First past the post and foreign insolvency proceedings: the race for recognition in protecting assets from judgment creditors

Other Author      Malcolm Wu, trainee solicitor

Summary

In a case which concerned the interaction between a judgment creditor seeking to enforce its judgment and a foreign insolvency office-holder seeking to realise assets for the benefit of the insolvent estate, the English High Court¹ has made a final third party debt order ("TPDO") in respect of monies belonging to a Lithuanian company (the "company") which was the subject of Lithuanian insolvency proceedings.  As a result, the monies will be paid over to the creditor which obtained the TPDO² and will not form part of the company's insolvent estate.

The monies were in a bank account held by an English company (the "third party").  The TPDO had been sought and obtained by one of the company's creditors (the "applicant creditor") which had the benefit of an arbitral award against the company (that had been converted into orders of the English court).

The Court was required to exercise its discretion in deciding whether to grant the final TPDO sought by the applicant creditor, or to dismiss the application on the basis that recognition of the Lithuanian insolvency proceedings was imminent.  The insolvency administrator in the Lithuanian insolvency proceedings had applied for recognition in England under the Cross-Border Insolvency Regulations 2006 ("CBIR") and the recognition hearing was in fact due to take place the very next day following the hearing of this application. It was common ground that, had the recognition hearing taken place at any point prior to the date of this hearing, a recognition order would have been granted and there would have been no prospect of the TPDO being made final.

In the absence of domestic insolvency proceedings or the recognition of the foreign insolvency proceedings, the High Court exercised its discretion and made the final TPDO in favour of the applicant creditor.  There was no prior judicial authority on this point.

In doing so, it applied the general principle of "first past the post" which, as between creditors competing to enforce over the same assets, confers priority on the first-in-time creditor.  That principle applied equally here, where the competition was between: the applicant creditor as the first-in-time creditor in respect of this particular asset; and the other creditors generally in the foreign insolvency proceedings.

Implications for foreign insolvency officeholders and judgment creditors

This decision highlights the importance to foreign insolvency officeholders of seeking recognition in the UK of foreign insolvency proceedings in a timely fashion, especially where there is active and competing creditor pressure on assets in the UK. 

Post Brexit, recognition in the UK of insolvency proceedings from EU member states is no longer automatic.  In this case, recognition was sought under the CBIR, which requires a court process to be undertaken and the foreign insolvency proceedings remain unrecognised (and therefore assets unprotected) unless and until the court has granted the recognition order³.  It would have been impermissible for the applicant creditor to pursue the TPDO if the foreign insolvency had already been recognised under the CBIR. 

If urgent relief is required, the foreign representative may wish to apply for provisional relief on the filing of the recognition application (such as a stay of execution against the company’s assets or a moratorium) in order to protect the company’s assets from creditor action⁴, but no such relief had been sought in this case.

As for judgment creditors in circumstances where foreign insolvency proceedings may be imminent or already on foot (but not yet recognised), this decision also highlights the importance of acting quickly in enforcing against the debtor’s assets before recognition is obtained. Particularly given the availability of provisional relief for the office-holder pending such recognition, and the fact that recognition is generally more or less automatic, it might be suggested that time is even more of the essence for any creditor seeking a meaningful return on the debt, i.e. not as part of the insolvency process.

Decision

The Court considered the earlier decision in British Arab Commercial Bank v Algosaibi⁵ in which it was held that "in non-statutory insolvency regime cases, the general rule is that the principle of 'first past the post' applies".  The Court concluded that a "statutory regime" was to be construed as domestic statute, i.e. purposively.  Whilst the CBIR was a domestic statute, the scheme of the CBIR gave a strong statutory indication that the legislature intended to make a distinction between foreign insolvency and domestic insolvency orders, the former being unrecognised until a recognition order is granted. The CBIR recognition process is quite streamlined (close to semi-automatic), however, there will always be a point in time prior to which foreign insolvency proceedings are not yet recognised.

The Court held that the first past the post approach should apply here, in the absence of a recognised insolvency order. A creditor is thus entitled, absent some abuse or other countervailing considerations, to the fruits of its own diligence in beating other creditors – whether directly 'creditor-on creditor' or via some unrecognised foreign insolvency process through the proxy of a foreign insolvency officeholder whose role is not (yet) subject to an recognition order.