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HIH Insurance (McGrath v Riddell) - Lords divided on universalism

A unanimous appeal verdict but a divergence of reasoning characterise the Law Lords' speeches in McGrath and another v Riddell and others [2008] UKHL 21.

The significant point of the judgement is not the result of English assets being remitted to Australia, but the absence of majority support for the proposition that it is English common law or judicial principles, rather than section 426 Insolvency Act 1986, that allow the result.

Commentators suggesting that the judgement paves the way for foreign liquidators to seize English assets in cross-border insolvency disputes (eg Norton Rose, who acted for the Australian liquidators, and Accountancy Age) may therefore have overstepped the mark.

In the liquidations of four HIH insurance group companies, the Australian court sought the assistance of the English High Court through s426 Insolvency Act 1986 in directing that the English provisional liquidators, who had been appointed over the companies' English assets - mostly reinsurance claims, should remit the assets to the Australian liquidators for distribution rather than distributing them through an English liquidation.

Under the Australian regime an insurance company's assets are applied first to Australian debts and reinsurance proceeds are applied to the reinsured liabilities, whereas under the English regime at the time of the provisional liquidators' appointment (which was therefore applicable in this case although insurance insolvency priorities have since been changed) such assets would be distributed pari passu among insurance, reinsurance and other unsecured creditors.

The appeal was allowed and the assets are to be remitted, but there was disagreement in the judgements over how the decision could be reached.

Lord Hoffmann (with Lord Walker agreeing) analysed the doctrine of ancillary liquidation, noting that:

"the judicial practice to which I have referred . . . is inconsistent with the broad proposition that creditors cannot be deprived of their statutory rights under the English scheme of liquidation."

He went on to say that allowing the appeal and directing remittal of the assets to Australia was exercising a power established under English common law, and he concluded:

"this is a case in which it is appropriate to give the principle of universalism full reign."

Lord Phillips declined to support this view, saying:

"I do not propose to stray from the firm area of common ground [allowing the appeal on the basis of s426] onto the controversial area of whether, in the absence of statutory jurisdiction, the same result could have been reached under a discretion available under the common law."

Lord Scott was very clear in his opposing view:

"The proposition that the assistance and directions sought . . . could be given under an inhernet power of the court . . . is unacceptable . . . [and] would constitute the usurpation by the judiciary of a role expressly conferred by Parliament on the Secretary of State."

"It would, in my opinion, as I hope I have made apparent, have been sufficient [to justify a refusal] if the country of the principal winding up had not been a "relevant country or territory" for section 426 purposes."

"I would allow this appeal but repeat that I would do so on the footing that the power to accede to the Australian liquidators' request derives from section 426 and not from any inherent jurisdiction of the court."

Lord Neuberger similarly disagreed with Lord Hoffmann:

"I take the view that it would not have been open to an English court to make the order sought by the Australian liquidators in the absence of section 426(4) and (5) of the 1986 Act."

Under s426 it has always been open to the English courts to choose to apply the law of a "relevant country or territory" designated as such by the Secretary of State. This judgement clarifies the exercise of the court's discretion under s426 but it does not extend the geographical boundaries.

It has been suggested that this judgement will make it easier for foreign office-holders to obtain the assistance of the English courts under The Cross-Border Insolvency Regulations 2006. I would observe that the cross-border regulations restrict the court's discretion rather more than does s426, for example in Article 21(2):

"Upon recognition of a foreign proceeding, whether main or non-main, the court may, at the request of the foreign representative, entrust the distribution of all or part of the debtor's assets located in Great Britain to the foreign representative or another person designated by the court, provided that the court is satisfied that the interests of creditors in Great Britain are adequately protected."

and Article 22(1):

"In granting or denying relief under article 19 or 21, or in modifying or terminating relief under paragraph 3 of this article or paragraph 6 of article 20, the court must be satisfied that the interests of the creditors (including any secured creditors or parties to hire-purchase agreements) and other interested persons, including if appropriate the debtor, are adequately protected."

How do you see universalism developing in the response of English courts to requests from foreign liquidators and courts for assistance and directions?

 

 

Date: 12th April, 2008
Author: Chris Laughton

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