Swissair, Re

SwissAir Schweizerische Luftverkehr-Aktiengesellschaft (Swissair) is a company incorporated under the laws of Switzerland, which used to carry on business as that country’s principal international airline. In 2001 it became insolvent and was granted a debt restructuring moratorium by the Swiss court. Mr Karl Wüthrich was appointed its administrator. Following approval of a debt restructuring agreement by the Swiss court in May 2003, Mr Wüthrich became liquidator and has since proceeded with the realisation of assets and admission of claims.

Swissair had established a branch office in England, and had acquired assets and incurred liabilities here. In April 2002, Swissair, acting by Mr Wüthrich, presented its own winding-up petition to the High Court in London, which appointed provisional liquidators. In October 2002, it was ordered to be wound up under the Insolvency Act 1986 and the provisional liquidators were appointed as liquidators. As would be expected, it was envisaged that the English liquidation would be ancillary to the proceedings in Switzerland and this was confirmed by an order of the English court made in February 2003. By the same order, the English liquidators were authorised to enter into a protocol with Mr Wüthrich, which set out detailed provisions with a view to harmonising and co-ordinating the insolvency proceedings in the two countries.

The English liquidators have realised the available assets in this jurisdiction and have advertised for claims. While some claims have been lodged here, creditors were encouraged to submit their claims in the Swiss liquidation, and most have done so. As provided by the protocol, the English liquidators apply to the court for directions for the remittal of the assets in their hands, net of their expenses and a small amount for a claim with preferential status under English law, to the Swiss liquidator. Since the protocol was entered into, the United Kingdom has enacted, with a small number of modifications, the Model Law on cross-border insolvency adopted by the United Nations Commission on International Trade Law in May 1997 (the Model Law). As so modified, it is contained in The Cross-Border Insolvency Regulations 2006. Pursuant to the Regulations, the Swiss liquidator applies for the same order for the remittal of assets to him in Switzerland. At the hearing of the application I made the order sought, and in this judgment I give my reasons for doing so.

If remitted to Switzerland, the assets realised by the English liquidators will be administered by the Swiss liquidator as part of the assets of the principal liquidation in accordance with Swiss law. Evidence has been filed as to the relevant provisions of Swiss law. Certain liabilities are accorded preferential status in the Swiss liquidation, but more than sufficient assets have been realised in Switzerland to pay all such liabilities in full. All other claims rank pari passu in a distribution, and assets remitted from England will be applied solely in the general pari passu distribution. A long line of authorities in England and other Commonwealth jurisdictions, starting with Re Matheson Bros Ltd (1884) 27 Ch D 225 and culminating in Re BCCI (No 10) [1997] Ch 213, established the jurisdiction of the court to direct the liquidator in an ancillary English liquidation to remit assets to a foreign liquidator to be distributed in accordance with the law applicable to the foreign liquidation, at least where there would be a pari passu distribution among unsecured creditors. In Re BCCI (No 10), Sir Richard Scott V-C stated that the court had power “to direct liquidators to transmit funds to the principal liquidators in order to enable a pari passu distribution to worldwide creditors to be achieved”. This jurisdiction was independent of any specific power such as that conferred by section 426 of the Insolvency Act 1986.

Against this factual and legal background, it might be thought that the present application was straightforward, and that there was no difficulty in making the order sought. However, in their skeleton argument, counsel for the applicants stated that the case raise for decision

“The issue on which the House of Lords was divided 2:2 in Re HIH Casualty and General Insurance Ltd [2008] 1 WLR 852, namely whether the Court has an inherent jurisdiction to direct remittal of assets from an English ancillary liquidation to the foreign principal liquidation in the absence of section 426 of the Insolvency Act 1986.”

Section 426 does not apply in the present case, as Switzerland has not been designated as a “relevant country” for the purposes of the section.

The issue in Re HIH Casualty and General Insurance Ltd (Re HIH) was whether the English court should order the remittal of assets by the provisional liquidators in ancillary English proceedings to the liquidators in the principal Australian liquidation, in circumstances where there would not in Australia be a pari passu distribution among unsecured creditors to the material disadvantage of some creditors. The House of Lords were unanimous in their decision that the order could and should be made under section 426, Australia being a “relevant country”, irrespective of whether the absence of pari passu distribution in the Australian liquidation would preclude such an order under the general power of the court to give directions. The division to which counsel refer in their skeleton argument was between the view of Lord Hoffmann, with whom Lord Walker agreed, that the court had jurisdiction under its general powers to make an order for remittal notwithstanding the absence of a pari passu scheme of distribution in the foreign liquidation, and the view of Lord Scott and Lord Neuberger who considered that the court did not have jurisdiction to do so in those circumstances.

The controversial issue was not whether the court had jurisdiction under its general powers to order remittal where there would be a pari passu distribution in the foreign liquidation, but whether it had such jurisdiction in a case where there would not be. Nonetheless, counsel submitted that it was implicit in the reasoning of Lord Scott and Lord Neuberger that the court had no jurisdiction under its general powers even where there would be a pari passu distribution in the foreign liquidation. This would of course be contrary to the long line of authorities to which I have earlier referred, including Lord Scott’s own decision at first instance in Re BCCI (No 10). If counsel is correct, it follows that Lord Scott and Lord Neuberger considered those authorities to be wrongly decided, although neither of them said so, despite referring to them in their speeches.

Any judgment must be read in the context of the issue to which it is directed, and if it were the case that Lord Scott and Lord Neuberger had not in terms affirmed the principle that the court could direct remittance to a liquidation in which there would be a pari passu distribution, it would not follow that they rejected it. But in fact their speeches are not silent on the point. It is difficult to see that Lord Neuberger could have been any clearer. At para 66 he said

“I have come to the conclusion that, while remittal of assets can be effected pursuant to established judicial practice, the power to do so where the distribution will not be in accordance with the English insolvency regime derives from section 426.” (emphasis added)

At paras 72 to 74 he refers to the earlier authorities without any suggestion that they were wrongly decided. At para 75 he accepted that the lack of jurisdiction under the court’s general power to give directions to authorise remittal where there would not be a pari passu distribution limited the value of the power to order remittal but did not make it valueless. In that paragraph he affirmed the correctness of the earlier authorities and the existence of power to order remittal where there will be pari passu distribution:

“However, the fact that the English liquidator has an inherent power to relieve an ancillary liquidator in this country from the duty of distributing the assets himself, and to order that the assets be remitted to be distributed by a foreign liquidator, does not mean that it necessarily follows that those assets can then be distributed other than in accordance with the English insolvency regime.”

Lord Scott also refers to the earlier authorities, including his own decision in Re BCCI (No 10), without any suggestion of disapproval. It scarcely seems plausible that he intended to overrule them. In para 59 he regarded a remittal of assets to a foreign jurisdiction where there will not be a pari passu distribution as depriving creditors of their statutory rights, which the court has no inherent power to do. The focus here is on the lack of a pari passu distribution in the foreign liquidation. Counsel placed reliance on the following statement in para 61:

“The proposition that the assistance and directions sought by the Australian court and the Australian liquidators in the present case could be given under an inherent power of the court without reliance on section 426(4) and (5) is, in my respectful opinion, unacceptable.”

The critical words for present purposes are “the assistance and directions sought by the Australian court and the Australian liquidators in the present case”. They make clear that Lord Scott is referring not to remittals in general but to the particular remittal proposed in that case, resulting in a distribution on a basis which would not be pari passu.

In my judgment, there is nothing in the speeches in Re HIH which calls into question the long-established principle that the court possesses power to order the remittal of assets to a foreign liquidation where the local law provides for a pari passu distribution. Clearly Lord Hoffmann and Lord Walker did not question it, but considered that the jurisdiction was not qualified by reference to the basis of distribution in the foreign liquidation. Likewise, in my view, Lord Scott and Lord Neuberger did not question it, but, rather, re-affirmed it.

I asked counsel whether there was a view among insolvency specialists that this principle had been called into question by the speeches of Lord Scott and Lord Neuberger and they indicated that this was so. Following the hearing they told me that a number of leading law firms had published releases which suggested that those speeches had questioned the principle. They also sent me a copy of an article by Gabriel Moss QC, entitled Modified Universalism and the Quest for the Golden Thread (22 Insolvency Intelligence 145, November/December 2008). Mr Moss analyses the speeches in some detail, with objections expressed in vigorous terms, but I do not read him as suggesting that Lord Scott or Lord Neuberger disavowed the inherent power to order remittal to a foreign liquidation which would undertake a pari passu distribution, and he in fact notes that none of the judges specifically departed from or overruled the earlier case law.

I am satisfied that the court has the power to order the remittal of the assets realised by the English liquidators to the Swiss liquidator, and that it would be appropriate to do so in this case.

I have so far addressed the question as a matter of the court’s general power to give directions to liquidators. As I mentioned earlier, the Swiss liquidator applies for the same order under the Cross-Border Insolvency Regulations. In February 2009, on the application of the Swiss liquidator, the Swiss liquidation was recognised by the High Court as a foreign main proceeding under article 17 of the Model Law. The Model Law expressly authorises the court to order the remittal of assets to a foreign insolvency proceeding, once recognised. The following provisions are relevant to the present application:

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.

22.1

In granting or denying relief under article 19 or 21……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.

22.2

The court may subject relief granted under article 19 or 21 to conditions it considers appropriate, including the provision by the foreign representative of security or caution for the proper performance of his functions.

29 Where a foreign proceeding and a proceeding under British insolvency law are taking place concurrently regarding the same debtor……..the following shall apply-

(a)

when the proceeding in Great Britain is taking place at the time the application for recognition of the foreign proceeding is filed-

(i)

any relief granted under article 19 or 21 must be consistent with the proceeding in Great Britain….

While express provision is made for the remittal of assets to a foreign representative, there are two qualifications relevant to the present application, in addition to the discretionary nature of the power under article 21.2. First, under article 21.2 itself, the court must be satisfied that the interests of creditors in Great Britain are adequately protected. In the light of the evidence as to Swiss law and the arrangements made in the protocol to protect the interests of creditors who have submitted proofs of debt in the English liquidation, such as a review by the English liquidators of any proofs rejected by the Swiss liquidator and the preservation for those creditors of set-off rights under English law, no issue arises in relation to this requirement. Secondly, because Swissair was already in liquidation in England when the Swiss liquidator applied for recognition of the Swiss liquidation, article 29(a)(i) requires that an order for remittal must be consistent with the liquidation in England. It is not necessary to examine the precise meaning and limits of this qualification. It is enough to say that in the circumstances of this case the proposed remittal is unquestionably consistent with the English liquidation.

In the context of the submissions made in the present case, it is worth noting article 21.3 which provides that in granting relief under article 21, including remittal of assets under article 21.2, to a representative of a foreign non-main proceeding “the court must be satisfied that the relief relates to assets that, under the law of Great Britain, should be administered in the foreign non-main proceeding”. There is no equivalent restriction as regards remittal to a main proceeding. The implication is clear, that remittal to a main proceeding is contemplated by English law.

I conclude therefore that the order sought should be made both under the court’s power to give directions to liquidators and under article 21.2 of the Model Law.

The submissions made in this case as regards the differing views expressed by the House of Lords in Re HIH go to an issue of some importance and interest, particularly as to the limits on a universalist approach to cross-border insolvencies. The need to choose between those views does not arise in this case, nor will it arise until a direction is sought for a remittal of assets from a liquidator in England to a foreign liquidation in which they will not be distributed on a pari passu basis. So far as anyone has discovered, no such direction had been sought in the United Kingdom or any Commonwealth country from the early days of corporate insolvency in the nineteenth century until 2005 when it arose in HIH.