28 November 2012
Rubin v. Eurofinance - a welcome clarification for the insolvency world
On 24 October 2012 the UK Supreme Court handed down its highly anticipated decision on the enforceability of foreign judgments in the case of Rubin v. Eurofinance S.A.  UKSC 46, reversing the previous judgment of the Court of Appeal which had significantly altered the landscape of cross-border insolvency.
The Supreme Court judgment dealt with two conjoined appeals raising similar enforcement issues, namely Rubin v. Eurofinance and New Cap Reinsurance Corporation v. Grant. Further, the Supreme Court considered written representations from the parties in a Gibraltar case relating to litigation concerning the Ponzi scheme perpetrated by Bernard Madoff.
The main issue
The main issue before the Supreme Court was whether the English courts would recognise and enforce insolvency orders under common law, in a case where the English defendant had not submitted to the jurisdiction of the primary overseas court and was not subject to the in personam (against the person) jurisdiction of that foreign court. Lord Collins, delivering the leading judgment, summarised the issue as follows:
“As a matter of policy, should the court, in the interests of universality of insolvency proceedings, devise a rule for the recognition and enforcement of judgments in foreign insolvency proceedings which is more expansive, and more favourable to liquidators, trustees in bankruptcy, receivers and other officeholders, than the traditional common law rule embodied in the Dicey Rule, or should it be left to legislation preceded by any necessary consultation.”
The Facts of the Cases
In Rubin v. Eurofinance, Eurofinance S.A. created The Consumers Trust, an English law trust. The scheme ran into financial difficulties and The Consumers Trust decided to seek protection by entering into bankruptcy proceedings in New York. The New York court appointed Rubin to serve as foreign representative on behalf of the trust, inter alia, to seek aid, assistance and co-operation from the English High Court to enforce its judgments against persons and entities residing in or owning property in Great Britain.
Rubin subsequently commenced adversary proceedings in New York, which were the equivalent of the undervalue and preference claims under sections 238 and 239 of the UK Insolvency Act 1986. The defendants to those proceedings, who were not resident in New York and did not submit to the jurisdiction of the New York court, did not defend the proceedings. Default and summary judgment were entered against them.
In the case of New Cap Reinsurance Corporation v. Grant, New Cap was an Australian reinsurer which provided reinsurance to a Lloyd’s Syndicate (the “Syndicate”). New Cap made payments amounting to almost US$6 million to the Syndicate pursuant to a commutation agreement shortly prior to New Cap entering into administration in Australia. New Cap subsequently went into liquidation.
New Cap obtained leave from the Australian courts to serve the avoidance proceedings on the Syndicate in London and effected service out of the jurisdiction. Under Australian law the payments to the Syndicate were unfair preferences and thus voidable transactions. The Syndicate did not enter an appearance in the Australian proceedings and judgment in default was given in favour of New Cap, which then sought to enforce that judgment in England.
Court of Appeal judgments
In Rubin v. Eurofinance, the Court of Appeal effectively altered the long-standing position, as contained at Rule 43 of Dicey & Morris (the leading academic text on the conflict of laws), that a foreign court would not enforce a judgment in personam if the defendant had not submitted to the jurisdiction. The Court of Appeal held that insolvency proceedings fell outside of the categories of judgments in personam and that judgments determining insolvency rights formed a special category of case. Consequently, in the absence of an appearance, it was held that judgments may still be enforced in avoidance type litigation irrespective of submission to the jurisdiction.
In reaching its decision in Rubin the Court of Appeal relied upon the decision in Cambridge Gas Transportation Corp. v. Official Committee of Unsecured Creditors of Navigation Holdings plc  UKPC 26, which summarised the concept of modified universalism: the Privy Council held that judgments in insolvency proceedings were neither judgments in personam nor in rem (against property), but formed a special category of case whose purpose was to establish a mechanism of collective execution against the property of the debtor.
The Court of Appeal in the New Cap case was bound by the decision of the Court of Appeal in Rubin and held that the Foreign Judgments (Reciprocal Enforcement) Act 1993 applied and that registration would not be set aside for lack of jurisdiction in the foreign court, because of the Rubin decision. It was not necessary in this case to decide whether the court’s power of assistance at common law was exercisable because the statutory power was available.
Supreme Court decision
The Supreme Court, by a majority of 4 – 1, overturned the Court of Appeal decision in the case of Rubin v. Eurofinance and the leading judgment of Lord Collins provides an invaluable and detailed analysis on the law relating to the reciprocal enforcement of insolvency judgments.
The Supreme Court held that there was no reason to class avoidance judgments relating to insolvency proceedings any differently to any other type of foreign judgment. In his judgment Lord Collins stated:
“A change in the settled law of the recognition and enforcement of judgments, and in particular the formulation of a rule for the identification of those courts which are to be regarded as courts of competent jurisdiction (such as the country where the insolvent entity has its centre of interests and the country with which the judgment debtor has a sufficient or substantial connection), has all the hallmarks of legislation, and is a matter for the legislature and not for judicial innovation. The law relating to the enforcement of foreign judgments and the law relating to international insolvency are not areas of law which have in recent times been left to be developed by judge-made law.”
As a result of the Supreme Court decision it is now clear that there is no separate rule for judgments given in insolvency proceedings. When enforcing foreign insolvency orders at common law in England it is necessary to meet the test set out in Rule 3 of Dicey & Morris. Consequently, foreign officeholders will have to show that the judgment debtor:
- Was present in the foreign jurisdiction at the time proceedings were instituted;
- Was the claimant or the counter-claimant in the foreign proceedings;
- Had submitted to the foreign proceedings by voluntarily appearing; or
- Had submitted to the foreign proceeding by agreement.
In reaching its decision the Supreme Court held that the Cambridge Gas case was wrongly decided and that prior to that case there had been no suggestion that there might be a different rule for judgments in personam in insolvency proceedings and other proceedings.
The decision in New Cap was upheld on the grounds that the Syndicate submitted to the jurisdiction of the Australian court, such that the Australian court had in personam jurisdiction over the Syndicate. Importantly, the Supreme Court held that by the Syndicate submitting proofs of debt in the liquidation of New Cap and participating in creditors’ meetings it had submitted to the jurisdiction of the Australian court, and accordingly the judgment was enforceable.
The two main principles derived from the Supreme Court judgment are that the enforcement of insolvency proceedings will be treated in the same way as other foreign judgments, and that participating in foreign insolvency proceedings (for example by submitting a proof of debt or attending a creditors’ meeting) is likely to be sufficient for the Court to find that a party has submitted to the jurisdiction of the foreign court.
The decision of the UK Supreme Court provides welcome relief, particularly for offshore jurisdictions such as Guernsey and Jersey, in that the connection between offshore entities and the main commercial centre subject to insolvency proceedings may be sufficiently limited to allow offshore entities a greater ability to refuse to participate in the onshore insolvency process. If the Court of Appeal judgment had been upheld these entities would have been subject to the jurisdiction of a foreign court with which it may have had no or very little involvement.
The decision re-asserts the importance of territorial limits in insolvency proceedings and clarifies the common law position on the enforceability of judgments following the uncertainty that arose as a consequence of the Court of Appeal judgment.
It is important to note, however, that a party seeking to benefit from a liquidation process in a foreign jurisdiction may be put in a difficult position, as by attempting to establish claims as a creditor (i.e. by submitting proofs of debt) it is likely that the court will find that they have submitted to the jurisdiction of the foreign court. That conundrum will continue to arise with the plethora of litigation now underway or contemplated worldwide as a result of the collapse of numerous high profile Ponzi schemes and financial institutions.
Please note that this briefing is only intended to provide a very general overview of the matters to which it relates. It is not intended as legal advice and should not be relied on as such.
© Carey Olsen 2012