High Court decision may make it more difficult to bring claims against foreign parties under section 423 Insolvency Act (transactions defrauding creditors)

The High Court has held that a claim by a creditor under section 423 of the Insolvency Act 1986 does not fall within the jurisdictional gateway permitting service out of the jurisdiction at common law for claims "under an enactment which allows proceedings to be brought": Orexim Trading Limited v Mahavir Port and Terminal Private Limited [2017] EWHC 2663 (Comm).

There are conflicting first instance decisions in relation to the court's approach to the "enactment" gateway in the context of section 423. In this case, the court held that the Court of Appeal's decision in Re Harrods (Buenos Aires) Ltd (No.2) [1992] Ch 72 is binding authority that, to fall within this gateway, the enactment must indicate on its face that it contemplates proceedings against defendants outside the jurisdiction. Although the court noted that the present gateway is less explicit on this point than the gateway considered in Re Harrods, it held that the same approach should be adopted. The claimant has applied for permission to appeal.

If this approach is followed in other cases, it will be more difficult for creditors to bring section 423 claims in England and Wales against defendants domiciled outside the EU (jurisdictional gateways have no application where the recast Brussels Regulation applies), unless the defendant or claim has another connection to the jurisdiction. The reasoning could potentially be extended to other statutory claims, both under the Insolvency Act and other enactments.

John Whiteoak, a partner, and Andrew Cooke, a senior associate in our contentious restructuring, turnarounds and insolvency team, explore the decision below.

Background

The claimant (Orexim, incorporated in Malta) brought proceedings against the first defendant (MPT, incorporated in India) for breach of a settlement agreement, which contained an English law and jurisdiction clause.

Orexim also alleged that MPT was seeking to dispose of its assets so as to avoid any judgment being enforced against it, in particular by transferring ownership of its vessel, the Bon Vent, to the second defendant (Singmalloyd, a Singaporean company), which in turn transferred it to the third defendant (Zen, an Indian company).

Accordingly, Orexim also brought claims against MPT, Singmalloyd and Zen:

• to set aside the sale of the Bon Vent under section 423 of the Insolvency Act 1986, relating to transactions defrauding creditors. This section permits the English court to make such order as it thinks fit to (amongst other things) unwind a transaction entered into at an undervalue for the purpose of putting assets beyond the reach of a person who may at some time make a claim against the company. Claims under the section can be brought by an insolvency officeholder, such as a liquidator or administrator of a company, or by a creditor who is a victim of the transaction.
• for a declaration that the transfers were a sham, such that MPT retained ownership of the Bon Vent.

MPT could not challenge jurisdiction in respect of the claim for breach of the settlement agreement, as it contained an English law and jurisdiction clause.

However it (and Zen) challenged the court's jurisdiction in respect of the other two claims, applying to set aside the permission Orexim had obtained on an ex parte basis to serve those claims out of the jurisdiction. (Singmalloyd played no part in the proceedings.)

In order to obtain permission to serve outside the jurisdiction, Orexim needed to show that: (1) there was a good arguable case that the pleaded claim fell within a relevant jurisdictional gateway under CPR Practice Direction 6B; (2) the pleaded claim had a real prospect of success; and (3) England was the most appropriate forum for the claim to be heard.

MPT and Zen argued that Orexim could not establish a good arguable case that these claims fell within a jurisdictional gateway and, accordingly, permission to serve out should not have been granted.

Decision

The judge (His Honour Judge Waksman QC) set aside his earlier order, holding that Orexim could not bring the Insolvency Act claim or declaration claim in England.

The enactment gateway

Orexim first argued that the Insolvency Act claim fell within the jurisdictional gateway under paragraph 3.1(20)(a) of PD6B, which provides that the English court has jurisdiction in relation to a claim made "under an enactment which allows proceedings to be brought and those proceedings are not covered by any of the other grounds referred to in this paragraph."

Orexim contended that section 423 is such an enactment and there is no limiting factor to suggest the gateway does not apply – ie because the section does not limit the class of transferee defendant against whom a claim may be brought, whether by reference to location or otherwise. MPT and Zen argued that this was the wrong test; it was not enough that the section did not exclude the application of the gateway; rather, in order to rely on the gateway, the section must expressly confer a right to bring the claim against a person out of the jurisdiction.

This was a point on which there was earlier authority. In Re Harrods (Buenos Aires) Ltd (No.2) [1992] Ch 72, the Court of Appeal held, in the context of a minority shareholder's petition under what was then section 459 of the Companies Act 1985, that a provision had to state expressly that it was intended to have extra-territorial effect in order to fall within the predecessor of what is now paragraph 3.1(20)(a).

This approach was not followed by the High Court in Jyske Bank (Gibraltar) Ltd v Speldnaes [2000] BCC 16, where it was said (obiter) that a section 423 claim could be brought under the gateway considered in Re Harrods. However, Re Harrods was not cited to the judge in Jyske Bank. HHJ Waksman QC found that Re Harrods was binding on the judge in Jyske Bank and would have required a different result.

Re Harrods was applied to section 423 by the High Court in Banco Nacional de Cuba [2001] 1 WLR 2039. Because section 423 does not expressly state that it has extra-territorial effect, the High Court held that the enactment gateway could not be relied on when seeking permission to serve out of the jurisdiction. Although the gateway considered in Re Harrods was in different terms to the enactment gateway then in force (which HHJ Waksman QC considered was not materially different from the current gateway under 3.1(20)(a)), the judge concluded that Re Harrods was determinative on the point.

In another case, Erste Group Bank AG v JSC "VMZ Red October" [2013] EWHC 2926 (Comm), Flaux J concluded (without providing any detailed reasoning) that a claim under section 423 of the Act is "clearly" a claim under an enactment so that the gateway applied. When to the case went to the Court of Appeal, this had become common ground between the parties such that the point did not fall to be determined.

In the present case, HHJ Waksman QC held that Flaux J's judgment in Erste was wrong, noting that Re Harrods and Banco Nacional had not been cited to him.

Applying Re Harrods, paragraph 3.1(20)(a) required the relevant enactment to "at least indicate on its face" that it expressly contemplated proceedings against persons not within the jurisdiction, and that it was not sufficient that the enactment "give[s] a remedy in general cases … without any express contemplation of a foreign element." Section 423 does not expressly indicate any extra-territorial effect. The enactment gateway was therefore unavailable.

The judge suggested that this was not surprising. He said that "[i]t is one thing to stress the need for extra-territorial jurisdiction in circumstances where the relief is sought in connection with insolvency proceedings here in respect of an English registered company; but it is quite another where the claim has no such factor which intrinsically connects it to this jurisdiction."  The judge held that it was not enough to consider connection to England only when determining whether England was the most appropriate forum. The other gateways "generally have some feature which links the claim to this jurisdiction" and the enactment gateway should be no different.

The judge noted that the present gateway is in less explicit terms than the gateway in Re Harrods but, as in Banco Nacional, he considered the same approach should apply.

Other gateways

Orexim alternatively relied on the gateway in paragraph 3.1(4A), which provides that, where a claim is made against a defendant in reliance on one or more of the other gateways, a further claim can be served against the same defendant arising out of the same or closely connected facts. Orexim argued that the section 423 claim was such a "further claim"; it was secondary to the claim for breach of the settlement agreement.

The judge held that the two claims did not arise out of the same or closely connected facts and that this gateway was therefore also unavailable to Orexim. The claim for breach of the settlement agreement did not rely on a course of dealing encompassing the transfer of the Bon Vent – the facts were distinct.

Finally, in respect of its claim against Zen, Orexim argued that the gateway in paragraph 3.1(3), that Zen was a "necessary or proper party" to its damages claim against MPT, was available. The judge also rejected reliance on this gateway, on the basis that the claims against MPT and Zen did not involve a single investigation and there was no "common thread".

Having found that there was no gateway for the Insolvency Act claim, the judge concluded that the same analysis must apply to the declaration claim. As a result, Orexim would only be permitted to continue its claim for breach of the settlement agreement against MPT in England.

Comment

The decision may make it more difficult for creditors to make section 423 claims against defendants domiciled outside the EU, unless creditors commencing such a claim can identify an applicable gateway other than the enactment gateway. This may be the case where, for example, a transaction defrauding creditors is effected between defendants, at least one of whom is domiciled in England or can otherwise be served with proceedings here.

Given the uncertainty created by the High Court authorities, guidance from the Court of Appeal would be welcome. The judge's reasoning that the gateways should reflect an intrinsic link to England is difficult to apply to the enactment gateway – it is not immediately obvious why an enactment that expressly contemplates claims against foreign defendants has more connection to England than an enactment that does not.

The judgment potentially creates doubt in relation to claims under other provisions of the Insolvency Act which do not expressly state whether they have extra-territorial effect.

And indeed, this approach could have far-reaching consequences outside of the insolvency sphere, where claimants seek to persuade the court to permit service out of the jurisdiction of claims under enactments which do not expressly confer that right, even if previous authorities have proceeded on the basis that the provision was intended to have extra-territorial effect.

It seems, however, that other judges are not necessarily applying the same approach. In the recent decision in ED&F Man Capital Markets LLP v Obex Securities LLC [2017] EWHC 2965 (Ch), for instance, the High Court found that the court could permit service of an application for pre-action disclosure on a defendant in New York under the "enactment" gateway, without considering Re Harrods or the fact that the relevant enactment (section 33 of the Senior Courts Act 1981) does not indicate on its face that it is intended to apply extra-territorially.

The decision in Orexim is, in any event, unlikely to impact on claims against defendants within the EU, where the recast Brussels Regulation applies in place of the jurisdictional gateways, though the continued application of the Brussels Regulation is of course uncertain as negotiations between the UK and the EU in relation to Brexit continue.

Note: This decision was overturned on appeal. See our post on the Court of Appeal decision here.