Welcome to the “summer” edition of theDigest.Well its been a pretty momentous few

months since the last Digest. Almost as soon asthe last issue went out the Eurozone crisis gotworse. The Greek elections produced noGovernment so the Greeks had to vote againcausing much instability in Europe aboutwhether they were staying in or out. Secondtime around they got a Government but manystill question how long Greece can stay in forand what the knock on effects will be. And inthe meantime the Spanish banks needed ahuge bailout as well. And now there arequestions about whether Spain itself needsone. And who is next? These are all big bills forthe Germans to pick up – and Angela Merkeldoes not seem very keen on doing it whateverthe IMF or the G20 urge. Then we have our own Mervyn King looking

very gloomy and saying that over the recentpast the outlook for the UK has worsened as aresult of turmoil in the Eurozone. The countryis, of course, already in a second recession. Butit is not just Europe Mr King seems to beworried about. Asia causes concern. And evenAmerica. One asks what is going to happen?That seems to be very difficult to answer. All inall we seem to be in uncharted territory.So what else has been happening to Britain?

A bankers’ Libor fixing scandal, the resignationof Bob Diamond and more QE (another £50billion) is the perhaps less than good newsfrom the City. However, the Diamond Jubileeseems to have gone down pretty well,although the river pageant was very wet (andthe BBC copped it for its coverage). Irelandwent early in Euro 2012. England went a bitlater (but not much and on penalties). Therehas been masses more rain and for many

unfortunate people some pretty extraordinaryflooding. Indeed, there has now been so muchrain that all of the hosepipe bans have gone.What a lovely summer we have had. But the rain was not enough to stop the

England cricket team beating Australia (alwaysgood to record). Nor was it enough to stopFederer beating Andy Murray once theWimbledon centre court roof was closed. Andnow we have the Olympics! Time to escapethe likely chaos in London... So what have we got for you in this edition

of the Digest? Firstly, an article by SimonMortimore QC on systemically importantfinancial institutions. Secondly we have anarticle by Hannah Thornley on using HumanRights concepts in company law. Thirdly wehave an article by David Marks QC on possiblereforms in relation to the EC Regulation. Nextwe have the usual Case Digests but with adifferent editor this time: Lloyd Tamlyn, whohas kindly agreed to share the burden ofmaking sure you get all of these with HilaryStonefrost. Finally we of course have news inbrief, diary dates and the now infamous SouthSquare challenge.I hope that you enjoy reading this issue of

the Digest as much as I know people haveenjoyed previous issues. As always if you findyourself reading it and you are not on our listplease just send an email to my PA,kirstendent@southsquare.com asking to beadded and we will do that. Please also emailKirsten if your contact details have changed sothat we can make sure all those on the listcontinue to receive the latest issue.Finally all members of Chambers at South

Square join with me in wishing you a veryhappy summer.

David Alexander QC, Editor

Oh what a lovelysummer!

IN THIS ISSUE

FEATURE ARTICLE

Resolution powers for SIFIs and the rule of law p2

CASE DIGESTS

Banking and Financial Services p8

Civil Procedure p10

Commercial court p10

Company Law p11

Corporate Insolvency p13

Personal Insolvency p19

FEATURE ARTICLE

Using Human Rights concepts in company law p20

FEATURE ARTICLE

Possible reforms in relation to the EC Regulation p26

NEWS IN BRIEF p36

SOUTH SQUARE CHALLENGE p42

AUGUST 2012 A REGULAR REVIEW OF RELEVANT NEWS, CASES AND ARTICLES FROM SOUTH SQUARE BARRISTERS

SOUTH SQUARE DIGEST IS PUBLISHED BY SOUTH SQUARE BARRISTERS,AT 3-4 SOUTH SQUARE GRAY’S INN, LONDON WC1R 5HP. TEL 020 7696 9900. PUBLICATION PRINT AND PRODUCTION BY WENDOVER PUBLISHING. TEL 01428 658697.

2

to refer to the situation where a govern-

ment or person makes money available to

a failing business to save it from

collapse.6 It is interesting to note that no

such meaning is given in the Oxford

Shorter English Dictionary (2007). That

identifies many interesting meanings of

the noun and verb “bail”, but none

comes close to describing the rescue of a

failing business. Perhaps the nearest is the

use of the verb “bail” to describe the

process of scooping water out of a boat,

so that the boat remains afloat. This is

precisely the opposite of what happens in

a financial bailout, where money is

poured into the failing business to keep it

afloat. Where the verb “bail” is followed

by “out” it means “jump out of an air-

craft, make an emergency descent by

parachute, or (of a surfer) leave the surf-

board”, which may be a useful metaphor

for the conduct of some less scrupulous

directors of failing businesses, but does

not describe a financial bailout. I think we

can deduce from this that the usage of

the noun “bailout” to describe the rescue

of a failing business is of recent origin

and that it comes from America.

What then does the noun “bail-in”

mean? The short answer is that it is the

opposite of “bailout”. It is a tool or

power for resolving a financial institution

in financial difficulties, which is recom-

mended by the FSB in its Key Attributes

On 18 June 2012 I had the great good

fortune to be the only practicing member

of the English Bar invited to attend a

Cross-Border Resolution Symposium

organised by the Bingham Centre of the

Rule of Law.1 The purpose of the

Symposium was to discuss the recently

published proposals for resolving the

affairs of financial institutions that are

“too big to fail” without exposing

taxpayers to loss and instead ensuring

that losses are absorbed by shareholders

and creditors. Sadly, but inevitably, the

symposium took place under Chatham

House rules, so that I am not able to share

with the readers of the Digest the insights

of the experts from England, Europe and

the USA who attended.2 What I can do is

discuss some of the resolution powers

that the authorities soon may have at

their disposal to resolve the affairs of

systemically important financial

institutions (“SIFIs”). When a SIFI faces

financial difficulties the objectives are to

protect the market from systemic

disruption and to protect depositors. To

achieve those objectives the rights of

other creditors and shareholders may

have to be sacrificed. One of the most

potent new resolution powers for

achieving those objectives is the “bail-in”

power, which is intended to become

available to the resolution authorities in

2018.3

Resolution powers forSIFIs and the rule of lawSimon Mortimore QC discusses proposals for new resolution powers for systemically

important financial institutions.

Some definitionsWhether a financial institution is too big

to fail is a matter of judgment. The

largest of such institutions are called “G-

SIFIs”, because they are global systemi-

cally important financial institutions. The

Financial Stability Board (“FSB”) has iden-

tified 29 G-SIFIs: eleven are incorporated

in Euro countries, eight in the USA, four

in the UK, three in Japan, two in Switzer-

land and one in China.4 The four UK G-

SIFIs are Barclays, HSBC, Lloyds Banking

Group and Royal Bank of Scotland, but

several of the G-SIFIs incorporated abroad

have a significant presence in the UK. In

addition the authorities in each country

will regard other financial institutions as

SIFIs since they are systemically important

to it.5 No one could doubt that the four

English G-SIFIs are systemically important

to the UK, but there are no objective cri-

teria by which to assess whether a finan-

cial institution is a SIFI. That is a matter

left to the judgment of the resolution au-

thorities, which may change from time to

time and be heavily influenced by the

pressures of the moment. Consider

Metrobank. Is it a SIFI? If is not yet system-

ically important, may it become so in the

future, and if so when? The issue is impor-

tant because of the proposed new regime

for handling SIFIs in financial difficulty.

The noun bailout, when used in a fi-

nancial context, is generally understood

1/. Professor Ian Fletcher of South Square was also present.

2/. Professor Sir Jeffrey Jowell, the Director of the Bingham Centre was chairman and the discussion leaders were Professor Howell Jackson of Harvard Law School, Professor Rosa Lastra of

Queen Mary, University of London, and Charles Randell of Slaughter and May.

3/. In the UK the resolution authorities are the Bank of England, the Treasury and the Financial Services Authority (“FSA”), which will be replaced by the Prudential Regulation Authority and

the Financial Conduct Authority when the Financial Services Bill 2012 is enacted and comes into force.

4/. Press Release dated 4 November 2011 of the FSB: Policy Measures to Address Systemically Important Financial Institutions.

5/. So the Irish government considered that Bank of Ireland and Allied Irish Banks were too systemically important to it economy to be allowed to fail.

6/. See Black’s Law Dictionary (9th ed, 2009): “a rescue of an entity, usually a corporation or an industry, from financial trouble”.

� �

3

AUGUST 2012

of Effective Resolution Regimes for Finan-

cial Institutions, published in October

2011 (“Key Attributes”), and taken up by

the European Commission in its draft di-

rective establishing a framework for the

recovery and resolution of credit institu-

tions, published in May 2012 (the “Draft

Directive”). These propose that the reso-

lution authorities should have power to

write down the debt of a failing financial

institution or convert it into equity. In

other words debt is scooped out of the

sinking vessel so that it can re-float; so we

are back with one of the traditional

meanings of the verb “bail” in the Oxford

Shorter English Dictionary.

There is no established meaning of the

word “resolution” when used in the con-

text of failing SIFIs, but it is generally un-

derstood to mean the exercise by the

authorities of their powers to deal with a

SIFI in financial difficulties to preserve the

essential functions of its business and

avoid systemic damage.

It is evident that the “bail-in” power

represents a serious incursion by the reso-

lution authorities into creditors’ rights

and it is not surprising that the proposed

reforms for dealing with failing financial

institutions have attracted the interest of

the Bingham Centre for the Rule of Law.

To some extent the “bail-in” power has

been made law in the USA by the Dodd-

Frank Act 2010. In his recent Reith

Lecture7 Niall Ferguson held up this Act

as an egregious example of bad regula-

tion, citing not just the vast number of

new regulations to which banks are made

subject, but also the power of the Treas-

ury Secretary and the Federal Deposit In-

surance Corporation, subject only to the

most limited judicial review, to seize con-

trol of a failing firm if they agree that its

collapse would cause general instability.

Before returning to consider the impli-

cation of the “bail-in” power, it is worth

going back to see how bank failures were

dealt with in the recent past.

UK bank failures in the 1990sThe property crash of the early 1970s

brought down several “tertiary banks”

such as David Samuel Trust Ltd, but none

was big enough to cause systemic

problems. The 1990s saw two high-

profile, but contrasting, banking collapses

which did not create systemic risk and

which were dealt with under normal

insolvency procedures.

The first was Bank of Credit and Com-

merce SA (“BCCI”),8 a Luxembourg bank,

which carried on its main business in Eng-

land. It had 34 branches in England and

had many deposit customers. Just before

lunch on 5 July 1991 the Bank of England

obtained the appointment of provisional

liquidators, who closed down the business

of BCCI. The reason the Bank of England

petitioned for the winding up of BCCI was

SIMON MORTIMORE QC

that it had received an accountants’ re-

port which showed that over several years

BCCI had engaged in fraud and dishon-

esty. It was a rotten bank. In January 2002

BCCI was ordered to be wound up in Lux-

embourg and England, with a deficiency

of the order of US$9.25 billion, making it

the largest UK bankruptcy up to that time.

A wave of litigation followed, including

criminal proceedings against some of

those responsible for the frauds. Eventu-

ally unsecured creditors received dividends

of more than 90%.

One Sunday night in February 2005 Bar-

ings, one of the most venerable names in

� �

7/. The Darwinian Economy, 26 June 2012.

8/. Politely called the Bank of Competence and Credibility and, perhaps more accurately called the Bank of Crooks and Criminals.

4

the City, presented its own petition for ad-

ministration. It had been brought down

by the misconduct of a rogue trader in Sin-

gapore, Nick Leeson, who had incurred

massive losses on unprotected derivative

trades which had been exposed by the

Kobe earthquake. The deficiency was

thought to be about £1 billion. The struc-

ture of the Barings group was the familiar

one of holding company, intermediate fi-

nance companies which issued notes of var-

ious classes, and trading subsidiaries. This

made it possible to sell the trading business

in spite of the group insolvency. The im-

pediment to sale was uncertainty about

the extent of the liabilities under the deriv-

ative trades, but within a week or so the

administrators were able to sell the operat-

ing companies to ING for £1 plus a £62 mil-

lion buffer fund to cover some uncertain

obligations of Barings and the costs of the

administrations and liquidations of the

companies that were not sold.9 Several di-

rectors were disqualified for incompetence

in failing adequately to supervise Nick Lee-

son.10 Using the funds provided by ING,

claims for negligence were brought against

auditors which led to the senior creditors

of the liquidated companies receiving divi-

dends in the order 60%, while the subordi-

nated creditors and shareholders got

nothing.

Bailout: the traditional approachThe traditional view of bailout is that it

should be used where a firm of sufficient

importance to the market suffers from a

temporary liquidity problem, but is not

insolvent in the sense of suffering from “an

endemic shortage of working capital”.11

So, when the US hedge fund Long-Term

Capital Management LP suffered a US$4.6

billion loss following the Russian rouble

default in August 1998, the Federal Reserve

organised a US$3.625 billion bailout by

LCTM’s major creditors who took 90% of

the equity in the firm. The bailout

succeeded and within two years the banks

that financed the bailout were repaid.

By 14 March 2008 Bear Stearns could no

longer obtain liquidity from the market as a

result of its exposure to the failing sub-

prime market. It turned to the Federal Re-

serve Bank which was prepared to provide

a US$25 billion loan, secured on its assets,

for 28 days to enable Bear Stearns to obtain

a market solution. JP Morgan was prepared

to buy Bear Stearns for US$2 per share,

which was more than US$90 less than the

trading price of the shares a month earlier.

The share sale, which took the form of a

stock swap, was completed on 16 March

2008. In order to facilitate the sale the Fed-

eral Reserve Bank made a non-recourse

US$29 billion loan to JP Morgan, secured on

some of Bear Stearns’ more toxic assets. A

few days later a class action was launched

challenging the sale. JP Morgan then in-

creased its offer to US$10 per share, which

was approved at a shareholders’ meeting in

May 2008. By June 2012 the Federal Reserve

Bank’s non-recourse loan had been fully re-

paid with interest.

Bailout – no market solution The bailout position is rather different

where no market solution is available. This

was the position in New York in September

and October 2008 when Lehman, several

other US banks and the insurer AIG faced

acute financial difficulties. Lehman went

into Chapter 11, but the other institutions

were rescued by the US Government’s

US$700 billion Troubled Asset Relief

Programme. This was successful in

stabilising the financial system and it is

thought that the US Government’s net loss

may be of the order of US$30 billion.

Nor was there a market solution for

Northern Rock, the fifth largest UK mort-

gage lender and eighth largest UK bank by

market capitalisation. In August 2007 it be-

came unable to repay its money market

loans and the Bank of England stepped in

to provide it with liquidity support. This

did not calm the nerves of anxious savers

who on 14 September began a run on the

bank. At the time the deposit holders’ pro-

tection scheme only offered limited pro-

tection. To keep the bank in business the

Chancellor of Exchequer had to promise to

pay in full not only depositors, but all

other creditors. By December 2007 the

Bank of England had leant Northern Rock

£27 billion and the Treasury had given

guarantees to the order of £29 billion.12

In February 2008 Northern Rock was taken

into temporary public ownership,13 where

it remained until January 2012 when it was

acquired by Virgin Money.14 Northern

Rock’s shareholders lost everything,15 but

its creditors were saved and the Bank of

England loan is being repaid.

Northern Rock was certainly not a G-SIFI.

In fact it is debateable whether it was even

a SIFI. Perhaps judgments on what is strate-

gically important have changed since the

1990s. Governments are much more con-

cerned to protect the interests of deposi-

tors than they used to be. Depositors are

voters and students of politics will recall

that Gordon Brown had become Prime

Minister in June 2007 and the autumn of

that year was the time of the election that

never was. Northern Rock was undoubt-

edly a politically important financial institu-

tion (which could be called a PIFI).16

Governments are much more concernedto protect the interests of depositorsthan they used to be...

9/. Re Barings plc (No 7) [2002] 1 BCLC 401 at [6].

10/. Re Barings plc (No 5) [1999] 1 BCLC 433; [2000] 1 BCLC 523, CA.

11/. Re Cheyne Finance plc (No 2) [2007] 1 BCLC 741 at [51].

12/. R (SRM Global Master Fund LP) v Treasury Commissioners [2010] BCC 558 at [4], [18].

13/. Following the enactment of the Banking Special Provisions Act 2008.

14/. In 2010 Northern Rock was split into a “good bank”, Northern Rock plc, which carries on the banking business and a “bad bank”, Northern Rock (Asset Management) plc which holds

the more troubled assets.

15/. Subject to the outcome of an appeal to the Court of Appeal from a decision of Warren J, upholding a £nil valuation of the shares.

16/. In October 2008 the Government made an ingenious use of anti-terrorism legislation to rescue UK savers in the Icelandic banks’ Edge and Icesaver accounts, thereby exposing taxpayers

to the risk of loss. It is difficult to see how this intervention could be justified on systemic grounds.

� �

5

AUGUST 2012

In October 2008, following Lehman en-

tering administration in England, the Gov-

ernment had no choice but to provide a

bailout of Royal Bank of Scotland and

Lloyds Banking Group, which was in the

process of acquiring HBOS. These were un-

doubtedly G-SIFIs and the scale of their li-

abilities prevented a market solution. In

these cases the bailout took the form of

investment in share capital, not debt. As a

result the Government now owns about

84% of Royal Bank of Scotland and about

41% of Lloyds Banking Group. At the mo-

ment shares in these banks are trading at

a significant discount to the share price

paid by the Government, so that taxpay-

ers are facing a loss.

The two unsatisfactory features of a

bailout are (i) the exposure of the taxpayer

to loss if the bank fails to return to suffi-

cient good health so that the bailout

money can be recovered, and (ii) moral

hazard. It is a notable feature of the UK

bailouts of 2007 and 2008 that so far there

have been no proceedings to disqualify the

directors of the bailed out banks (although

recently the Secretary of State for BIS an-

nounced his intention to bring such pro-

ceedings against Fred Goodwin). That is in

marked contrast to what happened after

Barings went into administration.

UK reformIn order to increase the armoury of the

Bank of England, the Treasury and the FSA,

the Banking Act 2009 introduced a special

resolution regime for UK banks. This

consists of (i) three stabilisation options

under which all or part of the bank may be

transferred to a private sector purchaser, a

bridge bank or into temporary public

ownership, (ii) a bank insolvency under

which a bank liquidator is appointed to

protect the interests of eligible depositors

and also to wind up the bank, and (iii)

bank administration, where the business of

a bank is sold to a commercial purchaser or

transferred to a bridge bank and a bank

administrator is appointed to provide

support for the commercial purchaser or

bridge bank and, subject to that, to

conduct a normal administration. Soon

after the Act came into force, in March

2009 the Bank of England used these

powers to transfer the business of the

insolvent Dunfermline Building Society to

Nationwide. To cover the asset shortfall the

Treasury provided Nationwide with £1.6

billion cash, for which it would be a

creditor of Dunfermline.

More recently the Investment Bank Spe-

cial Administration Regulations 2011, made

under the Banking Act 2009, have intro-

duced a new special administration regime

for UK investment banks under which the

objectives are (i) the prompt return of

client assets, (ii) timely engagement with

market infrastructure bodies and authori-

ties, and (iii) rescue as a going concern or

winding up in the best interests of credi-

tors. These new regulations were soon put

to the test by MF Global, which entered

the new regime in November 2011. The

Lehman client money case shows that there

are likely to be real difficulties in identify-

ing what is client money and what belongs

to the firm.17

Progress towards further reform forresolving SIFIsIn April 2009 the G20-Leaders called for a

“review of resolution regimes and

bankruptcy laws in light of recent

experience to ensure they permit an

orderly wind-down of large complex cross-

border institutions”; i.e. G-SIFIs.

The FSB responded to the challenge and

in July 2011 published a consultative docu-

ment with recommendations and timelines

for the effective resolution of SIFIs. In Octo-

ber 2011 the FSB published Key Attributes

of Effective Resolution Regimes for Finan-

cial Institutions, which sets out the core ele-

ments that the FSB considers to be

necessary for an effective resolution

regime. It explains that the objective of an

effective resolution regime is to “make fea-

sible the resolution of financial institutions

without severe systemic disruption and

without exposing taxpayers to loss, while

protecting vital economic functions

through mechanisms which make it possi-

ble for shareholders and unsecured credi-

tors to absorb losses in a manner that

respects the hierarchy of claims in liquida-

tion”. In other words creditors and share-

holders, rather than taxpayers, should bear

the losses, but no one should be worse off

than they would have been in liquidation.

The G20-Leaders’ Final Declaration at the

Cannes summit on 4 November 2011 en-

dorsed the Key Attributes and said “We are

determined to ensure that no financial firm

is “too big to fail” and that taxpayers

should not bear the costs of resolution”.

Key Attributes, which runs to 41 pages,

describes the resolution regime that should

be available to deal with SIFIs that are no

longer viable or likely to be no longer vi-

able. One attribute of real practical value is

that at least all domestically incorporated

G-SIFIs should have in place a recovery and

resolution plan (“RRP”). Key Attributes cov-

ers a range of other important issues, but I

will concentrate on the general resolution

powers which the FSB considers that all au-

thorities should have at their disposal.18

Several of these powers are already avail-

able to the UK authorities in the Insolvency

Act 1986 or the Banking Act 2009, but oth-

ers would be new, if enacted. The Financial

Services Bill 2012, currently before Parlia-

ment includes amendments to the Banking

Act 2009. These amendments include a

power for the authorities to require SIFIs to

put in place RRPs, but they do not include

resolution powers to override the rights of

shareholders or to “carry out bail-in within

resolution”.

In May 2012 the European Commission

published the Draft Directive with a trans-

position deadline of 31 December 2014 for

all measures except the bail-in tool which

should not come into force until after 1

January 2018. Over 171 pages the Draft Di-

rective contains 97 Recitals, 117 Articles

and an Annex. It follows the Key Attributes

and covers the following matters:

1) Scope, definitions and authori

ties (Articles 1-3);

2) Preparation, including (i) recovery

and resolution planning, (ii) as

sessment by the authorities of

resolvability and preventative

powers and (iii) intra-group fi

nancial support (Articles 4-22);

3) Early intervention measures and

special management (Articles 23-

25);

� �

17/. [2012] 1 BCLC 487, SC.

18/. Charles Randell has written an illuminating article on the application of the Key Attributes to UK banks in Law and Financial Markets Review (January 2012, pages 39-51).

6

4) Resolution, including (i) objec

tives, conditions and general prin

ciples, (ii) valuation of the assets

and liabilities of the institution on

a fair and realistic basis, (iii) reso

lution tools (sale of business,

bridge institution, asset separa

tion and bail-in), (iv) write-down

of capital instruments, (v) resolu

tion powers, (vi) safeguards, (vii)

procedural obligations, and (viii)

right of appeal by way of judicial

review only (Articles 26-79);

5) Group resolution (Articles 80-83);

6) Relations with third countries

(Articles 84-89);

7) European system of financing

arrangements (Articles 90-99);

8) Sanctions (Articles 100-102);

9) Powers of execution (Article 103);

10) Amendments to other directives

(Articles 104-112); and

11) Final provisions (Articles 113-117).

In a statement to the House of Com-

mons on 14 June 2012 the Financial Secre-

tary to the Treasury welcomed the Draft

Directive.

This review of the progress of reform

shows that there is a strong political will to

bring the Key Attributes into effect in the

UK. Several of the reforms are already in

place under the Banking Act 2009 and oth-

ers will follow when the Financial Services

Bill is enacted. The introduction of the

bail-in power has the potential to trans-

form the way failing SIFIs are handled. In

theory the bail-in power will enable the

authorities to reconstruct a failing SIFI in

the interests of avoiding systemic damage

and of protecting depositors, without

going near a court. Administration and liq-

uidation procedures will be a last resort.

On the other hand, it should be recognised

that exercise of the three stabilisation

powers under the Banking Act 2009 does

not involve the court and may lead to

some creditors becoming separated from

the bank’s assets or part of them, so that

they suffer the same economic conse-

quences as they would suffer if their debts

were bailed-in and written off or con-

verted to equity.

The Key Attributes and the Draft Direc-

tive raise many interesting issues, but to an

insolvency lawyer the issue that stands out

concerns the overriding shareholders’ and

creditors’ rights in the interests of market

stability and depositors. This raises funda-

mental issues of the rule of law as identi-

fied by the late Lord Bingham in his book

The Rule of Law (2010), including: (i)

whether the rights of shareholders and

creditors of a SIFI are intelligible, clear and

predictable (including whether it is appar-

ent that the financial institution is a SIFI to

which the resolution powers apply); (ii)

whether there is sufficient justification for

the rights of creditors and shareholders

being resolved by the exercise of discretion

of the resolution authorities rather than

by application of law; and (iii) whether an

after the event application for judicial re-

view is an adequate remedy.

Overriding shareholders’ rights Paragraph 3.2(v) of Key Attributes says

that the resolution authorities should have

the power to override the rights of

shareholders and need not obtain their

approval of a transaction, recapitalisation

or restructuring. Article 56 of the Draft

Directive states that Member States should

ensure that resolution authorities have

those powers.

Where shareholders are “out of the

money” it is usually possible to carry out a

reconstruction without their involvement,

but that is not so where they continue to

have a real interest. The Key Attributes in-

dicates that in all cases shareholders should

yield to the greater good of avoiding sys-

temic disruption and accept the judgment

of the resolution authorities.

Before accepting the wisdom of this, it is

worth pondering on what happened in the

case of Bear Stearns. The Federal Reserve

Bank supported a sale of the firm at US$2

per share. Shareholders evidently had a le-

gitimate grievance about the price, since

within days JP Morgan increased the price

to US$10. Under the Key Attributes

regime, the shareholders would have had

no bargaining position with JP Morgan

and would have been left with the uphill

struggle of persuading a court on a judicial

review application that in liquidation of

Bear Stearns they would have got more

than US$2.

If shareholders in a SIFI fear that they

will be disenfranchised if it enters resolu-

tion procedures, they are likely to head for

the exit. This will lead to a crash in the

share price, which may trigger defaults,

precipitate the SIFI’s insolvency and make

resolution more difficult.

Overriding creditors’ rightsKey Attributes explains that the purpose

of the bail-in power is to achieve

continuity of the institution’s essential

functions, so avoiding systemic disruption,

by either recapitalising the institution, or if

that is not possible by capitalising a new

entity or bridge institution to which the

functions are transferred.19Where the

institution is subject to resolution by the

authorities, they should be able to carry

out “bail-in”, which involves (i) writing

down debt and equity to absorb losses,

but in a way that respects creditor

hierarchy and the “no creditor worse off

than in liquidation” principle, (ii)

converting debt into equity, and (iii)

crystallising contingent liabilities and

treating them as in (i) or (ii).20 The Draft

Directive contains detailed provisions

about the scope of the bail-in tool, the

minimum requirement for liabilities

subject to write-down and conversion

powers, the assessment by the resolution

authorities of the amount of the bail-in,

the treatment of shareholders, the

hierarchy of claims and safeguards so that

creditors and shareholders are no worse

off than they would have been under

normal insolvency proceedings.21

The writing down of debt or the conver-

sion of debt into equity are familiar fea-

tures of modern reconstructions. They are

achieved by obtaining the creditors’ con-

sent or by binding all creditors or class of

creditors through a scheme under Part 30

of the Companies Act 2006 or a voluntary

arrangement under Part I of the Insol-

vency Act 1986. These procedures involve

both creditor democracy and a measure of

court control. Under the Key Attributes

there will be no consultation with credi-

tors and their only access to court is subse-

quently by way of judicial review under

the “no creditor worse off than in liquida-

19/. Paragraph 3.2(ix). Article 37(2) of the Draft Directive.

20/. Paragraph 3.5.

21/. Articles 37-42 and 65.

� �

7

AUGUST 2012

tion” principle.22 In this connection the

creditor’s position will assessed as it would

have been “under normal insolvency pro-

ceedings immediately before the writing

down or conversion”.23

There is a serious question as to

whether giving the authorities the bail-in

power is necessary and whether it is likely

to reduce the risk of taxpayers bearing the

burden of insolvent SIFIs. If the bail-in

power cannot be used promptly its advan-

tages over the traditional procedures be-

come questionable. A bank, unlike other

businesses, cannot function if there are

doubts as to its ability to meet its engage-

ments. So there can be no delay in the

restoration of confidence and liquidity.

There are three particular features of in-

solvencies of a bank or other financial in-

stitution that are likely to impact on the

prompt and effective use of the bail-in

tool.

The first feature concerns liquidity, the

lack of which will have placed the financial

institution in difficulties. The writing off of

debt will only directly improve the institu-

tion’s liquidity if the debts written off in-

clude debts that are immediately due. In

this connection the Draft Directive ex-

cludes from the bail-in power many of the

debts that would be expected to be imme-

diately due: deposits, secured liabilities,

client money liabilities, debts with an orig-

inal maturity of less than one month and

employee, trade and tax liabilities.24 On

the other hand, the bail-in should improve

the institution’s balance sheet and this

may indirectly assist in attracting new liq-

uidity. In other words the bail-in may assist

in encouraging a bailout.

It may be worth considering whether

Northern Rock, Royal Bank of Scotland and

Lloyds Banking Group would have been

handled differently if the bail-in tool had

been available to the authorities. This

rather is doubtful. The write-down or con-

version to equity of Northern Rock debt

would not have calmed the fears of its de-

positors or solved its liquidity problem and

might have accelerated the financial crash

that reached its critical point a year later,

when Royal Bank of Scotland and Lloyds

Banking Group needed rescuing. By that

stage only the Government could save

them and the availability of the bail-in

power would have made no difference.

The second feature is the complexity of

the institution’s affairs and the difficulty of

segregating client assets from its own. This

has been a major problem in the Lehman

and MF Global administrations. It would

be optimistic to think that the analysis in

the RPP will be agreed by clients and other

creditors. Similarly creditors may not share

the institution’s view on the hierarchy of

claims. For example, Barings issued two ap-

parently similar series of notes, but after it

had gone into administration it emerged

that a slight difference of wording re-

sulted in holders of one series being credi-

tors of the business bought by ING, so that

they would be paid in full, while holders

of the other series were left behind as

creditors of the insolvent companies.

Therefore the resolution authorities may

require time to investigate the assets and

liabilities of the institution and even then

they may not have sufficient confidence to

exercise the bail-in power.

The third feature is that ultimate return

to creditors of a failed financial institution

tends to be high and the problem is one

of delay in returning money to creditors

and clients. Even BCCI ultimately produced

a dividend or unsecured creditors of over

90%. This means that the write down of

debt may not be justifiable, but a conver-

sion of debt for equity may be. While the

bailing-in of debt may help to resolve the

financial institution, it may spread the con-

tagion to the creditors who have been

bailed in who have to wait for their money

just as they would have done in insolvency

proceedings. This may lead to the systemic

disruption that the resolution authorities

sought to avoid.

How will creditors react to the risk of

their debts being bailed-in? They will not

be able to contract out, but they may be

reluctant to extend credit to a financial in-

stitution whose situation causes concern.

They may not be able to determine

whether or not the institution is a SIFI so as

to expose them to the risk of bail-in. If it is

a SIFI, creditors may have concerns about

the potential conduct of the resolution au-

thorities, particularly if they are called

upon to exercise their resolution powers in

circumstances of near chaos, as was the

case in the autumn of 2008.

There are two ways in which firms deal-

ing with a possible SIFI may be able to

achieve some protection from the risk of

bail-in. One way is to stipulate that any

obligations owed to the SIFI are not

payable if a debt owed by it is not paid or

is subject to bail-in.25 This is likely to raise

issues under the anti-deprivation

principle.26 Another way would be to

make contracts subject to a system of law

which would not recognise that the debt

has been discharged by being bailed-in

under English law.27 This may be difficult

to achieve, because the Key Attributes en-

visage recognition of the effectiveness of

the exercise of resolution powers in courts

in jurisdictions where G-SIFIs are found.

ConclusionIf it does nothing else, this short review of

the proposals for resolving SIFIs in financial

difficulties reveals that there are

fundamental issues about the proposals to

give resolution authorities discretionary

powers which may be used to override the

rights of shareholders and creditors. It is far

from clear that the bail-in power is

necessary or will be of practical value.

There is a nagging concern that this may be

an example of a bad case (the exceptional

financial crisis of 2008) making bad law.

There are fundamental issues about the proposals to give

resolution authorities discretionary powers which may be

used to override the rights of shareholders and creditors

22/. Paragraph 5 of Key Attributes and Articles 65 and 78 of the Draft Directive.

23/. Article 65 of the Draft Directive. Compare s 57(3) of the Banking Act 2009.

24/. Article 38(2) of the Draft Directive.

25/. Lomas v JFB Firth Rixson Inc [2012] EWCA Civ 419.

26/. Perpetual Trustee Co Ltd v BNY Corporate Trustee Service Ltd [2012] 1 AC 383, SC.

27/. Global Distressed Alpha Fund 1 Ltd Partnership v PT Bakrie Investindo [2011] 1 WLR 2038.

� �

CASE DIGESTS

8

CASE DIGESTS Edited by LLOYD TAMLYN

BANKING AND FINANCIAL SERVICES

LLOYD TAMLYN

One side effect of litigants’ desire to

litigate in this country is the reap-

pearance of the doctrine of piercing

of the corporate veil, as litigants

claim that jurisdiction clauses are

binding not only on the company

which actually agreed the clause, but

also the puppeteers who were pulling

the company’s strings.

The Court of Appeal in VTB Capital,

[page 11], has held, however, that

whilst the doctrine of piercing the

corporate veil does exist, its effects

do not extend to making puppeteers

parties to their puppet’s contracts.

The debate over the Minmar deci-

sion on the effects of failure to give

due notice before appointing admin-

istrators (Digests, passim) reappears

in this edition, providing two more

first instance decisions (Re Ceart Risk

Services, [page 14]; Re BXL Services,

[page 15]. HHJ Purle QC in Re BXL has

decided that it is time for the debate

to stop and that all first instance

Judges should take the same prag-

matic Virtualpurple line in holding

that absence of notice is a mere de-

fect. We shall see.

In the world of personal insolvency,

the Court of Appeal has reasserted

the primacy of the bankruptcy regis-

trars and chancery judges in matters

of bankruptcy in Sofia Arif, [page 19];

whilst (at first sight) the world turned

upside down in Bramston v Haut,

[page 19], where a bankrupt applied

to suspend his discharge on the basis

that he had failed to comply with his

duties to the trustee, whilst the

trustee himself opposed the applica-

tion. Lloyd Tamlyn

Digested by WILLIAM WILLSON

The Supreme Court has handed down

judgment in the Lehman Brothers Client

Money Application. The majority

dismissed the appeal by 3-2. Lord Dyson

gave the lead judgment for the majority

and held: (1) that the client money trust

arises upon receipt and not upon the

segregation of client money, irrespective

of whether the firm adopted the

“normal” or “alternative” approach to

segregation of client money; (2) that on

a firm’s insolvency all client money

identifiable, in whatever account of the

firm into which client money has been

received, is pooled for distribution; and

(3) that the client money pool is to be

distributed to all clients in accordance

with each client’s respective contractual

entitlement to have had client money

segregated for it at the date of pooling

and irrespective of whether any money

had in fact been so segregated or had

been recorded by the firm as having

been so segregated.

The first key issue was whether the

statutory trust arose upon the receipt of

client money or only upon its

segregation. It was common ground

that the “normal approach” did not

allow the firm any freedom to deal with

client money, so that the trust arose

upon receipt of the funds. The Supreme

Re Lehman Brothers Europe (in administration), [2012] UKSC 6,

Supreme Court (Lords Collins, Clarke, Dyson, Hope and Walker),

22 February 2012

Court held that the “alternative

approach”, which allowed a firm to

receive client money into its own

account for a time, was only one

method that a firm might adopt to

comply with its obligation to segregate

client money and that that method did

not affect or undermine the obligation

to hold client money as trustee from

the moment of receipt.

The second key issue was whether the

pool of client money constituted upon a

firm’s failure extended to all client

money, in whatever accounts, or only to

money which had been segregated as at

the date of pooling. No judge in the

ANTONY ZACAROLI QC

DAVID ALLISON RICHARD FISHER

9

AUGUST 2012

WILLIAM WILLSON

Supreme Court accepted the first

instance judge’s conclusion that money

outside the firm’s segregated account

was not pooled but might be traced

and claimed in equity. The majority held

that the pool extended to all client

money in whatever account.

The third key issue, and in respect of

which the Supreme Court was divided

sharply, was whether the pool of client

money should be distributed on a

‘claims’ basis or a ‘contributions’ basis.

The former required a distribution

relative to clients’ contractual

entitlements as at the date of pooling,

and irrespective of whether or not any

client money had been segregated for

a given client, whereas the latter

required a distribution relative to what

had been contributed by or for a client

and which remained identifiable as at

the date of pooling. The majority

favoured the claims basis whereas the

minority favoured the contributions

basis.

[Antony Zacaroli QC, David Allison,

Richard Fisher and Adam Al-Attar]

The claimants (“C”) applied for summary

judgment on their claim for breach of a

contract to purchase loan notes: the

defendants cross-applied for summary

judgment and/or striking out of all or

part of C's claim. D2 issued loan notes,

subject to the terms of a trust deed, and

D3 was later substituted as issuer. Under a

restructuring plan three proposals were

sent to creditors: C consented to the first

two amendments in return for a

payment. C claimed repayment of the

sums lent under the notes, plus damages

for breach of contract. The Ds sought to

strike out the claims by relying on a

clause in the trust deed that expressly

precluded direct action against the issuer.

C argued that (1) D2 was not discharged

from liability under the contract by the

substitution of D3; (2) D could not rely on

the no action clause where they were in

repudiatory breach, and they were

because the offer of a consent payment

was a bribe or illegal and amounted to

differential treatment of note holders

and was contrary to the principle of pari

passu. Held that D2 had been released,

the consent of note holders was not

Sergio Barreiros Azavedo & Anor v Imcopa ImportacaoExportacao e Industria de Oleos Ltda (2) Imcopa International SA(3) Imcopa International Cayman Islands Ltd [2012] EWHC 1849(Comm) (Hamblen J), 20 May 2012

required for substitution and there was

no real prospect of success against D2.

Consent payment offers were not bribes

when made openly and where no note

holders were incapacitated from voting,

The payments were not inconsistent with

the pari passu requirements. There was

nothing in the trust deed or notes

preventing the payments. Finally, by

voting in favour of the first two payments

C were in effect acknowledging that the

payments were lawful and restructuring

had been approved by the Brazilian

courts [Ben Valentin]

BEN VALENTIN

The appellants, Maybourne Finance

Limited (“MFL”) and National Asset Loan

Management Limited (“NAMA”)

appealed against a decision on a

preliminary issue of law concerning the

correct interpretation of a clause in a

facilities agreement (“Clause 40.3”).

Two banks had loaned money to a

company (“C”). NAMA acquired the

beneficial interest in the loan, while the

banks remained the legal owners of the

loan. The facilities agreement was then

amended and extended. NAMA and the

two banks subsequently purported to

transfer, by way of novation, all their

interests under the agreement to MFL.

The central issue on appeal was

whether certain transfer requirements

in Clause 24 of the facilities agreement

(including a requirement for

consultation) were disapplied by Clause

40.3. Held that NAMA had been formed

to acquire, and then to sell, many of the

bank loans which were causing

difficulties to the Irish banks, and both

the arrangements set out in the

National Asset Management Agency Act

2009 (the “NAMA Act”) to achieve that

aim, and their implementation, had to

be completed as quickly as possible.

NAMA's objective under the NAMA Act

was to achieve the best financial return

as soon as practicable. If Clause 24.3

applied to a disposal such as that

McKillen v Maybourne Finance Ltd & Ors [2012] EWCA Civ 864,

Court of Appeal (Neuberger MR, Toulson, Lewison LJJ)

effected by the instant transfer, in

effect NAMA would have voluntarily

accepted an impediment in the

agreement to effect a transfer or

disposal of the loan which was

inconsistent with its statutory right.

MFL and NAMA were right as to the

effect of Clause 40.3 if Clause 24.3

would otherwise have applied. Given

the commercial and statutory

background, the restrictions in Clause

24.3 would not have been expected to

apply to any disposal or transfer by

NAMA. In any event, MFL and NAMA's

interpretation of Clause 40.3 was more

natural than that advanced by C.

[Robin Dicker QC; William Willson]

ROBIN DICKER QC

CASE DIGESTS

10

Amatra, Ajial, AA and GA commenced

an FINRA arbitration in NY seeking

damages from CGMI for losses allegedly

sustained under options transactions

structured by Citigroup. CGML, as the

Citigroup entity which was the party to

the options transactions, commenced a

claim before the English court against

Amatra, Ajial, AA and GA for negative

declarations that neither it nor its

Affiliates (including CGMI) were liable in

respect of the options transactions,

relying on a number of statements of

non-reliance in the relevant contractual

documentation entered into by Amatra,

Ajial, and AA. The Court gave CGML

permission to serve the defendants

outside the jurisdiction.

Each of the defendants applied to set

aside the order for service outside the

jurisdiction in respect of the claim of

CGML for declaratory relief that its

Affiliates were not liable. Despite

deciding that CGML had sufficient

standing to seek the Affiliate declarations

and that the Affiliate declarations fell

within the jurisdiction clauses in the

agreements, the Judge set aside the order

for service out in respect of the Affiliate

declarations as he was not satisfied that

there was "a serious issue to be tried" as

between CGML and the defendants.

AA and GA also applied to set aside the

order for service outside the jurisdiction

in respect of the claims of CGML for

declaratory relief on its own behalf. The

Judge rejected the argument that CGML

did not satisfy the forum conveniens

requirements for service out in respect of

its claims against AA and GA. However,

the Judge found that AA was not a

proper party for the purpose of the

service out requirements as he was not a

party to any contracts with CGML.

The Judge then proceeded to granted a

case management stay of CGML’s

remaining claims until the resolution of

the FINRA arbitration, relying on the fact

that the FINRA reference was brought

pursuant to a mandatory regulatory

regime to which CGML's affiliate (CGMI)

was subject as a matter of American

public policy.

[Antony Zacaroli QC; David Allison]

Citigroup Global Markets Ltd v Amatra Leveraged Feeder

Holdings Ltd & Ors [2012] EWHC 1331 (Comm) (18 May 2012)

Andrew Smith J

CIVIL PROCEDURE Digested by ADAM AL-ATTAR

ADAM AL-ATTAR

COMMERCIAL COURT Digested by STEPHEN ROBINS

The applicant shipyard operators (“W”)

applied for summary judgment on a

payment guarantee issued by the

respondent bank (“E”) in respect of the

second instalment of the price of a

vessel under a shipbuilding contract. W's

case was that E's payment guarantee

was a demand or performance bond and

that payment was due on a written

demand, whether or not the payment

which the bond guaranteed was actually

due by B to W. E contended that the

instrument was a guarantee and that, if

the second instalment was not due,

there could be no liability under the

guarantee. The Court held that E's

payment guarantee was not to be

regarded as a demand bond. The

instrument set out the core obligation in

the classic language of a guarantee.

Wuhan Guoyu Logistics Group Co Ltd v Emporiki Bank of Greece

SA [2012] EWHC 1715 (Comm) Commercial Court (Christopher

Clarke J) 22 June 2012

Clause 3 contained a guarantee of

interest after B was "in default", which

was inconsistent with a free-standing

obligation to pay interest from any

given date or following demand. Caja

de Ahorros del Mediterraneo v Gold

Coast Ltd [2002] 1 All E.R. (Comm) 142

and Carey Value Added SL v Grupo

Urvasco SA [2011] 2 All E.R. (Comm) 140

considered.

STEPHEN ROBINS

The appellant shipowner (“L”) entered

into a contract of affreightment with the

respondent charterer (“C”) for the

carriage of ten cargoes of coal from

Indonesia to Spain on the American

Welsh Coal Charter form (1979

amendment). Clause 9, which governed

the calculation of laytime at the

discharging port, provided that delay as a

result of strikes was not to count as

laytime unless the vessel was already on

demurrage. When four of the vessels

were delayed at the discharge port by

congestion following strikes, C

maintained that it could rely on the

strikes exception in clause 9 and the time

Carboex SA v Louis Dreyfus Commodities Suisse SA [2012] EWCA

Civ 838 Court of Appeal (Lord Neuberger MR, Moore-Bick LJ,

Toulson LJ) 19 June 2012

lost was not to count as laytime. L

maintained (inter alia) that time ceased

to count only if the vessel was in berth

and ready to discharge cargo or had

begun cargo handling operations. The

Court of Appeal held that there was

nothing in clause 9 to support the

contention that its operation was limited

11

AUGUST 2012

to interruptions and delays occurring

during the period of the excepted causes;

rather, clause 9 was concerned only with

the consequences of the excepted causes,

not with their duration. London and

Northern Steamship Co Ltd v Central

Argentine Railway Ltd (1913) 108 L.T. 527

considered. In order to obtain the

protection of clause 9, the charterer had

to show that the event on which he relied

fell within the clause and was the

effective cause of delay to the vessel; L

was wrong to contend that clause 9

protected the charterer only once the

vessel had reached the discharge berth.

Central Argentine Railway Ltd v Marwood

[1915] A.C. 981 considered. Accordingly, if

and to the extent that C could establish

that the strike was the effective cause of

delay to the discharge of any of the

vessels, the time lost as a result would not

count against laytime. Whether the strike

was the effective cause of delay was a

question of fact. On the facts of the case,

the necessary causal connection could be

established even in relation to vessels

arriving after the strike had ended.

The claimant (“R”) was a state-owned

Russian airline which claimed that it

was the victim of frauds perpetrated by

D1 and D2 using companies controlled

by them, D3, D4, D5, D6 and D6 (“the

Company Defendants”). Agreements

between R and D5 contained Swiss law

and Swiss jurisdiction/arbitration

clauses. R sued D1 and D2 in England

on the basis that they were domiciled

in England. R sued the Company

Defendants as necessary and proper

parties. D3, D4, D5 and D7 challenged

the jurisdiction of the English court to

entertain the actions against them. The

Court declined jurisdiction over D5 on

the basis of the Swiss

jurisdiction/arbitration clauses but held

Aeroflot v Berezovsky [2012] EWHC 1610 (Ch) Chancery Division

(Floyd J) 18 June 2012

that it retained jurisdiction over other

foreign company defendants since the

claims against them were so closely

connected with the claims against

defendants in England that it

remained expedient to hear and

determine them together. Powell

Duffryn Plc v Petereit (C-214/89) [1992]

E.C.R. I-1745 applied.

H was an investor in distressed assets

which had purchased arbitration awards

against the Democratic Republic of the

Congo (“D”). The Jersey courts had

applied the common law test in

Trendtex Trading Corp v Central Bank of

Nigeria [1977] Q.B. 529 to determine

whether a state-owned mining

corporation (“G”) was an organ of D,

and had permitted H to enforce against

G's assets in Jersey. G appealed

submitting that the Trendtex test

related solely to the question of

immunity and could not be used to hold

G responsible for D's indebtedness.

Given that there had been no

suggestion that G or its corporate

existence was a sham, D submitted that

G and its assets should be treated no

differently from any other company, and

that G's separate legal identity should

be respected unless there had been

impropriety and the case was so

exceptional that the corporate veil could

La Generale des Carrieres et des Mines v F.G. Hemisphere

Associates LLC [2012] UKPC 27 Privy Council (Lord Hope, Lord

Walker, Lord Mance, Lord Wilson, Lord Carnwath) 17 July 2012

be lifted. H argued that the differences

between a state-owned corporation and

a regulated stock company, which

protected the interests of creditors,

justified a different approach. The

appeal was allowed. The courts below

had applied the incorrect test. It was

apparent from G's accounts that it was a

real and functioning corporate entity

with substantial assets and business.

There was no basis for holding G

responsible for the debts of D.

COMPANY LAW Digested by MARCUS HAYWOOD

It would be contrary to principle and

authority to hold that where the court

pierced the corporate veil it could find

that those who had misused the

corporate structure were parties to the

company's contracts.

The Court of Appeal so held on the

appeal of VTB Capital Plc ("VTB") against

a decision of Arnold J, amongst other

things, refusing permission to VTB to

amend its Particulars of Claim so as to

allege a liability on the part of certain of

the Defendants in contract, in the

alternative to the claim in tort originally

VTB Capital PLC v Nutritek International Corp [2012] EWCA Civ

808 Court of Appeal (Lloyd, Rimer, Aikens LLJ) 20 June 2012

pleaded.

VTB was a subsidiary of a Russian state-

owned bank. It lent money under a

facility agreement to a Russian company

("R") to fund the acquisition by R of

Russian companies from the first

defendant ("D1"). The agreement

MARCUS HAYWOOD

CASE DIGESTS

12

provided for English law and jurisdiction.

R had defaulted on the loan. VTB alleged

that it had been induced to enter into

the facility agreement by fraudulent

misrepresentations made by D1, for

which the other defendants were alleged

to be jointly liable. VTB's case against the

Defendants was pleaded in deceit and

unlawful means conspiracy. It applied to

amend to add claims in contract on the

basis that the Court should pierce the

corporate veil of R so as to make certain

of the Defendants liable as parties under

the facility agreement.

The Court of Appeal held: (1) The

contract claim that VTB wished to

advance was not founded on a cause of

action known to English law.

Furthermore, there was no principled

basis upon which the law might be

incrementally developed so as to

recognise such a claim. (2) It was

appropriate to pierce the corporate veil

only where special circumstances existed

indicating that it was a mere facade

concealing the true facts. Once the veil

was pierced, however, the court could

not treat those in control of the company

as themselves parties to its contracts. (3)

VTB's submission amounted to the

proposition that there is a principle of

English law that a person can be held to

be a party to a contract when, assessed

objectively, none of the undisputed

parties to the contract had any thought

that he was, let alone an intention that

he should be. To accede to VTB's

submission would be to make a

fundamental inroad into the basic

principle of law that contracts are the

result of a consensual arrangement

between, and only between, those

intending to be parties to them. (4) In

the circumstances, the Judge was right to

refuse VTB permission to amend.

The definition of "existing transfereecompany" in the Companies (Cross-Border Mergers) Regulations 2007reg.3(1) ("the Regulations") was wrong.It did not mean to exclude transfereecompanies formed specifically for thepurposes of, or in connection with, across-border merger, only those formedfor the purposes of, or in connectionwith, a merger by formation of a newcompany. The words "by formation of anew company" were to be added at theend of the definition of "existingtransferee company".

It was clear that something had gonewrong with the language and draftingof reg.3(1) of the Regulations. There isno discernible policy reason forexcluding transferee companies formedspecifically for the purposes of themerger, and none was to be found in theEU Directive which the Regulations weremade to implement (Directive2005/56/EC of 25 October 2005 on cross-border mergers of limited liabilitycompanies). If the restriction had beenintended, it would be necessary to knowfor how long the company needed to

Re Itau BBA International Ltd [2012] EWHC 1783 (Ch); Chancery

Division (Henderson J) (28 June 2012)

have been in existence, the test fordetermining whether it had sufficientassets, the activities it would need tohave carried on, and so forth. Thedefinition had been intended to do nomore than exclude a transfereecompany formed for the purposes of, orin connection with, a merger byformation of a new company. Thesimplest way to make that clear was byadding the words "by formation of anew company" at the end of thedefinition of "existing transfereecompany".

The appellant directors had run a

business which had been loss-making for

some time and which failed to pay PAYE

and NIC due to HM Revenue and

Customs ("HMRC") for a period of some

15 months. A disqualification order was

sought on the basis that the company

discriminated against HMRC by failing to

pay it while it paid other creditors. The

directors defended the proceedings,

saying that they had kept HMRC

informed of the company’s position and

that it had not objected to the company

continuing to try to trade its way out of

difficulties.

The directors were disqualified by the

District Judge at first instance because

they had failed to disclose all relevant

facts to HMRC. The directors’ appeals to

the High Court (Henderson J) and the

Court of Appeal failed.

The Court of Appeal held as follows: (1)

The correct test for the court to apply is

to consider the evidence as a whole,

including extenuating circumstances,

and to decide whether the director has

fallen below the standards of probity

and competence appropriate for persons

fit to be directors of companies. It was

not unhelpful to use expressions such as

Cathie v Secretary of State for Business [2012] EWCA Civ 739

Court of Appeal (Pill, Sullivan, Kitchin LLJ) (1 June 2012)

“exceptional circumstances” to refer to

situations where misconduct is proved

but there are reasons not to make a

disqualification order. (2) The burden of

proving misconduct is on the Secretary

of State, but if directors seek to defeat

the inference of misconduct which arises

from prolonged non-payment of tax, it is

for them to provide the evidence. (3) The

conduct of the Secretary of State in the

proceedings (including the loss of a file

and errors in the evidence) were not so

serious as to amount to an abuse of

process requiring the claim to be struck

out.

13

AUGUST 2012

Where a director and shareholder had

undertaken to keep adequate records to

allow damages to be determined if he

were found to have breached his

fiduciary and confidential duties, it had

been within a Judge’s discretion to deny

an application for an interim injunction

to enjoin him from competing against

the company. The appellant ("Wright")

appealed against a decision of HHJ

Hodge QC refusing an application for an

interim injunction. Wright and the first

respondent ("Pyke") had been equal

shareholders in a dental laboratory

business ("the Company"). Pyke had

been the sole director of the Company.

Without Wright's knowledge, Pyke had

formed a new dental laboratory

business, which he operated from the

Company's premises with the Company's

employees. Wright filed a derivative

action against Pyke alleging breach of

confidence and fiduciary duty. Wright

also applied for an interim injunction to

prevent Pyke from using or disclosing

the Company's confidential information

or competing with the Company. The

Judge denied the application on the

ground that the balance of convenience

lay in allowing Pyke to continue doing

business subject to his undertaking to

keep adequate financial records so that

Wright v Pyke [2012] EWCA Civ 931 Court of Appeal (Mummery,

Hooper, Pitchford LLJ) (15 May 2012)

Wright could establish damages.

Dismissing the appeal, the Court of

Appeal held that the Judge had not

erred in the exercise of his discretion.

There was a real risk that, if the

injunction were granted, the parties

would get the worst of both worlds. The

injunction would inflict definite damage

on Pyke's business without any certainty

of a benefit for the Company or Wright.

The Judge's solution, on the other hand,

meant that there was some certainty

that there would be adequate

information available, if liability were

established at trial, to determine the

amount of damages payable.

In proceedings concerning a lender's

purported appropriation of charged shares

in a company, the Court of Appeal of the

British Virgin Islands had been wrong to

order that the continuation of interim

injunctive relief preserving the company's

management and control of itself and its

related companies pending the hearing of

its appeal should be conditional upon it

making a payment into court. Whilst it

Cukurova Finance International Ltd v Alfa Telecom Turkey Ltd

Privy Council (British Virgin Islands) (Lord Walker, Lord Mance,

Lord Sumption) (23 May 2012)

could be appropriate to order security in

respect of indebtedness which would exist

if an appeal failed, there was, on the facts,

no question of such indebtedness in the

instant case.

CORPORATE INSOLVENCY Digested by HENRY PHILLIPS

HENRYPHILLIPSGABRIEL MOSS QCMARK PHILLIPS QC

The case concerned the legality of the

so-called “football creditor rule”

operated by the Football League. The

purpose and effect of the football

creditor rule is to ensure that in the

event of a member club becoming

insolvency particular classes of creditors,

such as players and other clubs in the

Football League, are paid in full in

priority to any other creditors.

HMRC contended that the rules of

membership to the Football League

which confer a priority to football

creditors’ claims were (a) contrary to the

pari passu principle (which requires the

assets of an insolvent person to be

distributed among creditors on a pari

passu basis) and (b) caught by the anti-

deprivation principle (which renders void

any provision by which a debtor is

deprived of assets by reason of

insolvency).

The Court considered the characteristics

of the pari passu and anti-deprivation

principles as articulated in the leading

case of Belmont Park Investments Pty Ltd

v BNY Corporate Trustee Services Ltd

[2011] UKSC 38. Significantly, David

Richards J held that the pari passu

principle and the anti-deprivation rule

are both potentially applicable to

companies in administration, albeit at

Commissioners for Her Majesty’s Revenue and Customs v

Football League Ltd [2012] EWHC 1372 (ch), David Richards J, 25

May 2012

different times.

As long as the survival of the company or

even the survival of the business as a

going concern remains a potential aim

of an administration, the application of

the pari passu principle could be very

damaging. Accordingly, the pari passu

principle comes into play only if the

purpose of the insolvency proceeding is

to effect a distribution. In an

administration, the Court held that the

principle is engaged only when the

administrator gives notice of a proposed

distribution under rule 2.68 Insolvency

Rules 1986.

As to the anti-deprivation rule, the Court

14

CASE DIGESTS

held that it applies on a company going

into administration as it does to a

company going into liquidation. Even

where the survival of the company or

business is still a potential aim of the

administration, the interests of creditors

are likely to be best served by preserving

the company’s assets.

David Richards J held that in most cases

where the Football League’s articles and

Insolvency Policy operates, they will not

be rendered void by the anti-deprivation

rule or the pari passu principle. Under

the terms of the FL's articles, a member

club has no right to the payment of any

sum derived from television and other

commercial contracts made by the FL

unless and until it has completed all its

fixture obligations for the relevant

season. If it ceases to be a member

before the end of the season it is

therefore not deprived of any debt or

accrued right to payment. However, the

Court left open the question of whether

either or both might be engaged in

particular circumstances, for example

where an administration or liquidation

commences after the end of a season.

[Gabriel Moss QC, Mark Phillips QC,

Daniel Bayfield]

A chargeholder bank was considering

appointing administrative receivers of an

insolvent company (the Claimant) to

carry out a pre-pack sale of its assets to a

third party. A fire had destroyed the

company’s premises, the company’s

insurers had refused cover and the

company considered that it had damages

claims against those insures and the

brokers who had arranged the cover.

Those claims were intended to be

assigned as part of the pre-pack sale.

Prior to their appointment, the intended

receivers instructed the Defendant

solicitors, who were already acting for

the bank, to advise on the strength of

the claims. The appointment of receivers

went ahead, and immediately on their

appointment the company, acting by its

receivers, sold its assets, including the

claims, by a pre-pack sale to a third

party. That third party then litigated

some of the claims, making a substantial

recovery. In due course the receivership

terminated and the Claimant company

was placed back into the control of its

directors. The Claimant company sued

the solicitors, claiming that their advice

on the claims was negligent and unduly

pessimistic, causing the claims to be sold

at a considerable undervalue as part of

the pre-pack. The Claimant alleged that

since the receivers were, on

appointment, its agents, the Claimant

was owed a duty of care both in contract

and in tort by the Defendant solicitors.

The Defendant solicitors applied to

strike out the claim, or enter reverse

Edenwest Limited v CMS Cameron McKenna [2012] EWHC 1258

(Ch), Hildyard J, 14 May 2012

summary judgment. Hildyard J struck out

the claim. The clients of the Defendant

solicitors at the time the advice was

given were, necessarily, the receivers in

their personal capacity, and their

subsequent appointment as receivers,

and hence agents, of the Claimant

company did not mean that the

Claimant company became their client at

that point. As to the duty of care in tort,

applying Raja v Austin Gray [2003]

Lloyd’s Rep PN 126 (CA), the Judge held

that the only relevant duty of care was

owed by the receivers, and not the

solicitors themselves, taking into

account, in particular, the potential

conflicts of interest which would

otherwise arise.

[Lloyd Tamlyn]

LLOYD TAMLYN

The case concerned the validity of the

appointment of joint administrators

made out of court by the directors of a

company authorised by the FSA. The

company resolved at a general meeting

that it should be placed into

administration. There was no qualifying

floating charge holder and therefore no

consent to the appointment of the

Administrator was required from such a

person. On the same day the company

filed a notice of appointment pursuant to

paragraph 22 of Schedule B1 on Form

2.10B. Section 362A Financial Services and

Markets Act 2000 provides that, in the

case of a company authorised by the FSA

an administrator “may not be appointed

under paragraph 22 of Schedule B1 to the

[Insolvency Act 1986]…without the

consent of the [FSA]”. No consent from

the FSA was sought, obtained or filed as

required under section 362A FSMA until

after the purported appointment of the

administrators. The Court considered the

conflicting decisions in Re Virtualpurple

Professional Services Ltd [2012] BCC 254

and National Westminster Bank v Msaada

Group [2012] BCC 226 but did not seek to

resolve the conflict (see [14]). Instead,

Arnold J held that as a matter of

construction section 362A FSMA did not

require the directors to obtain consent

Re Ceart Risk Services Limited [2012] EWHC 1178 (Ch), Arnold J,

Companies Court, 3 May 2012

from the FSA prior to the appointment of

administrators. The appointment

therefore took effect on the date when

the FSA’s consent was filed with the

Court. The purported earlier appointment

was defective, but not incurably so (see

Norris J in Re Virtualpurple Professional

Services Ltd). In those circumstances, the

Court made a declaration under

paragraph 104 of Schedule B1 that the

Administrators’ acts from the date on

which the notice of appointment was

filed to the date on which the FSA’s

consent was filed were valid

notwithstanding the defect in their

appointment.

15

AUGUST 2012

The case concerned the validity of the

appointment of joint administrators of a

charitable company limited by

guarantee made by the directors out of

court.

There was no person entitled to appoint

an administrative receiver or an

administrator under paragraph 14 of

Schedule B1 to the Insolvency Act 1986,

upon whom a notice of intention to

appoint had to be served. However, no

formal notice in a prescribed form was

given to the company. The Court

considered the conflicting decisions in

Re Virtualpurple Professional Services

Ltd [2012] BCC 254 and National

Westminster Bank v Msaada Group

[2012] BCC 226 and held, perhaps

questionably, that the conflict between

those two cases had been resolved by

Re BXL Services [2012] EWHC 1877 (Ch), HHJ Purle QC (sitting as a

High Court Judge), Birmingham District Registry, 10 July 2012

Arnold J in Re Ceart Risk Services

Limited (digested above). HHJ Purle QC

therefore held (a) that the failure to

give notice of an intended appointment

to one of the parties prescribed under

paragraph 26(2) of Schedule B1 does not

invalidate the appointment, even

assuming such notice is required and (b)

that the law must now be taken to be

settled at first instance.

The Court considered whether the

appointment of a “vorläufiger

Insolvenverwalter” – literally

“preliminary insolvency liquidator” –

over a German company amounted to

the opening of insolvency proceedings

within the meaning of the Insolvency

Regulation. In December 2011, an

arbitration award for over $11 million

was made in favour of the Applicant.

On the Respondent’s own initiative, an

application to open insolvency

proceedings was made to the local court

of Dusseldorf on 20 January 2012. A

“preliminary insolvency liquidator” was

appointed on 25 January 2012.

On 2 March 2 2012, after the filing of

documents with the Dusseldorf Court,

the Applicant issued an application in

this jurisdiction seeking: (a) permission

to enforce the award against the

Respondent and (b) the appointment of

receivers over the Respondent to bring

and enforce a claim against a third

party. Permission to enforce the

arbitration award and to serve the

application out of the jurisdiction was

given by Eder J at a without notice

application. At a further without notice

hearing, a freezing injunction was

obtained. Subsequently, the Applicant

was told of the German insolvency

proceedings.

The principle question before the Court

was whether the application to appoint

Receivers over the Respondent should

be dismissed. The resolution of this

question turned on whether the order

of the Dusseldorf court appointing a

preliminary insolvency liquidator

constituted the opening of insolvency

proceedings within the meaning of the

Insolvency Regulation. If it did, the

English Courts would be required to

give effect to the German moratorium

and German prohibition on new

enforcement proceedings. The Court

held, relying on the decision of the ECJ

Westwood Shipping Lines Inc and anor v Universal

Schiffahrtsgesellschaft [2012] EWHC 1394 (Comm) Christopher

Clarke J, Commercial Court, 25 May 2012

in Re Eurofood IFSC Ltd [2006] Ch 508,

that there had been a “divestment” of

the debtor’s powers of management

over its assets. While the divestment

was not absolute, as the German

proceedings allowed the Respondent to

dispose of its assets with the consent of

the preliminary liquidator, the

Respondent had lost its control of its

assets to a “not inconsiderable” extent

[67]. Accordingly, insolvency

proceedings had been opened in

Germany and the Court dismissed the

Applicant’s application to enforce its

arbitration award. Aside from the

European Regulations, the Court held

that there was “considerable force” in

Glen Davis QC’s argument that the

common law principle of universality in

insolvency proceedings would also

require the court to dismiss or, at the

very least, stay the Applicant’s attempts

to enforce the arbitration award.

[Glen Davis QC]

Three payments totalling £375,000 were

made by 727 companies to an associated

company. The associated company lent

that money to another company using

funds held in a designated account in its

name, which were held on trust for the

727 companies. The 727 companies were

insolvent by the time of the first

In the matter of Algrave Ltd & 726 Ors sub nom (1) Malcolm Cohen (2)Anthony David Nygate (Joint Administrators of Algrave Ltd & 726 Ors)v (1) Safe Solutions International Ltd (2) Dominic Hill (2012) Ch D, NStrauss QC, Companies Court, 25 June 2012

payment. The associated company had

provided administrative services to the

727 companies pursuant to the terms of a

management agreement. The agreement

FELICITY TOUBE QC

GLEN DAVIS QC

16

entitled S, in return for the services it

provided, to "an amount, the bank

administration charge, equivalent to all

interest from time to time arising in

respect of the bank account from time to

time administered by S for the

company". Schedule 1 of the agreement,

which dealt with the payment

procedure, stated that "the bank

administration charge shall be due to

the associated company from the

moment any interest accrued on the

relevant account and that such interest

shall be deemed to belong to the

associated company from such moment".

The associated company and its directors

asserted that £200,000 was therefore

held on trust for them. The

administrators and the 727 companies

contended that the agreement merely

provided a charge over the monies, and

that charge was void for lack of

registration. The administrators and the

companies applied for declarations that

payments totalling £375,000 made by

the companies to the associated

company were (a) as against the

associated companies, voidable

preferences within the meaning of the

Insolvency Act 1986 s.239 and (b) as

against the director of the associated

company (who was also a de facto

director of each of the companies), that

he caused the payments to be made by

the companies in breach of his fiduciary

duties and, as a result, an order for

payment of that sum to the companies

with interest.

The Deputy Judge held that the monies

were held on trust and not merely

caught by a charge. However as to the

remaining £175,000 the director of the

associated company (and de facto

director of the companies) breached his

duties to the 727 companies and also

caused a preference to be made to the

associated company. The director’s vague

and unsubstantiated suggestions that

the purpose of the payments was to

advance work on the VAT issues did not

establish the necessary basis for relief

under the Companies Act 2006 s.1157,

namely that he acted honestly and

reasonably. [Felicity Toube QC]

CASE DIGESTS

The United States District Court for the

Southern District of New York (the “US

Appeal Court”) upheld the decision of

the United States Bankruptcy Court

recognising the Bermuda winding up

proceedings of two hedge funds as

foreign main, alternatively non-main,

proceedings. The US Appeal Court

rejected the argument that the COMI of

the Funds was in the United Kingdom,

where the Funds’ investment manager,

one of their two prime brokers, many of

their investors and counterparties, and

their portfolio manager were located.

The US Appeal Court based its decision

of the fact that two of the Funds’ three

directors resided in Bermuda, where

calls concerning the management of the

Re Millennium Global Emerging Credit Master Fund Limited Case

No. 11-07865, United States District Court for the Southern

District of New York, 25 June 2012

Funds were initiated and where the

Funds’ books and accounts were

maintained. In addition, Bermuda law

governed the establishment and

operation of the Funds; and Bermuda

appeared to have been the only location

that was ascertainable to investors and

other interested third parties as the

COMI of the Funds. [Barry Isaacs QC]

BARRY ISAACS QC

The United States Bankruptcy Court for

the Southern District of New York (the

“US Bankruptcy Court”) approved a

motion by the Liquidators to compel

wide-ranging production of documents

under the US Bankruptcy Code.

The Liquidators had found evidence that

certain of the Funds’ investments had

been overvalued. In 2011, they successfully

filed a petition with the US Court for the

recognition of the Bermuda winding up

proceeding under chapter 15 of the

Bankruptcy Code, noting that the purpose

of filing the petition was to pursue

discovery against parties in the United

States. The Liquidators then served a

subpoena for the production of

documents on BCP, a broker alleged to

have been involved in certain

overvaluations. BCP filed objections to the

subpoena and the Liquidators filed a

motion for an order under section

1521(a)(4) of the Bankruptcy Code

compelling BCP to produce documents

requested in the subpoena. Section

1521(a)(4) authorises US bankruptcy courts

to order “the delivery of information

concerning the debtor’s assets, affairs,

Re Millennium Global Emerging Credit Master Fund Limited Case

No. 11-13171, United States Bankruptcy Court for the Southern

District of New York, 25 May 2012

rights, obligations or liabilities.” The US

Bankruptcy Court allowed the Liquidators’

motion to compel, on the basis that: (i)

section 1521(a)(4) enables a foreign

representative to obtain broad discovery

concerning the property and affairs of a

debtor; (ii) the documents sought

concerned the financial affairs of the

Funds; and (iii) the documents sought

related to potential causes of action

against BCP, so as to qualify as the taking

of evidence concerning the debtors’ assets

under section 1521(a)(4).

[Barry Isaacs QC]

17

AUGUST 2012

The issue before the court was whether

or not Office Metro Limited (the

“Company”) could be wound up in this

jurisdiction in light of the fact that,

despite its being an English registered

company, its centre of main interests was

in Luxembourg. The question to be

determined was whether or not it had

an “establishment” within the

jurisdiction for the purposes of the

Insolvency Regulation. The Company had

guaranteed the liabilities of a number of

tenants of properties in England and

abroad. Until 2008 its registered office

was at an address in Chertsey, Surrey.

The Petitioner was one of the landlords

to whom a guarantee was given in

respect of a property in this jurisdiction.

The Company changed its centre of main

interests in 2008. From that time it

retained a registered office at the

Chertsey address but had no interest in

any part of those premises either as a

tenant or as a licensee. It maintained

and employed no staff in those premises

or in the United Kingdom. So far as any

activities of the company had to be

conducted in England, they were

conducted by a service company in the

same group of companies.

The definition of “establishment” in the

Insolvency Regulation requires a non-

transitory economic activity to be carried

out with human means. The Court held

that it was not necessary for the humans

in question to be employees of the

company. It was sufficient if the humans

were employed by another group

Trillium (Nelson) Properties Limited v Office Metro Limited [2012]

EWHC 1191 (Ch) Mann J, 9 May 2012

company. However, by the time the

petition had been presented, the only

“activity” of the Company was its

exposure to liabilities as guarantor. The

Court held that being in a state of

liability, with the need sometimes to pay

out on that liability, was not an

“economic activity” for the purposes of

the Regulation. Even if they were

“economic activities” they were

transitory as the activity involved in

paying up on a guarantee does not have

the character of a consistent business or

business like activity.

The Court also held that the date on

which the existence or otherwise of an

establishment is to be judged is the date

of presentation of the petition.

[Lucy Frazer]

LUCY FRAZER

It was established on the evidence that

the statement “I confirm that the debt for

which the charge described above was

given has been paid or satisfied in full” in

two Forms MG02 registered at Companies

House as Statements of Satisfaction of

Re OC Realisations 2011 (in liquidation) HHJ Langan QC,

Newcastle Upon Tyne District Registry, 4 July 2012

liquidators, the Court decided that

notwithstanding the registration of the

Forms, the relevant debentures constituted

valid and subsisting security and directed

the liquidators to pay the secured creditors

accordingly. [Glen Davis QC]

charges was incorrect. The fact that the

Forms had been entered on the Register

did not affect the continuing validity of

the security. On an application for

directions commenced by the

Administrators and continued by them as

This was an application for freezing

orders against individuals and for the

appointment of a provisional liquidator

against individuals/a company. The Serious

Organised Crime Agency (“SOCA”) had

strong evidence that the Company was

involved in money laundering and that

the Company/individuals had not declared

their true income on their tax returns.

SOCA made the application as it had had

vested in it the general revenue functions

usually conferred on HMRC. The Judge

made the orders including a freezing

injunction against a third party without

Serious Organised Crime Agency v Dong & Ors, Proudman J, 21

May 2012

requiring SOCA to give a cross undertaking

in damages on the basis that collecting

revenue was nearer to the spectrum

represented by law enforcement rather

than proprietary right enforcement,

seeking to protect its ability to recover

sums publicly due. [Lucy Frazer]

18

CASE DIGESTS

The Court had jurisdiction under the EC

Regulation on Insolvency Proceedings

(No. 1346/2000) (“the Insolvency

Regulation”) to make a winding-up

order in relation to Olympic Airlines SA

("the Company") on the petition of the

trustees of the Company's pension

scheme as, when the petition was

presented, the Company had an

"establishment" in England for the

purposes of art.2(h) of the Insolvency

Regulation.

The Company, which was the Greek

national airline, was placed into special

liquidation in accordance with a decision

of the Athens Court of Appeal ("the

Greek Liquidation Proceedings"). The

Greek Liquidation Proceedings were

main proceedings for the purposes of the

Insolvency Regulation. Accordingly, the

only insolvency proceedings that could

be opened in this jurisdiction were

secondary proceedings. Under Article 3(2)

of the Insolvency Regulation such

proceedings could only be opened if the

Company possessed an "establishment"

in the jurisdiction.

The Chancellor held as follows: (1) The

wording of the Insolvency Regulation

had to be interpreted in accordance with

the autonomous and uniform

interpretation indicated by the by the

ECJ in Interdill Srl Fallimento Interdil Srl

C-396/09. (2) The liquidation of an

insolvent company and the winding up

of its affairs were not incompatible with

the possession of an establishment. (3)

The relevant time when the existence or

not of an establishment has to be judged

is when this petition was presented.

However, the facts as established at that

date need to be evaluated in the light of

what came before and what followed

after. (4) Whilst in order for there to be an

"establishment" in the jurisdiction there

must be "non-transitory" activities, there

was no requirement that such activities be

permanent. (5) It was not a requirement

Re Olympic Airlines SA [2012] EWHC 1413 (Ch) Chancery Division

(Sir Andrew Morritt, Chancellor) (29 May 2012)

to the possession of an "establishment"

that the company was carrying out

external market activities; only that its

activities are "economic". External market

activities are inconsistent with the

generality of companies in liquidation

which, by definition, do not engage in

external market activities any longer. (5)

Applying those principles to the facts the

Company had an establishment in the

jurisdiction at the date of the

presentation of the winding up petition.

(6) It was appropriate for the Court to

exercise is discretion to make a winding

up order, the primary purpose of which

was to ensure that the pension scheme

was eligible for entry into the Pension

Protection Fund (s.121(3) of the Pensions

Act 2004 not listing a winding up outside

the UK as an “insolvency event” sufficient

to trigger the duty to assume

responsibility imposed on the Pension

Protection Fund by s.127 of that Act).

[David Marks QC; Marcus Haywood]

DAVID MARKS QC

On the first-ever application for the

Court to approve a Distribution Plan

under Rule 146 of the Investment Bank

Special Administration (England and

Wales) Rules 2011, the Judge considered

that it was appropriate to apportion the

costs incurred by the Administrators in

gathering in, protecting and preparing

to distribute, client assets pro rata to the

value of the assets to be returned to

them, with specific costs relating to

particular client assets and their return

to be borne by the respective clients. The

court was satisfied that the requirements

in the Rules as to content of the Plan

and the procedure for notification had

been satisfied and that the Plan was a

fair and reasonable way of effecting the

Re MF Global UK Ltd David Richards J, 18 July 2012

distribution of client assets in pursuit of

Objective 1 of a Special Administration:

the return of client assets as soon as

reasonably practicable (Regulation

10(1)(a)). The application was supported

by the FSA. The Distribution Plan was

approved.

[Martin Pascoe QC and Daniel Bayfield,

Glen Davis QC]

MARTINPASCOE QC

DANIEL BAYFIELD

19

AUGUST 2012

PERSONAL INSOLVENCY Digested by CHARLOTTE COOKE

H was made bankrupt in April 2011 and a

trustee in bankruptcy was appointed. H

would have been automatically

discharged from bankruptcy by the

operation of s 279 IA 1986 on 3 April

2012. H did not want to be discharged as

that would have denied him the

opportunity to enter into an IVA, which

was his proposed course of action and

had his creditors’ consent. On 28 March

2012 H’s solicitors sought the trustee’s

consent to an application for suspension

of H’s s discharge. The trustee responded

by stating that he did not see that it was

open to H to apply under s 279 IA 1986.

H successfully applied without notice for

the order, which the trustee then applied

to set aside. The issue was whether it

was unreasonable for the trustee not to

have made an application under s 279(3)

IA 1986. The trustee’s application was

dismissed. The test to be applied was

Bramston v Haut [2012] EWHC 1279 (Ch) (Arnold J) – 21 May 2012

Wednesbury unreasonableness, which is

a flexible standard to be moulded

depending on the relevant circumstances.

On the present facts the evidence was

that that 94% by value of H’s creditors

supported the proposal, and it was for

them to decide what is in their interests.

Accordingly the trustee had been

unreasonable in exercising his discretion

not to make an application under s

279(3) IA 1986.

CHARLOTTE COOKE

The trustee in bankruptcy for H applied

for declaratory relief and an order for

the possession and sale of the residential

property occupied by H and his wife, W.

The property had always been registered

in H and W’s joint names. In late 2007 or

early 2008 solicitors advised W that she

could protect the property from H’s

creditors if they executed a trust deed.

The deed, dated February 2008,

purported to record that as of July 2007

W was beneficially entitled to the whole

of the net equity in the property. H and

W claimed that the deed was evidence

of an oral declaration of trust made in

July 2007.

The trustee argued that no declaration

of trust had been made in July 2007 or, if

there was a trust, it was a transaction at

under value within the meaning of

Garwood v Ambrose and Ambrose [2012] EWHC 1494 (Ch) (Peter

Leaver QC) – 26 April 2012

section 339 IA 1986.

It was held that there was little to no

evidence to support a July 2007

agreement between H and W. In

particular, it was not until late 2007 that

W had sought advice from solicitors

regarding protecting the property from

creditors. Further, even if there was a

trust, it would have been a transaction

at undervalue under s 339 IA 1986.

Whilst divorce proceedings were

ongoing in the Family Division, the

husband made himself bankrupt. The

wife applied to annul, contending that

the husband was not, in truth, unable to

pay his debts. At a directions hearing in

the Family Division, the Judge invited

the Bankruptcy Court to transfer the

annulment application to the Family

Division to be heard alongside the wife’s

ancillary relief application, and the wife

therefore issued an application for

transfer in the Bankruptcy Court.

Registrar Derrett declined to order a

transfer: but the Family Division Judge

purported to exercise the power of the

Court under under CPR 3.1(7) to vary or

revoke its own orders, overriding the

Registrar’s Order and directing a

transfer. The Court of Appeal reversed

Sofia Arif v Arif Anwar Zar [2012] EWCA Civ 986, Court of Appeal

(Thorpe, Rimer, Patten LJJ), 3 July 2012

that Order, holding that the Court’s

power under CPR 3.1(7) (like the power

under s 375 of the Insolvency Act 1986)

was limited to cases where there has

been a material change of circumstances.

Besides, as shortly stated by Patten LJ,

“The regulation of proceedings in

bankruptcy is a matter for the registrars

and judges of the Chancery Division to

which it is assigned.”

20

Using Human RightsConcepts in CompanyLaw: The Defence ofLast Resort?

IntroductionThe Human Rights Act 1998 (“HRA”) was

brought into force on 2 October 2000 by

the Labour government and aimed to

give further and direct effect in UK law to

the European Convention for the

Protection of Human Rights and

Fundamental Freedoms (“the

Convention”).

Prior to becoming Prime Minister, David

Cameron had promised to repeal the HRA

if he was elected, due to its perceived

unpopularity, in favour of a UK Bill of

Rights. However, due to the strong views

of the Liberal Democrats in the coalition

on this issue, the HRA has not been

repealed and instead, a Commission was

set up by the Government to investigate a

Bill of Rights1. So the HRA survives for

now in its current form. Whatever

legislation replaces the HRA in the future,

it is highly likely to continue to provide

for human rights claims and defences.

This article aims to look at current

human rights arguments in the context of

companies. The Convention rights which

are most relevant in the context of the

law relating to companies are: (i) Article

6: the right to a fair trial; (ii) Article 10:

the right to freedom of expression; (iii)

Article 14: the prohibition on

discrimination; and (iv) Protocol 1: Article

1: the right to peaceful enjoyment of

property.

From a more “human” and individual

perspective, human rights defences are

often utilised by directors of companies in

response to proceedings that are issued

against them, especially in

disqualification proceedings or in

response to applications pursuant to

section 236 of the Insolvency Act 1986.

However, judges and practitioners tend to

be fairly sceptical of litigants trotting out

the “human rights defence”, or “defence

of last resort”.

CompaniesIt seems that, although human rights

concepts were originally created to

protect the individual from abuse,

companies now tend to rely on such

concepts quite regularly in respect of

complaints or claims that are made in

their name, and this appears to be

accepted by the Courts: see for example

Autronic AG v Switzerland (1990) 12 EHRR

485 at para 47: “neither Autronic AG’s

legal status as a limited company nor the

fact that its activities were commercial

nor the intrinsic nature of freedom of

expression should deprive the company of

the protection of article 10”; and Societe

Colas Est v France [2002] ECHR 421 at para

41 : “The Court reiterates that the

Convention is a living instrument which

must be interpreted in the light of

present-day conditions… Building on its

dynamic interpretation of the

Convention, the Court considers that the

time has come to hold that in certain

circumstances the rights guaranteed by

Art.8 of the Convention may be construed

as including the right to respect for a

company’s registered office, branches or

other business premises”. Further, the

decision of GJ v Luxembourg, Application

No. 00021156/93 (96) suggests that

shareholders, employees and creditors

may also fulfil victim status. This was a

case in which a 90% shareholder in a

Hannah Thornley analyses the current use of human rights

claims and defences by companies and their officers

� �

1/. The Commission on a Bill of Rights was set up on March 18th 2011 and intends to report its findings by the end of 2012

21

AUGUST 2012

company succeeded in alleging a breach

of article 6, where the winding up

proceedings in relation to the company

had gone on for too long (for 6 years).

Company as Victim?A company may only make a claim as a

“victim” if it is not a public authority. In

Foster v British Gas PLC [1991] 1 QB 405 at

427, a public body was described as: “a

body, whatever its legal form, which has

been made responsible, pursuant to a

measure adopted by the state, for

providing a public service under the

control of the state and has for that

purpose special powers beyond those

which result from the normal rules

applicable between individuals”.

Therefore, many public or quasi-public

bodies may be held not to have any

enforceable convention rights. A quasi-

public body which carries out both public

and private functions, such as, for

example, a security firm like G4S plc that

will be operating (some of!) the security

for the Government at the 2012 Olympics,

but also has many corporate and retail

clients, would be likely to fulfil “victim”

status in respect of its private functions.

Former state-owned companies or

companies that carry out both public and

private functions may also have

difficulties in showing their “victim”

status.

The Yukos oil company was a company

formerly owned by the Russian state. In

Neftyanaya Kompaniya Yukos v Russia

(2012) 54 E.H.R.R. 19, the European Court

of Human Rights (“ECHR”) ruled in

September 20112, that the Russian state

had violated the company’s Convention

right to a fair trial (Art.6), and that there

had also been violations of its right to the

protection of property (Art.1,Prot.1).

Yukos had been Russia’s largest oil

company and one of the world’s largest

non-state owned oil companies, after

having been privatised in the 1990’s by

the Russian government. Yukos filed its

complaint in 2004. It took another 5 years

before the complaint was considered

admissible to the ECHR. The complaint

centred on the fact that the Russian

authorities had made some large and

unexpected tax claims against it for the

period 2000-2003, prevented the

company from investigating and paying

the claims by freezing its assets at the

same time and then intentionally seeking

to break up the company. Yukos was later

liquidated in 2007. The ECHR ruled in

favour of Yukos on the following issues:

(i) (by a majority of 6 to 1) that there had

been a violation of Yukos’ right to a fair

trial in respect of a tax assessment for

2000 in the sum of $3.9bn, due to the

four days that Yukos was given to

respond to the assessment, once it had

raised a dispute; (ii) (by a majority of 4 to

3) that there had been a violation of the

right to the protection of property, in

respect of the imposition of fines and

penalties regarding the 2000-2001 tax

assessments and (iii) (by a majority of 5 to

2) that there had also been a violation of

article 1 protocol 1 in respect of the

measures employed in the enforcement

proceedings. The Russian authorities had

imposed massive fines and enforcement

fees which added up to 7% of the total

debt, had refused to accede to time to

pay proposals and had auctioned off one

of the company’s major assets which it

might have been able to sell itself, had its

assets not also been frozen by the Russian

authorities. However, the Court found

that the tax assessments themselves were

not disproportionate and that there was

not enough evidence to show that the

company had suffered from

discrimination in comparison with the

treatment of other companies, or that

there was political motivation behind its

treatment. Yukos is claiming

approximately $100bn in compensation.

HANNAH THORNLEY

2/. In a judgement which became final on 8 March 2012

� �

22

The ECHR does not traditionally award

large sums of compensation for claims by

companies or by individuals. The

compensation claim was held not to be

ready for decision pending further

submissions by the parties.

Other interesting recent cases of

companies asserting victim status include

the following:

• An Italian medical diagnostics company

alleged a violation of Article 6: see A.

Menarini Diagnostics S.R.L v Italy,

Application no. 43509/08, 27 September

2011. The Company had been

investigated for unfair competition and

had been fined €6m. All of its appeals

were rejected. It complained that it had

not had access to a court with full

jurisdiction or to judicial review of the

Italian competition commission. Its

complaint failed;

• Consideration by the ECHR of a

complaint by an educational firm

registered as a company in Moldova and

which runs a primary school, alleged

violations by the Moldovan authorities of

Art 6 and Art 1, Prot.1 and succeeded: see

Dragostea Copiilor Petrovschi-Nagornii v

Moldova, Application no. 25575/08, 13

September 2011;

• In Ringier Axel Springer Slovakia A.S. v.

Slovakia, Application No. 41262/05, 26

July 2011, a Slovak multimedia publisher

alleged a breach of its right to freedom

of expression, after it was sanctioned for

reporting that a Slovak member of

Parliament, aided by a high-ranking

police official, had urinated from a

restaurant terrace. The ECHR held that

there had been a breach of the Article 10

freedom of expression as the Slovakian

Court had failed to take into account

several factors in its decision-making

process, including the good faith of the

journalists involved, and the public

interest in the story. Another complaint

was made by the same company against

the Slovakian government pursuant to

articles 6 and 10 of the Convention, in

respect of a story in which it had

identified two men who had allegedly

committed a serious crime and the

conduct by the Court of the ensuing libel

proceedings that had been brought

against it. This complaint failed as

inadmissible in respect of both alleged

breaches: Application No. 35090/07 and

reported at (2012) 54 E.H.R.R. SE4.

Convention rights are not directly

enforceable against private companies or

individuals, but only against public

authorities or quasi-public bodies acting

in their public capacity. Therefore, in

litigation between private parties, the

parties themselves will not be able to use

convention rights against each other, but

will seek to ensure that the Court, as a

“public authority” acts compatibly with

their convention rights.

In addition to claims made by

companies, there are often situations in

which human rights concepts might be

applicable in the context of company and

insolvency applications, although not

being directly asserted by companies

themselves. For example, it may be

necessary for the Court to consider the

human rights of the residents of a nursing

home where the company that runs it is

threatened with an application to wind

up or other insolvency proceedings (and

care home insolvencies are common

occurrences in the current market).

DirectorsDirectors often resort to human rights

defences when proceedings are brought

against them by insolvency practitioners

in the context of an administration or

liquidation or by the Secretary of State

for their disqualification pursuant to the

Company Directors Disqualification Act

1986 (“CDDA”).

Use of InterviewsIt was decided by the Court of Appeal in

Official Receiver v Stern [2000] 1 WLR

2230, that the use of interviews obtained

by a liquidator pursuant to section 235 of

the Insolvency Act 1986 could be used in

disqualification proceedings and that

because the primary purpose of sectionTHE EUROPEAN COURT OF HUMAN RIGHTS

23

AUGUST 2012

The use of interviews and documentsobtained by liquidators does not breachthe right to a fair trial.

235 and 236 interviews was to obtain

information, rather than to acquire

incriminating material, that did not

necessarily breach the right to a fair trial

set out in article 6 of the Convention. The

House of Lords in Re Pantmaenog Timber

Co Ltd [2004] AC 158, further confirmed

the permissibility of using evidence

obtained by way of section 236

proceedings in disqualification

proceedings.

Fair TrialA recent example of the fair hearing

defence being relied upon (and failing) in

disqualification proceedings is in

Secretary of State for Business and Skills v

Doffman and Isaacs [2011] 1 BCLC 596. In

this case, the two defendants were both

solicitors and were directors of four

companies in liquidation. The principal

creditor was a bank. The Secretary of

State (“SoS”) brought disqualification

proceedings against the defendants. The

defendants then applied to have those

proceedings struck out on the ground

that the SoS had breached their right to a

fair trial or had breached his duty to act

fairly. The basis for the strike out

application, was that the SoS had a duty

to carry out a full, thorough and unbiased

investigation. That investigation had,

they argued, been controlled by the bank

which meant that relevant witnesses had

not been interviewed and disclosure had

been selective. They also pointed to a

number of general deficiencies in the

SoS’s case. It was held by Mr Justice

Newey that neither the right to a fair trial

nor the SoS’s duty to act fairly would

extend to a requirement that certain

evidence or investigations should be

undertaken. The relevant authorities on

the Convention showed that the SoS

simply had a duty to disclose all material

evidence in his possession. The

defendants could apply for judicial

review, apply for the proceedings to be

struck out as too weak or make their own

investigations and seek non-party

disclosure orders. Any deficiencies in the

SoS’s case could be addressed at trial.

Further to this, Mr Justice Newey took the

view that even if the investigation had

effectively been run by the bank, this

would not make a difference, as it is

often inevitable that there is a close

connection between the office holder

and the principal creditor. It was later

held at trial by Mr Justice Newey that

both directors should be disqualified: see

[2010] EWHC 3175 (Ch).

Deficient ProceedingsOne of the matters that was raised in

Doffman and Isaacs, was that the

evidence of the Secretary of State was

deficient and did not deal with various

explanations and pieces of evidence that

had been provided by the defendants.

The problem with deficient evidence

being provided by the SoS in support of

KHORDOKHOVSKY OF YUKOS

24

any claim for disqualification is that

because disqualification proceedings are

mandatorily brought by way of the Part 8

procedure (and because the Directors

Disqualification Proceedings Practice

Direction (“the Practice Direction”) does

not allow for conversion of part 8

proceedings into part 7 proceedings

where there are disputes of fact),

deficient evidence might in some

circumstances lead to an unfair trial. This

is because pursuant to the Practice

Direction, statements of case are not

ordered in disqualification matters, unless

in exceptional circumstances. It might be

argued that evidence which is wholly

deficient in several respects, for example

where a claim simply alleges a breach of

duty of a director, but fails to state which

duty is alleged to have been breached,

might lead to an unfair trial, due to the

fact that the defendant does not know

what is being alleged against him. Of

course there is the option of making a

request for further information, but that

is a very unsatisfactory way of effectively

pleading out a claim, although it might

put the pressure on for an application to

strike out or for a discontinuance of

proceedings. It is contended that the

Practice Direction may fail to provide a

right to a fair trial in some circumstances,

because it specifically prevents a part 8

claim from being converted into a Part 7

claim. The counter argument is of course

that most directors’ disqualification

proceedings include extensive factual

disputes, and the Court retains a

discretion to order statements of case in

exceptional circumstances. The question is

whether statements of case should be

exceptional or the norm, where there are

highly likely to be disputes of fact and

there is no guarantee that the evidence

supporting the claim will be properly

drafted.

Waiver of Right to a Fair TrialIn Eastaway v Secretary of State for Trade

and Industry [2007] BCC 550 it was held

by the Court of Appeal that it is possible

for a director to waive the right to a fair

trial if he settles proceedings by the

giving of undertakings not to act as a

director. The former director appealed

against the decision of Lightman J not to

set aside an undertaking that he had

given pursuant to s.1A of the CDDA not

to act as a director for four and a half

years. Proceedings had been brought

against “E” in 1992 by the SoS. The

proceedings had then been stayed in

2001 when he entered into the

undertaking. However, before he had

given that undertaking, E had sought to

bring the disqualification proceedings to

an end, by way of a judicial review

application and then proceedings under

section 7 of the Human Rights Act 1998

on the ground that the proceedings had

taken an excessive length of time. The

judicial review proceedings failed, the

human rights proceedings were dismissed

and E failed to gain permission to appeal.

After these domestic avenues had been

closed, E entered into the undertaking.

However, in July 2004, the ECHR then

held that the disqualification proceedings

had taken too long and had thus violated

E’s rights under article 6 of the

Convention. On the basis of the ECHR

judgment, E claimed that he now had a

right in domestic law for his undertaking

to be set aside.

The Court of Appeal held that: (i)

although the excessive delay had violated

article 6 of the Convention, the ECHR had

not found that there could not ultimately

be a fair trial due to the delay; (ii) No case

had been made to the court that a fair

trial was not possible; (iii) the question on

waiver was whether E had waived his

Convention right to contend that a fair

trial was not possible. E had been legally

represented. Further, the purpose of the

undertaking was to avoid the need for a

trial. It had not been obligatory for E to

give the undertaking but it had avoided

the cost and publicity of a trial; (iv) there

was no public interest which prevented E

from waiving his right to a fair trial by

giving the undertaking. This decision

shows that one must be very wary about

giving an undertaking in circumstances

where human rights or fair trial

arguments might be available to the

director in question.

ConclusionsThe debate about whether companies

should have human rights at all remains

heated. Perhaps organisations created

solely for the purpose of making a profit

should not be permitted to make claims

in respect of human rights: “A nonhuman

entity that cannot possess morals is

certainly not fit to be granted equal

standing with a person. Indeed, granting

Deficient evidence might in somecircumstances lead to an unfair trial...

THE HUMAN RIGHTS ACT SURVIVES FOR NOW

their own facts. However, it seems that

the domestic courts are generally less

open to human rights defences than the

ECHR is to claims by company “victims”.

Domestic human rights arguments do not

seem to succeed very often and it appears

that the English courts remain quite

sceptical about human rights, more than

10 years on.

Directors of companies will always use

human rights claims or defences if it suits

their purpose, or if they have nothing else

to say. However, there might be some

circumstances when the right to a fair

trial defence has merit, for example

where a director is simply unable to

decipher the basis of the claims made

against him from wholly deficient

proceedings. So although the courts need

to be sceptical of defences of last resort,

they must also be open-minded to

potential deficiencies in the current state

of the law.

Hannah Thornley specialises in company and

insolvency law with a particular interest and

expertise in the duties of directors and fraud.

25

AUGUST 2012

amoral entities so-called equal rights with

persons, which because of corporations'

great wealth and power become greater

rights, is so irrational it ought to be

considered a kind of insanity”3. However,

there are many companies and

institutions that are non-profit-making,

or are set up for charitable purposes. Not

only that, but the ECHR has been quite

specific in the past about granting

companies human rights, and it would be

difficult to now try and exclude

companies from victim status on the back

of the case law that has now grown up

surrounding the rights of companies.

Some of the examples of the sorts of

complaints made by companies set out

above, seem extremely reasonable and in

the light of those and other examples, it

might be unjust to take such access to

the ECHR away. Furthermore, it is argued

that the reason that companies need

protecting equally as well as individuals,

is in order to prevent abuse of state

power in general, in respect of both

companies and individuals. In reality,

many large and multi-national companies

are as financially and politically powerful

as states themselves, but the sympathy of

the ECHR with the “plight” of Yukos, one

of the world’s largest non-state owned

oil companies, shows that even these

types of companies may be in need of

human rights protection, especially where

there may be discriminatory or politically-

motivated reasons behind state action

that is taken against them.

The human rights claims and defences

that are currently utilised by companies

and their officers tend to be decided on

Should organisations created solely tomake profit be permitted to makeclaims in respect of human rights?

� �

3/. Jennifer Van Bergen, US National Lawyers Guild, 2003

26

Insolvency regulationThe European Commission has recently

launched a consultation examining the

current European insolvency regime. The

consultation is wide ranging. It seeks to

elicit views on a number of fundamental

aspects of the present regime. In

particular, it asks what views there are

about the general effectiveness of the EC

Insolvency Regulation in facilitating cross-

border proceedings, whether the scope of

the Regulation should be expanded to

include pre-insolvency proceedings,

whether the concept of ‘Centre Of Main

Interests’ (COMI) is workable and has

withstood the rigours of recent

experiences, whether there are problems

with the interaction between the

Insolvency Regulation and the Brussels

Regulation and how the Regulation

works in a multi-national and/or group

situation.

The Commission’s Committee on legal

affairs issued a report on 17 October

2011. It formulated a request to the

Commission to submit to the European

Parliament on the basis of various key

articles in the mian Treaty, particularly

Articles 50, 81(2) and 114, one or more

legislative proposals relating to an EU

corporate insolvency framework

following detailed recommendations set

out in an Annex which the Committee

produced in order to ensure what it

called a level playing field. Appended to a

motion in the above terms for a

resolution by the European Parliament

were detailed recommendations as to the

content of the proposal requested. The

first part of the Annex dealt with

recommendations regarding the

harmonisation of specific aspects of

insolvency and company law. The second

part contained recommendations

regarding the revision of the EC

Regulation which is the subject matter of

this piece, while the third part dealt with

recommendations of the insolvency in

groups of companies and the fourth and

final part dealt with recommendations on

the creation of a EU wide insolvency

register.

It follows that change is very much in

the air, or at least a discussion for change.

With that in mind, INSOL Europe, which

had previously prepared and issued a

publication now available on its website

on certain aspects of possible

harmonisation of individual insolvency

systems within the European Member

States, has now provided a report which

in effect attempts to address the key

areas in some detail which in its working

party’s view might be susceptible to

reform. The drafting committee ( the

Committee) was led by Robert van Galen

of the Netherlands and five main

members who were drawn from some of

the principal regimes within the Member

States, i.e. France, Germany, the United

Kingdom and Belgium, and also had

among its membership another Dutch

lawyer deputed to assist the Chairman.

In any event, Article 46 of the

Regulation stipulates a five year review

period, at the end of which on a recurring

basis, the Commission is to present to the

European Parliament and the Council and

the Economic and Social Committee, a

report on the application of the

Regulation. In April 2011, Monsieur

Carriat, the Director General of the

Justice Department within the European

Commission formally stated that the

Commission would make legislative

proposals in 2013.

INSOL Committee’s working procedures

The Committee held a number of

meetings to consider and put together

various drafts prepared by all its members

and then held two main consultation

rounds to which the main experts in the

field across the European Union were

invited. The final version represents, in

effect, a fusion of the Committee’s own

deliberations and proposals, coupled with

the observation and commentaries

proposed by the experts.

There is no hiding the fact that the

proposals overall are really based on the

practitioner’s point of view, albeit based

EC insolvency regulationIs it reform time?

David Marks QC discusses the European Commission’s

recently launched consultation on the European

insolvency regime

27

AUGUST 2012

on a legal analysis of the Regulation and

the underlying case law. The aim, even if

not ultimately achieved, was to further

the proper functioning of the Regulation

by amending the substantive aspects

within it and by improving technical

aspects of the rules which find expression

within the Regulation.

The main upshot was the provision of

three new chapters. These chapters are

given the titles Chapters V, VI and VII. The

first of these contains provisions which

prescribe powers addressing the

coordination of insolvency proceedings

with regard to groups of companies (one

of the matters focused upon by the

European Commission). Chapter VI sets

out rules on what is called a European

Rescue Plan for groups of companies

located in different European

jurisdictions and the final additional

chapter, namely, Chapter VII, concerns

the recognition of and provision of

assistance with regard to insolvency

proceedings opened outside the

European Union.

Although not the subject of a separate

chapter, another major proposal concerns

the opening of main proceedings. The

Committee felt that the overall practical

experience with the Regulation over the

past 10 years or so has shown that there

have been important cases in which the

Centre of Main Interests, i.e., COMI, was

changed in order to create a new venue

for main proceedings. This led to much

criticism and comment and despite some

protestations from some extremely

eminent sources, the Committee finally

proposed, first the inclusion of a revised

definition of COMI in Article 2 and a new

and additional requirement in Article 3(1)

that in some cases the main proceedings

must be opened in the Member State in

which the former COMI was located.

Other large scale proposed changes

concern the rights of secured creditors

under Article 5, new provisions with

regard to the treatment of agreements

under Article 31a and changes with

regard to expenses within the estate in

accordance with Article 20(3). Those who

are familiar with the Regulation will

know that these last two topics are not

fully addressed, if they are addressed at

all, under the present Regulation.

Summary of proposalsThe Report sets out at page 3 and

following a summary of the principal

recommendations. They are numerous

and not all of them will be mentioned in

this survey.

In the case of Article 2 the definition of

COMI is included within the Article. In the

case of companies and legal persons

COMI means the place of the registered

office except where the operational head

office functions of the company or of

such a legal person are carried out in

another Member State and that other

Member State is ascertainable to

prospective creditors as the place where

such operational head office functions

are carried out and in such a case it shall

mean and refer to the Member State

where such head office functions are

carried out.

Article 3(1) it is suggested, should

provide that if a company has moved its

COMI less than one year prior to the

request for the opening of the insolvency

proceedings only the courts of the

Member State where the COMI was

located one year prior to the request will

have jurisdiction to open insolvency

proceedings, if the debtor has left unpaid

liabilities caused at the time when its

COMI was located in this Member State.

This will be the position unless all the

creditors who are the cause of the said

DAVID MARKS QC

28

liabilities have agreed in writing to the

transfer of COMI out of this Member

State. As indicated above this is a

contentious matter and a number of

practitioners felt that this did disservice to

the philosophy behind the Regulation.

This will be reverted to below. However,

the Committee felt there was no

compelling reason why secondary

proceedings could or should not be

reorganisation proceedings ,a view which

is perhaps more widely shared.

With regard to Article 5(1) the

Committee was very sensitive to the fact

that there had been a discrepancy with

regard to the treatment of security rights

depending on whether insolvency

proceedings had actually been opened in

the Member State where the assets are

located. It was felt that the distinction

might be understandable for historical

reasons but that in practical terms and in

modern conditions such a distinction was

no longer justified. The suggested

amendment to Article 5(1) was one which

involved the insertion of provisions

similar to the provisions of Articles 8 and

10 to the effect that the effect of

insolvency proceedings on the rights in

rem of creditors or third parties should

generally be governed only by the law of

the Member State within which the assets

are situated.

Article 13 was also carefully considered.

The Committee considered it to be

undesirable that a legal act should be

made ‘avoidance proof’ by selecting the

law applicable to the contract. However,

the Committee also felt that it had to be

borne in mind that a relocation of the

COMI might be detrimental to the other

party to an agreement if under the law of

the new COMI avoidance action could be

easier to institute. The amended text

therefore went along the following lines,

namely that Article 4(2)(m) should not

apply if the law of the Member State

where COMI was situated at the time of

the legal act did not allow any means of

challenging that legal act in the relevant

case.

The interplay between Article 14 and

Article 4(2)(f) has of course been the

subject of judicial consideration in

England in the Vivendi litigation. The

expression ‘proceedings brought by

individual creditors’ in the latter Article

concerns primarily what are called

individual enforcement actions. Clearly

the relationship between the collective

feature of insolvency proceedings and

individual actions by creditors is primarily

a matter for the lex concursus. An

exception is generally made for lawsuits

which are pending at the time of the

opening of proceedings in other Member

States. The Committee therefore

proposed that it be made clear that this

Article, ie Article 4(2)(f) applies to actions

or proceedings brought by way of

enforcement alone. In other words the

Committee proposed that it be made

explicit that the exception for lawsuits

pending should apply both to court

proceedings and to arbitrations.

The problems generated in the case law

in particular in the Vivendi decision in the

Court of Appeal in England reflected the

fact that the present wordings in the two

articles do not match. The earlier article,

ie Article 4(2)(f) provides that the law of

the State of the opening of proceedings

should determine in particular the effects

of insolvency proceedings on proceedings

brought by individual creditors with the

exception of lawsuits pending. On the

other hand the current text of Article 15

provides that the effect of insolvency

proceedings on a lawsuit pending

concerning an asset or a right of which

the debtor has been divested should be

governed solely by the law of the

Member State in which that lawsuit is

pending. The Committee observed and

felt that the provisions do not correspond

because the later Article is limited to

lawsuits concerning an asset or right of

which the debtor has been divested. The

suggestion therefore is that deleting this

limitation in Article 15 and providing that

the ‘lawsuits pending’ rule cover all civil

and commercial matters otherwise subject

to the Brussels Convention as well as

arbitration proceedings should be catered

for.

In the present Article 20(3) the

Committee proposes that it should be

provided that if administrative expenses

have been incurred during the course of

insolvency proceedings and have been

caused by the liquidator or by a court

then such costs should be borne in

proportion to the proceeds which have

been realised in insolvency proceedings

and which have to contribute to the

payment of administrative expenses from

those proceedings.

With regard to Article 27 there has

been an extensive debate on the question

whether the possibility of secondary

THE COURT OF APPEAL DECISION IN VIVENDI REFLECTED THE FACT THAT THE PRESENT WORDINGS IN ARTICLES 14 AND4(2)F) DO NOT MATCH

29

AUGUST 2012

proceedings is desirable and whether this

concept should be maintained. Quite

apart from the submissions made to the

Committee and its own deliberations

there is an extensive periodical literature

on the subject. The Committee therefore

proposed that the court which has

jurisdiction under Article 3(2) should

have a discretionary power to appraise

and assess the need for secondary

proceedings in view of the interests of

one or more creditors and an adequate

administration of the estate. This could

be said in passing to lessen the problems

that might arise where main proceedings

are opened based on COMI in a

particular Member State and thereafter

secondary proceedings are opened, the

choice being made to do so being

decided upon by the liquidator in the

main proceedings but in circumstances

where it is not clear that the

jurisdictional provisions providing for the

creation or existence of an establishment

had been properly addressed or more

importantly dealt with in accordance

with the spirit and intent behind the

Regulation as a whole.

With regard to Article 37 the

Committee felt strongly that there was

no compelling reason why secondary

proceedings could not be reorganization

proceedings. This necessitated in the

Committee’s view a proposed change to

the last sentence of Article 3(3) so as to

delete the phrase ‘these latter

proceedings must be winding up

proceedings’ and further providing that

the liquidator of the main proceedings

have the same conversion rights with

respect to the secondary proceedings as

the liquidator of the secondary

proceedings himself. Thus if the

liquidator of the secondary proceedings

is entitled to request the court to convert

winding up proceedings into

reorganisation proceedings or vice versa

then the liquidator of the main

proceedings should enjoy the same right.

The three new chaptersThere is no doubt that one of the most

important practical issues thrown up in

the wake of the Regulation since its

inception is the occurrence of group

company insolvency. This has become an

increasingly frequent phenomenon

almost crying out for rules on co-

ordination of insolvency proceedings.

Essentially the Committee’s proposal is

that if a subsidiary and its ultimate

parent company both enter into

insolvency proceedings then the

liquidator of the latter should be given

powers similar to those that the

liquidator in main proceedings has with

regard to secondary proceedings. In

other words the starting point should be

the application in an analogous fashion

of the provisions of Articles 27 and

following of the Regulation taking into

account, however, the differences

between main and secondary

proceedings with respect to the same

debtor on the one hand and the

insolvency proceedings of multiple group

companies on the other.

The problem on any basis is one of

definition. The Committee took the view

that the group main proceedings should

be the main insolvency proceedings of

the ultimate parent with its COMI in the

European Union that is itself in an

insolvency proceeding. This entailed

definitions of the following phrases and

terms, namely ‘group of companies’,

‘parent company’, ‘subsidiary’, ‘ultimate

parent company’ and ‘group main

proceedings’. These definitions as drafted

by the Committee are now included in

Article 2.

Moreover, it was strongly felt that the

centrepiece of the group proceedings

should be the possibility of proposing a

plan covering one or more group

companies. This should be in effect a

restructuring mechanism which ensures

that each creditor will at least receive

value which on the one hand equals a

distribution in the case of the winding up

of its debtor and on the other procures

that conglomerates are saved and do not

fall victim to a lack of co-ordination in an

international context.

With regard to the new Chapter VI and

the European Rescue Plan it was stressed

by the Committee that there is no

replacement in this instance of any

legislation within the Member States with

regarding to compositions and rescue

plans. Instead what was proposed was an

introduction of an initial instrument for

the adoption of cross border rescue plans

involving groups. It was strongly felt by

the Committee as a whole that such an

instrument would considerably further

the proper functioning of the internal

market since it would provide a means for

restructuring conglomerates engaged

within the common markets on an

international level.

Basically, the following main principle

was put forward. First, the proceedings

with regard to the Plan should take place

in the court which opened the

proceedings with regard to the parent

company. Second, the Plan might be

proposed by either the parent company

or its liquidator. Third, the creditors

should be divided into classes: moreover

creditors of different companies should

be placed into different classes while

creditors with differing ranks in respect of

the assets of a particular company should

also be put in different classes. Finally, the

creditors should vote by class whereby

each class determines whether it accepts

the Plan with acceptance requiring a

qualified majority of two thirds of the

amount of the creditors voting within the

concerned class.

The provisions of the Plan are openly

inspired by the US Chapter XI regime as

well as by several modern and well

known reorganisation plan regimes in

Member States. However, there remain

important differences. First, classification

of claims will not be part of the Plan itself

but will be decided upon by the court

separately and in the event that

individual creditors oppose the Plan cram

down possibilities will be much more

It was strongly felt that the centrepieceof the group proceedings should be thepossibility of proposing a plan coveringone of more group companies...

30

restrictive than under Chapter XI.

Furthermore, the Chapter XI regime

principally concerns single companies

whereas the European Rescue Plan

applies only to groups.

With regard to Chapter VII in effect the

Committee proposed the incorporation

of much, if not all, of the UNCITRAL

Model Law provisions into the

Regulation. The paradigm situation was

the opening of insolvency proceedings

outside the European Union. In such a

case the UNCITRAL Model Law provides

assistance supported by the global

community which created it. Contrary to

the European Regulation the Model Law

is not based on similar principles to those

finding expression in what is called

community trust and therefore the effect

of foreign proceedings within the

receiving state will be much less

pronounced with more elaborate reviews

than under the Regulation. To take one

example, there is no automatic recognition

of the powers of the foreign liquidator but

instead there is a two tier review system.

First, the court of the receiving State

considers whether the foreign insolvency

proceedings meet the standards of

recognition and whether there is a COMI

or establishment as the case may be and

whether the same is indeed located in the

country where the proceedings have been

opened. However,even if the recognition

of the foreign proceeding is obtained this

will not entail the consequence that the

foreign liquidator can exercise all his

powers in the receiving State; if, therefore,

for example he desires to sell assets of the

debtor which are located in the receiving

State he has to obtain relief from the

courts of the receiving State and those

courts will investigate and consider

whether the interests of the creditors and

other interested parties such as the debtor

are adequately protected.

The Committee was, therefore, firmly

of the view that it was desirable that

these provisions be incorporated within

the Regulation. This would lead to a

unified approach to insolvency

proceedings opened outside the Union

and it was strongly felt that this would

enhance the proper functioning of the

internal market and support a unified

external trade policy.

The main recommendations: selectedArticlesArticle 1 in its present form says that the

Regulation should apply to collective

insolvency proceedings entailing the

partial or total divestment of a debtor

and the appointment of a liquidator. The

definition of ‘insolvency proceedings’ in

Article 2(a) refers to both the collective

proceedings referred to in Article 1(1) as

well as to the listing in Annex A. INSOL

Europe proposes to change that provision

so that reference is made to Annex A

alone. In other words, Article 1(1) will have

no direct effect on the meaning of

‘insolvency proceedings’ within the

Regulation, but will only serve as a

guideline to determine whether or not

proceedings should be listed within Annex

A. As for the ingredients of the overall

definitions, INSOL Europe proposes with

regard to the first criterion that the

‘collective’ nature of the proceedings be

expanded so as to include rescue and

reorganisation proceedings as provided for

in the Directives on credit institutions and

insurance companies. As to the

requirement that proceedings be based on

a debtor’s ‘insolvency’, INSOL Europe

looked back to its own earlier report on

the harmonisation of national laws and

took the view that there was a need to

define the criteria to be applied for the

opening of all insolvency proceedings. In

addition, the Committee was very

conscious of the need to remove, if at all

possible, any gap between the Brussels

Convention and the EC Regulation so that

court proceedings and judgments opened

in Member States and rendered by courts

in Member States excepted under Article

1(2) of the Brussels Convention fall under

the scope of the present Regulation unless

specifically excepted. Moreover, as

between the two classic tests of insolvency,

namely that based on liquidity and that

based on a balance sheet solvency , again,

in the light of its earlier report, the

Committee took the view that the liquidity

test appeared to be the more common of

the two within the European Union and

indeed was the preferred single test

promoted by the UNCITRAL Model Law.

Consequently, the amended draft contains

two criteria: first, the inability to pay debts

as they mature, and secondly, the concept

of insolvency based on the fact that the

debtor could in the foreseeable future be

unable to pay its debts as they mature.

Article 2 contains a number of critical

definitions. In particular, INSOL Europe

suggests that the definition of COMI be

included within Article 2. The definition

now expanded in the proposals is directed

to and addresses the case of both

companies and legal persons: ther COMI is

to be the place of the registered office

except that where the operational head

office functions of a company or the legal

person be carried out in another Member

State and that other Member State is

ascertainable to actual or prospective

creditors, then it shall mean and refer to

the Member State where such operational

head functions are carried out. Moreover,

the proposals are that where the company

or legal person is a mere holding company

within a group with head office functions

in another Member State, then the COMI

as defined should be located in that other

Member State. The definition goes on to

say that the mere fact that the economic

choices and decisions of a company are or

can be controlled by a parent company in

another Member State other than the

Member State of the registered office will

not cause the COMI to be located in the

latter Member State. In the case of

individuals, COMI shall mean the place of

habitual residence except that in the case

of professionals, it shall be the

professional’s principal office or principal

location from which his profession is

conducted.

It is well known that the courts across

Europe have used a variety of connecting

factors in order to identify COMI. They

need not be listed here. What is clear is

that there is no necessary correlation or

indeed consistency between the factors

which have been employed in the major

cases even those in the ECJ, e.g. in the

Interedil litigation, culminating in the ECJ

decision of that name (see Case C-396/09).

However, the Committee employed the

expression ‘operational office functions’,

not as a means of introducing a

completely new concept, but simply to

follow the existing case law. Moreover, as

can be seen from what has been said

above, there is no reason why a COMI

cannot be established in a jurisdiction

31

AUGUST 2012

other than the place of an operational

head office if certain key functions are

performed elsewhere. Such would be the

case for example where internal

management or the financial strategic

decisions were located or taken in a

particular Member State as well as that

State being the location relevant to the

contractual relationship with employees

and/or its suppliers and so on. However,

the Committee was firm in its belief that

the requirement of ascertainability by

third parties would not just be another

factor by which to determine the place of

the operational head office. It would

constitute a second and individual test to

apply besides the test for the operational

head office.

There are other substantial

recommendations made with regard to

Article 1 and the definitions it contains.

They cannot be mentioned here for

reasons of space. There is however a new

proposed definition of the term

‘liquidator’ to take into account the

possibility that no separate person is

inevitably appointed as liquidator and that

the debtor can in effect be appointed as

liquidator and that the debtor or

management itself might administer the

insolvency. Moreover, as already indicated,

the new definition includes a reference to

reorganisations.

Article 3 is another key Article. It sets

out the basis of international jurisdiction

within the Regulation. Article 3 has been

the subject perhaps to the most extensive

literature and case law as well as extended

academic debate. Much argument has

occurred over what happens when an

enterprise is ‘moved’ at the time of an

approaching financial crisis, sometimes

with the explicit intention of opening

proceedings under Article 3 in a second

and subsequent Member State and

thereby invoking the insolvency law of the

new COMI. A variety of terms have been

used for this phenomenon, e.g. forum

shopping, COMI-shift and sometimes

insolvency tourism.

There is no doubt that overall there is a

shared desire to curtail the abuse of forum

shopping. Indeed Recital 4 of the

Regulation says as much in terms. One of

the key aspects of the debate is where the

starting point exists. INSOL Europe takes

the view that those who enter into a

contract with a debtor or become creditors

in another way rely, and should be able to

rely, on the insolvency regime that will

apply when and if the debtor enters into

insolvency proceedings. As a working rule,

such reliance should be honoured.

However, there may be cases where such

reliance cannot be honoured, at least not

in perpetuity, typically where a debtor

moves its COMI to another Member State

and an ‘old’ creditor or set of ‘old’

creditors remain in place. The amendment

to Article 3(1) which is proposed

introduces further rules to protect the

reasonable expectation of creditors. There

may be a somewhat arbitrary aspect to

this, but the Committee took the view that

if a company has moved its COMI less than

a year prior to the request for opening of

insolvency proceedings, and there remain

debts which are incurred prior to the shift,

then the Member State relating to the

‘old’ COMI will have jurisdiction unless the

‘old’ creditors agree to the COMI-shift.

During the formulation of the

recommendations, there was much

contentious debate about this suggestion.

First, it is claimed that there is no

principled basis for an arbitrary look-back

period of, in this case, one year. It is also

claimed that the proposed amendment

fails to reflect the paramount

consideration which, in effect, is the

interests of creditors as a whole. Moreover,

it is said that the policy reflected in Recital

4 referred to above which is against forum

shopping applies only to fraudulent steps

taken to damage creditors. It is also said

that the proposed amendment would

seriously restrict the ability of a debtor to

move its COMI in order to achieve or

obtain a rescue or some other

reorganisation proceeding in a jurisdiction

which is in some material way ‘better’ for

creditors as a whole.

All this lies at the heart of the

Regulation itself it could be said. Against

these very powerful contentions it can be

said first that in practice, it is extremely

difficult to ascertain whether a transfer is

fraudulent or not. This is why INSOL

There is no doubt that overall there is ashared desire to curtail the abuse offorum shopping...

EUROPEAN COMMISSION

32

Europe took the view that the distinction

between fraudulent and good faith

COMI-shifts was not only inappropriate

but also not workable. Moreover, it failed

to take into account the fact that the so-

called ‘old’ creditors might even agree to

the new regime. Second, any fraud- based

test would involve to some degree the

application of subjective criteria and the

application of such criteria would be even

more problematic than those which apply

at present. In a case where a COMI-shift

could be said to be beneficial to some

creditors and prejudicial to others, it

might be difficult to define what would

constitute a fraudulent COMI-shift. In

addition, a court of the Member state of

the old COMI might look upon such

matters quite differently from the

attitude taken by the court of the

Member State of the new COMI. Hence,

INSOL Europe took the view that, on

balance, objective criteria should apply

provided sufficient leeway was given in

the sense that if all old creditors had been

paid, there would be no issue, and if they

were not paid, they could be asked to

consent or, indeed,they might formally

consent to the shift. These are but a

selection of the very powerful arguments

for and against the suggested

amendment.

Another major Article which

underwent suggested proposals for

change is Article 5. Article 5 provides in

general terms that the opening of

insolvency proceedings shall not affect

the rights in rem of creditors or third

parties in respect of tangible or

intangible, moveable or immoveable

assets. As is well known, Article 5 is really

an exception to the general rule set out

in Article 4, that the law applicable to

insolvency proceedings, i.e. the lex

concursus will determine the effects of

the insolvency proceedings, i.e. the so-

called universalist effect. Overall, INSOL

Europe agrees with the objection that

secured creditors are, if anything, over

protected as a result of the existing and

somewhat inflexible wording of the

current text. If nothing else, Article 5 had

generated a deep split as to its proper

interpretation among serious

commentators. Relevant questions

included whether, and if so to what

extent, the right in rem was limited, e.g.

only to the extent that the limitations of

the lex rei sitae matched with those of

the lex concursus. By and large, although

the position is not by any means settled,

commentators have taken the view that

the right in rem was neither affected by

the lex concursus nor by the lex rei sitae.

In practical terms, this means that the

holder of the right in rem can exercise its

or his rights without any exception or

limitation. It is this so-called hard and fast

rule which led to the degree of over-

protection which INSOL Europe was

sensitive to. Drawing a line between the

competing arguments, INSOL Europe

suggests that there be an amendment to

Article 5(1) to the effect that there be a

provision that the right in rem be limited

only to the extent that the limitations of

the lex rei sitae match with those of the

lex concursus.

INSOL Europe also suggests

amendments to Article 13. The current

version is that Article 4(2)(m) dealing with

the general applicability of the lex

concursus shall not apply where the

person who benefited from an act

detrimental to all the creditors proves

that the act in question is subject to the

law of the Member State other than that

of the law of the State of the opening of

proceedings and that latter law does not

allow any means of challenging that act

in the relevant case. The suggested

variation is that Article 4(2)(m) shall not

apply if the law of the Member State

where the COMI of the debtor was

situated at the time of a legal act does

not allow any means of challenging that

legal act in the relevant case. In other

words, the suggested amendment

simplifies matters by saying that it is the

law of the State of the opening of the

proceedings which is the arbiter as to the

substantive rules determining the

voidness, voidability or unenforceability

of legal acts detrimental to all creditors.

The present version has regard to the

applicability of the law of the contract as

a means of protecting the counterparty

that relied on the transaction in question.

It therefore gives that other party the

possibility of asserting that the avoidance

action also has to be judged by the law

that was applicable to the legal

transaction itself.

However, INSOL Europe was very

conscious of the objections that had been

made to the current version. The risk is

it is extremely difficult to ascertainwhether a transfer is fraudulent or not...

INSOL EUROPE AGREES WITH THE OBJECTION THAT SECURED CREDITORS ARE, IF ANYTHING, OVER PROTECTED AS A RE-

SULT OF THE EXISTING AND SOMEWHAT INFLEXIBLE WORDING OF THE CURRENT TEXT

33

AUGUST 2012

that the present Article leads to the

undesirable result that the parties to a

contract detrimental to the mutuality of

creditors might succeed in protecting it

from being challenged by introducing

into it a choice of law clause in favour of

a legal system not permitting challenge.

To the Committee, there seemed no

compelling reason why a party should be

allowed to presume that an act can only

be invalidated if the law that applies to

the act allows such invalidation. Indeed,

there is US Supreme Court authority to

that effect. See e.g. Canada Southern

Railroad v Gebhard 109 US 527 (1883).

This is why in simple terms INSOL Europe

proposes that Article 4(2)(m) should not

apply if the law of the Member State

where the COMI is situated at the time of

a legal act simply does not allow for any

means of challenge. There are interesting

side issues as to the effect, if any, of a

secondary proceeding with some authors

having suggested that the secondary

liquidator could avoid such acts only

when such acts are at the expense of the

State of the secondary proceedings.

Indeed, the Virgos-Schmit Report itself, at

para 224, refers to the power of the

secondary liquidator to avoid an act

outside the State in question and to claim

back goods that have been transferred

after the opening of secondary

proceedings to another Member State to

the detriment of the creditors in the

secondary proceedings. Overall, INSOL

Europe felt that the liquidator should

initially have the power to avoid the legal

act and that the power to act under

secondary proceedings be limited to

situations in which the estate of the

secondary proceedings, and no other

estate, suffers. This area is one which was

the subject of suggested harmonisation

by the earlier INSOL Europe report on

harmonisation across the union.

Article 15 has generated important case

law, particularly in England. Its current

version specifies that the effects of

insolvency proceedings on a lawsuit

pending concerning an asset or a right of

which the debtor has been divested shall

be governed solely by the law of the

Member State in which that lawsuit is

pending. The amended version as

suggested by INSOL Europe is that the

procedural effects of insolvency

proceedings on lawsuits pending should

be governed solely by the law of the

Member State in which that lawsuit is

pending. Such lawsuits include all civil

matters subject to the Brussels

Convention as well as arbitration

proceedings. Moreover, Article 15 should

not have the effect of altering the law

applicable to any question of the validity

of a current contract or to any other

substantive issue in the lawsuit pending.

This is a complex area and, again, one

not free from seriously arguable rival

contentions by commentators. Article

4(2)(f) states that the law of the

insolvency proceedings determines the

effect of insolvency proceedings on

proceedings brought by creditors with

the exception of lawsuits pending. On

any basis, the present versions of Article

4(2)(f) and 15 do not match, or properly

square-up with each other. This alone was

the reason for revisiting this issue. Article

15 is a major exception to the general

rule set out in Article 4 that insolvency

proceedings be governed by the lex

concursus. The current version of Article

15 attaches a good deal of importance to

the domestic law of the forum, i.e., the

lex fori processus. Again, the current

version of Article 15 suggests that the

position is different from the general

position under the Regulation in the case

of lawsuits already pending or in progress

where the insolvency proceedings are

opened and concerning an asset or right

of which the debtor has been divested.

The intention is perhaps clear. Article 15

was designed and at the moment remains

designed to avoid what would otherwise

be the application of the rule of vis

attractiva concursus which often applies

in Member States and means that

pending proceedings can be removed

from the civil or commercial courts in

which the proceedings had been opened

and placed under the exclusive control of

the relevant insolvency tribunal. The real

difficulty in the present drafting is to

equate the meaning of lawsuit pending

in both Articles 4 and 15. One particular

difficulty stems from the argument that

individual enforcement actions such as

attachment which might otherwise be

regarded as being a lawsuit pending, is

outside Article 15 . For one thing there

would have been no divesting of any asset

or right otherwise held or claimable by

the debtor. On this view, any pending

action which seeks a determination on the

merits could have continued past the date

of commencement of the insolvency after

judgment so as to be the basis for a claim

to a distribution in the insolvency.

However, such a judgment could not be

employed to justify a seizure or some

other form of enforcement of the

judgment upon the debtor’s assets. The

position is further complicated by

linguistic differences in the various texts.

Two language versions of the Regulation

contain references to ‘lawsuits’ being

limited to court proceedings, whilst the

other nineteen versions refer to terms

which do not expressly limit the scope of

either Article 4(2)(f) and Article 15 to

court proceedings. As is perhaps well

known in the Court of Appeal decision in

this country in Elektrim v Vivendi [2009]

EWCA Civ 677, the English court took the

view that the phrase ‘proceedings

brought by individual creditors’ in Article

4(2)(f) referred to what had been called,

even in this survey, individual enforcement

actions, i.e. proceedings brought by way of

execution, as well as actions brought solely

to establish a claim. The latter at least

meant that there was no reason for

restricting the term ‘lawsuit pending’ such

as to exclude arbitrations.

Article 27 deals with the opening of

proceedings in the context of secondary

proceedings. The present version specifies

the procedural effects of insolvency proceedings on lawsuits pending shouldbe governed by the law of the MemberState in which that lawsuit is pending.

34

that the opening of proceedings referred

to in Article 3(1), i.e. main proceedings, is

not a bar to the opening in another

Member State which has jurisdiction under

Article 3(2) which latter court will have

jurisdiction to open secondary insolvency

proceedings. The principal change

suggested by INSOL Europe is that there be

some provision that in the case where main

proceedings have been commenced with

regard to a debtor, secondary proceedings

can be commenced without having to

establish the insolvency of the debtor in

another Member State. In other words,

there is no binding and immutable principle

that secondary proceedings be governed by

the relevant national law in accordance

with Article 4. In practical terms, this would

mean that the court of the secondary

proceedings does not always have to

investigate whether the local test of the

opening of proceedings has been passed.

This is clearly a deep change in principle.

Underlying all this is again another

extensive debate between expert

commentators on the question of whether

the possibility of secondary proceedings is

desirable at all or whether indeed the

whole concept should be maintained. The

special regimes with regard to credit

institutions and insurance companies

simply do not provide for secondary

proceedings. The overriding and

somewhat generalised desirability behind

secondary proceedings is that they serve to

protect local interests. However, secondary

proceedings might indeed unnecessarily

complicate the administration if only

because they will cause coordination and

boundary disputes and invariably cause

costs to increase. This is why INSOL Europe

suggests that the court which has

jurisdiction under Article 3(2) should enjoy

a discretionary power to appraise and

assess the need for secondary proceedings

in view of the interests of one or more

creditors and the need for an adequate

administration of the overall estate.

In the light of these changes, changes

were also suggested to Article 33. The

current version entitles the court opening

secondary proceedings to stay the process

of liquidation, in whole or in part, on

receipt of a request from the liquidator in

the main proceedings provided that the

latter can take any suitable measure to

guarantee the interests of the creditors in

the secondary proceedings. The suggested

new version takes issue with the apparent

lack of clarity with regard to the term and

expression ‘process of liquidation’: does

this refer to secondary proceedings, or only

to the process regarding the liquidation of

assets within those proceedings? There is at

least one individual Member State decision

which suggests that Article 33 only stays

the process of liquidating assets, and not

the secondary proceedings as a whole. This

is now the subject of a suggested

amendment by the Committee. Moreover,

pursuant to the suggested amendments to

Article 3(3), secondary proceedings no

longer need be winding up proceedings,

but can also be reorganisation

proceedings. INSOL Europe takes the view

that it should be explicitly provided that

Article 33 does not only concern the

liquidation of assets, but also other

activities of the liquidator at the secondary

proceedings which may undermine the

integrity of the enterprise such as

determination of vital contracts.

Groups of companiesPerhaps the most problematic area within

the present Regulation deals with groups

of companies. There are simply no

provisions dealing with this question in

any way whatsoever. This is not the place

or occasion to review the various options

available, but simply to summarise in as

brief a way as possible the view that was

ultimately taken by the Committee. On

balance, the Committee took the view that

the group main proceedings should be the

main insolvency proceedings of the

ultimate parent with its centre of main

interests in the European Union that might

be an insolvency proceeding. As to the

definition of parent company, the

suggestion is that this be the company

which has the majority of the

shareholders’ or members’ voting rights in

the other company, and if no such

company meets that definition, then it will

be the company that has the right to

appoint or remove the majority of the

members of the administrative

management supervisory body of the

other company, or the company that has

the right to exercise what could be called a

dominant influence over another company

of which it is a shareholder or member.

Helpful parallels are sought to be drawn

with definitions of parent companies and

other regimes, in particular, the 7th

Council Directive 83/349 EC of 13 June

1993 dealing with the consolidated

accounts in the context of Article 54(3)(g)

of the Treaty which led the Committee to

set out suggested definitions of the well-

known notions of ‘group of companies’,

‘parent company’, ‘subsidiary’, ‘ultimate

parent company’ and ‘group main

proceedings’, etc.

The US doctrine of substantive

consolidation is also suggested as being a

proper means of consolidating two or

more insolvent companies where it is not

possible to determine which assets or

liabilities or contracts belong to which

company, with the ultimate decision being

taken by the court supervising the parent’s

main proceedings as being the court most

appropriate to supervise the consolidated

proceedings.

The centrepiece of the group provisions

as promoted by the Committee is the

possibility of proposing a plan covering

two or more group companies. This, in

effect, would be a restructuring mechanism

which on the one hand ascertains and

determines that each creditor will at least

receive value which equals a distribution in

case of the winding up of his or its debtor,

and on the other, procures that

Underlying all this is again another extensive debate … on the question ofwhether the possibility of secondary pro-ceedings is desirable at all or whether thewhole concept should be maintained.

35

AUGUST 2012

conglomerates are saved and do not fall

victim to a lack of coordination in an

international setting.

There are therefore a number of new

suggested Articles, beginning with a

suggested Article 43 and following, dealing

with the various aspects of this new regime,

namely, the opening of group main

proceedings, the powers of a liquidator

within group main proceedings,a rescue

plan, substantive consolidation and so on.

The European Rescue PlanThe European Rescue Plan is the brainchild

of the Committee. The provisions which are

suggested do not replace legislation within

Member States with regard to composition

and rescue plans, but simply introduce an

additional instrument for the adoption of

cross-border rescue plans involving groups.

As indicated at the outset of this particular

survey, INSOL Europe takes the view that

such an instrument will considerably assist

in the proper function of the internal

market since it will enable and facilitate

the restructuring of conglomerates which

have several locations within the European

Union.

The Plan aims to take into account the

fact that the creditors of various

subsidiaries in question, as well as the

parent company’s creditors, may well

occupy different standpoints. On the other

hand, it should not be possible for the

creditors of simply one subsidiary to sink

the whole Plan by voting against it if the

benefits they are to receive under the Plan

are greater than those they would have

received is the subsidiary were completely

wound up, etc.

INSOL Europe therefore sets out a

number of guiding principles which apply

to the contemplation of and

implementation of the European Rescue

Plan. The following list is not exhaustive,

but the factors which are set out by the

Committee include the desirability of

having proceedings with regard to the Plan

taking place in the court which opened the

proceedings with respect to an ultimate

parent company, secondly, the need to

divide creditors into appropriate classes,

thirdly, the use of cram-down provisions if

one or more classes reject the Plan and in

the event of acceptance, confirmation of

the Plan unless a creditor or shareholder

objects to it and the Plan can be seen to

unfairly favour one or more creditors or

shareholders, or a creditor or shareholder

junior to the creditor who does not receive

any value etc.

Overall, the provisions regarding the

European Rescue Plan are inspired by the

US Chapter XI provisions, but there are

important differences. First, classifications

of claims will not be part of the Plan itself

but will be decided upon by courts

separately and in the event that individual

creditors oppose the Plan, cram-down

possibilities will be more restrictive than

under Chapter 11. In addition, Chapter 11

does not principally concern single

companies whereas, as is clear, the

European Rescue Plan applies to groups

alone.

Insolvency proceedings opened out-side the European UnionThe new Chapter VII of the Working

Party’s recommendations within the

amended Regulation deals with in effect

the imposition of the UNCITRAL Model

Law on an insolvency or set of insolvency

proceedings where insolvency proceedings

are opened outside the European Union

and where recognition occurs within the

Union. Overall, it was thought that there

should be a unified approach to insolvency

proceedings, especially with regard to

those opened outside the European Union

so as to enhance the proper functioning of

the internal market.

There was extensive discussion within

the Committee as to whether the bases in

the Treaty on the Functioning of EU were

solid enough to build a regime for the

recognition of non-EU insolvency

proceedings as incorporated now in the

suggested Chapter VII. Overall it was felt

that there was a sufficient juristic basis, if

only because the Union had created a

system for the recognition of the EU

insolvency proceedings which in the

Committee’s view meant that it could also

assume such powers in respect of non-EU

insolvency proceedings. See e.g. and cf

Case 22/70 Commission of the EC v Council

of the European Community [1971] ECR

263. In effect, the criterion relied on is that

EU institutions can exercise any power

‘reasonably necessary’ to the achievement

of an objective set forth in the EU family

of Treaties, even in the absence of an

express power of action provided for in

relation to that objective.

This in effect enabled the Working Party

to engraft the Model Law as a new

Chapter VII to the proposed amendments

of the EC Regulation with a large number

of Articles in effect reflecting the principal

provisions of the Model Law already

embodied in the UK Cross-Border

Regulations.

MiscellaneousThere are substantive amendments to the

Annexes, some of which have been

pointed out above in this suvey. In

addition, the Committee’s report contains

a lengthy appendix dealing with the

suggested harmonised rules on

detrimental acts in turn revisiting, in

effect, the harmonisation principles

considered in the INSOL Europe report in

2010 on the national harmonisation of

insolvency laws within the EU. Finally,

there is a substantial bibliography

amounting to about 40 pages of materials,

reflecting the immense body of work that

has been produced already by

commentators of all sorts and sometimes

of the most eminent level in its area since

the inception of the Regulation.

FootnoteINSOL Europe is now a major institution

reflecting the considered views of

practitioners across the length and

breadth of Europe. On any basis, this

report is a substantial piece of research

and body of work. As at the date of this

present article, the EC Commission has

formally taken delivery of the

Committee’s report and it is hoped and

tentatively expected will take it into

account in considering the next steps that

have to be taken in the life cycle of the

Regulation as a whole.

It is hoped that the contents of the

report at least will stimulate even more

debate and argument about the workings

of cross-border insolvency reflective of the

increasing importance of this subject in

today’s legal and financial environment.

This article was first published in InternationalCorporate Rescue journal and is reprinted withpermission by Chase Cambria Publishing Ltd –www.chasecambria.com

36

NEWS in brief

The brother of footballing legend and

BBC Sport presenter Gary Lineker has

been declared bankrupt.

Wayne Lineker, 50, is best known for

his association with the infamous

Linekers chain of bars and clubs across

Europe despite official documentation

declaring his occupation as ‘unknown’

when he was declared bankrupt earlier

this month.

In a bad period for high-profile people,

Coronation Street actress Beverley Callard

– best known for pulling pints as barmaid

Liz McDonald in the long running soap –

has also been made bankrupt.

The actress, 55, found herself overcome

with debt after facing huge medical bills

incurred when she was treated for

depression in 2009.

Also in the bankruptcy courts was

Shane Filan, the lead singer of Irish boy-

band Westife, whose Irish property

company recently collapsed with debts

that are said to amount to £18 million.

Bad period for celebrity bankrupts

BEVERLEY CALLARD

Gabriel Moss QC will be chairing the

Sweet & Maxwell Insolvency Law

Conference in October 2012.

Charlotte Cooke and Henry Phillips

will also be speaking at the

conference on various insolvency

updates.

A discount in the delegate fee is

available to Digest readers.

Registration on the Sweet &

Maxwell website

(www.sweetandmaxwell.co.uk) is

now open. In order to obtain the

discounted rate of £295 you need to

enter the code 0791510A when you

register.

WAYNE LINEKER

Insolvency conference in October

GABRIEL MOSS QC

On 2 July 2012 David Alexander QC and

Henry Phillips gave a joint talk at Berwin

Leighton Paisner in relation to guarantees

and the type of defences that debtors

seek to run in order to avoid liability

under them.

DAVID ALEXANDER QC HENRYPHILLIPS

Guarantees at BLP

SHANE FILAN

37

AUGUST 2012

DIARY DATES2012

13 September 2012LondonTMA Europe Distressed InvestingConference

13 September 2012LondonIFT National Conference

11-14 October 2012.Brussels, Belgium.INSOL Europe Annual Conference.

14 November 2012London (Natural History Museum)ILA Annual Dinner

15 November 2012LondonTMA(UK) Annual Conference

28 November 2012LondonIFT Annual Awards

201324-26 April 2013.Hotel Martinez, Cannes, France.R3 23rd Annual Conference.

19-22 May 2013.The Hague, Netherlands.INSOL 2013 Ninth World InternationalQuadrennial Congress.

New era ofproportionality

Briefing the BarA thought leadership article by Georgina

Peters was featured in The Lawyer

magazine, ‘Briefing – The Bar’ on 25 June

2012, on the subject of Bank Insolvency.

Georgina’s article summarised the way in

which the English and Scottish courts have

navigated the uncharted waters of UK

bank insolvency legislation in the post-

credit crunch era. The article remains

available online.

The courts can anticipate some satellitelitigation next year as the Jacksonreforms on costs and proportionality bedin, according to Lord Neuberger, theMaster of the Rolls. Lord Neuberger, in a lecture on the

implementation of the Jackson reforms,at the Law Society in May, said it wouldbe “positively dangerous” for him to givedetailed guidance on proportionate costsas the law would need to be developedon a case by case basis.

Changing theguardLord Phillips of Worth Matravers,President of the Supreme Court, isexpected to take up two senior judicialroles in Qatar and Hong Kong on hisretirement this autumn. In September, hewill succeed Lord Woolf of Barnes asPresident of the Qatar International Court& Dispute Resolution Centre. Lord Woolfpreceded Lord Phillips as both Master ofthe Rolls and Lord Chief Justice. LordPhillips is being replaced as President ofthe Supreme Court by Lord Neuberger ofAbbotsbury. Curiously both Lords taketheir titles from places in Dorset. LORD PHILLIPS

LORD NEUBERGER

GEORGINA PETERS

38

Sovereign debt crisis conferenceOn 25 June 2012, Glen Davis QC

participated in a conference entitled The

EU Sovereign Debt Crisis: Where from -

Where to? The conference was organised

by the Centre for Commercial Law Studies

at Queen Mary, University of London in

association with Freshfields Bruckhaus

Deringer with the collaboration of

ARC&C, and was held at Freshfields.

Glen appeared with Dr Rodrigo Olivares

of Queen Mary and Professor Anna

Gelpern of Washington College of Law,

American University in a panel discussion

on Pari Passu from New York to EU?.

The keynote address was given by Mr

George Papaconstantinou, who was until

recently Finance Minister of Greece.

n Glen Davis QC will also be participating

in a panel session titled “Issues arising

from the global financial crisis and

sovereign debt” at the Global Financial

Institutions Litigation 2012 conference, to

be held at the Bloomsbury Hotel, London

on Thursday 25th October 2012. The

panel will look at claims that might arise

as a result of a Greek exit from the Euro,

and more general sovereign debt

disputes and issues of enforcement.

On 10 October 2012, Glen Davis QC will be taking part in the Insolvency TodayAnnual Conference at the Lancaster London Hotel. He will be participating in apanel discussion: What’s special about the SAR? considering the new SpecialAdministration regime for investment banks, and delivering a talk on Cross-borderInsolvency.

Insolvency Today conferenceGLEN DAVIS QC

On 30 May 2012, Glen Davis QC gave

a talk at the Brown Rudnick training

day on the subject of English Law

Schemes for Foreign Companies, in

which he considered recent first-

instance cases discussing the

jurisdiction to sanction such schemes,

and possible challenges and contrary

arguments. On 22 June 2012, Glen

and William Willson led a seminar on

the Insolvency Practice Direction at

CMS Cameron McKenna.

WILLIAM WILLSON

Glen Davis has also recently written

two articles. The first was entitled

Service of Insolvency Process out of

the Jurisdiction, revisited and

appeared in Insolvency Intelligence

at Insolv Int 2012, 25(5), 71-73.

The second was entitled Firth

Rixson in the Court of Appeal and

was published in the Butterworths

Journal of International Banking and

Financial Law at BJIBFL 27(6), 337-

343

Insolvency talksand seminars

NEWS in brief

39

AUGUST 2012

Following the discontinuation of

disqualification proceedings brought

against the directors of the Farepak group

of companies on 21 June 2012 the trial

judge, Peter Smith J, made a lengthy

statement in open court to explain the

reason why the case collapsed.

The transcript runs to 128 paragraphs,

and can be downloaded from the

judiciary website:

http://www.judiciary.gov.uk/media/judgme

nts/2012/farepak-judges-statement. The

media coverage of the statement has

concentrated on the Judge’s comments

about the actions of Bank of Scotland

which in his view led to the insolvency of

the group. In addition to those comments,

Peter Smith J made a number of

observations about the conduct of the

Secretary of State’s case which may be

relevant to practitioners in this area. In

particular, the Secretary of State’s

evidence was presented in the usual way,

in the form of a lengthy witness

statement made by a senior individual

within the investigation team. Peter Smith

J made a number criticisms of this

approach. The deponent is never a

witness to events and has to give hearsay

evidence (para [42]): “In significant cases

like this the use of hearsay evidence like

that which cannot be tested unless those

deponents are made available for cross-

examination must be considered, in my

view, in the future very carefully because

it is essential that if defendants are on the

receiving end of proceedings which if

successful ruin them, that they are

entitled to be able properly to test the

evidence.”

The Judge went on to comment that in

future contested cases, the Secretary of

State should make sure that all people

who provide statements which are found

in the main witness statement should be

available for cross-examination.

Farepak: lengthy statement made

MR JUSTICE PETER SMITH

PwC finds buyer for CorytonPricewaterhouseCoopers has found a

buyer for the Coryton Refinery in Essex –

previously owned by Petroplus Refining

and Marketing – which entered

administration earlier this year.

Coryton will be sold to a joint venture of

Shell UK Ltd, Vopak and Greenergy as a

terminal according to Steven Pearson,

joint administrator of Petroplus.

The administrators are presently

overseeing the removal of all crude oil

and refined products from the site and

are managing the safe closure of the

refinery. The sale follows a five-month

exercise to explore all the options for the

refinery.

Brandy pleaseA judge in Germany ordered drinks foran alcoholic whose withdrawalsymptoms began to affect hismemory, it has been reported. Judge Frank Rosenow ordered a

court official to go to an off license tobuy two bottles of German brandy forMiroslav Waldchek, before the Polishwitness returned to the witness boxto complete his evidence about aknifing incident two years ago. Counsel for the defence is reported

to have complained to the judgeabout the improper use of statefunds.

BPTC over-recruitment bad Chairman of the Bar Council, MichaelTodd QC, has complained that the over-recruitment of students to the BPTC isbad for the profession and social mobility.Todd said that it was of “great concern”that students were paying over £16,000for a 25% prospect of pupillage, and thatlaw schools were producing anoversupply of graduates with “no realisticprospect of pupillage”. The College ofLaw is reported to have described hiscomments as “scaremongering”. CORYTON: FROM REFINERY TO TERMINAL

40

NEWS in brief

On 25 June 2012 Gabriel Moss QCattended a meeting of expertsadvising the EuropeanCommission on proposals for thereform of the EC Regulation oninsolvency proceedings. On 6 July2012 Gabriel, David Marks QCand Felicity Toube QC attended adebate on the proposed reformsat the Supreme Court.

FELICITY TOUBE QC DAVID MARKS QC

The Special Administration of MF Global(the first special administration under theInvestment Bank (Special Administration)Regulations ) reached a significantlandmark on 18 July when David RichardsJ approved a Client Asset Distribution Planwhich will permit client assets (other thanclient money) to be returned to therelevant clients whose claims have beenaccepted. Martin Pascoe QC and DanielBayfield appeared for the SpecialAdministrators and Glen Davis QCappeared for the FSA.KPMG’s Richard Heis, joint special

administrator of MF Global UK said thatthis court hearing represented animportant milestone in returning some £54million of agreed assets largely comprisingshareholdings plus some physically heldsecurities and LME commodities andwarrants. The MF Global UK assetdistribution plan sets a precedent as it isthe first use of such a plan under thespecial administration rules. “We will besending letters to clients with agreed assetclaims over the coming days to explain andagree the final steps in returning theirassets.”

MF Global distributionscheme approved

MARTIN PASCOE QC

DANIEL BAYFIELD

Reform of the EC Regulation

On 13 June 2012 Hilary Stonefrostand William Willson gave a talk tothe Slaughter & Mayinsolvency/restructuringdepartment on out-of-courtappointments of administrators.The talk discussed the potentialpitfalls for out-of-courtappointments highlighted by therecent case law, and looked at thevarious solutions available foroffice-holders faced withotherwise invalid appointments.

HILARY STONEFROST

Out of courtappointment talk

The Bar Standards Board was recently

accused of being in a “shambolic state”

on Radio 4’s Today programme, with

barristers accusing it of a “lack of

transparency” and “lazy incompetence”.

Problems are said to include conflicts of

interest in disciplinary proceedings against

barristers. The BSB’s chair, Baroness Deech,

has hit back at the comments, describing

it as a “competent, transparent and public

interest regulator” which upholds the

“highest regulatory standards”.

Bar Standards Board shambles

The long-standing ban on televising,or photographing, court proceedings,is due to be overturned. Clause 22 ofthe Crime and Courts Bill allows theLord Chancellor by order, made with

the concurrence of the Lord ChiefJustice, to provide that the relevant“banning” sections in the CriminalJustice Act 1925 and the Contempt ofCourt Act 1981 do not apply.

Lights, Camera, Action!

41

AUGUST 2012

INSOL Europe ConferenceOn 28-29 June 2012 Richard SheldonQC spoke at the INSOL Europeconference at Nottingham Law Schoolheld on 28-29 June 2012. Richardspoke in the third session dealing withEnterprise and Group Insolvencies. Histalk was entitled “Hell as explained –A case study of Hellas CommunicationsSARL”

RICHARD SHELDON QC

The Minmar MuddleCharlotte Cooke hasrecorded a podcastentitled “TheMinmar Muddle:Administrations andPrecedent in theCompanies Court”which is available atwww.cpdcast.com. CHARLOTTE COOKE

Criminal barristers could resort to

“stopping the courts” in protest at low

fees and delays in payment, Criminal Bar

Association (CBA) chair Max Hill QC has

warned.

A CBA survey of its members found 89

per cent of those who responded

favoured “lawful” protest action, such as

not attending court, while a similar

number would consider refusing to take

on new cases. About half of the CBA’s

membership responded to the survey.

‘Heartache’ at the criminal Bar…

Response to ECRegulation ConsultationOn behalf of the Chancery BarAssociation, Mark Arnold and DanielBayfield joined forces with PeterArden QC on behalf of the GeneralCouncil of the Bar to produce a jointresponse to the EuropeanCommission’s recent consultation onthe EC Regulation on InsolvencyProceedings (1346/2000). A copy of thejoint response can be seen on theChBA’s website athttp://www.chba.org.uk/library/responses_to_consultation_papers/news20.

MARK ARNOLD

NEW RECEPTION TEAM: RHYANNE HALL, NATALIE HALL AND EMILY BELL

We are pleased to welcome Niti Sidpra,

who joins us as our Marketing and

Communications Manager. This is a new

role aimed at increasing the profile of

South Square and its Members. Niti is

looking forward to raising the profile of

South Square and improving its

communication. Since her arrival, she has

been heavily involved in a market research

exercise with solicitor firms who were

asked for their views on South Square.

She comments, “this exercise was

invaluable as it provides a base from which

we can direct marketing initiatives, to

respond to our client’s needs. I am very

grateful to all the firms who took part.

Their views will help us develop a rolling

programme of activities to improve the

South Square brand and its visibility.”If you

wish to contact Niti for further

information on South Square’s marketing

activities, please email her at

nitisidpra@southsquare.com

South Square is also pleased to welcome

its new Reception team, led by Natalie

Hall. Natalie is joined by 2 further new

receptionists - Rhyanne Hall and Emily Bell.

Natalie is very excited to be with

Chambers during this time of change and

has already introduced new procedures

and improvements to the current level of

Reception Service. Referring to the

renovations taking place to Chambers’

reception and conference rooms, Natalie

said “it will be challenging while they are

taking place on the ground floor, but I am

confident that once the works are

complete, the transformation will not just

be of the surroundings, but of the way

that we provide Front of House Services to

Members of Chambers and their clients.

The disruption will be well worth it!”

Welcome to South Square

4242

South Square ChallengeWelcome to the August 2012 South Square Challenge. This time, whilst it looks like the familiar format, there is a twist. Instead of the names of caseseach pair of picture clues should give you two words, or in one case three words, from a well-known legal principle – all you have to do is identify theeight principles from the clues. And for the ninth question you have to identify from which area of the law the principles come (which is easy once youhave even two or three of the answers to the eight questions). As usual for the winner (drawn from the wig tin if we get more than one correct entry)there will be a magnum of champagne. Please send your answers by email to kirstendent@southsquare.com or by post to Kirsten at the address on theback page. Entries by 1st October 2012 please! Good luck. David Alexander QC.

1

2

3

4

43

AUGUST 2012

May 2012 South Square ChallengeThe correct answers to the May 2012 South Square Challenge set by Martin Pascoe QC were (1) Chartbrook v Persimmon (2) Clegg v Hands (3)Beckham v Drake (4) Stickney v Keeble (5) Cherry v Boultbee (6) Cutter v Powell (7) Greig v Insole and (8) Dunlop v Selfrdiges (9) They are all con-tract cases. Congratulations to all those who sent in correct entries (and there were a lot of them). With so many correct entries the wig tin wasrather full. But the winner drawn from the wigtin is Roger Laville, of Matthew Arnold & Baldwin LLP to whom go many congratulations and amagnum of champagne

5

6

7

8

9 And the connection is?

Michael Crystal QC

Christopher Brougham QC

Gabriel Moss QC

Simon Mortimore QC

Richard Adkins QC

Richard Sheldon QC

Richard Hacker QC

Robin Knowles CBE QC

Mark Phillips QC

Robin Dicker QC

William Trower QC

Martin Pascoe QC

Fidelis Oditah QC

David Alexander QC

Antony Zacaroli QC

David Marks QC

Glen Davis QC

Barry Isaacs QC

Felicity Toube QC

John Briggs

Mark Arnold

Adam Goodison

Hilary Stonefrost

Lloyd Tamlyn

Ben Valentin

Jeremy Goldring

Lucy Frazer

David Allison

Daniel Bayfield

Tom Smith

Richard Fisher

Stephen Robins

Joanna Perkins

Marcus Haywood

Hannah Thornley

William Willson

Georgina Peters

Adam Al-Attar

Henry Phillips

Charlotte Cooke

“FINE ADVOCATES, WHO QUIETLY BUTPROFICIENTLY GO ABOUT THEIR BUSINESS ANDPROVE DEADLY EFFECTIVE IN COURT”.

South Square Gray’s Inn London WC1R 5HP. UK.

Tel. +44 (0)20 7696 9900. Fax +44 (0)20 7696 9911. LDE 338 Chancery Lane. Email practicemanagers@southsquare.com

CHAMBERS & PARTNERS 2012

SOUTH SQUAREBarristers