Isle of Man
29 January 2007
22 August 2013
9 April 2013
22 July 2013
14 February 2014
22 August 2013
The Isle of Man recently played its part in concluding a long-running case in respect of an insolvent group of companies. In doing so the Manx court (in the guise of the Privy Council) has rendered a landmark decision in the field of cross-border insolvency.
In its judgment of 16 May 2006, relating to an appeal by Cambridge Gas Transport Corporation, the Privy Council set out the boundaries by which courts can give common law assistance in insolvency situations at the request of a foreign court.
The Privy Council judgment arose out of Chapter 11 proceedings commenced originally in January 2004 in the US Bankruptcy Court Southern District of New York by the Manx-incorporated Navigator Holdings and its six subsidiaries, or debtor companies.
The debtor companies, which owned and operated five semi-refrigerated gas tankers, were heavily insolvent, with combined debts of more than $300m (£151.94m). The majority of their creditors were located in the US.
Chapter 11 of the US Bankruptcy Code allows insolvent companies a period of protection in which they may seek to negotiate a plan for reorganisation with their creditors. The debtor companies proposed a plan whereby their assets would be sold to an associated entity. However, this proposal was unacceptable to the majority of creditors, who, through a committee appointed to represent their interests, applied successfully for the right to submit their own plan. The plan proposed by the creditors' committee was to transfer the ownership of the debtor companies to the principal creditors in satisfaction of the debts due to them.
After a process in which interested parties were given the opportunity to vote upon the competing plans, on 17 March 2004 the US court ordered the implementation of the creditors' committee's plan.
Under the US reorganisation, the shares in the immediate parent company, Navigator Holdings, were to be transferred to certain interim shareholders to be held on behalf of the principal creditors. This would enable the creditors to control Navigator Holdings and therefore the other debtor companies. To achieve this the US court issued a Letter of Request seeking the assistance of the Manx court in transferring the shares in question.
Common law jurisdiction
Proceedings to pursue the transfer of the shares on behalf of the creditors commenced in the Isle of Man on 24 March 2004. The Isle of Man has no statute, nor is it party to any convention, that would have allowed the Manx court to implement the US court's order and the creditors' plan for reorganisation. The creditors' committee submitted that the Manx court had a common law jurisdiction to recognise the US court's order and grant the relief sought.
Cambridge, the owner of the majority of the shares in Navigator Holdings, objected to the share transfer, arguing that the US court had no jurisdiction to make orders relating to the ownership of the shares in Navigator Holdings.
At first instance the Manx court found that the US court's order was a judgment in rem, purporting to change the title to property outside the jurisdiction. The general rules of private international law provide that judgments can only affect property within a court's own territorial jurisdiction. Applying such principles, the judge at first instance concluded that the US court's order could not therefore be recognised so as to require the shares in Navigator Holdings to be transferred pursuant to the Letter of Request.
The Manx Appeal Court (the Staff of Government Division), however, held that the US court's order was a judgment in personam and as such the court did have the ability to accede to the request from the US court to order the transfer of the shares and hence assist in the reorganisation of the Navigator companies for the benefit of the creditors. It was this decision that was the subject of the appeal by Cambridge to the Privy Council.
Cambridge founded its appeal to the Privy Council on the argument that the US court's order should not be recognised, as it was either in rem, in which case it could not affect the title to shares in the Isle of Man, or in personam, and thus did not bind Cambridge as it had never submitted to the jurisdiction of the US court.
Lord Hoffman held that the US court's order did not fall to be treated as either in personam or in rem. Instead it was decided that bankruptcy and insolvency proceedings constituted a separate category of case to which the usual rules of private international law concerning the recognition and enforcement of judgments do not apply. This was because bankruptcy and insolvency proceedings did not determine the existence of rights, as would be the case in most judgments; rather they provided a mechanism for enforcement against the property of the debtor.
Boost for Manx court
By recognising the US bankruptcy proceedings, the Privy Council found that the Manx court was empowered to give assistance in the implementation of the reorganisation. The Privy Council stated that the recognition of the US court's order was sufficient to allow the Manx court to give assistance by ordering the transfer of the shares without the need of having to start separate parallel insolvency proceedings on the island. The purpose of recognition was to enable the foreign office-holder or the creditors to avoid such parallel litigation and to give them "the remedies to which they would have been entitled if the equivalent proceedings had been taken in the domestic forum".
As to the possible limits upon the assistance the court could give, the Law Lords decided that, as long as the Manx court would have had the domestic ability to grant the relief sought in the Letter of Request, assistance could be provided. Under Manx law shares in companies can be transferred or otherwise affected pursuant to a scheme of arrangement, thus the Manx court had the domestic power to transfer the shares.
The Law Lords considered that it would not be unfair for the US reorganisation to be carried into affect, there being no discretionary reason for withholding such assistance. It followed that it was right to assist in the transfer of the shares to the creditors so as to enable them to relaunch the debtor companies.
In reaching its decision the Privy Council has gone some considerable way to clarifying what it described as the "underdeveloped state of the common law" with regard to the circumstances in which courts can assist in the area of international insolvency. It remains to be seen whether practitioners will utilise the Letter of Request/ common law route in the future in preference to the instigation of parallel insolvency proceedings.
The decision will dispel any uncertainty regarding the ability of the Isle of Man to play its part in international insolvency situations and is in line with an increasing internationalist attitude being adopted by Manx courts regarding foreign requests for assistance.
-Robert Long is a partner at Dickinson Cruickshank