The English Court’s power to appoint provisional liquidators over foreign companies in urgent cross-border insolvencies

HMRC v Rochdale Drinks Distributors Ltd [2012] 1 BCLC 748, Lord Justice Lewison described the appointment of a provisional liquidator as “one of the most intrusive interim remedies in the court’s armoury.” This is especially so where the Court appoints a provisional liquidator over a company outside the jurisdiction. This article considers the circumstances in which the English court will exercise its discretion to appoint a provisional liquidator over a foreign company. As will be seen, the Courts will generally only do so in exceptional and extreme cases, where there is an urgent need to protect assets pending the hearing of the winding up petition.

The grounds for the appointment of a provisional liquidator

Section 135(1) of the Insolvency Act 1986 provides that the Court may appoint a provisional liquidator over a company at any time after the presentation of a winding up petition. The provisional liquidator’s primary responsibility will be to preserve assets pending the making of a winding up order (at which point a liquidator will  be appointed to take steps to realise those assets), and will have the powers and functions set out in the order appointing them.

Any creditor of the company can make an application for the appointment of a provisional liquidator. In Rochdale Drinks, the Court set out a two stage approach that will be taken when considering whether a provisional liquidator should be appointed. First, the Court must be satisfied that, on the hearing of the winding up petition, an order for winding up is likely to be made. Second, assuming the first stage is satisfied, the Court must be satisfied that it is right, in all the circumstances, that a provisional liquidator is appointed (i.e., the Court considers whether it should exercise its discretion to appoint a provisional liquidator).

The Court’s jurisdiction to wind up foreign companies

As the applicant must show that it is likely that a winding up order will be made at the hearing of the petition, a provisional liquidator can only be appointed over companies which the English court has jurisdiction to wind up. Many of the cases dealing with the appointment of provisional liquidators over foreign companies therefore involve a careful analysis of whether or not the Court has jurisdiction to make a winding up order. As Lord Justice Peter Gibson noted in Re Titan International Inc [1998] 1 BCLC 102, for an English court to wind up a foreign company which has done nothing whatsoever in the jurisdiction would be “a giant, impermissible and unjustified extension of the jurisdiction of the English court.”

At present, the jurisdiction of the English court to wind up a foreign company is subject to the Recast EU Regulation on Insolvency Proceedings (2015/848). For companies which have their centre of main interests (“COMI”) in an EU member state, the country in which the COMI is located has exclusive jurisdiction to open “main” insolvency proceedings. There is a rebuttable presumption that the COMI is located in the jurisdiction in which the company’s registered office is located. “Secondary” proceedings in another jurisdiction may only be opened if the debtor “possesses an establishment” in that jurisdiction (and may relate only to the assets of the debtor situated in that jurisdiction).

Subject to the rules in the Recast EU Regulation in relation to companies with their COMI in another EU member state, the jurisdiction of the English courts to wind up foreign companies is part of the Court’s jurisdiction over unregistered companies under section 221 of the Insolvency Act 1986. Section 221(5) provides that the circumstances in which an unregistered company may be wound up are:

1. If the company is dissolved, or has ceased to carry on business, or is carrying on business only for the purpose of winding up its affairs;
2. If the company is unable to pay its debts; or
3. If the court is of the opinion that it is just and equitable that the company should be wound up.

In Re Real Estate Development Company [1991] BCLC 210 the Court set out the grounds on which a foreign company can be wound up in England:

1. There must be a sufficient connection with England and Wales. In OJSC Oil Company v Abramovich the Court said that an asset within the jurisdiction would not automatically be considered a sufficient connection, but in that case a Commercial Court claim for US$2 billion constituted a sizeable asset forming a sufficient connection with England and Wales.
2. There must be a realistic possibility of benefit to those applying for the winding up order. In Buccament Bay Limited and Harlequin Property (SVG) Limited [2014] EWHC 3130 (Ch), the English court refused to make a winding up order in respect of a company incorporated in St Vincent and the Grenadines as there was a “perfectly satisfactory winding-up process” available in the company’s jurisdiction of incorporation and so there was no reasonable possibility of the petitioners deriving a benefit from a winding up in England and Wales.
3. One or more persons interested in the distribution of a company’s assets must be persons over whom the Court can exercise jurisdiction. The fact that a creditor has presented a petition is not in itself sufficient. However, in Stocznia Gdanska SA v Latreefers Inc (No 2) [2001] 2 BCLC 116 the petitioning creditor had the benefit of an English judgment debt (which involved submission to the jurisdiction) and it was still the plaintiff in ongoing proceedings meaning that the submission to the jurisdiction was continuing. The petitioning creditor was therefore held to have submitted to the Court’s jurisdiction and was a person over whom the Court can exercise jurisdiction.

Each of these conditions must be satisfied in order for a foreign company to be wound up in England as an unregistered company under section 221. However, following the decision in Re Titan International, if the company is being wound up pursuant to section 221(5)(c) (i.e., if the Court is of the opinion that it is just and equitable for the company to be wound up), there only needs to be a sufficient connection with England and Wales.

The Court’s exercise of its discretion to appoint a provisional liquidator

If the Court is satisfied that a winding up order is likely to be made it will then consider whether it is right, in all the circumstances, that a provisional liquidator is appointed.

The English courts exercise their discretion in this regard carefully and do not make a decision to appoint a provisional liquidator lightly. There are potentially dire consequences for the company concerned in the appointment of a provisional liquidator, and it is likely to be fatal to the company continuing to operate as a going concern. In Rochdale Drinks, Lord Justice Rimer recognised that an appointment of a provisional liquidator is a very serious step for a Court to take and that it is almost inevitable that as a result of such an appointment the underlying business of the company is likely to cease and that damage is likely to be irremediable. Similarly, in HMRC v Winnington Networks Ltd [2014] EWHC 1259 (Ch), the Court held that the appointment of a provisional liquidator is a most serious step and should be the subject of anxious consideration. There must be a risk to assets or a potential loss or destruction of a company’s books and records, or alternatively it must be in the public interest for a provisional liquidator to be appointed.

An appointment of a provisional liquidator is therefore usually only made in a clear case of insolvency. For example, in Re Treasure Traders [2005] EWHC 2774 (Ch), the company was carrying on a business that was unlawful under the Fair Trading Act 1973 as well as being an unlawful lottery and it was “a virtual certainty” that it would be wound up. It was therefore held to be appropriate to appoint a provisional liquidator to secure the company’s assets and prevent further unlawful activity.

The concern as to potentially severe effects on the company is especially pertinent in the case of the appointment of a provisional liquidator over a foreign company, where the Court is exercising extraterritorial jurisdiction. Usually the company is involved in misconduct, although it is not necessary to show a deliberate making away with the assets but rather a serious risk that the assets may not continue to be available to the company and distributed other than rateably amongst its creditors. In Re a company (No 003102 of 1991), ex parte Nyckeln Finance Co Ltd [1991] BCLC 539, it was held that assets of a company incorporated in Guernsey were in jeopardy and, as the aim of the provisional liquidator was to get in assets, the appointment of a provisional liquidator would prevent assets from being dissipated.

Part of the provisional liquidator’s function will be to obtain control of books and records so that he can engage in all necessary investigations of the company’s transactions. In Rochdale Drinks, the circumstances justified the appointment of a provisional liquidator because there were questions as to the integrity of the company’s management and the quality of its accounting and record-keeping function.

In appropriate cases, therefore, the English court will exercise its discretion to appoint a provisional liquidator over a foreign company. However, that jurisdiction is exercised very carefully.

Procedural issues involved in any application for the appointment of a provisional liquidator

An application for the appointment of a provisional liquidator is often made urgently, in order to prevent dissipation of assets or the destruction of books and records. Insolvency Rule 12.10 provides that the Court may hear an urgent application immediately with or without notification to (or the attendance of) other parties.

Therefore, whilst notice of the application is normally given to the company, it is possible to make an application for the appointment of a provisional liquidator without notice (particularly where there is a risk of the company taking steps to defeat the purpose of the appointment). In HMRC v Winnington Networks the Court said that an application without notice needs to be justified by exceptional circumstances, although in that case the without notice applications were properly made and justified having regard to the apparent lack of integrity in the management and the ease with which funds could be moved offshore.

Where the application is made without notice, there are two important points to bear in mind.

First, the applicant will need to give full and frank disclosure of any and all matters which may affect the making of the order. In OJSC v Abramovich the Court held that the extent of the non-disclosure was so substantial that it would have been sufficient to set aside the order appointing the provisional liquidator. In other cases, the Court might deal with a breach of the duty of full and frank disclosure by other means even where the Court is entitled to discharge the ex parte order, for example by continuing the order or making a new order on terms (see Brink’s Mat Ltd v Elcombe [1988] 1 WLR 1350). It is also possible for the Court to deal with any breach by way of an adverse costs order (NML Capital Ltd v Republic of Argentina [2011] UKSC 31).

Second, the applicant will ordinarily be required to give a cross-undertaking in damages to compensate the company for any loss or damage that is caused by the order if it is later determined that it should not have been made. This is a potentially substantial liability for the applicant in cases such as the appointment of a provisional liquidator where the company may cease to operate as a going concern. In Abbey Forwarding v HMRC [2015] EWHC 225 (Ch), an inquiry as to the damages suffered by the company as a result of the appointment of a provisional liquidator was ordered in relation to a cross-undertaking in damages given by HMRC. However, in Rochdale Drinks, Lord Justice Lewison noted that, “[i]f a business is shut down wrongly, the cross-undertaking is unlikely to provide adequate compensation to the company concerned, let alone to the employees who will have lost their jobs and to whom no cross-undertaking will usually have been offered.”

If a provisional liquidator is appointed, his or her appointment comes to an end automatically on the date of any winding up order made in relation to the company. It could also come to an end when the winding up petition is dismissed, or by order of the Court upon an application by the provisional liquidator or anyone else entitled to apply for their appointment.

Conclusion

The English court is willing, in appropriate cases, to appoint a provisional liquidator over a foreign company if it has jurisdiction to do so. However, the Court will consider carefully the circumstances of each particular case in order to determine whether it should exercise its discretion to appoint a provisional liquidator.

Whilst appropriate cases for the appointment of a provisional liquidator are still unusual, as Mr Justice Harman noted in the Nyckeln Finance case as far back as 1991, “as communications, transport and so on become easier and faster so such cases become less highly unusual.” The increase in the number of appointments of provisional liquidators over foreign companies is therefore only likely to increase.