ARM Asset Backed Securities SA, Re

This is an application by ARM Asset Backed Securities S. A. (the company) for the appointment of provisional liquidators of the company under the Insolvency Act 1986.

The company is incorporated in Luxembourg. For a number of years, from about 2005, it carried on the business of raising funds through the issue of bonds governed by Luxembourg law, and the investment of such funds in the purchase of life insurance policies in the United States. The policies so purchased were vested in a trust constituted under the law of Delaware, which was responsible for the payment of premiums under the policies and for the collection of sums due under the policies. The net proceeds were remitted to the company to enable the company to service and, in due course, repay the bonds issued by it.

For a number of years the company took the position that it was not required to be recognised and regulated by the relevant regulator in Luxembourg, but, having taken advice, it applied for recognition in 2009. That process came to an end in 2011 when the Luxembourg regulator declined to grant the necessary licence and obtained the appointment in November 2011 of a Supervisory Commissioner of the company, the appointee being a partner in Ernst & Young in Luxembourg. It is relevant to note that the Supervisory Commissioner has a monitoring rather than a management function.

The company appealed the refusal of the licence, but this appeal was finally dismissed in August 2013.

Since the commencement in 2009 of the process obtain a licence in Luxembourg, the company has not made further bond issues, although the US trustee has, of course, continued its function in relation to policies held by it. In the case of the last two bond issues by the company, funds were received from investors but not applied in accordance with the company's business plan. There is a live issue as to whether those funds should be retained by the company or should, as the Financial Conduct Authority in London maintains, be repaid to investors. The sums involved are some £22 million. That is an issue which, in due course, will have to be resolved, either by agreement or, failing that, by litigation.

The present position of the company is therefore that it is no longer actively conducting business, but is rather continuing its activities for the purpose of receiving funds from policies held by the Us trust and, in due course, in accordance with the terms of the bonds, servicing and repaying those bonds.

Following the dismissal by the Luxembourg court of the company's appeal against the refusal of a licence, the Luxembourg regulator has issued a press release to the effect that it has requested the Luxembourg public prosecutor to apply to the Luxembourg district court for an order for the dissolution or liquidation of the company. No steps, it appears, have yet been taken to give effect to that request.

The application is made today by the company, acting by its directors, on the basis that, subject to a point that I will come to, the company is insolvent, in the sense that it does not have sufficient funds and is unlikely to have sufficient funds to service and repay its bonds in full, and it is at least desirable, if not necessary, for control of the company to be vested in the hands of third party professional office holders, who can take steps necessary for an orderly realisation of the company's assets and distribution of the proceeds amongst the creditors entitled to receive them.

The decision was taken not to apply, as might have been the first thought, for the appointment of administrators under the Insolvency Act, but rather for the company to present a winding-up petition, which it did on 7th October 2013, and to apply for the appointment of provisional liquidators.

A number of issues arise on which I need to be satisfied before I can properly make this order.

The first is whether as a matter of the distribution of jurisdiction in relation to winding-up matters this court has jurisdiction rather than the Luxembourg court, which is a court of the state in which the company has its registered office.

This has involved a consideration of the EC Regulation on Insolvency Proceedings, and I am grateful to Ms. Toube QC, appearing today on behalf of the company with Mr. Robins, for the careful way in which she has taken me through the relevant provisions and law.

The jurisdiction to open main proceedings, which is what is sought to be done by the presentation of the winding-up petition in their case, is conferred by the EC Regulation on the courts of the member state in which the company has its centre of main interests (COMI). The Regulation provides that the COMI is presumed to be in the member state where it has its registered office unless the contrary is shown. The evidence which has been filed in support of this application aims to establish that the COMI of the company is located in England and not in Luxembourg, where it has its registered office.

There is before the court a substantial witness statement by Timothy Roberts, who is one of the three directors of the company and the chairman of its board of directors. He sets out clearly the nature of the company's business and activities, which I have previously briefly described. He explains that the company has never had a place of business in Luxembourg. The directors of the company are based in London, Northern Ireland and the Republic of Ireland. Meetings of directors are usually held by telephone, although there are sometimes physical meetings and some of those meetings have been held in Luxembourg.

The day-to-day conduct of the business and activities of the company has been in the hands of agents appointed by the company, principally two companies, in what is called The Catalyst Group of Companies. One of those companies, Catalyst Investment Group Limited, assumed, pursuant to a business service agreement dated 1st October 2007, full responsibility for providing a range of services to the company, including day-to-day management of its business, providing marketing support and structuring the mechanism through which the bonds were sold and distributed. It is also the primary distributor of the bonds.

The company also had an investment management agreement with another company in The Catalyst Group, giving that company complete discretion in relation to the management of the company's portfolio and authorising it to take day-to-day decisions in relation to the portfolio, although it is worth noting that in terms of its appointment it was not permitted to present itself as a representative of the company. None the less, it did comply with all directions given to it by the company.

The test to be applied in determining where the COMI is located was authoritatively established by the decision of the European Court of Justice in Eurofood IFSC Ltd, C-341/04 [2006] Ch 508. That case also concerned the appointment of provisional liquidators by the Irish court over a company incorporated in the Republic of Ireland but wholly owned by an Italian company. The Irish court referred to the European Court the question as to the relative weight which should be given as between, on the one hand, the fact that the subsidiary regularly administered its interests in a manner ascertainable by third parties in respect of its own corporate identity in the Republic of Ireland, but, on the other hand, its parent company was in a position, by virtue of its shareholding and power to appoint directors, to control the policy of the subsidiary: see paragraph 27 of the judgment of the ECJ.

In paragraphs 32 to 37 of the judgment, the court referred to recital 13 to the Regulation, which states that the COMI “should correspond to the place where the debtor conducts the administration of his interests on a regular basis and is therefore ascertainable by third parties."

In paragraph 33 of the judgment, the court stated:

I am satisfied on the evidence not only that the relevant decisions are taken in England but also that this is clear to third parties with whom the company deals.

It may be a difficult question whether the COMI of the company is affected by where the agents appointed by the company are operating, but they are in any event operating in London. But if the location of their activities is not relevant, it does appear from the evidence that London is the place where this company is managed and administered and is seen as such by the agents and others dealing directly with the company.

Accordingly, for the purposes of the Regulation, I am satisfied that the COMI of the company is located in England and that the presumption in favour of Luxembourg, being the location of its registered office, is rebutted.

There is, however, a further issue to address in relation to the EC Regulation. I raised with Ms. Toube whether the Regulation applied only where the company in question was insolvent or, at any rate, where the application to the court was based on the company's actual or apparent insolvency. Whether this is a necessary requirement for the engagement of the Regulation is not absolutely clear from the language of the Regulation, because although it is entitled "Regulations on Insolvency Proceedings", insolvency proceedings are defined by reference to individual proceedings under the laws of Member States, which, so far as the United Kingdom is concerned, include winding-up by the court. A company may be wound-up by the court on grounds other than its insolvency.

An indication that the Regulation is confined to cases of insolvency appears somewhat obliquely from recital 7, which provides that insolvency proceedings relating to the winding-up of insolvent companies or other legal persons are excluded from the scope of what was then the Brussels Convention, which might suggest such proceedings relating to the winding-up of solvent companies was not excluded from that Convention or its successor, the Judgments Regulation.

Furthermore, in Eurofoods, it is stated in paragraph 46 that the Regulation applies to collective proceedings, based on the debtor's insolvency, a phrase which is repeated in paragraph 54.

This application has been made as a matter of some urgency and it has not been possible in the time available to pursue to a final conclusion the issue as to the applicability of the Regulation in the case of proceedings not based on the insolvency of the company. But assuming that it is the correct interpretation, the circumstances of this company are, in my judgment, such as to suggest that the company is insolvent.

The reason why this is a matter of some difficulty is that the petition presented by the company for its winding-up is based not on an inability to pay debts, but on the grounds that it would be just and equitable to wind up the company.

The reason for taking that approach was that although it is clear that there are insufficient funds to service in full the bonds issued by the company, and it is likely that there will be insufficient funds to repay the bonds in full, the terms of the bonds provide for only a limited recourse by bond holders. That is to say that they are entitled to recover sums due to them only to the extent that the company has available to it funds derived from the policies purchased in the United States and possibly other funds raised from the issue of bonds.

The bonds also provide, consistently with that, that the bonds holders cannot take steps to attach assets of the company and cannot themselves apply for a winding-up order of the company or other insolvency related orders.

Their raises the question as to whether a company is insolvent. Although it has insufficient funds to meet all its liabilities at their face value, its ultimate liability will be restricted to the funds available to it.

As a matter of ordinary language, I would take the view that if a company has liabilities of a certain amount on bonds or other obligations which exceed the assets available to it to meet those obligations, the company is insolvent, even though the rights of the creditors to recover payment will be, as a matter of legal right as well as a practical reality, restricted to the available assets, and even though, as the bonds in this case provide, the obligations will be extinguished after the distribution of available funds.

It seems to me it can properly be said in relation to this company that it is unable to pay its debts. A useful way of testing this is to consider the amounts for which bond holders would prove in a liquidation of the company. It seems to me clear that they would prove for the face value of their bonds and the interest payable on those bonds.

I therefore conclude that the company can properly be said to be unable to pay its debts, both on a cash-flow basis and on a balance sheet basis. Therefore, if insolvency is a pre-requisite for the application of the EC Regulation, it is satisfied in this case.

Accordingly, I am satisfied that this court has jurisdiction under the EC Regulation, both to wind-up the company and, as is sought on this application, to appoint provisional liquidators.

I turn therefore to the requirements of domestic legislation as they apply to a company incorporated outside the United Kingdom. The company is an unregistered company for the purposes of the Insolvency Act. The circumstances in which a provisional liquidator may be appointed are provided in section 135, which, although contained in the group of sections dealing with the winding-up of the registered companies, applies by incorporation to the winding-up of unregistered companies: section 222(1). Section 135 provides, in very general terms, that the court may, at any time after the presentation of a winding-up petition, appoint a liquidator provisionally.

It is therefore apparent that a necessary pre-requisite is the presentation of a winding-up petition, and therefore the court must have jurisdiction to wind-up the company. That, in the case of unregistered companies, is provided by section 221. Section 221 (5) provides:

In the circumstances which I have summarised above, and which are set out in some detail in the evidence, it certainly appears to me that there is a substantial case to be made that it is just and equitable to wind-up the company. Although the power to wind-up companies on just and equitable grounds is normally invoked in the case of disputes between shareholders, it is clear from many authorities that it is not limited to those circumstances, and that general effect is to be given to its words.

In addition, it does seem to me, having regard to what I have just said, that the jurisdiction exists also under paragraph (b), because the company is unable to pay its debts, and also under (a), because the company has either ceased to carry on business or is carrying on business only for the purpose of winding-up its affairs.

Whichever way it is put, I am satisfied that there is a real prospect, indeed a likelihood, that the court would wind up the company once the petition comes to be heard, subject, of course, to contrary arguments and evidence that may be put before the court.

So far as the circumstances required for the appointment of a provisional liquidator are concerned, the paradigm case is one where it appears that the assets of the company may be in jeopardy and urgent steps must be taken to secure the company's assets. That is not this case. There is no suggestion that the directors are not properly fulfilling their duties to safeguard the assets of the company, but the jurisdiction to appoint provisional liquidators is certainly not limited for such circumstances.

The considerations to which the court should have regard were considered by the Court of Appeal in Revenue & Customs Commissioners v Rochdale Drinks Distributors Ltd [2011] EWCA Civ 1116. In the course of his judgment, Rimer LJ said at [75]

The question for the court is whether the circumstances of this case are such that it is right that a provisional liquidator should be appointed.

In my judgment, in the circumstances as I have described above, it does seem to me appropriate that provisional liquidators should be appointed, and it is relevant to consider that that is the view which has been reached by the directors of the company itself.

Accordingly, I make the order sought for the appointment of provisional liquidators.

I should say that it does seem to me on the evidence that a provisional liquidator will be better placed than the existing directors to take matters forward with a view to proposing a CVA or scheme of arrangement or other arrangement, for an orderly realisation of the company's assets, for resolving the issue of the frozen funds in London and for effecting the distribution of assets amongst creditors.

Finally, I should say that notice of these proceedings has been given to the Supervisory Commissioner, appointed by the Luxembourg regulator, and he has consented to this application.

Earlier this week, notice of the application was given by e-mail and by personal service to the Luxembourg regulator and to the Luxembourg prosecutor. There was earlier telephone contact with the Luxembourg regulator. The Luxembourg regulator has acknowledged receipt, but nothing further has been heard from the regulator and nothing has been heard from the prosecutor. It is fair to note that they have had very little time in which to consider this application being made in the court of another member state. None the less, I am satisfied that it is right to appoint the provisional liquidators in the absence of either consent or appearance from those persons.

Accordingly, I will make the order sought.