In the recent English case of Schmitt v Deichmann and Others [2012] 2 ALL ER 1217, it was held that the Court had an inherent common law jurisdiction to permit the statutory powers relating to transactions defrauding creditors under Section 423 of the Insolvency Act 1986 to be applied to a German administrator not falling within the express scope of that Act.

Background

Mr. Frank Schmitt (“Mr. Schmitt”), the German administrator of Phoenix Kapitaldienst GmbH (“Phoenix”), a German company which had carried on business in Germany and other countries, alleged that: (1) Phoenix was loss-making from the start; (2) all or most of the money invested had been used to cover overheads and to pay fictitious profits to other investors rather than being invested in the futures market as represented by Phoenix; and (3) there was a worldwide fraud in the form of a “Ponzi” scheme.

In 2008, an order was granted by the Mr. Registrar Jaques (the “Recognition Order”) which gave Mr. Schmitt recognition under the common law and authority to exercise the powers afforded to licensed insolvency practitioners under the Insolvency Act 1986 (the “Act”).

In 2010, Mr. Schmitt issued an application for relief under Section 423 of the Act against certain investors (the “Investors”) claiming back the initial invested amounts and the fictitious profits. Section 423 of the Act contains a statutory power to set aside transactions entered into at an undervalue for the purpose of defrauding creditors (similar to Section 60 of the Conveyancing and Property Ordinance (Cap 219) (“CPO”) in Hong Kong).

Criminal proceedings had been successfully brought against the principal directors of Phoenix.Some 240 sets of proceedings in over 20 jurisdictions were initiated where former investors were being sued, or had been successfully sued, for recovery.The investors appealed against the Recognition Order.

Decision

In the appeal, Proudman J noted that:

1.the Council Regulation (EC) 1346/2000 (on insolvency proceedings) did not apply as Phoenix was an investment undertaking;

2.the UNCITRAL Model Law (the Legislative Guide on Insolvency Law (2005) as reflected in the Cross-Border Insolvency Regulations 2006, SI 2006/1030) could not be invoked due to the date of its incorporation into English Law; and

3.Germany was not a relevant country within the definition in Section 426 of the Act which provides that the courts having jurisdiction in any part of the United Kingdom shall assist the courts having the corresponding jurisdiction in any relevant country or territory to exercise jurisdiction in relation to insolvency.

The main issue was whether the Court had an inherent common law jurisdiction to permit the statutory power under Section 423 to be applied to a foreign administrator not falling within the express scope of the Act.

Proudman J, after considering the authorities, came up with these propositions:

1.there was a power to use the common law to recognize and assist an administrator appointed overseas;

2.assistance included doing whatever the English court could have done in the case of a domestic insolvency;

3.bankruptcy proceedings were collective proceedings for the enforcement (not establishment) of rights for the benefit of all creditors, even when those proceedings included proceedings to set aside antecedent transactions;

4.proceedings to set aside antecedent transactions were central to the purpose of the insolvency; and

5.powers contained in Section 423 could be characterized as part of the collective enforcement regime of the bankruptcy proceedings.

Proudman J agreed with the broad brush approach and the views expressed by Lord Hoffmann in Cambridge Gas Transportation Corp v Official Committee of Unsecured Creditors of Navigator Holdings plc [2006] 3 ALL ER 829 that under the English common law there should be a single insolvency process, both in corporate and personal bankruptcies, whereby the English court will recognize and assist a foreign insolvency representative empowered under his local law under the underlying principle of universality.

Despite there being case law suggesting that to recognize the inherent jurisdiction under common law allowing a foreign administrator to sue under Section 423 could be said to almost thwart the statutory purpose, in the absence of a determinative decision explaining the apparent conflict between the application of black letter law and a broad commercial support of international comity, the latter should prevail.Recognition and assistance should be granted to a foreign administrator.Proudman J held that the English court should cooperate with the country of the principal liquidation, i.e.Germany, to ensure that all of the Phoenix’s assets are distributed under a single system of distribution.Indeed, as Proudman J said, it would be perverse to refuse relief on discretionary grounds when recoveries of proceeds of an alleged fraud had been made in more than 20 other major jurisdictions.

In short, the Court dismissed the appeal and held that it did have inherent common law jurisdiction to allow a foreign administrator (not falling within the express scope of the Act) to enforce its powers under Section 423 to set aside certain antecedent transactions based on the underlying principle of universality and international judicial co-operation.

Conclusion

This recent English case shows the willingness on the part of the English Courts to assist foreign administrators in cross-border insolvency proceedings.As Hong Kong does not have a similar Section 426 of the Act in the Companies Ordinance (Cap. 32), foreign liquidators will have to initiate separate liquidation proceedings in Hong Kong to seek assistance from the Hong Kong courts for recognition of foreign liquidation proceedings.Thus, it remains to be seen whether this English case would be a persuasive authority for foreign liquidators to convince the Hong Kong Courts to recognise foreign liquidation proceedings.For completeness, we mention that insofar as Hong Kong liquidators trying to be recognised in the English Courts, Hong Kong is a relevant territory under Section 426 of the Act.Therefore, our liquidators may apply to the English courts for assistance and recognition of Hong Kong liquidation proceedings.