Anti-suit injunctions and cross-border insolvency

Anti-suit injunctions and cross-border insolvency

Benn Richards, solicitor in the Lexis®PSL Restructuring & Insolvency team looks when the English courts grant an anti-suit injunction where there are cross-border insolvency applications in other jurisdictions.

This was considered in the case of Kemsley v Barclays Bank Plc [2013] All ER (D) 169 (May) where the Chancery Division dismissed the applicant bankrupt's application for an anti-suit injunction in respect of proceedings brought by the respondent bank in the United States of America. The court held, among other things, that it could not be regarded as oppressive or unfair or in any way improper for the question whether the bank should be allowed to maintain its action in the US on an English debt or whether those proceedings should be stayed or dismissed on the basis that the applicant had become discharged from his debts under the British statute, or indeed whether there should be any restriction on enforcement on post-discharge assets, to be determined by the New York court.

What were the key facts of the case?

The case of Kemsley v Barclays Bank plc looks at when it is appropriate to grant an anti-suit injunction to stop proceedings in another jurisdiction (in this case the USA), where the applicant (the bankrupt, K) was subject to English bankruptcy proceedings. This case very much turned on its facts and K's application was refused.

As noted in the judgment of Mr Justice Roth, until 2008 K was a very wealthy man. Due to this, the respondent, Barclays Bank plc, lent him £5 million by way of an unsecured loan, which was repayable after a year but this period was extended. In 2009, K's network of businesses entered administration and K suffered financial difficulties. Because of this, a number of creditors issued proceedings against K (including one for £6.8 million and HMRC for £3 million, which lead to HMRC presenting a bankruptcy petition against K). K then petitioned for his own bankruptcy in January 2012 in the UK, and was eventually made bankrupt in March 2012, when joint trustees were appointed.

Following the collapse of his businesses, in June 2009 K moved with his wife and family to a house he owned in Florida which was purchased in 2007. K and his family then moved to New York City in May 2010 but subsequently K's marriage broke down and his wife returned to the UK with their children in June 2012. Throughout this time K remained in the USA.

Shortly before K's bankruptcy, Barclays issued proceedings in New York against K under the loan agreement. After the making of the bankruptcy order, Barclays issued further proceedings in Florida concerning K's property in Florida. In addition, K's trustees in bankruptcy issued an application in the New York court under the UNCITRAL Model Law on Insolvency Proceedings, Chapter 15 of the US Bankruptcy Code, seeking recognition of the English court's bankruptcy order as "foreign main-proceedings". This application was opposed by Barclays. In light of the joint-trustee's application, the bank's application in New York was adjourned pending the out come of the trustees' application.

It was common ground that if the joint-trustees' application for recognition was granted by the New York court, both sets of proceedings would be stayed by the US courts (as the English bankruptcy proceedings would take precedence and Barclays' debt would be dealt with under the English bankruptcy).

K's application to court

The thrust of K's application to the English court for an anti-suit injunction was to stop Barclays from continuing with the New York and Florida proceedings. As summarised in paragraph 14 of the judgment, K's application had two grounds to it:

• to stop Barclays obtaining an unfair advantage over other creditors and therefore not being consistent with the English court's regime of equal distribution to certain creditors in a bankruptcy, and
• that Barclays’ actions would avoid the operation of the English bankruptcy regime whereby K would be released from his bankruptcy debts on discharge from bankruptcy, unless the trustees applied to extend the period, and that his discharge would take effect in March 2013—although K's trustees would of course still be able to recover the debt against the estate in bankruptcy, any property K might acquire after discharge would be free from Barclays’ claims (however, if Barclays were able to obtain a judgment in the New York proceedings, that judgment would be enforceable against K for 20 years and other jurisdictions could recognise it).

The first point was swiftly dealt with by Barclays, as they provided an undertaking that they would pay to the trustees any sums recovered from the US proceedings (less their reasonable costs). The case then turned on one point: the need of K to obtain an anti-suit injunction to enable him (as a matter of English law) to be free from his debts after his discharge from bankruptcy.

How was the law applied?

With regard to English bankruptcy law, there are two points to note. First, on the making of a bankruptcy order, the bankrupt's estate will vest in the trustee under IA 1986, ss 305-306. In addition, unless an application is made by K's trustee's to extend the period of bankruptcy, K's discharge from bankruptcy and release from his debts will take place on the first anniversary of the bankruptcy order (IA 1986, s 281). Secondly, when bankruptcy proceedings are opened, the court may stay any action or proceedings against the bankrupt and his property (IA 1986, s 285). This is because that estate vests in the trustee, who has power to deal with claims against the bankrupt. However, this position does not affect foreign proceedings or enforcement. Therefore, the step for the debtor/trustee to take is to make an application for an anti-suit injunction.

Anti-suit injunctions are not made lightly, even in the context of insolvency proceedings, which are a collective remedy to deal with all creditors equally. As analysed in the judgment (paras 23 to 36 inclusive), anti-suit injunctions in the context of an insolvency tend to only be given where there is a need to prevent injustice and wrongful conduct in order to preserve the equal distribution of assets, or where there is a very good reason to stop the foreign proceedings and deal with the matter in the English courts (which will be seldom used).

As Barclays was not seeking to obtain an unfair advantage, this part of the test fell away and it was therefore highly unlikely that the court would grant the injunctive relief.

In addition, the position on the trustees' application under the UNCITRAL model law was highly relevant. Put simply, if the trustees' application to recognise the English bankruptcy as foreign main proceedings was successful, then the bank's proceedings in the US would "fall away" as they would be subject to the English bankruptcy proceedings. If the trustee's application was not successful, then the matter would fall under the jurisdiction of the US courts.

What was the outcome?

K's application was refused, as the court's threshold for granting an anti-suit injunction where there are insolvency proceedings was not met (mostly due to Barclays' offer to pay any sums to the trustees).

In addition, the application also fell away for very practical reasons concerning the UNCITRAL application. If that application failed, it would be because K's centre of main interests (COMI) was in the US and not England (something not explored by the English court). Therefore, if K’s COMI was in England, an anti-suit injunction would be unnecessary; or if K's COMI was in the US, the injunction would be wholly inappropriate. For these reasons, the application was dismissed.

Following the hearing of K's application, but before Mr Justice Roth handed down his judgment, the US court ruled on the trustee's UNCITRAL application. It held that K's COMI was in the US at the time of the English bankruptcy proceedings and therefore the trustees' application to recognise the English bankruptcy as foreign main proceedings failed and the bankruptcy would be governed by US law.

What does this mean?

Although this case turned on its facts, it clearly sets out the factors when the English court will grant an anti-suit injunction where there are cross-border insolvency applications. Practitioners should note the affect insolvency proceedings can have on creditors, irrespective of their location and the impact of recognition applications under the UNCITRAL model law.

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