Jersey Unreported Judgments

Companies - application for letter of request to be issued to High Court of England and Wales in relation to insolvency.

[2015]JRC137

Royal Court

(Samedi)

24 June 2015

Before     :

J. A. Clyde-Smith, Esq., Commissioner and Jurats Kerley and Sparrow

IN THE MATTER OF ALARD INVESTMENTS LIMITED AND UPON THE APPLICATION OF DEUTSCHE PFANDBRIEFBANK AG - REPRESENTOR

AND IN THE MATTER OF AN APPLICATION TO ISSUE A LETTER OF REQUEST TO THE HIGH COURT OF ENGLAND AND WALES FOR THE APPOINTMENT OF AN ADMINISTRATOR

Advocate D. V. Blackmore for the Representor.

judgment

the commissioner:

1.        On 15^th June, 2015, the Court granted the application of Deutsche Pfandbriefbank AG ("the Bank") that a letter of request be sent to the High Court of England and Wales for its assistance in relation to the insolvency of Alard Investments Limited ("the Company") by making an administration order under the provisions of the Insolvency Act 1986. 

2.        The application was similar to a number of previous applications that have been made for a letter of request where, as here:-

(i)        The Company is incorporated in Jersey.

(ii)       All of its assets (bar bank accounts) are in England and Wales and subject to security governed by English law.

(iii)      The majority of its unsecured creditors are in England and Wales.

(iv)      English counsel, in this case Lexa Hilliard QC, has confirmed that the English High Court would be minded to accede to such a request.

(v)       The making of an administration order is more appropriate than any other insolvency procedure that could be invoked.

3.        The last reported case in which a letter of request was issued in these circumstances was the representation of HSBC Bank Plc re Tambrook [2013] JRC 046.  Initially assistance in that case was refused by the English High Court on the grounds that s.426(4) of the Insolvency Act 1986 did not empower the English Court to act merely because a foreign court had invited it to do so or in order to fill a gap in another jurisdiction's insolvency processes (Re Tambrook Jersey Limited [2013] 2 WLR 1249).  The High Court, it was held, was not being requested to assist the Jersey Court in any insolvency proceedings, but rather was being asked to provide a substitute for such proceedings.  That decision was overturned by the English Court of Appeal (Re Tambrook Jersey Limited [2014] Ch 252) when it was held allowing the appeal:-

"..... that section 426(4) of the Insolvency Act 1986 was by its wording applicable to courts having, rather than exercising, jurisdiction, or the corresponding jurisdiction, in insolvency law; that, although section 426 would not of itself empower the courts to issue or act upon a request in respect of a matter unrelated to insolvency, the courts would not be astute to equate "having" jurisdiction with "exercising" jurisdiction in the sense of connoting a requirement for the existence of some formal insolvency proceedings in a requesting state; that section 426(4) was to be given a broad interpretation, and was amply sufficient to enable the English court to "assist" the Jersey court as requested; that the judge had erred in finding that the English court was not being asked to assist the Jersey court in any endeavour when the latter's request in the circumstances was part of, and the exercise of, Jersey insolvency jurisdiction; that, accordingly, the judge had erred in his conclusion that there was no jurisdiction pursuant to section 426 of the 1986 Act to grant the bank's application for the administration order which it sought; and that, since the judge had found that if he had jurisdiction he should grant the application, an administration order would be made."

4.        The English Court of Appeal also confirmed that orders made by other Chancery judges in comparable circumstances on five previous occasions were orders which the English High Court had jurisdiction to make (at page 264 of that judgment). 

5.        The facts in the case before us can be summarised as follows:-

(i)        The Company was incorporated in Jersey on 24^th June, 1998. 

(ii)       By a credit agreement dated 8^th July, 1998, as supplemented and amended, the Company entered into a facility with Bayerische Hypotheken und Wechsel-Bank AG, London Branch pursuant to which a loan of up to £41,260,000 was made available to the Company.  By a series of restructuring transactions which it is not necessary to describe the facility was eventually acquired by the Bank on 27^th November, 2008. 

(iii)      £40,000,000 of the facility was drawn down and used to finance a portfolio of 19 commercial properties, some of which were vested in the name of the Company and some in the name of a company incorporated in England, namely Hypo Property Investment (1992) Limited ("HPI"), the beneficial interest of which was held for the Company. 

(iv)      As security for the facility, on 8^th July, 1998, the Company executed a debenture containing fixed and floating charges in favour of the Bank and in particular a first fixed charge over the Company's legal and beneficial interest in the properties. 

(v)       Six of the properties have been sold and the remaining properties, all of which are tenanted, have been valued to the order of £22,460,000 as against a liability to the Bank in the sum of £33,376,653.34, a very substantial negative equity. 

(vi)      There have been a number of defaults under the facility and it was not repaid on the due date for repayment, namely 8^th July, 2013.  On 27^th May, 2015, the Bank served a formal demand for the amount then outstanding under the facility which has not been met and accordingly under the terms of the debenture the charges over the properties became enforceable. 

6.        The Company had been given notice of the application for a letter of request and wrote on 11^th June, 2015, accepting that whilst it had not been able to verify the exact amount, it acknowledged that a significant sum was due which it was unable to meet and that the Bank was entitled to take action to enforce its security.  It confirmed that the vast majority of its assets comprising an investment portfolio of freehold and leasehold properties were located in England and Wales and it had no significant assets in Jersey. 

7.        It would have been open to the Bank to appoint receivers and managers under Clause 9 of the debenture but this was not its preferred option for the reasons summarised by counsel in her opinion:-

"5.       Receivership is not the preferred option of the Bank for the following reasons;

a.        There is no power inherent in the receivership regime to protect the chargor from the precipitate action by one or more creditors.  By contrast the administration regime under the Insolvency Act 1986, Schedule B1 prevents any creditor from stealing a march on other creditors without the consent of the administrator or permission of the Court.  This bar on unilateral and precipitate action by creditors as known as a "moratorium".

b.        Upon termination of an administration an administrator can also take steps to bring the existence of the company to an end.  I understand from Appleby, the Bank's legal advisers in Jersey, that the administrators would be able to bring the existence of the Company to an end by sending notification to the Jersey Registrar of Companies that the administration has concluded.  The Jersey Registrar will then register the notice and three months later the Company will be deemed dissolved.  By contrast a receiver cannot unilaterally bring the existence of the Company to an end even if it no longer serves any useful purpose.  The Company would have to be declared en désastre separately (whereby the Viscount would then take control of the désastre process) or be handed bank to the Company's directors, who are unlikely to have any further interest in the Company.  An administrator's power to bring an end to a company's existence is more efficient and economical."

8.        The Bank had been advised that there were strong commercial and practical reasons for an administration order to be made in relation to the Company by the English High Court for the following reasons:-

(i)        The Company was insolvent;

(ii)       The Company's major assets, the properties, are situate in England and Wales;

(iii)      The majority of the Company's unsecured creditors were based in England;

(iv)      Each of the properties was subject to a lease and all of the properties were tenanted.  The properties needed to be actively managed in order to maximise their value;

(v)       The Company owned the beneficial interest in other properties where legal title is vested in HPI.  It was thought that it would be easier for the Company to realise its interest in the HPI properties if it was in administration. 

(vi)      There may be other creditors who might seek to take precipitate action which, without the protection of the administration moratorium, would be likely to undermine the process of realising value from the properties. 

9.        Turning to the procedures available in Jersey, the Bank had been advised that a désastre was not appropriate in these particular circumstances since:-

(i)        The "sudden death" nature of the désastre procedure would involve the cessation of the business activities of the Company, including the active management of the thirteen unsold properties which are located in England and Wales;

(ii)       The Viscount would need to seek recognition in England and Wales on the basis that at the time of any declaration being made, the ownership of the properties would vest in the Viscount as a matter of Jersey law; and

(iii)      The Viscount would need to appoint local agents to deal with the properties which might lead to a double cost. 

10.      A remise des biens was not available to the Bank which was a creditor and Jersey heritage is a pre-requisite.  As the Court noted in the case of Representation of RBS Plc [2012] JRC 080:-

"15 The only Jersey insolvency framework ordinarily available to a creditor of a company is that which is contained within the Bankruptcy (Désastre) Law 1990.  Unlike the rescue and work-out features contained within an administration, a désastre has a sudden-death nature which invariably involves cessation of all business activities of the debtor.  It is likely that the Viscount, on a désastre, would engage professionals in the United Kingdom to assist with the realisation of the company's assets but their powers would nonetheless be constrained by the extent of the powers available to the Viscount.

16 The Loi (1839) sur les Remises des Biens makes provision for a process which is in some respects comparable to that of an administration but is not a mechanism that is available to a creditor, only to the debtor.  It seems to us unlikely in the extreme that the Court would grant a remise, were it to be applied for, partly as a matter of jurisdiction as it is doubtful in our view whether it has power to do so over immovable property situated outside the Island but also because an administration order in England would provide a more satisfactory remedy."

11.      The relevant provisions of the administration regime in England and Wales are set out in the Insolvency Act 1986 schedule B1.  A company incorporated in Jersey is not a "company" for the purpose of schedule B1 unless its centre of main interest is in the United Kingdom.  The Company was managed and controlled from Jersey and the Bank was unable to demonstrate that its centre of main interest was England and Wales. The only option therefore was for an application to be made to the High Court on the basis of a letter of request issued by the Royal Court. 

12.      The purpose of an administration is in order of priority:-

(i)        Rescuing the borrower as a going concern. 

(ii)       Achieving a better result for the borrower's creditors as a whole than would be likely if the borrower were wound up (without first being in administration) or

(iii)      Realising property in order to make a distribution to one or more secured or preferential creditors. 

13.      As noted by counsel at paragraph 13 of her opinion:-

"..on the facts of this case the purpose most likely to be achieved is (c) realising property in order to make a distribution to one or more secured creditors.  However, an administrator must perform his functions with a view to achieving the purposes described at (a) and (b) above first.  An administrator can only turn to the purpose described at (c) if he concludes that achievement of those purposes described at (a) and (b) are not reasonably practicable.  Thus, if the High Court accedes to the letter of request and makes an administration order, the administrators will be obliged to have regard to the interests of all creditors, in the first instance, rather than merely the interests of the Bank" (emphasis added)

14.      It seemed that there was only one unsecured creditor in Jersey but the Viscount, who had been notified of the application and had no objection to it, was concerned to ensure that the administration process and the order sought would adequately protect the position of any Jersey creditors, hence the inclusion within the letter of request of the following:-

"THIS COURT HEREBY RESPECTFULLY REQUESTS that the High Court pursuant to the provisions of section 426 of the Insolvency Act 1986 and/or otherwise and as a matter of comity to assist and act in aid of and be auxiliary to this Court in these proceedings by:

(a)       ...

(b)       Giving directions to the administrators, or granting such other relief as is appropriate including that:

(i)        the administrators shall within 7 days of their appointment advertise such appointment in the Jersey Gazette,

(ii)       the administrators shall accord creditors who would have a priority status under Articles 32(1)(b) and (c) of the Bankruptcy (Désastre) Law 1990 (as amended) (the Désastre Law") if the Company had been placed en désastre in Jersey to have the same priority status in the English administration as if they were priority creditors under the Désastre Law,

(iii)      at the conclusion of the administration, the administrators shall as soon as practicable thereafter send notification of the same to the Jersey Registrar of Companies.

And that if the High Court is not prepared to make administration orders on those terms, then for the High Court not to make any administration order at all;

(c)       ...

(d)       ...

(e)       ..."

15.      The Court was satisfied that these orders, if made, would adequately protect the position of Jersey creditors both secured and unsecured. 

16.      Advocate Blackmore submitted that the Court should exercise its discretion to issue the letter of request for the following reasons:-

(i)        The appointment of administrators to the Company was more appropriate in the circumstances;

(ii)       The proposed administrators were situated in England and if appointed they must (pursuant to the provisions of the Insolvency Act) seek to maximise the value of the Company's assets for the benefit of the creditors as a whole (not just for the benefit of the Bank).  They would have wide powers to manage the Company and, as officers of the Court, they would be duty bound to act in the best interests of the creditors as a whole;

(iii)      An administration would have the effect of imposing a moratorium on creditor action against the Company in England and Wales, where all material assets (insofar as they are known to the Bank) were located;

(iv)      The proposed administration was in the best interests of the creditors as a whole;

(v)       No interested party was likely to be adversely affected by the Company being placed into administration in England;

(vi)      The Company was aware of this application and the Bank's intentions;

(vii)     The letter of request, such as was proposed by the Bank, affords adequate protection to those creditors who would be priority creditors in a désastre and who accordingly would not be disadvantaged if the High Court made the orders requested; and

(viii)    The Bank had carefully considered all the options available to it and had come to the conclusion that an English administration process was to be preferred in all the circumstances of the case. 

17.      The Court accepted these submissions and agreed that it was appropriate for a letter of request to be issued to the English High Court.  It ordered accordingly. 

Authorities

Insolvency Act 1986.

HSBC Bank Plc re Tambrook [2013] JRC 046.

Re Tambrook Jersey Limited [2013] 2 WLR 1249.

Re Tambrook Jersey Limited [2014] Ch 252.

Representation of RBS Plc [2012] JRC 080.