Schmitt v Deichmann & Ors

This is an application for permission to appeal out of time against an order made by Registrar Jaques dated 23 May 2008 (“the Order”). By that Order the High Court recognised the appointment of the Respondent to this application (“Mr Schmitt”) as the insolvency administrator appointed by the Frankfurt Insolvency Court in Germany in respect of Phoenix Kapitaldienst GmbH (“Phoenix”) and ordered that Mr Schmitt “be empowered or otherwise entitled to exercise and/or enjoy all such rights, powers, duties and obligations” as a licensed insolvency practitioner could do under the Insolvency Act 1986 and general English law.

The order was applied for ex parte without notice to the Applicants on this application (“the present Applicants”). Registrar Jaques gave a judgment, which is reported as Re Phoenix Kapitaldienst GmbH [2008] BPIR 1082.

Mr Schmitt has investigated the affairs of Phoenix. His case is that while ostensibly operating as an investment company it in fact operated a Ponzi scheme whereby monies paid in by investors were recycled to pay profits and capital to other investors rather than being invested to earn genuine returns. There were a considerable number of investors in a number of jurisdictions.

The present Applicants are certain Dutch investors who are resident or have assets in this jurisdiction. They invested with Phoenix and received various payments back from it. The application to Registrar Jaques was made on the footing that Mr Schmitt was considering bringing proceedings against the present Applicants and others in the course of the insolvency administration of Phoenix and wished to be able to bring proceedings in the English courts to establish his rights as administrator for Phoenix against them. It was, however, explained to the Registrar that Mr Schmitt had not yet formed a firm intention of suing in England.

The present Applicants were not named as parties to Mr Schmitt’s application. At that stage there was no necessity for them to be joined. The solicitors acting for Mr Schmitt (“Orricks”) wrote to the solicitors acting for the present Applicants (“Kennedys”) by letter dated 22 August 2008 to inform them that the recognition order had been made by Registrar Jaques and demanding payment and threatening legal proceedings. No copy of the order was enclosed nor did Orricks enclose any of the materials put before the Registrar, any transcript or note of the hearing before him or any copy of his judgment.

The present Applicants rejected the demands for payment made by Mr Schmitt. Despite the threat in Orricks’ letter of 22 August 2008 Mr Schmitt did not at that stage launch proceedings against them. He did, however, commence proceedings in a range of other jurisdictions against a number of other investors who had received payments from Phoenix.

Eventually, in March 2010, Mr Schmitt sent the present Applicants and certain others (“the Defendants”) a pleading setting out his case against them for repayment of sums paid out to them by Phoenix, annexed to a notice of application for orders against them inter alia under s.423 of the Insolvency Act 1986 for such repayment. In the notice of application and in the annexed pleading Mr Schmitt made reference to and relied upon the Order as the basis for his having standing to bring those claims. The notice of application and the pleading were sent to the Defendants on about 22 April 2010.

When the application for the Order was made to Registrar Jaques, the notice of application suggested that the application was made on the basis of the Cross-border Insolvency Regulations 2006 (“the Regulations”, which incorporated the relevant UNCITRAL model law into English law) or, in the alternative, on the basis of the common law. In the event, at the hearing before the Registrar Mr Marks for Mr Schmitt (who appears before me now as Mr Marks QC) relied only on the common law as the basis for the Registrar’s power to make the order sought, and it is clear from the Registrar’s judgment that that was the power which he exercised. That point did not appear on the face of the Order itself.

A copy of the Order was only sent to the Defendants on about 27 May 2010. At that stage, again, none of the materials put before Registrar Jaques on the ex parte application, nor any note or transcript of the hearing nor any copy of his judgment or reference to the report of it were provided to the Defendants.

The present Applicants filed a Defence and Additional Claims dated 23 July 2010. In that pleading they put in issue Mr Schmitt’s standing to bring the claims against them, but did so on the mistaken assumption - as was evident from the pleading - that the Order had been made on the basis of the Regulations. Those acting for Mr Schmitt did not disabuse them and explain that the Order had been made on the basis of common law powers. Nor, again, did they send the present Applicants the materials relating to the ex parte application before the Registrar or a copy of his judgment (which would have made the position clear). Instead, in Mr Schmitt’s Reply and Defence to Counterclaim dated 3 September 2010, at paragraph 2, it was blandly pleaded that no reliance was placed on the Regulations “and reference will be made in full at trial to the terms of the order and judgment made and issued by Mr Registrar Jaques.”

Kennedys pressed for disclosure of the materials relating to the ex parte application to Registrar Jaques and the Order, but these were still not provided. It was only in a letter from Orricks dated 11 October 2010 that it was explained that the Order had been made on the basis of the common law rather than the Regulations. Even at that stage, no copy of the judgment was provided nor reference to its citation in a set of law reports.

Eventually, by a letter dated 27 October 2010 Orricks sent the present Applicants a copy of the judgment and on 2 November 2010 a copy of the skeleton argument deployed before the Registrar was provided to them. The present Applicants managed eventually to obtain for themselves a copy of the transcript of the hearing before Registrar Jaques.

A case management conference (“CMC”) had been scheduled for 4 November 2010. Now armed with full knowledge of what had transpired before the Registrar and of the terms of his judgment, the present Applicants promptly indicated that they wished a preliminary point to be determined, namely whether Mr Schmitt had proper standing to bring the claims against the Defendants. Mr Wolfson QC for the present Applicants served a skeleton argument dated 1 November 2010 for the CMC, which set out the essence of the argument which the present Applicants wished to raise on the question of Mr Schmitt’s standing which has been repeated before me. That argument involves, in substance, a challenge the Order made by Registrar Jaques, on the basis of a submission that the common law powers he exercised do not extend to allowing an English court to clothe a solvency practitioner appointed by a foreign court with authority to bring proceedings in England to establish rights against persons, as distinct from providing assistance to such practitioner to get in the recognised assets of the entity in administration or liquidation and to distribute those assets.

At the CMC hearing on 4 November 2010 Deputy Registrar Garwood declined to direct a trial of this point as a preliminary issue, because the Order had not itself been put in issue by way of an application to appeal against it or an application back to Registrar Jaques to rescind it. However, the Deputy Registrar directed that the present Applicants should have until 12 November 2010 to decide whether they wished to issue such an appeal or application. Although an issue of delay arises on the present application, it is common ground that the effect of this direction is that the question of delay falls to be assessed as at 4 November 2010 and that the additional period down to 12 November 2010 does not affect matters.

On 12 November 2010 the present Applicants issued their notice of appeal. Appended to that notice were a number of orders they asked the court to make. The first two orders sought were for an extension of time to appeal and for permission to appeal against the Order. The next two orders sought, in the alternative, were for an extension of time to apply for the Order to be set aside or varied and for it to be set aside in exercise of the court’s powers under Rule 7.47(1) of the Insolvency Rules 1986 and/or CPR Part 40.9 and Part 23.10. The final order sought was for the claims to be struck out or for summary judgment on the issue of Mr Schmitt’s standing to bring them.

Mr Wolfson’s primary argument before me was that this court should extend time to appeal and then grant permission to appeal. He argued that an extension of time should be allowed because the present Applicants had not had a fair opportunity to understand the basis of the Order until very late in the day, and when they did appreciate what the position was they raised the point on the standing of Mr Schmitt and issued their notice of appeal promptly. Since the Order itself had been made ex parte without any notice to his clients, they had had no proper opportunity to challenge it up until now. He submitted that the present Applicants had an arguable point on appeal with a realistic prospect of success, to the effect that the Order went further than was permissible for the court in exercise of its common law jurisdiction.

Mr Wolfson said that there was doubt whether the proper basis to challenge the Order as an order made under common law powers (whether by appeal or by application back to the court which made the Order to rescind it) was Rule 7.47 of the Insolvency Rules 1986 (which sets out the procedure where a court makes an order in exercise of its jurisdiction under the Insolvency Act) or the ordinary regime for appealing or applying for a rescission of a court order set out in CPR Part 52 and Part 23.10 respectively. But whichever set of rules apply, it is common ground that this court has jurisdiction to entertain an appeal against the Order even if Registrar Jaques might also have jurisdiction to entertain an application back to him to rescind the order. Mr Wolfson submitted that, given the choice between hearing an appeal or requiring the matter to go back to Registrar Jaques by way of application for rescission of the Order, there were strong case management reasons why the court should prefer the appellate route rather than the application for rescission route, and so should exercise its powers to give permission for an appeal against the Order.

Mr Marks for Mr Schmitt submitted that the court should not grant permission for an appeal, because of the delay since the making of the Order, because there is no merit in the appeal as a matter of law and because the proper course should be for the present Applicants to apply back to Registrar Jaques to ask him to rescind the order.

In my judgment, this is a proper case for granting an extension of time for an appeal against the order and for granting permission to appeal. I accept the submissions of Mr Wolfson. I do not need to decide whether the present application is properly brought under Rule 7.47 of the Insolvency Rules (which I rather doubt) or under the general rules governing appeals in the CPR, since that point does not affect my conclusion.

In my view, the present Applicants did not have a full and fair chance to understand the basis of the Order or to consider their rights to contest it until they were provided with a copy of the judgment of Registrar Jaques on 27 October 2010 and a copy of Mr Marks’s skeleton argument for the application to the Registrar on 2 November 2010. Where an order is obtained ex parte and it has a direct effect on the interests of another person it is incumbent on the party who obtains the order to ensure that there is full disclosure to that other person of all matters which explain the basis on which the order was sought and obtained. In my judgment, at the latest from July 2010 when those acting for Mr Schmitt must have appreciated that the present Applicants wished to challenge his standing to bring the proceedings and that they did not understand the basis on which the Order relied upon by Mr Schmitt had been made, disclosure should have been given of the judgment and the other materials sought in relation to the application to the Registrar.

Mr Marks submitted that the present Applicants and their advisors were at fault by not asking for more information after receiving the letter of 22 August 2008 and in not scrutinising the law reports to find the report of Registrar Jaques’s judgment. I do not accept these submissions. For a long time after August 2008 Mr Schmitt did nothing with the Order and there was no pressing reason for the present Applicants to do anything in relation to it either. It was not until Mr Schmitt brought his claims in March 2010 that it became directly relevant to them and from that point they sought to contest the Order and to ask questions about it. It was not incumbent on them or their advisors to scrutinise the law reports on the off-chance that a judgment might have been reported. The insolvency court issues thousands of judgments, few of which are reported. Where an ex parte order is obtained which comes directly to affect the interests of a person, I consider that the onus is on the party who has obtained the order - at least, if an issue arises regarding that order - to give full disclosure of all relevant matters to that person. Therefore, I accept Mr Wolfson’s submission that the present appeal was brought promptly in the circumstances and that the present Applicants cannot be criticised for any delay in issuing their notice of appeal.

I have found the question of whether there is sufficient arguable merit in the appeal more difficult. Each side relied on passages in the judgment of the Privy Council in Cambridge Gas Transportation Corporation v. Official Committee of Unsecured Creditors (of Navigator Holdings Plc and others) (Isle of Man) [2007] 1 AC 508. That was a case concerning the common law jurisdiction for the courts to make orders recognising foreign bankruptcy proceedings. I was taken in particular to paragraphs [13] to [20] in the judgment, as follows:

“13.

Mr Howe's submissions as to the rules of private international law concerning the recognition and enforcement of judgments in rem and in personam are of course correct. If the New York order and plan had to be classified as falling within one category or the other, the appeal would have to be allowed. But their Lordships consider that bankruptcy proceedings do not fall into either category. Judgments in rem and in personam are judicial determinations of the existence of rights: in the one case, rights over property and in the other, rights against a person. When a judgment in rem or in personam is recognised by a foreign court, it is accepted as establishing the right which it purports to have determined, without further inquiry into the grounds upon which it did so. The judgment itself is treated as the source of the right.

14.

The purpose of bankruptcy proceedings, on the other hand, is not to determine or establish the existence of rights, but to provide a mechanism of collective execution against the property of the debtor by creditors whose rights are admitted or established. That mechanism may vary in its details. For example, in personal bankruptcy in England, the assets of the bankrupt are vested in a trustee for realisation and distribution to creditors. So the mechanism operates by divesting the bankrupt of his property. In corporate insolvency, on the other hand, the insolvent company continues to be owner of its property but holds it in trust for the creditors in accordance with the provisions of the Insolvency Act 1986: see Ayerst v C & K (Construction) Ltd [1976] AC 167. In the case of personal bankruptcy, the bankrupt may afterwards be discharged from liability for his pre-bankruptcy debts. In the case of corporate insolvency, there is no provision for discharge. The company remains liable but when all its assets have been distributed, there is nothing more against which the liability can be enforced: see Wight v Eckhardt Marine GmbH[2004] 1 AC 147, 155-156. At that point, the company is usually dissolved.

15.

But these are matters of detail. The important point is that bankruptcy, whether personal or corporate, is a collective proceeding to enforce rights and not to establish them. Of course, as Brightman LJ pointed out in In re Lines Bros Ltd [1983] Ch 1, 20, it may incidentally be necessary in the course of bankruptcy proceedings to establish rights which are challenged: proofs of debt may be rejected; or there may be a dispute over whether or not a particular item of property belonged to the debtor and is available for distribution. There are procedures by which these questions may be tried summarily within the bankruptcy proceedings or directed to be determined by ordinary action. But these again are incidental procedural matters and not central to the purpose of the proceedings.

16.

The English common law has traditionally taken the view that fairness between creditors requires that, ideally, bankruptcy proceedings should have universal application. There should be a single bankruptcy in which all creditors are entitled and required to prove. No one should have an advantage because he happens to live in a jurisdiction where more of the assets or fewer of the creditors are situated. For example, in Solomons v Ross (1764) 1 H Bl 131n a firm in Amsterdam was declared bankrupt and assignees were appointed. An English creditor brought garnishee proceedings in London to attach £1200 owing to the Dutch firm but Bathurst J, sitting for the Lord Chancellor, decreed that the bankruptcy had vested all the firm's moveable assets, including debts owed by English debtors, in the Dutch assignees. The English creditor had to surrender the fruits of the garnishee proceedings and prove in the Dutch bankruptcy.

17.

This doctrine may owe something to the fact that 18^th and 19^th century Britain was an imperial power, trading and financing development all over the world. It was often the case that the principal creditors were in Britain but many of the debtor's assets were in foreign jurisdictions. Universality of bankruptcy protected the position of British creditors. Not all countries took the same view. Countries less engaged in international commerce and finance did not always see it as being in their interest to allow foreign creditors to share equally with domestic creditors. But universality of bankruptcy has long been an aspiration, if not always fully achieved, of United Kingdom law. And with increasing world trade and globalisation, many other countries have come round to the same view.

18.

As Professor Fletcher points out (Insolvency in Private International Law (1999 OUP) at p. 93) the common law on cross-border insolvency has for some time been ‘in a state of arrested development’, partly no doubt because in England a good deal of the ground has been occupied by statutory provisions such as section 426 of the Insolvency Act 1986, the European Council Regulation on Insolvency Proceedings (1346/2000/EC) and the Cross-Border Insolvency Regulations 2006 (SI 2006 No 1030), giving effect to the UNCITRAL Model Law. In the present case, however, we are concerned solely with the common law.

19.

The underdeveloped state of the common law means that unifying principles which apply to both personal and corporate insolvency have not been fully worked out. For example, the rule that English moveables vest automatically in a foreign trustee or assignee has so far been limited to cases in which he was appointed by the court of the country in which the bankrupt was domiciled (in the English sense of that term), as in Solomons v Ross, or in which he submitted to the jurisdiction: Re Davidson's Settlement Trusts (1873) LR 15 Eq 383. It may be that the criteria for recognition should be wider, but that question does not arise in this case. Submission to the jurisdiction is enough. In the case of immovable property belonging to a foreign bankrupt, there is no automatic vesting but the English court has a discretion to assist the foreign trustee by enabling him to obtain title to or otherwise deal with the property.

20.

Corporate insolvency is different in that, even in the case of moveables, there is no question of recognising a vesting of the company's assets in some other person. They remain the assets of the company. But the underlying principle of universality is of equal application and this is given effect by recognising the person who is empowered under the foreign bankruptcy law to act on behalf of the insolvent company as entitled to do so in England. In addition, as Innes CJ said in the Transvaal case of Re African Farms 1906 TS 373, 377, in which an English company with assets in the Transvaal had been voluntarily wound up in England, “recognition carries with it the active assistance of the court”. He went on to say that active assistance could include:

‘A declaration, in effect, that the liquidator is entitled to deal with the Transvaal assets in the same way as if they were within the jurisdiction of the English courts, subject only to such conditions as the courts may impose for the protection of local creditors, or in recognition of the requirements of our local laws.’”

Mr Wolfson emphasised the passages at paras. [14] and [15] where the Privy Council emphasised that bankruptcy proceedings are “To enforce rights and not to establish them.” He said that in this case the primary objective of Mr Schmitt in seeking the Order was to bring proceedings in this jurisdiction to establish his rights against the Defendants, not simply to enforce rights already established against them or accepted by them. He also submitted that the principle of universality of bankruptcy, referred to by the Privy Council, pointed in favour of all relevant proceedings to establish rights to be taken in the court with jurisdiction over the bankruptcy so as to avoid inconsistent judgments.

Mr Marks disputes both points. He points to para. [15] of the judgment, which indicates that proceedings to established rights might be brought “incidentally” in this jurisdiction to assist foreign bankruptcy proceedings, and says that the judgment does not support the distinction which Mr Wolfson seeks to make. He says that if the present proceedings proceed in this jurisdiction the principle of universality will be respected, because Mr Schmitt is the sole administrator of Phoenix and any assets gathered in by him in the proceedings here will be remitted into the bankrupt estate and dealt with in a fair and orderly way within the bankruptcy presided over by the German court. He also points out that Mr Schmitt has already brought proceedings against investors in many jurisdictions other than Germany to recover assets. Indeed, by reference to evidence from German lawyers submitted for Mr Schmitt shortly before this hearing, Mr Marks says that in fact Mr Schmitt could not bring proceedings against the Defendants in Germany. This evidence is new and the present Applicants have not yet had a fair opportunity to respond to it.

I have to say I have doubts about the present Applicants’ arguments on the legal merits of the appeal, but I consider that they do have a sufficiently arguable case which warrants the grant of permission to appeal. The law in this area is in a state of development and in my view the issue which the present Applicants seek to raise is one which is fit to be explored by full argument on an appeal. By the time of the hearing of that appeal the present Applicants will also have had a fair opportunity to respond to the latest evidence about German law filed on behalf of Mr Schmitt.

The other points on the exercise of the court’s discretion as a matter of case management can be dealt with shortly. In my judgment, it is appropriate that this preliminary point now be dealt with at the level of a High Court judge. It is an important point of law in a developing area; it is likely that, if the matter were remitted to the Registrar, there would be an appeal back to a High Court judge whatever the outcome before him; and this is in substance a preliminary point in relation to a trial which is due to take place before a High Court judge and which (as with the other points in issue between the parties) ought now likewise to be determined by a High Court judge. Allowing the matter to proceed by way of an appeal will also obviate the need for exploration of what might be complicated and time-consuming arguments whether this is a suitable case for rescission of the Order made by the Registrar or not - with the trial looming it is important that the issue which Mr Wolfson seeks to have argued be resolved definitively and as promptly and with a minimum of fuss as possible.

It is also clear, in my view, that since the point is arguable it should be heard as an appeal before the trial rather than being reserved to be determined by the judge at trial. Mr Marks did not really seek to suggest otherwise. The issue on the appeal is a relatively short and discrete point of law, involving some reference to some very limited and discrete evidence, which may be determinative of the proceedings as a whole. If the present Applicants are successful on the appeal the cost, expense and effort of a substantial trial, estimated to last 21 days, will be avoided. I find these to be compelling points in favour of directing that the appeal should come on to be determined at High Court level before the trial.