Chapter 40
February 2006
PART 9
40.134 Cross border insolvency
There is no single international approach to insolvency. Each country has its own laws and practices. With the increasing number of multinational companies and the ability to transfer money and other intangible assets around the world electronically, the possibility of conflict between insolvency laws increases. In recognition of this conflict governments throughout the world have made efforts to at least recognise the insolvency laws of their trading partners.
40.135 1997 UNCITRAL Model Law on Cross-Border Insolvency
On 30 May 1997 the United Nations adopted the Draft Model Legislative Provisions on Cross-Border Insolvency, which has become known as the UNCITRAL Model Law on Cross-Border Insolvency.
The Secretary of State is able to implement the 1997 UNCITRAL Model Law on Cross-Border Insolvency, with or without modifications, by way of regulations [note 1]. For further information see Chapter 52, Co-operation of Courts, Part 4.
40.136 EC Regulation on insolvency proceedings
In May 2000 the member states of the Council of the European Union, excluding Denmark, adopted the EC Regulation on insolvency proceedings [note 2], which came into force on 31 May 2002 and provides for mutual recognition of the member states' insolvency laws. This regulation has become part of UK Insolvency law. Details of the regulation are provided in Chapter 41, EC Regulation on insolvency proceedings.
40.137 US Bankruptcy Code 1978
The United States are taking steps to recognise foreign insolvency proceedings in recent amendments to the bankruptcy code [note 3].
40.138 Co-operation between states
Section 426 provides for co-operation between courts exercising jurisdiction in relation to all forms of insolvency proceedings. The provisions extend to all courts within the United Kingdom (i.e. England and Wales, Scotland and Northern Ireland, but excluding the Channel Islands and the Isle of Man) and in certain circumstances to those in the Channel Islands, the Isle of Man and other countries designated by orders made by statutory instrument [note 4]. For further information see Chapter 52, Co-operation of Courts.
40.139 Foreign companies
Overseas corporations with assets in England and Wales can be wound up here as unregistered companies (see Chapter 58, Unregistered companies, paragraph 58.1). There have been judicial decisions to the effect that it is not a necessary requirement that there should be any asset of the company situated within the jurisdiction of the court for a winding-up order to be made. Provided that a sufficient connection with this country can be shown, together with a reasonable prospect that an order would be of benefit to creditors, a winding-up order may be made. In one case, the fact that the company's business had been controlled and conducted from a location in England (a hotel near London) was treated as satisfying the sufficient connection test [note 5].
40.140 Bankruptcy
There is a broad range of jurisdictional criteria for the presentation of a bankruptcy petition. The debtor must have some connection with this country by way of domicile, presence, ordinary residence, place of residence or carrying out of business for a petition to be presented. It is in the discretion of the court whether to make the bankruptcy order [note 6].
40.141 Foreign Assets
The United Kingdom insolvency law has an extraterritorial approach to property whereby all property belonging to the debtor, wherever situated, is covered by the Insolvency Act 1986. The liquidator is entitled to take control of all property of a company in liquidation and the property of a bankrupt, (with exceptions), vests in the trustee. Therefore under English law the liquidator or trustee has the power to deal with all the assets. Most other countries have a similar universalist approach but in practice the law of the country in which the property is situated retains control. Usually some positive step needs to be taken locally in addition to the appointment of the liquidator or trustee. Often registration of security is required in accordance with local law and practice or some form of court order is needed recognising the appointment as having some local effect, for example the United States Bankruptcy Code has a specific procedure for recognition of a foreign representative in ancillary proceedings.
The EC Regulation on Insolvency Proceedings (see paragraph 40.136) has significantly restricted the universalist approach within the European Union, particularly when there are concurrent insolvency proceedings.
40.142 Foreign creditors
Foreign creditors are given the same rights as English creditors in relation to the commencement of and participation in English insolvency proceedings. As a general rule priority of debts and set-off are governed by the Insolvency Act 1986 whether that is the law under which the debt arose or not.
40.143 Judgments
Where a judgment is given in a foreign court, the English court is not always obliged to follow it. A foreign judgment is not sufficient grounds from preventing the defendant from discounting the basis of the claim[note 7].
40.144 Rate of Exchange
(May 2008)
Foreign debts are to be converted into sterling at the exchange rate prevailing at the date of the bankruptcy order or liquidation [note 8]. This is to ensure fairness to all the creditors. The fluctuating exchange rate may lead to a loss or a gain in real terms to the creditor.
Daily currency exchange rates can be obtained from www.ft.com, a link to which is also available through the intranet useful links page under the news subheading. Historical exchange rates are available from the Bank of England website at www.bankofengland.co.uk/mfsd/iadb/Rates.htm.
40.145 Foreign Revenue Debts – European Union
(August 2008)
The EC Regulation on insolvency proceedings was adopted by the Council of the European Union on 29 May 2000 and came into force throughout the EU (with the exception of Denmark which has not adopted it) on 31 May 2002 (see Chapter 41, EC Regulation on Insolvency Proceedings, for further information) [Note 2].
The recovery of debts due to another Member State is permitted within the European Union, including Denmark, in relation to VAT, customs duty and agricultural levies [Note 9] [Note 10]. Further information is available from the European Commission website on the following link: http://ec.europa.eu/taxation_customs/taxation/tax_cooperation/tax_recovery/index_en.htm.
These foreign claims, including any interest and related costs, all rank for dividend purposes as non-preferential.
The responsibility for dealing with such claims rests with HM Revenue and Customs who will lodge a claim on behalf of the member state if there is any prospect of a recovery being made from the insolvent.
40.145A Foreign Revenue Debts – Non European Union
(August 2008)
The EC Regulation does not deal with cross-border insolvency matters extending beyond Member States of the European Union. The Cross-Border Insolvency Regulations 2006 [Note 11] came into force on the 4 April 2006 and provide a complementary regime outside the European Union (see Chapter 52, for further information).
40.146 Penal Law
Insolvency proceedings cannot be used to enforce the criminal law of a foreign country. Where the sole purpose of any foreign insolvency proceedings is to enforce foreign penal law, the court will not recognise those proceedings. The court has refused to accept as valid in England an appointment of a receiver under the United States Securities Exchange Act of 1934 which was treated as a penal statute of no effect in England [note 14]; but recognition will not be denied merely because there is a penal element in or relating to the foreign insolvency. The court must look to the substance of the foreign insolvency.