Sandbags at dawn: administration of Scottish company has priority over foreign liquidation proceedings

The Court of Session has confirmed that the administration in Scotland of a Scottish company will take priority over an Indian liquidation of the same company, regardless of where the company’s business and assets are situated. The Court has also confirmed that the validity and enforceability outside the UK of a floating charge is irrelevant to the validity of an administrator’s appointment in Scotland under that floating charge. The decision provides the holders of floating charges granted by a Scottish company with reassurance that an administrator appointed to the company in Scotland is able to sell assets situated abroad.

Background

Hooley Limited v The Victoria Jute Company Limited and others [2016] CSOH 141 concerned three companies incorporated in Scotland but carrying on business in India, relics of Scotland’s jute trade in the late 19th century. Hooley appointed an administrator to those companies in Scotland in 2011 and 2012 and bought their business and assets from the administrator. The three companies were already the subject of complex proceedings in India aimed at recovering debts due to their employers’ pension funds. One of the companies was in liquidation in India and the others were subject to an Indian “special management” regime.

A creditor in the Indian proceedings took issue with the sale to Hooley by the administrator. Hooley accordingly asked the Court of Session to confirm that the contracts by which it had bought the companies’ business and assets from the administrator in Scotland were effective. The creditor argued in return that the Scottish administration (and therefore the sale) should not be given priority if it would interfere with the Indian liquidation proceedings. They also sought to challenge the validity of the administrator’s appointment to two of the three companies.

Substantive issues

The first issue for the Court was whether the existence of a non-UK winding up could limit the powers of a validly appointed administrator of a Scottish company. The court considered whether the administrator’s powers were only exercisable to the extent that their exercise was recognised as legally valid by the law of that non-UK jurisdiction.

The court then considered the validity of an administrator’s appointment, in circumstances where a Scottish company’s whole property is situated in, or governed by the law of, a non-UK jurisdiction and that company has granted a floating charge over all of its property. The issue was whether the law of the non-UK jurisdiction had to recognise the floating charge as legally valid or enforceable before it could be used to appoint an administrator in Scotland.

The court’s opinion

The Court of Session confirmed for the first time that the principle of “modified universalism” should be recognised by Scots law and applied in this case. The principle provides that the courts in the place of a company’s incorporation should be recognised as having primary jurisdiction worldwide for the winding up of its affairs, notwithstanding territorial limits. The court concluded, applying the principle, that the insolvency proceedings taking place in India were ancillary to the administration proceedings in Scotland, where the companies were incorporated. The powers of a validly appointed administrator to a Scottish company were therefore not limited by the Indian winding up.

The court also confirmed that the question of whether a person is entitled to appoint an administrator in the UK under a floating charge is limited to looking at two points only: first, that the terms of the instrument creating the floating charge allow it and, second, that an event has occurred which allows the appointment. There was no need for an inquiry into the validity and practical enforceability of the floating charges under Indian law, even where the whole of the companies’ property was situated in India.

Comment

The Court’s decision is helpful for insolvency practitioners and lenders involved in insolvencies of Scottish companies with a cross-border aspect, particularly those involving assets located in jurisdictions out with the European Union. An administrator can be certain that insolvency proceedings elsewhere will not prevent them from selling the company’s assets under Scots law. For the purchasers of such assets, however, the question remains as to whether that sale will be recognised in the foreign jurisdiction.

Interestingly, the Court expressly rejected the suggestion that the location of a company’s business and assets abroad might mean that foreign insolvency proceedings should have primacy. The same might not be the case if the non-UK jurisdiction were a member state in the European Union. In those circumstances, the location of a debtor’s “centre of main interests” would have to be taken into account in determining which proceedings had priority and that might not always be the place of incorporation.

Further information on cross-border insolvency laws applicable to the UK, including those regarding other EU jurisdictions, and the impact that Brexit has on these can be accessed here.