When a reasonably substantial connection just isn't enough

Original news

Re Buccament Bay Resort; Re Harlequin Property (SVG) [2014] EWHC 3130 (Ch), [2014] All ER (D) 32 (Oct)

The Chancery Division dismissed the petitioners' application to have a winding up petition heard in England in respect of two foreign companies (BBL and Harlequin), which were part of a group that developed and operated luxury Caribbean resorts. The court ruled that, notwithstanding that a reasonably substantial connection with England had been satisfied, the English court had no jurisdiction for a winding up order in circumstances where, among other things, most of the companies' assets were mainly in a foreign jurisdiction, and where the order sought would prove ineffective.

How did the issue arise and what were the jurisdictional factors?

BBL and Harlequin were both companies incorporated in Saint Vincent and the Grenadines (SVG). The petitioners (investors in the Buccament Bay resort development) sought to wind up the companies in England based on largely undisputed debts.

The arguments on jurisdictional connections included:

When does an English court have jurisdiction to wind up a foreign company?

The English court has jurisdiction to wind up an unregistered company which is unable to pay its debts (Insolvency Act 1986, s 221(1) (IA 1986)).

Foreign companies are, for company law purposes, treated as unregistered companies. The three core requirements (as set out in the Re Real Estate Development case [1991] BCLC 210) are:

1. a sufficient connection with England and Wales which might, but did not necessarily have to, consist of assets within the jurisdiction
2. a reasonable possibility, if a winding-up order was made, of benefit to those applying for the winding-up order
3. one or more persons interested in the distribution of assets of the company have to be persons over whom the court could exercise jurisdiction

In addition to the three requirements, the court will always consider whether there is a more appropriate jurisdiction (see paras [18]–[20]).

The High Court focused on the discretionary nature of IA 1986, s 221 which provides that 'any unregistered company may be wound up under this Act'. The judge emphasised the word ‘may’. Whether the power should be exercised in respect of a foreign company is a matter of discretion depending on the facts of the case. In a number of cases, judicial guidance has been given as to when the discretion should and when it should not be exercised in relation to foreign companies. It is clear and common ground that the court should not exercise its jurisdiction in respect of a foreign company where there is no connection whatever between the foreign company and this jurisdiction, other than the decision of the petitioning creditor (which would be present in every case) to present a winding-up petition in England.

Was the centre of main interests (COMI) in England?

There is a presumption that a company’s COMl is in the jurisdiction where it is incorporated. The court found that despite some uncertainty as to the exact nature of the respondents’ activities in England, the evidence came nowhere near rebutting the presumption. All that the petitioners had been able to establish was that the main shareholder and sole director was resident in England, that there was some administration activity here and that some sales to English residents were conducted here. As against that, there was undisputed evidence that the sole director and main shareholder spent a considerable part of his life administering the Harlequin group’s business in SVG with regular and frequent meetings with senior management and a variety of third parties. The court was swayed by his assertion that it would be impossible to administer the business from England.

What did the court decide?

In the present case, there was no justification at all for a winding up order. It was clear that all the assets (except for a claim against the auditors) were situated in SVG, and there was undisputed evidence that SVG had a perfectly adequate winding up process which was available to the petitioners and is a more appropriate forum.

There was undisputed evidence that an English liquidator would be likely to face considerable and possibly insuperable difficulties in gaining control of the company's assets (especially if his authority as liquidator was not recognised and/or other investors began winding up proceedings in SVG and/or there were difficulties because the employment of 320 employees might not be terminated by an unrecognised English winding up order).

The court could see no advantage in winding up proceedings in England, rather than in SVG. As Briggs J said in Re Rodenstock GmbH ([2011] All ER (D) 62 (May)), the court will not act in vain. Applying settled principles, while the first core requirement (a reasonably substantial connection with England) was satisfied, as was the third, the second was not (no reasonable possibility had been shown of the petitioners deriving benefit from a winding up). Further, it was clearly a case in which SVG was by far the more appropriate forum.

Where a company’s COMI is in this country, it is highly likely that, by definition, the court will be satisfied that there is a substantial connection with this country, but otherwise the discretionary factors will be the same. In this case, even if the court had been satisfied that the COMl was in England, it would still have made no sense to make winding up orders in a case which was obviously much more suitable for the SVG courts.

What are the practical lessons for restructuring and insolvency professionals?

Following the string of schemes of foreign companies pushing the boundaries on sufficient connection, this is a timely reminder that the English courts will not automatically assume jurisdiction even if a sufficient connection is proved and will assess all the evidence when exercising their discretion. The English courts will not step in if the courts where the company is incorporated have adequate insolvency laws.

It also highlights the difference between the requirements to prove sufficient connection and COMI—if the higher COMI test is proved, it is highly likely that, by definition, the court will also be satisfied that there is a substantial connection with this country, but the English court still retains a discretion whether to grant the relief sought.

Further Reading

If you are a LexisPSL Subscriber, click the links below for further information:

1. Establishing jurisdiction and sufficient connection
2. Main proceedings, secondary and territorial proceedings
3. Which governing law? Restructuring Apcoa's debt.

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First published on LexisPSL Restructuring and Insolvency

Kathy Stones, solicitor in the Lexis®PSL Restructuring & Insolvency team.