XXIV success in the Supreme Court in leading case on cross-border insolvency

Marcus Staff appeared for the successful appellants in Rubin v. Eurofinance SA [2012] UKSC 46.

On 24th October, 2012 the Supreme Court held by a majority of 4 to 1 that judgments of foreign bankruptcy courts in proceedings to adjust or set aside transactions prior to bankruptcy (“avoidance proceedings”) will be enforced in England only if the defendant has submitted to the jurisdiction of the foreign court.

In so holding the majority (Lords Collins, Walker, Mance and Sumption) rejected a novel argument which had found favour in the Court of Appeal and was approved in the dissenting judgment of Lord Clarke, that because avoidance proceedings are part and parcel of collective execution in bankruptcy, the English court should recognise the jurisdiction of the foreign court over the defendants as being founded on the foreign bankruptcy proceedings and enforce such judgments as a matter of discretion instead of by reference to the well-established principles in the “black letter” common law rules summarised in rule 43 of Dicey, Morris & Collins (15th Edn.).

The novel argument was based largely on an interpretation of Lord Hoffman’s speech in Cambridge Gas Transportation v. Committee of Unsecured Creditors of Navigator Holdings Plc [2006] UKPC, [2007] 1 AC 508 in which he espoused the principles of “universalism” in bankruptcy. However Lords Collins, with whom Lords Walker and Sumption agreed, held that even though Lord Hoffman’s speech in Cambridge Gas was “brilliant” that case had been wrongly decided.

The Supreme Court also rejected the respondents’ argument that the judgment of the US Bankruptcy Court could be enforced in England pursuant to provisions of the Cross-border Insolvency Regulations 2006 (which adopted and enacted a form of the UNCITRAL Model Law on cross-border insolvency into English law). This is because the recognition and enforcement of judgments are fundamental in international cases whereas nothing in the Model Law refers to recognition and enforcement and the legislature cannot have intended it would cover those matters by implication.

The importance of the judgment in Rubin is exemplified by the exceptional intervention of US trustee of Bernard L. Madoff (Irving H. Picard) who is seeking to enforce US judgments on avoidance type claims in Gibraltar and the Cayman Islands for, respectively, USD 247 million and USD 1 billion. The Gibraltar and Cayman courts stayed the enforcement proceedings pending the outcome in Rubin. The Privy Council is the final court of appeal of Cayman and Gibraltar and it remains to be seen how the courts in those jurisdictions will approach Cambridge Gas and Rubin.

The Supreme Court explained that whether or not a party has submitted to the jurisdiction of the foreign bankruptcy court will be a matter of fact to be determined in every case taking into consideration a wide range of circumstances. Thus, in the appeal in New Cap Reinsurance Corporation v. AE Grant (and others), which was heard and decided together with the Rubin appeal, the appellants were held to have submitted to the jurisdiction of the Australian Court because they had filed a proof of debt in the Australian bankruptcy, participated in creditors’ meetings and voted on a scheme of arrangement.

Any person considering whether or not to participate in foreign bankruptcy proceedings must consider the prospect of avoidance proceedings being brought against him as well as the prospects of defending the enforcement of judgment on such claims whether in England or against his assets in some third jurisdiction. The guiding principle is that a party “should not be allowed to benefit from the insolvency proceeding without the burden of complying with the orders made in that proceeding.”

Defendants in England and Wales may of course challenge the jurisdiction of the foreign court without submission because of section 33 of the Civil Jurisdiction and Judgments Act 1982. However equivalent statutory protection is not available in all common law jurisdictions: thus in each jurisdiction the factors affecting enforcement may contain small but significant differences.

The judgment in Rubin and New Cap clarifies where the boundaries of universalism lie in the modern law of insolvency. It should inform and may well curtail recent rife academic and professional speculation about just how special bankruptcy is in the conflicts of law.