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Does section 236 of the Insolvency Act 1986 (IA 1986) have extra-territorial effect? Marc Brown, a barrister at St Philips Chambers, discusses the court’s decision in Re MF Global UK Ltd and its implications for practitioners.
Re MF Global UK Ltd  EWHC 2319 (Ch),  All ER (D) 22 (Aug)
The joint special administrators of a financial markets broker-dealer sought orders under IA 1986, ss 236 and 237(3) seeking the production of documents from the respondent clearing houses. Alternatively, an order seeking similar information was sought against one of the respondents, a French company, under Council Regulation (EC) 1206/2001 (the Evidence Regulation).
The Chancery Division, in dismissing the applications, held that IA 1986, s 236 did not have extra-territorial effect, the order sought was outside the scope of the Evidence Regulation and there was no cause to exercise its discretion under IA 1986, s 236 in respect of the English company respondent.
The Joint Special Administrators of MF Global UK Ltd (MF Global) sought an order under IA 1986, s 236 against LCH.Clearnet Limited (LCH UK) and LCH.Clearnet SA (LCH France).
The information sought comprised production of documents and a full description by way of witness statement of the process by which LCH UK and LCH France closed out on MF Global’s open positions very shortly after the appointment of the administrators.
The application was opposed by LCH France on the grounds that the court had no jurisdiction to make any order under IA 1986, s 236 against it.
Both LCH UK and LCH France argued that in any event the court should not exercise its discretion to make the orders sought.
The court therefore had to consider:
MF Global was a member of a group of companies which carried on business as broker-dealers in financial markets. MF Global and other companies in the group entered formal insolvency proceedings in the US and England on 31 October 2011.
LCH UK and LCH France operate clearing houses, with an entitlement to close out the open positions of defaulting members. When MF Global went into administration, it had a number of large open positions, particularly involving European sovereign debt. The appointment of administrators constituted an event of default. LCH UK and LCH France exercised their rights to close out MF Global’s open position and losses totalling approximately €422m were suffered on those close-outs.
While the administrators accepted that it was inevitable that significant losses would result from the close-outs, they were concerned that, compared with contemporary prices quoted on Bloomberg screens, the losses were exceptionally large—the administrators calculated that if all of the open positions had been closed at or around the prices quoted by Bloomberg, the discount suffered would have been €241m, rather than €422m.
In those circumstances, the administrators made their application for the disclosure of documents and information relating to those close-outs.
The administrators confirmed during the first day of the hearing that the prime focus of the administrators’ interest was the close-out of the positions in Italian and Spanish government debt which took place on 2 November 2011. As a result, after the first day of the hearing, the administrators sought to limit their request by seeking documents and information in relation to the sale of €2.2bn of Italian government bonds and two tranches of Spanish government bonds, all on 2 November 2011.
As for the costs of the exercise, LCH UK and LCH France put forward that the cost of retrieving all of the information originally sought would be approximately £135,000 and the cost of legal review of that material would be between approximately £3.13m and £4.625m. The respondents could not undertake the task of forecasting costs for the more limited review sought given the lateness of the change in scope. The figures were challenged by the administrators, but the judge accepted that the exercise would involve substantial costs. In any event, the administrators offered to bear the reasonable costs of compliance with those orders to be assessed on the indemnity basis.
As a result of the limiting of the scope of the application, the three transactions concerned were all made between MF Global and LCH France and were all closed out by LCH France. In respect of LCH UK, the application therefore sought information and documents relating to the actions not of it but of LCH France.
LCH France argued that it had no presence in England and that IA 1986, s 236 does not have extra-territorial effect and so the court had no jurisdiction to make the order sought. In this respect it relied upon Re Tucker  Ch 148, which concerned the Bankruptcy Act 1914 (BA 1914), in which the Court of Appeal held that no order under BA 1914, s 25 could be made as the respondent was resident in Belgium.
The administrators argued that Re Tucker was not binding on the effect of BA 1914, s 25 as it was per incuriam or else suffered from a logical fallacy. They also referred to other sections of IA 1986 which have been held to have extra-territorial effect.
The judge made clear that the onus lay on the administrators to satisfy the court that the orders sought came within the powers conferred by IA 1986, ss 236 and 237 and that, as a matter of discretion, it was appropriate for the court to make the orders sought.
As to jurisdiction, the judge held that where a statutory provision is re-enacted in substantially the same terms, it is intended to carry the same meaning as its predecessor. As a result, Re Tucker authoritatively decided that there was a lack of extra-territorial effect of BA 1914, s 25 and was a binding interpretation of that section, which would then apply to any successor section in IA 1986 unless the context showed that the meaning must be taken to have changed.
The judge also found that the argument that the decision was per incuriam was wrong, as was the argument that the decision was illogical. In any event, the judge noted the difficulty of a first instance judge concluding that a decision of the Court of Appeal was per incuriam, still less would it be appropriate or permissible to conclude that a decision of the Court of Appeal was wrong on grounds of illogicality.
The judge held that in the absence of authority, there might be a good deal to be said for concluding that IA 1986, s 236 was intended to have extra-territorial effect. However, given the effect of Re Tucker, the judge concluded that IA 1986, s 236 does not have extra-territorial effect and therefore no order could be made against LCH France.
The judge also held that there was no jurisdiction to make a request under the Evidence Regulation as the evidence was not intended for use in judicial proceedings, commenced or contemplated, which will result in a decision.
As for LCH UK, the judge held that, the application having been narrowed to three positions closed-out by LCH France, ultimately in the circumstances the differences in prices achieved was not of itself sufficient to justify the far-reaching order for the production of information, documents and tape recordings sought by the administrators.
As a result, the application was dismissed in its entirety.
This decision makes clear that IA 1986, s 236 does not have extra-territorial effect.
It is important to remember when making applications under IA 1986, s 236 firstly that the scope of the application is limited to the jurisdiction of England and Wales, but also that the documents and/or information sought should be limited so far as possible.
By limiting the request for information to that which is really justified in the circumstances, then not only will the costs of compliance be reduced accordingly, but also the prospects of obtaining the order at all will be increased.
It must be remembered that it is the office-holder’s onus to satisfy the court that the orders sought are within the court's powers and that it is an appropriate case for the court to exercise its discretion.
Marc Brown undertakes work across a broad spectrum of commercial work, but is a particular specialist in insolvency matters. He offers advice that is tailored towards the commercial outcomes sought by the client and is conscious of the business needs of clients, as well as the pure legal aspects of litigation. Marc is regularly instructed in relation to high value and complex cases, and has experience of dealing with cases involving lengthy and detailed factual backgrounds and complex issues of law.
Interviewed by Kate Beaumont.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
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First published on LexisPSL Restructuring and Insolvency
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