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Partner, Head of Dispute Resolution, Gateley
Richard has expertise in restructuring matters and complex and international dispute resolution. He has significant extra-territorial experience in cross-border insolvency, tax avoidance, evasion and fraud, asset protection, tracing and recovery and of representing parties in disputes, both in the High Court and London Court of International Arbitration, as well as numerous overseas courts. Richard is heavily focused on asset tracing assignments deriving from Ukraine, Russia and some Former Soviet Union countries. In particular Richard has been retained in a number of matters involving claims on behalf of ultra-high net worth individuals/ corporations emanating from the region.
He has lectured extensively for various UK and overseas organisations including: the St Petersburg International Legal Forum; The EU Advisory Mission in Ukraine; Senior Government Officials in the Republic of Uzbekistan; Sberbank of Russia and others.
Elena is a very experienced lawyer who advises clients on all aspects of complex cross-border asset recovery, both in English courts and Arbitral Tribunals. As well as working in England, Elena has significant experience of working as part of a cross-border team in jurisdictions such as Russia, Ukraine, Cyprus, the Channel Islands, BVI and Cayman. In addition to her cross-border asset recovery work, Elena assists clients to manage their international matrimonial and children disputes. In the course of this work, Elena has gained extensive experience in working with ultra-high-net-worth individuals to structure their assets in trusts and to mitigate their UK personal and corporate tax liability.
Elena is a native Russian and fluent English speaker. She also has basic reading skills in Ukrainian and French.
Cross-Border Insolvency: Introduction
Cross-border insolvency issues are often at the heart of insolvency where international elements or participants are involved. Such international participants could be foreign liquidators, foreign companies, directors, beneficial owners or foreign bankrupts. In this article we will focus on the UK framework governing cross-border insolvency which comprises of:
The Cross-Border Insolvency Regulations 2006 (CBIR 2006) which give effect to the UNCITRAL Model Law on Cross-Border Insolvency (Model Law) in the UK.
1.1 Council Regulation (EC) No. 1346/2000 of 29 May 2000 on insolvency proceedings (Insolvency Regulation 2000) (for insolvency proceedings that are commenced before 26 June 2017) and Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings (recast) (Recast Insolvency Regulation) (for insolvency proceedings opened on or after 26 June 2017).
1.2 Section 426 of the Insolvency Act 1986 (IA 1986).
1.3 English common law.
1.4 EU Insolvency Regulation is relevant if the cross-border insolvency is taking place in one of the EU Member States. As neither Ukraine, not the UK are members of the EU (although in the latter, where main insolvency proceedings were opened before the end of the Brexit transition period on 31 December 2020, the EU legislation may apply), however in this article we will discuss CBIR 2006 and Section 426 proceedings which we encounter most commonly where foreign jurisdictions including Ukraine are concerned.
Cross-Border Insolvency Regulations (CBIR)
Under the CBIR 2006 a foreign insolvency practitioner can apply to the British courts for recognition of those insolvency proceedings. Foreign insolvency proceedings for which recognition may be sought must be collective insolvency proceedings which are subject to the supervision and control of a foreign court.
The CBIR apply without the need for reciprocity which means that, even though we understand that Ukraine has not enacted the CBIR Model Law into its legislation, the UK may nevertheless recognise eligible Ukrainian insolvency proceedings.
In this connection, there is a relevant recent (on 11 March 2021) decision by the High Court in England recognising foreign liquidation of the Ukrainian bank PJSC Bank Finance and Credit under the CBIR. Investigations into the bank revealed that the Bank and those controlling it are suspected to have been involved in high value fraud, resulting in funds being sent to many overseas countries, including companies registered in England. Because the liquidation in Ukraine was a “foreign main proceeding” it satisfied the English court that proceedings can be brought under CBIR in England.
The CBIR 2006 provide for the recognition of two types of insolvency proceedings: foreign main proceedings and foreign non-main proceedings.
Foreign main proceedings are proceedings that are taking place in the state in which the debtor has its center of main interests. The term “center of main interests” is not defined but there is a rebuttable presumption that the debtor’s registered office is the center of the debtor’s main interests (article 16(3), Schedule 1, CBIR 2006).
An application for recognition shall be accompanied by a certificate from the foreign court affirming the existence of the foreign proceeding and of the appointment of the foreign liquidator.
An application for recognition shall also be accompanied by a statement identifying all foreign proceedings, proceedings under British insolvency law and requests under section 426 IA 1986 in respect of the debtor that are known to the foreign representative.
The advantage of this application is that upon the granting of a recognition order of main proceedings under the CBIR, an automatic stay is imposed in respect of the debtor, and the foreign representative is entitled to request relief, including the examination of witnesses, the taking of evidence or the delivery of information concerning the debtor’s affairs, rights, obligations or liabilities.
Upon recognition, the CBIR give the foreign representative certain rights. For example, to be heard in English courts and in some cases to commence proceedings relying on the provisions of the English IA 1986 (IA 86). The CBIR do not expressly permit the foreign representative to apply foreign insolvency law directly in England.
If there is an insolvent foreign entity, it may be beneficial to consider applying to have a company’s insolvency recognised in England. Recognition would bring the following potential advantages, including both automatic and discretionary benefits.
The automatic benefits include the automatic provision of permission to a foreign officeholder to bring claims in the English High Court under the following sections of the IA 1986:
(i) Section 238 (transactions at an undervalue); and
(ii) Section 423 (transactions defrauding creditors), subject to appropriate modifications.
Section 238 IA 1986: transactions at an undervalue.
Section 423 IA 86: transactions defrauding creditors (putting assets beyond the reach of creditors).
An “undervalue” in the context of both of these sections means that the transaction is for a consideration the value of which, in money or money’s worth, is significantly less than the value, in money or money’s worth, of the consideration provided by the company.
This, therefore, enables the foreign liquidator to bring claims in the English High Court which have the effect of reversing any transactions which were entered into at an undervalue and/or for the purposes of defrauding creditors and to enable any property transferred to be restored.
CBIR also provides for the availability of any additional relief that may be available to a British insolvency office holder under English law. The potential diversity of relief available in principle is an important and substantial addition to the toolkit of options provided to a foreign office holder under the CBIR.
The English High Court is likely to require the foreign officeholder to show that there is a sufficient connection with the jurisdiction to make it just and proper for it to act despite the foreign element to the claim. In principle, a sufficient connection might be shown by proof the transaction in question has some link to the jurisdiction. For example there is a UK holding company in the structure accepting and/or sending funds or a there is a UK domiciled director or beneficial owner.
The court has discretion in what order is made; but the order must be compensatory (i.e. related to the loss caused to creditors) rather than penal.
In summary, CBIR brings a variety of benefits to use if the application to bring insolvency proceedings under the CBIR in England is recognised.
Recognition under s 426 IA1986
As an alternative to CBIR, under section 426 of the IA 1986, a court in the Channel Islands (Jersey, Guernsey), Isle of Man, the BVI, the Cayman and some other former commonwealth countries can apply to the UK courts for assistance in insolvency proceedings. In our experience, these offshore jurisdictions are popular with Ukrainian individuals in structuring their personal and business assets, therefore it is worth discussing section 426 of the IA 1986 in this note.
In cooperating with foreign courts in relation to insolvency proceedings, the UK court has a wide discretion. The UK court can apply UK insolvency law or the relevant foreign insolvency law (section 426(5), IA 1986).
Case law on section 426 shows that, although the court has a discretion regarding whether to provide assistance, and in what form, the general rule is that the court should provide assistance unless there are powerful reasons not to: England v Smith  Ch 419; In Re HIH Casualty and General Insurance Ltd  1 WLR 852.
Assistance under section 426 IA 1986 can include:
(iii) An order for injunction.
(iv) A declaration recognising the rights of a foreign insolvency representative (Hughes v Hannover-Ruckversicherungs AG  1 BCLC 49).
(v) The making of an administration order (Re Dallhold Estates (UK) Pty Ltd  BCLC 621).
(vi) The UK court will provide assistance unless there are powerful reasons not to (England v Smith  Ch 419 and McGrath and Others v Riddell and Another  UKHL 21 (also known as Re HIH Insurance)). However, it appears that section 426 of the IA 1986 will not be used to enforce foreign judgments (Rubin and another v Eurofinance SA and others and New Cap Reinsurance Corporation (in liquidation) and another v Grant and others  UKSC 46.
There may not necessarily be a great deal to choose between the route of CBIR and application under section 426 IA86 if the parties are simply seeking recognition. An application under section 426 to the English court for assistance must be made by first asking the foreign court to issue a letter of request to the English court, so it may be simpler for the foreign office holder to apply directly under the CBIR 2006.
However, as mentioned above, depending on the circumstances, CBIR brings a variety of potential actions within the English Insolvency legislation, both automatic and discretionary. Therefore, depending on the circumstances in many cases it may appear to be prudent to use the CBIR route.