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OUTER HOUSE, COURT OF SESSION
[2007] CSOH 165
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P198/06
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OPINION OF LORD DRUMMOND
YOUNG
in the cause
CHRISTOPHER MORRIS,
liquidator of BANK OF CREDIT AND COMMERCE INTERNATIONAL SA
in the petition of
THE BANK OF ENGLAND
for an order under section
426 of the Insolvency Act 1986
for
Directions and other orders in respect of the
closure of the winding up of Bank of Credit and Commerce International
SA in Scotland
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Act: Sellar QC; Shepherd & Wedderburn
3 October 2007
[1] On 14 January 1992 the Noter was appointed joint
liquidator in Scotland of Bank of Credit and Commerce International SA ("BCCI"). BCCI is a company incorporated under the law
of Luxembourg.
The Noter's appointment followed letters of request made to the Court of
Session under section 426 of the Insolvency Act 1986 by the High Court in England.
Those letters were granted on the application of the liquidators who had
been appointed to BCCI by the High Court.
The winding up of BCCI in England has been the primary winding up
in the United Kingdom.
BCCI is, however, also being wound up globally by the courts in Luxembourg, the country of its
incorporation. The winding up has
proceeded since 1992, and the Noter now seeks certain directions and other
orders from the Court of Session in order to close the process in Scotland.
[2] At
this point it is convenient to summarize the history of the winding up in Scotland. A number of insolvency practitioners have
held office with the Noter as joint liquidators in Scotland of BCCI. The last joint liquidator was removed from
office by order of the Court dated 15 December
2004,
and since then the Noter has been the sole Scottish liquidator. Since the initial appointment the various
Scottish liquidators have duly carried out their duties. The Scottish winding up has been "ancillary"
in the sense that the only functions of the Scottish liquidators have been to
realize the assets of BCCI's Scottish branch and to make up a list of, and
adjudicate upon the claims of, BCCI's creditors in Scotland. In practice, the adjudication of the claims
of the Scottish creditors was performed through the agency of the English
liquidators, and the claims of Scottish creditors were filed in the English
winding up. The Scottish creditors have
obtained distributions from that the English winding up and the Luxembourg winding up.
[3] In
order to co-ordinate the English winding up and the Luxembourg winding up a
pooling arrangement has been entered into by the liquidators in each of those
jurisdictions. In broad terms, the
effect of that arrangement was that all funds realized from the assets of BCCI
were "pooled" and distributed by the Luxembourg liquidators among all of
its creditors, wherever situated. Those
distributions have been on a pari passu basis.
That arrangement applies also to two
related companies, BCCI Holdings (Luxembourg) SA, incorporated in Luxembourg, and BCCI (Overseas) Ltd,
incorporated in the Cayman Islands. The pooling
arrangement was subject to a qualification in relation to the English winding
up. This involved the English
liquidators giving effect to rights of set off and other preferential rights
which English law gave to the creditors in the English winding up; similar rights were not conferred by the law
of Luxembourg. The English liquidators retained sufficient
assets to give effect to those rights of set off, and have made appropriate
distributions to achieve that end.
[4] The
pooling arrangement was also subject to a qualification in the Scottish winding
up. In order to ensure that the Scottish
creditors were not prejudiced by the arrangement, particularly in relation to
rights of set off available under Scots and English law but not the law of Luxembourg, the Court of Session
issued a letter of request to the High Court under section 426. That request asked the High Court to authorize
the English liquidators to give the Scottish creditors rights in the English
liquidation which were broadly the same as they would have had if they had been
creditors in that process. That
authority was to be conditional on the Scottish liquidators transferring the
proceeds of their realisation of BCCI's assets in Scotland to the English
liquidators. The High Court made such an
order on 6 August 1996. A further order of the Court of Session dated
13 December 1996 authorized the Scottish
liquidators to transfer the realization proceeds to the English liquidators.
[5] The
main asset at the Scottish branch of BCCI was its loan book. Following their appointment, the Scottish
liquidators took action to recover the outstanding loans. All known assets of BCCI in Scotland have now been realized and
transferred to the English liquidators in accordance with the order of 13 December 1996. Those assets have been pooled and
distributed, in accordance with the pooling arrangement and the qualifications
designed to give effect to rights of set off.
[6] Following
the foregoing procedures the work of the Noter and his staff has, in effect,
been completed. It is the Noter's intention
to bring the Scottish liquidation to a close as soon as reasonably
practicable. By further orders dated 8 February 2006 and 21 November 2006 the Court of Session
approved the accounts of the Scottish liquidators and their remuneration.
[7] It is against
the foregoing background that the present note has been presented. The principal order sought is a direction
that the Noter is not obliged by section 146 of the Insolvency Act 1986 to
summon a final meeting of the creditors of BCCI who dealt with its Scottish branch
and are creditors in the Scottish winding up.
Section 146(1) is in the following terms:
"[I]f it appears to the
liquidator of a company which is being wound up by the court that the winding
up of the company is for practical purposes complete..., the liquidator shall
summon a final general meeting of the company's creditors which --
(a) shall
receive the liquidator's report of the winding up, and
(b) shall determine whether
the liquidator should have his release under section 174 in Chapter VII of
this part".
Thus the normal rule is that, on completion of a
winding up, the liquidator should call a final meeting of the company's
creditors to receive the report of the winding up and determine whether the
liquidator should obtain his release.
Section 146(1) is supplemented by rule 4.31 of the Insolvency
(Scotland) Rules 1986, which makes a
number of ancillary provisions relating to the final meeting in a winding up.
[8] The
wording of section 146(1) is, on its face, mandatory. The critical question, however, is whether
its terms are mandatory in an ancillary winding up. The concept of an "ancillary winding up" is
recognized in Scots law, although it is not mentioned expressly in the
Insolvency Act 1986 or any predecessor of that Act. The only reported Scottish case on the matter
is Marshall, 1895, 22 R 697. In that case the Court of Session granted a
winding up order in respect of a company incorporated in the state of Iowa, and appointed official
liquidators to the company. The company carried
on business in both Scotland and England, the Scottish business
being conducted through a branch office in Edinburgh. The company was insolvent. It ceased to carry on business, and a
receiver was appointed over the assets of the company by a court in Iowa. Representatives of the creditors in Scotland and New York conferred with the
receiver, and agreement was reached on an arrangement for the realization of
the company's assets to a new company formed for the purpose. The petitioning creditors in Scotland wished the scheme of
arrangement to be carried into effect and requested the winding up of the
company for that purpose. The Court of
Session in granting the prayer of the petition expressed the view that the
proceedings in Scotland should be ancillary to
those in the United States (properly, the state of Iowa), the proper domicile of
the company.
[9] The
reason for making one winding up ancillary to another is reasonably clear. It is obviously desirable in the winding up
of a company that one court should have overall control in order to ensure that
the fundamental objectives of insolvency law are realized on a consistent
basis. Those objectives, at least as
recognized in Scotland and the remainder of the
English-speaking world, are to pay the expenses of the liquidation, to pay any
creditors with a preference or security duly recognised by the appropriate
system of law, and otherwise to divide the company's assets pari passu among the ordinary
creditors. In addition, in countries
that recognize rights of set off on insolvency, those rights must be given
effect; in the present case that was the reason for the qualifications relating
to the Scottish and English winding up proceedings. It is obviously important that the
fundamental objectives of insolvency law should be achieved consistently,
especially as their primary objective is securing the equal treatment of
creditors of each class. That is why a
single jurisdiction, normally that of the country or state of incorporation,
should have overall control.
Nevertheless, if the company has carried on business in other
jurisdictions it is likely that there will be significant assets and
liabilities there. The realization of
the assets, in particular, is likely to depend on the local legal system, and
the rights of creditors will probably also be governed by that system. In those circumstances it is preferable that
a local liquidator should be appointed because he will best be able to deal
with rights and obligations that arise under the local legal system. In order to secure the primacy of the
jurisdiction that has overall control, however, the winding up proceedings in
the local jurisdiction must be made ancillary to those in the former
jurisdiction.
[10] The
reasons for making one winding up ancillary to another appear to me to be
compelling, and I would be reluctant to impose any legal requirement that would
threaten the possibility of such procedure.
I was referred to a number of cases dealing with the existence of an
ancillary winding up in other jurisdictions, principally in England. I note that in England the concept was
recognized in Re Commercial Bank of South
Australia, (1886) 13 Ch D 174, and it was the subject of elaborate
discussion in Re BCCI (No 10), [1997]
Ch 213. In the latter case, which obviously
involved the English equivalent of the present winding up proceedings, it was
held that the High Court could not dispense with the mandatory requirements of
English insolvency law, in particular set off under the English Insolvency Rules
1986. The same conclusion was reached in
Re HIH Casualty and General Insurance Ltd,
[2006] 2 All ER 671, where it was held that the rule of pari passu distribution was mandatory; the result was that, to the extent that
arrangements concluded between the ancillary liquidator in England and the
principal liquidator in Australia might involve the transfer of funds from
England to Australia for distribution there, effect had to be given to the rule
of pari passu distribution in respect
of those funds. In Re BCCI (No 10) Sir Richard Scott V-C stated his
understanding of the law as follows (at [1997] Ch 246C-F):
"(1) Where a foreign company
is in liquidation in its country of incorporation, a winding up order made in
England will normally be regarded as giving rise to a winding up ancillary to
that being conducted in the country of incorporation. (2) The winding up in England will be ancillary in the
sense that it will not be within the power of the English liquidators to get in
and realize all the assets of the company worldwide. They will necessarily have to concentrate on
getting in and realizing the English assets.
(3) Since in order to achieve a pari
passu distribution between all the company's creditors it will be necessary
for there to be a pooling of the company's assets worldwide and for a dividend
to be declared out of the assets comprised in that pool, the winding up in
England will be ancillary in the sense, also, that it will be the liquidators
in the principal liquidation who will be best placed to declare the dividend
and to distribute the assets in the pool accordingly. (4) None the less, the ancillary character of
an English winding up does not relieve an English court of the obligation to
apply English law, including English insolvency law, to the resolution of any
issue arising in the winding up which is brought before the court. It may be, of course, that English conflicts
of law rules will lead to the application of some foreign law principle in order
to resolve a particular issue".
[11] I
respectfully agree with those propositions.
Nevertheless, in relation to the last of them, it seems to me that Sir Richard Scott
had in mind the resolution of issues of substantive law. That is clear from the immediately following
passage, in which he considers the rules of set off in an English insolvency
and concludes that, because those are substantive rules, they must be applied
by the English court. I do not think
that he had in mind rules of procedure, which may be subject to important
modifications in an ancillary winding up.
Thus, in Re BCCI (No 10) itself,
the court authorized English liquidators to transmit assets to the Luxembourg
liquidators in order to enable a dividend to be declared and paid, a procedure
which is clearly in contravention of normal liquidation procedures. Indeed, it seems to me that the critical
point is that the fundamental policy objectives discussed in paragraph [9]
above should always be recognized by the court conducting an ancillary winding
up. Subject to that, I am of opinion
that the rules of procedure may be modified in such a way as best achieves the
objectives of the ancillary winding up.
[12] In the
present case, I am of opinion that the Scottish winding up is clearly ancillary
to the English winding up, which in turn is ancillary to the principal winding
up in Luxembourg. The interlocutor that appointed Scottish
liquidators to BCCI does not in terms state that the winding up here is to be
ancillary to the English winding up.
Nevertheless, I think that that was clearly contemplated at the time,
and it is a feature that has been consistently followed in the practical
conduct of the winding up by the Court of Session. The result of the Court's interlocutor is
that all Scottish assets have been transferred, following realisation, to the
English liquidators and have been subject to the pooling arrangements referred
to above. Although their claims were
adjudicated by the Scottish liquidators, Scottish creditors have participated
in those pooling arrangements and have participated fully in dividends paid by
the Luxembourg liquidators and the English
liquidators. They will continue to
participate in any future dividends that may become payable.
[13] I
understand that when the English liquidation is, for all practical purposes,
completed, the English liquidators may require to hold a meeting under
section 146. Such a meeting could
be attended by all creditors who had filed claims in the English winding up,
including the Scottish creditors.
Moreover, when the Luxembourg winding up is completed,
the procedures stipulated by the law of Luxembourg for its formal closure will
be undertaken. In these circumstances
counsel for the Noter contended that no practical advantage would be achieved
through the holding of a final meeting under section 146 in Scotland. I was informed that the cost of such a
meeting was likely to be approximately г20,000.
There are approximately 240 Scottish creditors whose admitted claims
amount to approximately US$127 million (г68.5 million) in total. Of that total sum approximately 95% is owed
to 19 creditors, whose claims are each greater than $1 million. All but two of these creditors are local
authorities. 12 of those 19 creditors,
who represent 30% of the total claims of the Scottish creditors by value, have
confirmed in writing to the Noter that they support an application to dispense
with a final meeting of the Scottish creditors.
The Noter has received verbal communication from two other creditors
that they support such an application; those
creditors' claims represent a further 38.6% of total claims in Scotland. None of the 19 creditors has indicated that it
opposes an application to dispense with a final meeting of the Scottish
creditors.
[14] In the
foregoing circumstances I am of opinion that I should dispense with the
obligation to hold a final meeting under section 146 of the Insolvency Act
1986. The Scottish winding up has
proceeded on an ancillary basis, with both assets and claims being transferred
to the English winding up. It seems to
me that no useful purpose would be served by a Scottish final meeting, because
of the ancillary nature of the winding up.
I am of opinion that I may dispense with any procedural provision that
would not serve any useful purpose in such a winding up. That is so notwithstanding the apparently
mandatory wording of a provision such as section 146(1). Such a provision is entirely procedural in
nature, and procedures that serve no useful purpose should if at all possible
be dispensed with. It is notable that in
the English cases discussed in paragraph [10] above the rules that were
held to be mandatory were rules of substantive law; moreover, they were rules that went to the
fundamental objectives of insolvency proceedings. The rationale of those cases does not apply
to rules that are merely procedural.
Counsel for the Noter very fairly indicated a contrary argument: statutory provisions that are otherwise
mandatory are implicitly qualified only so far as is necessary to give effect
to the ancillary winding up. In my
opinion that is too strict a rule. Rules
of procedure are not an end in themselves; they are designed to facilitate wider
objectives, and if they do nothing to achieve those objectives I consider that
they may, generally speaking, be dispensed with. I hold in particular that that approach
applies to section 146(1).
[15] The
Noter seeks two further orders in the event that I dispense with the holding of
a final meeting of creditors. The first
is to direct under rule 7.34(3)(a) of the Insolvency Rules 1986 that the
Noter should deliver all his books, papers and records of the winding up to the
liquidators appointed to BCCI in England.
The second is that the Noter should be removed from office as liquidator
of BCCI in terms of section 172(2) of the Insolvency Act 1986, such an
order to take effect from his delivering all his books, papers and records to
the English liquidators. I consider that
these orders are appropriate, and I have granted both of them.
