Determining the debts of insolvent estates in foreign currencies

Determining the debts of insolvent estates in foreign currencies

How is interest upon provable debts to be calculated, and debts in foreign currencies exchanged into sterling by trustees of insolvent estates? Donald Lilly of 4 Stone Buildings, says a recent ruling shows the importance of construing all insolvency law enactments within their context, and not in isolation.

Original news

Re Estate of Platon Elenin (aka Boris Abramovich Berezovsky); Subnom Lockston Group Inc v Wood [2015] EWHC 2962 (Ch), [2015] All ER (D) 231 (Oct)

The Chancery Division, in dismissing the applicant’s challenge to the appointment of trustees to the insolvent estate of Boris Berezovsky, held that the date of the debtor’s death was the date at which the assets comprising the insolvent estate were identified, and as at which the debts and liabilities were identified and quantified. That included the conversion of foreign currency debts into sterling and the date up to which interest might be proved, and after which statutory interest ran.

What was the background to the application?

Platon Elenin (formerly known as Boris Berezovsky) died in March 2013. In late 2014, the estate’s general administrators, Nick Wood and Kevin Hellard of Grant Thornton, presented a petition to place the estate into insolvent administration. An insolvency administration order (IAO) was made in January 2015.

At the first meeting of creditors, Messrs Wood and Hellard, along with another partner from Grant Thornton, Mike Leeds, were proposed to be trustees of the insolvent estate. Competing candidates from KPMG (the KPMG nominees) were also proposed. The chairman of that meeting calculated the debts of creditors for the purposes of voting on the basis that interest on those debts was provable only up to the date of Mr Berezovsky’s death in 2013. He also used the date of death as the relevant time to convert debts in foreign currencies into sterling. On that basis, the votes of creditors supporting Messrs Wood, Hellard and Leeds represented a majority and they were accordingly appointed as trustees.

Two of the estate’s creditors who supported the KPMG nominees, Lockston Inc and the Baltic International Bank (BIB), objected to the chairman’s calculation of the creditors’ votes, contending that the relevant date for the calculation of interest and foreign currency exchange was the date of the IAO in January 2015—rather than the date of death in March 2013.

If that were correct, the value of a number of creditors’ debts would change dramatically—particularly those in Russian Roubles, given the devaluation of the Rouble since March 2013. On the basis of Lockston’s and BIB’s calculation of the votes, the majority of creditors had in fact voted for the KPMG nominees, not the trustees. Accordingly, Lockston and BIB sought declarations that the chairman’s calculation of interest and foreign currency exchange had been incorrect and that the KPMG nominees had been duly appointed as the trustees of the estate.

What were the legal issues the judge had to decide?

There were broadly two legal issues:

  • firstly, whether, on a true construction of the Insolvency Act 1986 (IA 1986), the Insolvency Rules 1986, SI 1986/1925 (IR 1986) and the Administration of Insolvent Estates of Deceased Persons Order 1986, SI 1986/1999 (AIEDP 1986), the correct date for the calculation of provable interest or exchange of foreign currency debts into sterling was the date of the deceased’s death or the date of the IAO
  • secondly, if either interest or foreign debts were correctly calculated as at the date of the IAO, whether the court must or should make a declaration that the KPMG nominees had been appointed as trustees of the estate

What were the main legal arguments put forward?

Lockston and BIB relied on AIEDP 1986, Sch 1, Part I which provides that, when an IAO is made, each instance where the words ‘commencement of the bankruptcy’ appear within the IA 1986, such words are to be replaced with the words ‘the date of the insolvency administration order’. AIEDP 1986, art 3 also provides that the IR 1986 ‘shall apply accordingly’. Lockston and BIB therefore submitted that in the IR 1986 where the words ‘commencement of the bankruptcy’ appear, they should be amended to say ‘the date of the insolvency administration order’.

Since IR 1986, rr 6.111 (concerning the exchange of foreign currency debts) and 6.113 (concerning the calculation of interest on provable debts) provide that the relevant date for the calculation of interest and conversion of foreign currency debts is the date of the ‘commencement of the bankruptcy’, the correct date in the case of Mr Berezovsky’s estate for such calculation is that of the IAO, not Mr Berezovsky’s death.

Lockston then contended that, if their construction were correct, the judge should declare the KPMG nominees as having been appointed, since the majority of creditors’ votes would have been cast in support of them.

The trustees argued that the amendments to the IA 1986 provided for under AIEDP 1986, Sch 1, Pt I are subject to the opening caveat that such amendments take effect ‘except in so far as the context otherwise requires’. In this case, the context did otherwise require because the date of death was the date at which provable debts were identified by virtue of AIEDP 1986, Sch 2, Pt II, para 12. That provision specifically amends IA 1986, ss 283–285 so that the deemed date of the presentation of the petition and the making of the IAO is the date of death.

Consistent with the insolvency regime in other contexts, the date at which provable debts are identified should also be the date at which they are quantified. Therefore, IR 1986, rr 6.111 and 6.113 should ‘apply accordingly’ so that the date at which interest accrues and foreign debts are converted is the same date as when the provable debts are identified, namely, the date of death.

In any event, even if their construction were not correct, the trustees invited the judge not to declare the KPMG nominees as appointed. There were a number of factors, including the disruption to the estate, which indicated that the court should not exercise its discretion to do so.

What did the judge decide, and why?

David Richards J (as he then was) agreed with the trustees’ construction of the IA 1986 and the IR 1986, as amended by the AIEDP 1986. He considered that Lockston’s and BIB’s construction was inconsistent with the fundamental feature of insolvency law that there is a single date for the ascertainment of liabilities, whereas the trustees’ construction produces a consistent basis for such ascertainment in the context of an IAO, when compared to other insolvency regimes. The judge also relied upon Re Palmer (deceased) (a debtor) [1994] Ch 316, [1994] 3 All ER 835 which held that the AIEDP 1986 had the effect so as to ‘draw a line at the moment of death’. He also referred to—and relied upon—the law and practice under the Bankruptcy Act 1914 and the Cork Report, which were consistent with the trustees’ construction.

As a result of his decision on the construction of the IA 1986, the IR 1986, and the AIEDP 1986, the judge was not required to make any determination in respect of the second issue listed above.

To what extent is the judgment helpful in clarifying the law in this area?

The judgment is helpful in both a narrow and wider sense. In the narrow sense, it provides guidance to trustees of insolvent estates on how to calculate interest upon provable debts, and when debts in foreign currencies should be exchanged into sterling. This is relevant not only to voting, as in this case, but also for the purposes of any distribution to creditors from such an estate.

It is also instructive in a wider sense, since it underlines the importance of maintaining a coherent and internally consistent relationship between the regimes relevant to the insolvent estates of deceased persons, and those applicable to insolvents generally. The court will not adopt a formalistic approach to the amendments effected by the AIEDP 1986, but instead will apply those amendments in a manner to ensure that consistency is maintained.

What practical lessons can those advising take away from this case?

The key practical lesson is the importance of construing all insolvency law enactments within their context, and not in isolation. The need for a coherent and consistent system of insolvency law means that when construing any part of that law, it is necessary to test the consistency of the obvious or literal construction against the operation of insolvency law as a whole. The court will be slow, as shown by this case, to adopt a literal construction of an enactment if that were to have the effect of creating an inconsistency or aberration within the wider body of insolvency law.

Interviewed by Nicola Laver.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

Further Reading

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What happens if a debtor dies before or after the presentation of a bankruptcy petition?

Voting and attending at creditors' meetings

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First published on LexisPSL Restructuring and Insolvency

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About the author:

Stephen qualified as a solicitor in 2005 and joined the Restructuring and Insolvency team at Lexis®PSL in September 2014 from Shoosmiths LLP, where he was a senior associate in the restructuring and insolvency team.

Primarily focused on contentious and advisory corporate and personal insolvency work, Stephen’s experience includes acting for office-holders on a wide range of issues, including appointments, investigations and the recovery and realisation of assets (including antecedent transaction claims), and for creditors in respect of the impact on them of the insolvency of debtors and counterparties.