Rubin v Eurofinance SA
On 30 July 2010 the Court of Appeal in England and Wales handed down their decision in Rubin v Eurofinance SA and Others  WLR (D) 282. The decision may have significant consequences for investment funds (or any other corporate entity) facing insolvency proceedings in a foreign jurisdiction.
The Court, in what it described as a “novel but inevitable and desirable development of the common law”, decided that a judgment of the US Bankruptcy Court against a defendant for, inter alia, the fraudulent transfer of property under s.544 of the US Bankruptcy Code, could be enforced in England and Wales, even where the defendant had not submitted to the jurisdiction of the US Bankruptcy Court. The ruling represents the latest development in judicial assistance afforded to foreign courts under the common law principle of modified universalism, allowing greater scope for foreign liquidators to enforce judgments and recover monies in England and Wales.
Eurofinance SA was the settler of a trust, TCT, which was governed by the laws of England and Wales and was created as part of a sales promotion in the United States known as the “Cashable Voucher Scheme”. The customer, when buying a product from a merchant, would be offered a voucher which would promise a 100 per cent rebate for the product to be provided in three years time, provided certain conditions were followed. The conditions were so complex and obscure, that the prospect of any rebate was extremely remote.
The scheme was structured so that the merchant would pay to TCT 15 per cent of the face value of each voucher issued. TCT would retain a fraction of this amount in the unlikely event that TCT would have to pay out to a redeeming customer and distributed the rest amongst parties to the scheme and in particular Eurofinance SA and by extension Adrian Roman (the owner of Eurofinance SA) and his two sons Justin and Nicholas (together the “Romans”).
The scheme ran into difficulties when proceedings were brought in the state of Missouri under its consumer protection legislation. These proceedings and the inevitable proceedings that were to follow from other States forced TCT to institute insolvency proceedings.
Receivers were appointed by the High Court who decided to petition for relief in New York under Chapter 11 of the United States Bankruptcy Code. The decision was taken for two reasons (i) virtually all the 60,000 creditors, mainly the customers who held unredeemed vouchers, were in the United States and (ii) TCT, as a trust, was treated as a separate legal entity under the laws of the United States.
A Joint Plan of Liquidation under Chapter 11 was prepared and approved in New York. The receivers were appointed legal representatives of the debtor (TCT) with authority to prosecute all causes of action against potential defendants.
Proceedings were duly issued in the United States Bankruptcy Court against, inter alia, Eurofinance SA and the Romans (the “respondents”) for claims, inter alia, pursuant to 544 of the US Bankruptcy Code (fraudulent conveyance) and s.548 (transactions at an undervalue).
On advice the respondents decided not to submit to the jurisdiction and not to participate in the proceedings. Default judgment was entered against the respondents for a sum in excess of US$10 million. The receivers, armed with the judgment, applied to the High Court for its enforcement. Their application was dismissed and the receivers appealed.
The battle lines between the respondent and the appellant receivers were clearly drawn. The respondents argued that the judgment was in personam (against the individual), being a judgment for the payment of sums of money binding against the individuals. Given the respondents were not resident in the United States and had not submitted to the jurisdiction of the United States, the rules of private international law applied and the judgment was unenforceable.
The receivers argued that this was the wrong construction of the judgment. The judgment was not a judgment in personam but rather a judgment by a foreign court in respect of foreign bankruptcy proceedings. In such circumstances, the proper rule of private international law was based on the principle of universalism and, in particular, the principle of modified universalism whereby the English courts, in so far as is consistent with justice and public policy, would co operate with the courts in the country of the principal liquidation to ensure that all the company’s assets are distributed to its creditors under a single system of distribution. Accordingly, they argued, the foreign liquidators should be recognised by the Court and the judgment enforced.
The Court of Appeal agreed with the receivers, relying heavily on the judgments of Lord Hoffman in Cambridge Gas Transportation Corporation v Official Committee of Unsecured Creditors of Navigator Holdings  UKPC 26 and in Re HIH Casualty and General Insurance Ltd  UKHL 21.
The decision of the Privy Council, delivered by Lord Hoffman, in Cambridge Gas was a landmark judgement. Lord Hoffman found that in dealing with the recognition and enforcement of foreign judgments, there were three categories, rather than the traditional two. The first two categories dealt with the enforcement of judgments in personam and in rem which determined the existence of rights over individuals and property. In respect of judgments in personam the court would only enforce a foreign judgment if it was satisfied that the defendant had submitted to the jurisdiction of the foreign court. In respect of judgments in rem the court would only enforce the judgment if it was satisfied that the foreign court had jurisdiction over the property in question.
In a third category fell the recognition of foreign bankruptcy proceedings and the enforcement of judgments arising out of those proceedings. The Privy Council found that bankruptcy proceedings were distinct from proceedings in personam and in rem in that bankruptcy proceedings did not determine or establish the existence of rights but rather provided a mechanism for collective execution against the property of the debtor by creditors whose rights were admitted or established. Bankruptcy proceedings, the Privy Council concluded, were “collective proceedings to enforce rights not to establish them”, mechanisms by which those rights were established were “incidental procedural matters and not central to the purpose of [bankruptcy] proceedings”.
Given the distinct and separate nature of bankruptcy proceedings, the Privy Council found that the primary rule of private international law was the principle of universalism, which required the English Courts to cooperate with the courts in the country of the principal liquidation to ensure that all company’s assets were distributed to its creditors under a single system of distribution.
However, it was recognised that insolvency systems in different countries varied greatly and that, at common law, it was doubtful whether judicial assistance could take the form of applying the provisions of a foreign insolvency law which formed no part of the domestic system.
The Privy Council, therefore, adopted a principle known as modified universalism in respect of bankruptcy proceedings whereby the domestic court should, where consistent with justice and public policy, recognise the appointment of the foreign liquidator and provide assistance to the foreign court in bankruptcy proceedings by doing whatever it could in the case of a domestic insolvency. The purpose of such recognition, it was concluded, was to enable the foreign office holder or the creditors to avoid having to start parallel insolvency proceedings and to give them the remedies to which they would have been entitled if “the equivalent proceedings had taken place in the domestic forum”.
Having accepted the position in respect of recognition and enforcement of foreign bankruptcy proceedings, the Court in Eurofinance was left to decide whether the judgment constituted the enforcement of an order arising out of bankruptcy proceedings or whether the judgment was instead a judgment in personam and therefore unenforceable.
Pursuant to the Privy Council decision in Cambridge Gas and Lord Hoffman’s comments in HIH, bankruptcy proceedings are “collective proceedings to enforce rights not to establish them”. The respondents argued that on this definition, the judgment could not be classed as a bankruptcy proceeding. The judgment arose not out of collective proceedings to enforce rights, but rather proceedings whose sole purpose was to establish the debtor’s rights against a third party. As such they said, the judgment should be characterised as a judgment in personam.
The Court accepted that the judgment had all the indica of a judgment in personam. Nevertheless, the Court concluded that the judgment should be enforced. Ward LJ giving the leading judgement concluded that Lord Hoffman’s definition of bankruptcy proceedings could properly be extended to include special claims maintainable at the suit of the officeholder to bring actions against third parties for the collective benefit of all creditors. Such proceedings, he found, were for the purpose of the collective enforcement regime of the bankruptcy proceedings. As such, the judgment was governed by the private international rules relating to bankruptcy (modified universalism) and not the ordinary private international rules preventing the enforcement of judgments because the defendants were not subject to the jurisdiction of the foreign court.
The Cayman perspective
From a practical perspective, the decision of the Court may have wide reaching consequences in the Cayman Islands, where many funds are incorporated which invest in assets based in other jurisdictions. The Grand Court of the Cayman Islands has already endorsed the principle of modified universalism and the Cambridge Gas and HIH cases (see Re Lancelot Investors Fund Ltd (2008), unreported).
If the Cayman Islands accept the approach laid down by the English Court of Appeal in Eurofinance, judgments by a foreign court that previously were construed as judgments in personam may now, where they are actions brought against third parties for the benefit of all creditors, be construed as judgments in bankruptcy proceedings. They may be enforceable notwithstanding that the fund has not submitted to the jurisdiction of the foreign court. In some contexts, for example claw back claims related to the Madoff fraud, this would have very serious consequences for a large number of funds.
However, in responding to enforcement proceedings by foreign liquidators, practitioners should bear a number of points in mind. First, the decision only appears to deal with the enforcement of judgments arising out of “special claims maintainable at the suit of the officeholder”. Therefore, ordinary claims which may be brought by any interested party (presumably including the liquidator) against the estate, may not be covered and may have to be pursued in the usual way.
Secondly, it appears that the Court may only provide assistance to a foreign court where it is consistent with justice and public policy. Therefore, each case should turn on its own facts. It may be that the court will be less inclined, as a matter of public policy, to enforce a judgment where the estate has no funds to defend an action abroad and has effectively been bullied by a better funded or publicly funded foreign liquidator taking avoidance proceedings abroad.
Thirdly, it appears that the Court may only provide assistance, where the remedy sought is one that the foreign liquidator would have been entitled to if the “equivalent proceedings” had taken place in the domestic forum. Therefore, from a Cayman perspective, arguably a foreign liquidator may only enforce a judgment that could have been obtained in the Cayman Court. Little consideration seems to have been given to the issue of equivalence in Eurofinance.
There was an acceptance by Counsel that there was a “general” equivalence between the provisions of the US Bankruptcy Code and the Insolvency Act, but no greater guidance was given by the Court as to what “equivalence” meant. Indeed, no consideration appears to have been given to “equivalence” when considering that the debtor was a trust and therefore not amenable to winding up proceedings in England and Wales.
Finally, and perhaps most importantly, the respondents have been granted leave to appeal to the Supreme Court. A decision is expected early next year which may consign the decision, and this article, to the annals of history. It is difficult to predict how the Supreme Court will react. For many years the principle of universalism in bankruptcy proceedings has been the holy grail of cross border insolvency and, in the absence of international treaty achieving this goal, the common law has been allowed to fill the void.
Whether the Supreme Court is prepared to endorse such a radical step forward remains to be seen, especially where there is no guarantee of reciprocity from other jurisdictions. Whatever the decision, the issue of modified universalism will be squarely before their Lordships. It is hoped that they will provide clear and unequivocal guidance as to the scope of modified universalism.
Until then, however, the position remains uncertain.