One of the most powerful tools for insolvency practitioners when investigating the affairs of an insolvent company where wrongdoing is suspected is section 236 of the Insolvency Act 1986 (“IA 1986”). This confers power on English courts to order certain categories of parties to produce documents and an account of dealings relating to companies being wound up in the UK. In this article, Senior Associate in our Commercial Litigation team Natalie Osafo examines whether the provision has extraterritorial effect and can be used to make orders against EU resident parties.

Section 236 of the IA 1986 can, if used wisely, lead to the disclosure of facts and documents insolvency practitioners can use to pursue claims and recover monies for creditors.

Unhelpfully for insolvencies involving international parties, there has been inconsistency in the case law as to whether an order under s.236(3) of the IA 1986 has extraterritorial effect. In the recent case of Re Akkurate Limited [2020] EWHC 1433 (Ch), the High Court has clarified that an order under s.236(3) of the IA 1986 does not ordinarily have extraterritorial effect. However, where Council Regulation (EC) No. 1346/2000 on insolvency proceedings (the “2000 Regulation”) applies, the English courts have extraterritorial jurisdiction to make s.236 orders against EU resident parties.

The decision is significant because of the post-Brexit implications it may have for UK insolvency practitioners. Section 236 only has extraterritorial reach because of the 2000 Regulation (and presumably also under the Recast Insolvency Regulation of 2015 (the “2015 Regulation”), which contains a similar international jurisdiction provision to the 2000 Regulation). Unless a deal that maintains the extraterritorial reach these regulations confer on s.236 orders is agreed with the EU or is built into domestic law, in post-Brexit insolvencies, UK insolvency practitioners (IPs) will have no reach over EU residents. Their EU counterparts will, however, as they will still benefit from the extraterritorial effect the 2002 and 2015 Regulations confer on their local insolvency powers.

The facts

The case of Re Akkurate concerned two applications by joint liquidators of the company Akkurate Limited (“Akkurate”) for an order under s.236(3) of the IA 1986. The application was brought against two Italian companies, Calzaturificio Rodolfo Zengarini S.r.l. (“Zengarini”) and Italian Luxury S.r.l. The liquidators’ application was prompted by concern that there may have been impropriety leading to licencing agreements which Akkurate entered into with Zengarini in 2008 and 2014.

The decision

The two principal issues for determination by the court were:

1. Whether s.236(3) and/or the 2000 Regulation gave the court jurisdiction to make the orders sought against the Italian companies; and
2. If the court had jurisdiction to make the orders, how should it exercise its discretion?

In the decision, the Chancellor of the High Court, Sir Geoffrey Vos, noted that there were a number of competing first instance decisions on s.236(3), which had caused confusion about its territorial application.

Sir Geoffrey considered that it was first necessary to consider the decision in the case Re Tucker (“Tucker”) , in which it was held that section 25 of the Bankruptcy Act 1914 (“Section 25”) did not have extraterritorial effect. That provision confers a similar power to s.236(3) on office holders but in the context of bankruptcies. In Tucker, the court relied on a range of factors, including (a) the fact that the courts could only summon persons before them who accept service or are present in the territory when served with the relevant process and (b) the absence of any general power of English courts to compel British citizens residing overseas to give evidence in an English court.

Sir Geoffrey also referred to the following “trilogy of inconsistent cases” on the extraterritorial effect of s.236: (i) Re MF Global UK Ltd [2015] EWHC 2319 (Ch) (“MF Global”); (ii) Re Omni Trustees (No 2) [2015] EWHC 2697 (Ch) (“Omni”) and (iii) Re Carna Meats (UK) Ltd (Wallace v Wallace) [2019] EWHC 2503 (Ch) (“Wallace”).

In MF Global, the court said it was impossible to ignore the decision in Tucker and applied this decision to find that s.236 did not have extraterritorial effect.

However, in Omni and Wallace, the courts decided that s.236 could have extraterritorial effect. Key reasons for the decisions reached in these cases included:

1.      Section 236(3) constituted an independent power to require the production of documents and an account of dealings, in contrast to Section 25, which constituted an ancillary power dependent on the power to summon persons for examination before the court;
2.     The provisions of the 2000 Regulation expressly recognised an “English liquidator’s legitimate interest in taking actions abroad, within other member states, in the exercise of [their] statutory function”.

Ultimately, in Re Akkurate, the court decided that:

1. Tucker was binding authority that s.236 did not have extraterritorial effect and had to be followed by the courts (although Sir Geoffrey made this finding without expressing a view on the correctness of the decision). He gave five main reasons for this ruling, including that MF Global was preferred to Omni and Wallace and the House of Lords and Court of Appeal had considered Tucker without disapproval;
2. It was clear from the jurisprudence of the Court of Justice of the European Union that the 2000 Regulation extends the territorial effect of domestic insolvency provisions. In particular, article 3(1) of the regulation conferred an “international jurisdiction” on the member state where insolvency proceedings were commenced to hear “actions which derive directly from those proceedings and which are closely connected to them”. Sir Geoffrey held that s.236 proceedings were actions within the scope of this provision.

Sir Geoffrey concluded that the 2000 Regulation conferred extraterritorial jurisdiction on the English courts to make s.236 orders against EU resident parties.

In relation to the question of how the court should exercise its discretion in granting the orders, the court followed the approach in House of Lords case Re British and Commonwealth Holdings PLC (Nos. 1 and 2). This requires courts to balance the reasonable requirements of administrators to carry out their functions against the need to avoid making a wholly unreasonable, unnecessary or oppressive order.

Comment

The decision in Re Akkurate brings welcome clarity regarding the jurisdictional reach of s.236 in UK insolvencies commenced before 26 June 2017, which are governed by the 2000 Regulation.

Notably, in Re Akkurate, Sir Geoffrey Vos commented that there was no meaningful distinction between s.236 and the power to set aside transactions entered into by a debtor. This arguably lays a foundation for courts to give extraterritorial effect to other provisions of the IA 1986 where a similar argument applies, and the 2000 Regulation is engaged. This, in turn, raises the question of whether the courts could rely on the decision to extend the extraterritorial effect of s.236 to parties residing outside of the EU, especially in light of Brexit.

Certainly, such an approach would be consistent with the willingness of the English courts in recent years to assist foreign insolvency practitioners in foreign proceedings by providing access to the powers that would be available under domestic law. For example, Stewarts acted for the joint liquidators in Akers and McDonald v Deutsche Bank AG (Re Chesterfield United Inc and Partridge Management Group SA) [2012] EWHC 244 (Ch) (Re Chesterfield United), which confirmed that the liquidators of two British Virgin Island registered companies could utilise the powers under s.236 of the IA 1986.

Finally, as mentioned, s.236 only has extraterritorial reach because of the 2000 Regulation (and by analogy its successor, the 2015 Regulation). However, the Insolvency (Amendment) (EU Exit) Regulations 2019/146 provide for the provision in the 2015 Regulation which gives English courts extraterritorial jurisdiction in UK insolvency proceedings to be omitted from the 2015 Regulation after the Brexit transition period has ended. This will mean that in insolvencies that are commenced after the transition period, UK IPs will be hamstrung in comparison with EU IPs unless a deal is done that maintains the extraterritorial reach the current 2015 Regulation confers on s.236 orders, or the extraterritorial effect is built into domestic law, or Tucker is reversed.

In a post-Brexit landscape where cross-border EU/UK insolvencies will be less certain, UK IPs will want and need extraterritorial reach, not only to be effective but also to be an attractive seat for cross-border insolvencies. It remains to be seen whether and how this uncertainty will be addressed, and, as a result, it may be an area which is litigated over in the future.

The full judgment of the case can be found here.

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