidator for the payment of a pari passu dividend to all creditors.
[26]
In Re Federal Bank of Australia Ltd Vaughan Williams J had
ordered the institution of a compulsory ancillary liquidation, so that the liquidator could
"act much more efficiently as an assistant to the principal liquidators" but had imposed
(unspecified) limits on his authority, in a way which amounted to directions to him not to
carry out some of the functions that would, in any ordinary liquidation, have formed part of
his duties.
18
[27]
In Re English, Scottish, and Australian Chartered Bank [1893] 3 Ch 385 the same judge
had explained that the court of the country of the domicile of the company in liquidation
should be the principal court to govern the liquidation, with other courts, if need be, acting
as ancillary to that principal liquidation, subject to the proviso that the ancillary court would
never give up the "forensic rules" which governed the conduct of its own liquidation.
Although some doubt had been expressed about the true extent of that principle by
Roxburgh J in Re Hibernian Merchants Ltd [1958] Ch. 76, [1957] 3 WLR 486, it had been
followed by Wynn-Parry J in Re Suidair International Airways Ltd [1951] Ch 165. On the
question of some distinction being drawn between matters of substantive law and mere
questions of procedure, the judge had observed, at [1951] Ch 173 174, in relation to
Vaughan Williams J's remark that the ancillary court would never give up its own forensic
rules:
"Then it is said that all that that passage refers to is questions of procedure; that
section 325 concerns a question of substantive law; and that therefore the passage,
when properly regarded, is not any obstacle to the adoption by the court of the
argument put forward on behalf of the liquidator. To that I would make two
answers: first, I do not read Vaughan Williams J as confining himself to what, on a
narrow view, may be said to be matters of procedure. I think that he intended his
observations and the statement of the principle to apply to the decision of all
questions arising in the ancillary liquidation. Secondly, even if that passage could be
read otherwise, I should be prepared for myself to say that I can see no sound reason
for distinguishing between matters of procedure viewed in that narrow sense and
matters of substantive right. 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
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. Who could lay down
as a clear and exhaustive proposition where the court was to draw the line in any
particular case between administering the English law and the law of the main
liquidation?"
19
[28]
In Felixstowe Dock & Railway Co v United States Lines Inc [1989] QB 360, [1989] 2
WLR 109, Hirst J had noted that the English practice was to regard the courts of the country
of incorporation as the principal forum for controlling the winding up of a company, but
that in so far as that company had assets in England, the usual practice was to carry out an
ancillary winding up in England in accordance with English rules, while working in
harmony with the foreign courts, and had added that on the application of that principle,
the English courts would not and should not favour an order which removed the English
assets entirely outside their control.
[29]
The Vice-Chancellor noted the submission made to him that, unless the court had
power to direct English liquidators in an ancillary liquidation to transmit assets to the
principal liquidators, the concept of an ancillary liquidation would be meaningless. His
Lordship observed that powers could become vested in the courts by accretion of judicial
decisions, and that in ancillary liquidations, the paradigm example of which would be a
company in liquidation in its country of incorporation and against which a winding-up
order had been made in England, it had become accepted by implication that at some stage
in the liquidation the court would authorise the English liquidators to transmit the assets
they had got into the principal liquidators in order to enable a pari passu distribution to
worldwide creditors to be achieved. However, that power had not been established to
extend to an ability to disapply any "substantive rule" forming part of the statutory scheme
established under the 1986 Act and relative subordinated legislation.
[30]
Re HIH Casualty and General Insurance Ltd progressed, after being referred to in
incorporated and managed in Australia were authorised to, and did, also carry on business
in the United Kingdom. Winding up orders were made over them in New South Wales and
20
pursuant to letters of request joint provisional liquidators were also appointed in England
by the High Court. A further letter of request was issued by the Australian court pursuant
to section 426(4) of the 1986 Act, asking that the English provisional liquidators be directed,
after payment of their expenses, to remit the English assets to the Australian liquidators for
distribution. The Australian scheme of distribution gave preference to certain insurance
creditors to the prejudice of others. The alternative to the requested remit was a separate
liquidation and distribution of the English assets in accordance with the 1986 Act.
[31]
Lord Hoffmann (with whom Lord Walker of Gestingthorpe agreed) observed that,
despite an absence of statutory provision for international co-operation in corporate
insolvency matters until the enactment of what had become section 426 of the 1986 Act in
consequence of a recommendation of the Cork Committee in 1982, in practice a degree of
such co-operation had been achieved by judicial action, based upon the general principle of
private international law that bankruptcy (whether personal or corporate) should be
universal and that there should be a unitary bankruptcy proceeding in the court of the
bankrupt's domicile which received worldwide recognition and should apply to all the
bankrupt's assets. That principle had resulted in a judicial practice whereby an English
winding up of a foreign company was treated as ancillary to a winding up by the court of its
domicile, but which in theory at least operated universally, applied to all the foreign
company's assets, and was subject to all the powers and duties under the 1986 Act.
However, the judicial practice which had developed in such cases 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, disapplying the statutory trusts and duties in relation to the foreign
assets of foreign companies. That practice was based on pragmatism and universalism. It
had led to the recognition in BCCI (No. 10) that an English court had power in an ancillary
21
liquidation to authorise the English liquidators to transmit the English assets to the principal
liquidators. 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: Wynn-Parry J in Suidair at 173 and BCCI (No. 10). However, the whole
doctrine of ancillary winding up was based upon the premise that in such cases the English
court might disapply parts of the statutory scheme by authorising the English liquidator to
allow actions which he was 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), whether or not that was the same as English law. Once one accepted
that the logic of the ancillary liquidation doctrine required the court to have power to relieve
an English ancillary liquidator from the duty of distributing the assets himself and to direct
him to remit them for distribution by the principal liquidator, it had to 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. Any differences between the domestic and foreign principles of
distribution might sound in the exercise of the court's discretion to direct ancillary
liquidators to remit English assets abroad. The existence of the section 426 jurisdiction made
the court's powers even more pronounced, as it expressly gave the court power to apply the
foreign insolvency law to the matter specified in the request, and the section was itself part
of the domestic statutory scheme. In exercising its power under English law to direct the
liquidator to remit the assets and leave their distribution to the courts and liquidators
abroad, the court was exercising its own general jurisdiction and powers as well as the
insolvency law of England. That power existed well before the 1986 Act and fell to be
22
exercised when the English court decided that there was a foreign jurisdiction more
appropriate than England for the purpose of dealing with all outstanding questions in the
winding up. It was not a decision on the choice of the law to be applied to those questions,
which would be a matter for the court of the principal jurisdiction to decide. Section 426
extended the jurisdiction of the English court and the choice of law which it could make in
the exercise of its own jurisdiction, whether original or extended, for example by enabling
the court to apply a foreign law when it would otherwise be obliged to apply only English
law. The guiding principle remained that English courts should, so far as was consistent
with justice and UK public policy, co-operate with the courts in the country of the principal
liquidation to ensure that all the company's assets were distributed to its creditors under a
single system of distribution. Since no grounds of justice or policy required the English
courts in the circumstances of the case to insist upon distributing the company's assets
according to its own system of priorities simply because they happened to have been
situated in England at the time of the appointment of the provisional liquidators, the order
requested by the Australian court should be granted.
[32]
Lord Phillips of Worth Matravers agreed that section 426(4) and (5) of the 1986 Act
gave the court jurisdiction to accede to the request of the Australian court and that on the
facts of the case the court ought to do so. His Lordship declined to express a view on what
he called the "controversial area" of whether, in the absence of the statutory jurisdiction, the
same result could have been reached under a discretion available at common law.
[33]
Lord Scott of Foscote (as the Vice-Chancellor in BCCI (No. 10) had since become)
observed that his reasoning in that case was confined to the inherent power of the court and
had nothing to do with section 426. Luxembourg had not been designated a "relevant
country" for the purposes of section 426 and so no letter of request under that section asking
23
for the remission to Luxembourg of the assets held by the English liquidators had or could
have been issued. 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,
as section 426 was part of that scheme. Where section 426 did not apply, the English courts
had a statutory obligation in an English winding up to apply the English statutory scheme
and had no inherent jurisdiction to deprive creditors proving in an English liquidation of
their statutory rights under that scheme. That was what BCCI (No. 10) had decided and his
Lordship adhered to the opinion he had expressed in that case. It would not 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: English, Scottish and Australian Chartered Bank; Suidair; BCCI (No. 10). His Lordship
re-iterated the conclusion that he had reached in the latter case, 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." The proposition that the assistance and directions
sought in the present case could be given under an inherent power of the court without
reliance on section 426(4) and (5) was unacceptable. The request could and should,
however, be acceded to in terms of the section.
[34]
Lord Neuberger of Abbotsbury concluded that, while remittal of assets could be
effected pursuant to established judicial practice, the power to do so where the distribution
would not be in accordance with the English insolvency regime derived from section 426.
As a matter of general principle, in the absence of section 426(4) and (5), where a company
24
was wound up in England, its assets were held on terms that they must be applied in
accordance with that statutory insolvency regime. That principle applied in the case of an
English liquidation of a foreign company. The application of the English insolvency regime
applied 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, it was
therefore difficult to see on what basis an English court could have jurisdiction to disapply
the English insolvency regime to assets there of a company subject to a winding up order
made by an English court. There was no suggestion in any of the earlier authorities 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 England, could authorise the
distribution of those assets other than in accordance with the English insolvency regime.
The mandatory nature of the English regime had, on the contrary, been highlighted in
English, Scottish and Australian Chartered Bank, Suidair and BCCI (No. 10). On that basis, the
value of the English court's inherent ancillary liquidation powers was very much more
limited than if it could effectively disapply, or authorise the disapplication of, the English
insolvency regime. The fact that the English court had an inherent power to relieve an
ancillary liquidator from the duty of distributing the assets himself, and to order that the
assets be remitted to be distributed by a foreign liquidator, did not mean that it necessarily
followed that those assets could then be distributed other than in accordance with the
English insolvency regime. The fact that English assets were bound to be distributed in
accordance with certain principles did not prevent the assets being passed to someone else
so that they could be distributed in accordance with those principles, but it would prevent
the passing on of those assets for distribution in accordance with different principles. The
notion that the court had inherent jurisdiction to remit English assets to liquidators in
25
another jurisdiction on the basis that the insolvency regime of that jurisdiction would apply
sat uneasily with the provisions of section 426(4) and (5), at least in relation to remittal of
assets. However, the power to accede to the request in the current case fell under the terms
of section 426, and should be granted.
[35]
I recall, finally, that the subject of modified universalism which formed the
theoretical underpinning of the speech of Lord Hoffmann in HIH Casualty and General was
discussed in the Scottish context by Lord Tyre in Hooley Ltd, Petr [2016] CSOH 141, 2017
Lordship observed at [35] that although that principle had not at that point been the subject
of examination by a Scottish court, nothing had been placed before him to indicate that it
should not be recognised, and that Scots law had long recognised that there might be a
principal liquidation in the country of the company's incorporation and an ancillary
liquidation in another jurisdiction.
[36]
In the present case, the supervening Luxembourg insolvency process had in itself no
implicit effect on the nature or status of the Scottish administration, which the court did not
contemplate as having any ancillary quality at its inception. Whether the Scottish process
can and should be recognised as ancillary would require to be a matter of express
determination by this court. If the court were so to decide, that would accord with the
universalist principle that the primary insolvency process relating to the Company should
be in its place of incorporation, Luxembourg.
[37]
In the context of a winding-up, it is of the essence of ancillary status that it involves
the ingathering of assets situated in the ancillary jurisdiction and (subject to the court's
approval and compliance with such conditions as it may lawfully impose) their remit to the
principal jurisdiction for the declaration of dividends and distribution to the creditors of the
26
company. The power of the court to give directions under paragraph 63 of Schedule B1 to
the 1986 Act is circumscribed and controlled by the ancillary nature of the process in which
the directions are sought, and it would be over-simplistic to maintain that such directions as
seem necessary to ensure the convenient, economical and sensible management of process
may be given, without regard to that nature.
[38]
The leading Scottish case on ancillary winding up is Morris. Although that case also
involved a Luxembourg-registered company, it is useful to recall that the Scottish ancillary
liquidation had been commenced on a request of the English High Court (which had itself
instituted a liquidation ancillary to the principal process in Luxembourg) in terms of
section 426 of the 1986 Act, and very significant that the arrangements which assured the
rights of set-off enjoyed by the Scottish creditors were again achieved by way of a further
request by the English court under section 426. In the present case, there being no
intervening process in a relevant country capable of generating a section 426 request, and
Luxembourg not being a jurisdiction from which such a request may lawfully emanate, the
question of what can and cannot properly be ordered as an incident of any ancillary process
in the present case depends on the common law. In Morris, further, the Scottish liquidators
were afforded the power to adjudicate on the claims of the Scottish creditors (albeit in
practice they appear to have permitted the English liquidators to do so on their behalf) and
the Court of Session retained the right to, and did, examine and approve the liquidators'
remuneration features which appear to be absent from the draft co-operation protocol in
the present case.
[39]
The two salient legal points which emerge from Morris are, firstly, that it appears that
Lord Drummond Young considered that the set-off rights which would have been enjoyed
by the Scottish creditors had the liquidation been an entirely domestic one had to be given
27
effect in the arrangements made in relation to the ancillary liquidation, the implication being
that the court would not have sanctioned any arrangement which did not secure them.
Secondly, and as a related matter, what his Lordship took from BCCI (No. 10) was that rules
of insolvency procedure could be modified in such ways as would best achieve the
objectives of an ancillary winding up, but that rules of substantive law (such as the right to
set off) could not.
[40]
For my own part, I find it difficult to discern in BCCI (No. 10) a distinction being
drawn between procedural and substantive matters, particularly given the Vice-Chancellor's
citation without adverse comment of Suidair, in which Wynn-Parry J rejected the suggestion
that Vaughan Williams J's judgment in English, Scottish, and Australian Chartered Bank could
be read as making such a distinction, and expressed the further view that it would be an
unworkable one. In any event, the question whether any element of domestic law, whether
substantive or procedural, is indispensable in an ancillary winding up may have been
rendered otiose, depending on what is to be made for the purposes of Scots law of the
speeches in the House of Lords in HIH Casualty and General, to which I now turn.
[41]
The approach taken by Lord Hoffmann and Lord Walker in that case starts from first
principles, and in particular the proposition that insolvency should ideally be regarded as
universal and subject to a unitary process. I do not consider that that eminently pragmatic
proposition would be thought controversial as a matter of Scots law, and indeed would
suggest that it underlies in large measure the rationale and decision taken in Seventeen
Yellow Crowns. As their Lordships point out, and leaving aside the impact in certain cases of
section 426, that principled approach seems inexorably to lead to the conclusion that in an
ancillary winding up (that is to say, one in which the domestic jurisdiction has determined
that the courts of another jurisdiction very probably that of the relevant company's place
28
of incorporation are more suited to deal with the overarching issues in the insolvency
process) the duties of the domestic liquidators should be limited to the ingathering of local
assets and the determination of local claims, and, crucially, that the statutory trusts and
duties which would ordinarily attach themselves to a liquidator and to the assets ingathered
by him need not be regarded as applying to anything beyond those specific tasks unless
some particular consideration of justice or policy requires them to do so. For my own part, I
find that principled approach and its logical application to arrive at that conclusion
convincing and indeed compelling. The alternative view, espoused by Lord Scott and
Lord Neuberger, appears to me to be principally based on the English precedents of English,
Scottish and Australian Chartered Bank, Suidair and BCCI (No. 10) which are not binding in
Scots law and which appear to lack the analytical force underpinning the approach favoured
by Lord Hoffmann and Lord Walker. I was initially somewhat attracted by the argument
that that more liberal approach to the question of the nature of an ancillary winding up
risked cutting across the statutory jurisdiction provided by section 426 of the 1986 Act, as is
particularly suggested by Lord Neuberger, but ultimately have come to the view that the
statutory jurisdiction (in the exercise of which certain presumptions are generally judicially
applied) and the common law can co-exist without necessary conflict. I conclude, then, that
the description of the nature and incidents of an ancillary winding up given by
Lord Hoffmann in HIH Casualty and General falls to be regarded as representing the law of
Scotland on the matter.
Ancillary administrations?
[42]
Having thus identified the nature of an ancillary winding up in Scots law, it is next
necessary to consider whether there can be such a thing as an ancillary administration. The
29
primary difficulty is that an administration requires to serve one of the objectives set out in
the hierarchy of purposes contained in paragraph 3 of Schedule B1 to the 1986 Act, namely
the rescue of the company in question as a going concern, the achievement of a better result
for the company's creditors as a whole than would be likely if the company were to be
wound up without first being in administration, or the realisation of property in order to
make a distribution to one or more secured creditors (in this case without unnecessarily
harming the interests of the creditors of the company as a whole). The first objective seems
impossible to reconcile with an ongoing winding up process in the principal jurisdiction,
although it may be compatible with a different form of insolvency process there. Similar
considerations apply to the second objective, at least if one reads (as I think one should) the
reference there to a winding up as a reference to a winding up in the domestic jurisdiction.
The third objective (being the one which, the court was informed at the outset of the
administration proceedings, was that being pursued in the present case) is more obviously
compatible with the existence of a wider range of insolvency processes in the principal
jurisdiction.
[43]
Counsel's researches had not revealed any judicial recognition of the possibility of an
ancillary administration. However, Re Dallhold Estates (UK) Pty Ltd [1992] BCC 394,
[1992] BCLC 621 might be thought to fit the bill. In that case, Chadwick J made an administration
order in relation to a company registered in Western Australia at the request (in terms of
section 426 of the 1986 Act) of the Federal Court of Australia, a provisional liquidator having
been appointed to the company in both Australia and in England, where it held a potentially
valuable leasehold interest in an estate which would be imperilled should a winding-up
order be made against it. The company was the wholly-owned subsidiary of another
Australian company which had itself been placed in liquidation in Australia, and whose
30
liquidator had made an unsatisfied demand for payment from the subsidiary, thus
constituting its apparent insolvency. The administration order was made in terms of the
section 426 jurisdiction notwithstanding that the court at the material time otherwise lacked
the power to make such an order in relation to a company incorporated overseas. The
principal purpose for which the Federal Court had made its request that the subsidiary be
placed in administration was to attempt to achieve the best possible realisation of its assets
for the benefit of all its unsecured creditors, and the letter of request specifically stated that it
wished "the assistance of the English court to act in aid of and be auxiliary to" the Federal
Court. The case evidently had various specialities which are not present in the current
proceedings and which are unlikely to occur as a matter of routine, but seems to me to
confirm the conclusion that I would in any event have reached as a matter of principle,
namely that there is no bar in theory to an administration under the 1986 Act being ancillary
in nature, any more than there is such a bar to a liquidation being so conducted having that
status.
[44]
It may well be that in practice, and absent at least some such circumstances as were
present in Dallhold Estates, a court would be wary of instituting an administration in the
knowledge that it was to be ancillary only to a principal insolvency process elsewhere,
because of the need for any administration, even of an ancillary nature, to be capable of
serving one of the objectives set out in paragraph 3 of Schedule B1, and because the reasons
explained in Seventeen Yellow Crowns may militate against the conclusion that an ancillary
administration, even if competent, would represent a particularly useful or economical
solution to the situation presenting itself. The utility of an ancillary administration at all,
and exactly what constraints its ancillary status places upon its conduct and the rights and
31
duties of the administrators, are matters which will require to be considered and regulated
on a case-by-case basis.
[45]
In the present case, however, the court is not being asked to institute an ancillary
administration; rather, it is being asked to give directions as to the future conduct of an
extant administration in which the administrators wish the court's sanction to enter into an
arrangement with the receiver appointed by the court of the company's place of
incorporation on terms which seem to me not so tacitly to acknowledge the de facto ancillary
nature of the administration. I can see no reason why the court should not formally
recognise that Luxembourg is a more appropriate forum than Scotland for the purpose of
dealing with the overall insolvency of the Company by directing that the administration
should henceforth be regarded as ancillary to the insolvency proceedings there. The
implication of that is that the powers and duties of the administrators fall to be regarded as
limited to the realisation of the Company's property in Scotland without causing
unnecessary harm to the interests of the creditors of the Company as a whole, and the
determination of claims against the Company recognised as secured or preferential
according to Scots law.
[46]
Once the Scottish property has been realised and the claims of secured or preferential
creditors according to Scots law have been determined, it will be for the administrators to
seek further directions from the court. It seems to me to be premature to seek such
directions until the amount realised from the Scottish property is known. Only then will it
be apparent whether there are sufficient funds to meet costs, secured and any preferential
claims and, if so, what might remain for unsecured creditors. If, as seems likely, it transpires
that realisations are insufficient to meet demands, the administrators will need to decide
whether to propose that funds are retained in Scotland to ensure that the claim of the
32
secured creditor is not prejudiced by whatever the Luxembourg preferred claims may
transpire to be (by analogy with Morris) or whether the entire distribution should take place
in Luxembourg and according to the Luxembourgish law (by analogy with HIH Casualty and
General and the reasons in support of such a course of action there identified). There may
also be some middle ground worthy of consideration.
[47]
Should it be considered necessary for a protocol to be entered into between the
administrators and the receiver as an aspect of whatever is to be proposed to the court,
regard will no doubt be had to the difficulties identified above which the current proposal
for such a protocol presented. Some of the fundamental difficulties noted will have been
resolved by the clarification of the nature and status of the administration in which this
application for directions has resulted. Others will require further consideration. For the
avoidance of doubt, it is as an abstract proposition unlikely that the court would be
prepared to accept a protocol governed by the laws of the Grand Duchy, granting exclusive
jurisdiction over any dispute arising out of the protocol to the courts of Luxembourg, or
ceding the right and duty to approve the administrators' remuneration to a Luxembourg
judge.
Conclusion
[48]
I shall direct that the administration shall henceforth be regarded as ancillary to the
primary insolvency process underway in Luxembourg, with the consequences already
explained, and make no further order meantime.
