Cross-border insolvencies - how the UK Courts can apply provisions of the Insolvency Act 1986 to overseas companies

As businesses become more international it is common to find that a company’s assets are not necessarily confined to the company’s country of incorporation. Over recent years this has inevitably led to an increase in cross-border insolvencies.

Under section 426 of the Insolvency Act 1986 (the “Act”) the UK courts have a duty to co-operate with each other on matters of insolvency law. This duty extends to providing assistance to the courts of the Isle of Man and the Channel Islands as well as certain overseas courts as specified by the Secretary of State. The duty of assistance arises between courts. This means that a UK court must receive a request for assistance from a relevant court before it can act.

Section 426 has been used to apply to foreign companies the provisions of the Act relating to administration orders and to transactions at an undervalue.

Re: Television Trade Rentals Ltd

This case is thought to be the first case where an English court has been asked to extend Part I of the Act relating to company voluntary arrangements to a company outside the jurisdiction of England and Wales. The case was heard in February 2002 by the English High Court following a request by the High Court of the Isle of Man.

Television Trade Rentals Ltd and TTR Ltd (the “Companies”) both carried on business in England, but were incorporated in the Isle of Man. The Companies were both closely associated with an English company called Coin TV Ltd (“Coin TV”) which hired equipment such as refrigerators, televisions and video recorders to customers. The Companies purchased equipment and rented it to Coin TV. The affairs of the three companies were heavily intertwined.

Most of the equipment hired to customers was financed by ING Lease (UK) Ltd (“ING”) and Hitachi Credit (UK) plc (“Hitachi”). ING and Hitachi held security over both the income stream and the equipment of the majority of the hire contracts. In June 2001 Winding up petitions were presented against the Companies by ING and Hitachci and joint provisional liquidators were appointed.

The provisional liquidators entered into a transfer agreement by which the Companies transferred to Coin TV the whole of their businesses and assets. By this stage there was also a winding up petition pending against Coin TV. The idea behind the transfer was to allow for business to be carried on without concern for which assets belonged to which company and which company was entitled to the income stream.

In December 2001 the provisional liquidators requested the directors of the Companies to propose company voluntary arrangements. The proposals were that ING and another company would acquire the businesses and assets of all three companies in consideration of their making a payment to the supervisors of a voluntary arrangement. At subsequent meetings of the members and creditors of the Companies the directors’ proposals were unanimously accepted by all members and by all creditors present in person or by proxy and voting.

The section 426 assistance request arose because there is no procedure for company voluntary arrangements in the Isle of Man and because there were significant links with England. It was held that the provisions of Part I of the Act should be applied to the Companies, although not retrospectively. New meetings would therefore have to be called.

Conclusion

This case is important because it represents a significant widening of the scope of section 426. However, this does not mean that all future applications under section 426 requesting Part I of the Act to apply will be allowed. In this case the English connections were particularly strong: the great majority of the creditors were English, the Companies carried on business in England, and their affairs were heavily linked with an English company. The judge commented that these factors made this an ideal case for application of English insolvency law. This case demonstrates that the form of assistance given to a foreign liquidator will depend very much on the facts of each individual case.

The case shows the value of the section in cross-border insolvencies and restructuring. Regrettably, though, the section still applies only to a handful of countries, mostly Commonwealth members or former British colonies. Other nations must await regulations to bring in the UNCITRAL Model Law following the Insolvency Act 2000.

For further information about this article please contact Dan Hamilton of the Corporate Recovery team on +44(0) 7367 2796 or at dan.hamilton@cms-cmck.com