Mr Justice Newey :
Introduction
- This case concerns the relationship between (a) "secondary proceedings", as defined in the EC Regulation on Insolvency Proceedings 1346/2000 ("the Insolvency Regulation"), opened in this jurisdiction and (b) insolvency proceedings in respect of the same company opened in the member state of the European Union (here, Italy) in which the company's "centre of main interests" (or "COMI") was situated.
- The particular point raised by the case is whether assets in this jurisdiction should be applied in discharge of liabilities which are not preferential as a matter of English domestic law but which would be accorded priority under Italian law.
Factual background
- The company at issue is Alitalia Linee Aeree Italiane S.p.A. ("Alitalia"), the well-known airline. By August 2008 Alitalia was heavily insolvent, as a consequence of which, on 29 August, the President of the Italian Council of Ministers issued a decree admitting the company to Italy's extraordinary administration procedure. On 4 September the Court of Rome admitted Alitalia to the extraordinary administration procedure for large companies. The Respondent to the present application, Professor Fantozzi, was appointed as administrator.
- As Professor Fantozzi explains in his evidence, Italy's extraordinary administration procedure was introduced following the collapse of Parmalat S.p.A. and is intended to facilitate the reorganisation of large insolvent companies. The procedure applies only to companies having more than 500 employees and indebtedness in excess of €300 million. It enables a company's business to be restructured on the basis of a two-year plan proposed by the administrator.
- It is common ground between the parties that Alitalia's COMI was in Italy and so that the administration there represented "main" proceedings for the purposes of the Insolvency Regulation.
- On 31 October 2008 Professor Fantozzi received an offer for assets and contracts of the Alitalia group, of which Alitalia was part, from a company called Compagnia Aerea Italia S.p.A. ("CAI"). The price was to be in excess of €1 billion.
- Matters were, however, complicated by a ruling from the European Commission, issued on 12 November 2008, that Alitalia had received unlawful state aid from the Italian Government. In a second decision of the same date, the Commission held, in broad terms, that if the proposed sale to CAI contained elements which gave rise to a state of "economic continuity" between Alitalia and CAI, the Italian Government would be obliged to recover the unlawful state aid from CAI. However, the Commission decided that there would be no such "economic continuity" if CAI assumed only those staff of Alitalia indispensable to its operational activity, without any automatic transfer of employment contracts.
- In the circumstances, CAI re-submitted its offer on 19 November 2008, making it clear that the offer was for the purchase of specified assets and contracts, not for the business as a going concern. Professor Fantozzi accepted that offer on the following day, and a further contract was entered into on 12 December.
- To avoid "economic continuity", and so to facilitate the sale to CAI, Professor Fantozzi had to terminate the contracts of all Alitalia's existing employees. A consultation process was embarked on with representative employees across more than 40 countries. The process led to compromise agreements being entered into in January 2009 with, among others, 46 employees based in England and Wales. The agreements provided for the employees to be paid sums by Alitalia in two tranches. The sample agreement I have been shown, which is dated 20 January, stated that the first tranche (the "termination payment") would be paid within 28 days and that the second tranche (the "protective award payment") would be paid within 14 days of 13 April provided that, among other things, no proceedings had been brought in the Employment Tribunal. I was told that these latter payments were equal to the relevant employees' gross basic pay for 90 days and were made essentially for failure to inform and consult employees in the manner prescribed by the Transfer of Undertakings (Protection of Employment) Regulations 2006 ("TUPE").
- The assets comprised in the sale to CAI were transferred on 12 January 2009. The employment of all employees (including those in England and Wales) was terminated on the same date.
- By now, winding-up proceedings had been instituted in this jurisdiction. A winding-up petition was presented on 27 November 2008 by the trustees of the Alitalia Italian Airlines Pension and Assurance Scheme, founded on indebtedness put at £20,631,000. The trustees had informed Professor Fantozzi in a letter dated 5 November that they had resolved to bring secondary insolvency proceedings "with a view to triggering a relevant insolvency event for the purposes of commencing an assessment period under the regulations governing the Pension Protection Fund". A winding-up order was made on the petition on 22 January 2009.
- Alitalia had two bank accounts in this jurisdiction: a current account and a business premium account to which balances were swept on a daily basis. Both accounts were held with Barclays Bank. The company had used the accounts for trading purposes before it was put into administration, and they continued to be so used after it had gone into administration. As Professor Fantozzi points out in his evidence, it would have been open to him, following his appointment as administrator of Alitalia, to transfer the funds in the Barclays accounts out of the jurisdiction. The money was left in the accounts, as Professor Fantozzi explains, with a view to its being used to make payments to the employees based in England and Wales and to other local creditors.
- The first tranche of the payments due to employees under the compromise agreements was made from the current account with Barclays in early February 2009. These sums totalled some £576,175.23. The second tranche of payments, amounting in aggregate to £363,522, has not been made and is now long overdue. The present application is concerned with whether, as Professor Fantozzi wishes, the sums in the Barclays accounts can be used for this purpose. In this connection, Professor Fantozzi has said the following:
"It is confirmed that under Italian law, if the sums due to the Former Employees under the Compromise Agreements are not paid from assets in the UK, then I will be obliged to use the funds otherwise available to me to pay the Former Employees in full."
- Alitalia has immense debts. In September 2008 it was estimated that the company had liabilities of more than €2.836 billion, and some 13,000 claims against the group have so far been lodged. It is not at present expected that unsecured creditors will receive any dividend.
- The Applicants ("the Liquidators"), who are, respectively, a director of, and a partner in, PricewaterhouseCoopers LLP, were appointed as joint liquidators of Alitalia in England and Wales with effect from 16 June 2009. They issued the application which is now before me on 12 January 2010. The application seeks, in particular, a declaration that the second tranche of payments to employees based in England and Wales:
"insofar as they are a debt of Alitalia which is provable by the former Alitalia employees in the English Proceedings [i.e. the winding-up proceedings in England and Wales], are unsecured and shall rank pari passu with all other debts of Alitalia for the purposes of the English Proceedings".
Professor Fantozzi's contention, however, is that the second tranche of payments should be made from the Barclays accounts.
- As at 30 June 2009, the funds held in the Barclays accounts amounted to £739,926.70.
The framework
- The Insolvency Regulation provides for "main" insolvency proceedings to be opened in the member of the European Union ("Member State") in which the debtor has his COMI. "Secondary" proceedings can, however, be opened in another Member State if the debtor has an "establishment" there. Under Article 3 of the Insolvency Regulation, secondary proceedings must be "winding-up proceedings" and their effects are restricted to the assets of the debtor in the Member State where the secondary proceedings have been opened.
- Recitals (11) and (12) to the Insolvency Regulation explain what is intended as regards secondary proceedings. They state:
"(11) This Regulation acknowledges the fact that as a result of widely differing substantive laws it is not practical to introduce insolvency proceedings with universal scope in the entire Community. The application without exception of the law of the State of opening of proceedings would, against this background, frequently lead to difficulties. This applies, for example, to the widely differing laws on security interests to be found in the Community. Furthermore, the preferential rights enjoyed by some creditors in the insolvency proceedings are, in some cases, completely different. This Regulation should take account of this in two different ways. On the one hand, provision should be made for special rules on applicable law in the case of particularly significant rights and legal relationships (e.g. rights in rem and contracts of employment). On the other hand, national proceedings covering only assets situated in the State of opening should also be allowed alongside main insolvency proceedings with universal scope.
(12) This Regulation enables the main insolvency proceedings to be opened in the Member State where the debtor has the centre of his main interests. These proceedings have universal scope and aim at encompassing all the debtor's assets. To protect the diversity of interests, this Regulation permits secondary proceedings to be opened to run in parallel with the main proceedings. Secondary proceedings may be opened in the Member State where the debtor has an establishment. The effects of secondary proceedings are limited to the assets located in that State. Mandatory rules of coordination with the main proceedings satisfy the need for unity in the Community."
- Article 4 of the Insolvency Regulation states that, except as otherwise provided, "the law applicable to insolvency proceedings and their effects shall be that of the Member State within the territory of which such proceedings are opened". The Article provides for the "law of the State of the opening of proceedings" to determine, in particular, "the rules governing the distribution of proceeds from the realisation of assets, the ranking of claims and the rights of creditors who have obtained partial satisfaction after the opening of insolvency proceedings by virtue of a right in rem or through a set-off" (Article 4(2)(i)) and "who is to bear the costs and expenses incurred in the insolvency proceedings" (Article 4(2)(l)). In similar vein, Article 28 states:
"Save as otherwise provided in this Regulation, the law applicable to secondary proceedings shall be that of the Member State within the territory of which the secondary proceedings are opened."
- Chapter II of the Insolvency Regulation, comprising Articles 16 to 26, is concerned with recognition of insolvency proceedings. Under Article 17(1), a judgment opening main proceedings is to:
"produce the same effects in any other Member State as under this law of the State of the opening of proceedings, unless this Regulation provides otherwise and as long as no proceedings referred to in Article 3(2) [i.e. secondary proceedings] are opened in that other Member State."
Article 18(1) states:
"The liquidator appointed by a court which has jurisdiction pursuant to Article 3(1) [i.e. in main proceedings] may exercise all the powers conferred on him by the law of the State of the opening of proceedings in another Member State, as long as no other insolvency proceedings have been opened there nor any preservation measure to the contrary has been taken there further to a request for the opening of insolvency proceedings in that State. He may in particular remove the debtor's assets from the territory of the Member State in which they are situated, subject to Articles 5 and 7."
- (It is to be noted that, for the purposes of the Insolvency Regulation, "liquidator" is defined to refer to "any person or body whose function is to administer or liquidate assets of which the debtor has been divested or to supervise the administration of his affairs" – see Article 1(b). Professor Fantozzi is thus a "liquidator" within the meaning of the Insolvency Regulation.)
- Chapter III of the Insolvency Regulation, encompassing Articles 27 to 38, deals specifically with secondary insolvency proceedings. I have already quoted Article 28 (see paragraph 19 above). Article 31, which imposes requirements as to co-operation between liquidators, is in these terms:
"1. Subject to the rules restricting the communication of information, the liquidator in the main proceedings and the liquidators in the secondary proceedings shall be duty bound to communicate information to each other. They shall immediately communicate any information which may be relevant to the other proceedings, in particular the progress made in lodging and verifying claims and all measures aimed at terminating the proceedings.
2. Subject to the rules applicable to each of the proceedings, the liquidator in the main proceedings and the liquidators in the secondary proceedings shall be duty bound to cooperate with each other.
3. The liquidator in the secondary proceedings shall give the liquidator in the main proceedings an early opportunity of submitting proposals on the liquidation or use of the assets in the secondary proceedings."
- Article 32 relates to the exercise of creditors' rights. It provides:
"1. Any creditor may lodge his claim in the main proceedings and in any secondary proceedings.
2. The liquidators in the main and any secondary proceedings shall lodge in other proceedings claims which have already been lodged in the proceedings for which they were appointed, provided that the interests of creditors in the latter proceedings are served thereby, subject to the right of creditors to oppose that or to withdraw the lodgement of their claims where the law applicable so provides.
3. The liquidator in the main or secondary proceedings shall be empowered to participate in other proceedings on the same basis as a creditor, in particular by attending creditors' meetings."
- Article 33 provides for the stay of secondary proceedings at the request of the liquidator in the main proceedings. Article 33(1) states:
"The court, which opened the secondary proceedings, shall stay the process of liquidation in whole or in part on receipt of a request from the liquidator in the main proceedings, provided that in that event it may require the liquidator in the main proceedings to take any suitable measure to guarantee the interests of the creditors in the secondary proceedings and of individual classes of creditors. Such a request from the liquidator may be rejected only if it is manifestly of no interest to the creditors in the main proceedings. Such a stay of the process of liquidation may be ordered for up to three months. It may be continued or renewed for similar periods."
- Finally, Article 35 deals with assets remaining in secondary proceedings. It provides:
"If by the liquidation of assets in the secondary proceedings it is possible to meet all claims allowed under those proceedings, the liquidator appointed in those proceedings shall immediately transfer any assets remaining to the liquidator in the main proceedings."
- It is common ground that a "teleological" approach is to be adopted when construing the Insolvency Regulation. In Syska v Vivendi Universal SA [2008] EWHC 2155 (Comm), Christopher Clarke J said (in paragraph 16) that the correct approach to the interpretation of the Regulation had been accurately summarised by an arbitration tribunal in these terms:
"the interpretation of the EC Regulation should strive to establish an autonomous (European) meaning, based on the different language versions of the Regulation, considering (i) the overall scheme and purpose of the Regulation (teleological method of construction) and (ii) taking into account interpretative sources, such as the Preamble of the Regulation and the Virgós-Schmit Report, but also the available authorities, such as court decisions – in first line, those of the ECJ – and the opinions of legal commentators."
The Virgos-Schmit report (Report on the Convention on Insolvency Proceedings, Brussels, 3 May 1996), of which there is mention in this passage, was designed to provide a commentary on a November 1995 Convention on Insolvency Proceedings. That Convention did not itself come into force, but it provided the basis for the Insolvency Regulation.
The parties' cases
- It is the Liquidators' case that assets of Alitalia in England and Wales (comprising, essentially, money in the Barclays accounts) fall to be distributed to unsecured creditors in accordance with the Insolvency Act 1986. In support of this case, Mr Stefan Ramel, who appears for the Liquidators, relied on the terms of the Insolvency Regulation. Mr Ramel submitted that Articles 4 and 28, in particular, provide for secondary proceedings to be governed by the local law rather than the law applicable to the main proceedings.
- In contrast, as already mentioned, it is Professor Fantozzi's case that the sums in the Barclays accounts should be used to discharge the outstanding indebtedness to the English employees. Miss Lexa Hilliard QC, who appears with Miss Georgina Peters for Professor Fantozzi, argued that this result could be achieved by two routes. One possibility, she suggested, was to direct the Liquidators to remit all the money in the Barclays accounts (less whatever was needed to discharge debts with preferential status under English law) to Professor Fantozzi. Alternatively, the Liquidators could simply be directed to pay the English employees direct.
- Miss Hilliard put forward a number of arguments in support of her case. In the first place, she contended that money in the Barclays accounts is held on trust for the English employees. In the alternative, she argued that the Liquidators should be directed to discharge the debts to the English employees either on the strength of the duty of co-operation to be found in Article 31 of the Insolvency Regulation or pursuant to the principle in Ex parte James. Finally, she placed reliance on the law relating to ancillary liquidations.
- I shall take these matters in turn.
Was there a trust?
- Miss Hilliard submitted that a trust over money in the Barclays accounts in favour of the English employees (and other local creditors of Alitalia) had been established by Professor Fantozzi. She suggested that, as regards the employees at least, the trust will have taken effect when the compromise agreements began to be entered into.
- The creation of a trust requires the "three certainties": of words, subject matter and objects. With regard to the first of these, a trust can be established without the word "trust" being used. As Megarry J explained in In re Kayford Ltd [1975] 1 WLR 279 (at 282):
"it is well settled that a trust can be created without using the words 'trust' or 'confidence' or the like: the question is whether in substance a sufficient intention to create a trust has been manifested."
- On the facts, Miss Hilliard argued that all three "certainties" were present. As regards certainty of words, Miss Hilliard contended that Professor Fantozzi's evidence establishes a "sufficient intention to create a trust". Among the relevant passages from Professor Fantozzi's witness statement are these:
"I was fully aware of the UK Account [i.e. the Barclays accounts] at the time of entering into the Compromise Agreements and at that time, the UK Account of the Company became impressed with an obligation to pay sums due under the Compromise Agreements (see paragraph 3 of the Legal Opinion …). Under Article 111 of the Italian bankruptcy law (Royal Decree no. 267 of 16 March 1942), the payments due under the Compromise Agreements, being credits of the procedure, rank in priority to sums due to other unsecured creditors …."
"I accepted this offer [from CAI] on behalf of the Group on 20 November 2008 …. On this date, as a matter of Italian law, there was a binding agreement with CAI and as part of this binding agreement, the Compromise Agreements had to be entered into with the Former Employees so that there was no continuity of the employment of the Former Employees. At this point in time, the funds in the UK Account, which I was fully aware of became impressed with an obligation to pay the Former Employees."
"At the time of entering into the Compromise Agreements, I had expected these payments to be made from the UK Account. I could have removed the funds from the UK Account to make the payments but I did not feel that it was necessary to do. The funds were left there specifically to make these payments and pay other creditors in the UK."
- In my judgment, such evidence does not demonstrate an intention to create a trust. It can be seen from his evidence that Professor Fantozzi was intending to use money in the Barclays accounts to pay the UK employees. Of itself, however, that is not enough to establish a trust. Were it otherwise, a person who intended to pay a bill from a particular account would find that he had established a trust in favour of his creditor, with the result that he would commit a breach of trust if he changed his mind and decided to use the money in question for a different purpose. Further, the obligation with which Professor Fantozzi saw the funds as "impressed" was, as I read Professor Fantozzi's evidence, really the general obligation to administer funds in accordance with Italian insolvency law. The "Legal Opinion" to which Professor Fantozzi referred in the first of the passages set out above concluded, having referred to the Insolvency Regulation, that "Alitalia's total assets were impressed with an obligation to pay sums due under the Compromise Agreements" (emphasis added); it lends no support to the proposition that Professor Fantozzi declared a trust in relation to sums standing to the credit of the Barclays accounts. Further, advice the Liquidators have obtained from Italian lawyers speaks of the "general principle under Italian law that assets of the debtor are 'all impressed'".
- There are other indications that Professor Fantozzi was not intending to create a trust. He neither opened a new bank account nor arranged for the existing accounts to be redesignated as trust accounts. Moreover, there is no other contemporaneous evidence of an intention to declare a trust. It is significant, too, that there was not always enough money in the Barclays accounts to pay the first and second tranches in full. That was the case, in particular, both when the compromise agreements were being entered into and when the winding-up order was made in respect of Alitalia.
- To my mind, the evidence proves no more than that Professor Fantozzi thought it convenient to leave money in the Barclays accounts and saw no need to remove it. It does not establish an intention to create a trust. I therefore reject the submission that a trust was established.
Co-operation
- Miss Hilliard founded her argument on Article 31 of the Insolvency Regulation. As explained above, this imposes a duty of co-operation between the "liquidators" (within the meaning of the Regulation) in main and secondary proceedings. Miss Hilliard further argued that secondary proceedings are to be seen as subordinate to main proceedings. This, she said, is apparent from the Insolvency Regulation itself (in particular, Recitals (11) and (12)). Miss Hilliard referred, too, to the Virgos-Schmit report, paragraph 14 of which speaks of secondary proceedings being "coordinated with and subject to the main proceedings". In the circumstances, the duty of co-operation means, Miss Hilliard submitted, that the Liquidators should allow the money in the Barclays accounts to be used to carry into effect, as Professor Fantozzi had intended, the sale he had arranged as "liquidator" in the main (i.e. Italian) proceedings.
- Reference was made to Re MG Rover Espana SA [2006] BCC 599, Re MG Rover Belux SA/NV, an unreported decision of Norris J (as Judge Norris QC) dated 30 March 2006 and Re Collins & Aikman Europe SA [2006] BCC 861. The first two of these cases concerned sub-subsidiaries of MG Rover Group Limited, the car manufacturer. Administration orders were made in respect of the relevant companies in this jurisdiction (on the basis that the COMI of each company was here), but the companies had employees and debts in the particular European countries in which they had been incorporated and were responsible for sales of MG and Rover vehicles. The proceedings in Re MG Rover Espana SA arose out of the fact that employees stood to be treated more favourably under the laws of the countries of incorporation than under English law. This meant that there was a risk of secondary proceedings being brought in the countries of incorporation unless the English administrators could ensure that employees received as much as the local laws would give them. Norris J explained the problem as follows:
"9 … Art.3(2) of the EU Regulation contemplates the possibility of secondary proceedings being commenced in a Member State in which a national sales company possesses an establishment. Paragraph 3 of Art.3 says that these must be winding-up proceedings. By Art.27 of the EU Regulation the effects of such secondary proceedings are restricted to the assets of the company situated within the territory of the Member State in which the secondary proceedings are commenced. By Art.28 of the EU Regulation the law applicable to the secondary proceedings is that of the Member State in which the secondary proceedings commence. Thus if one asks what claims (say) French employees may make against the French assets of the French national sales company being wound up in secondary proceedings commenced in France the answer is to be found in French insolvency law.
10 The result of this disposal of international jurisdiction under the EU Regulation is that there will be strong pressure from those most favourably treated under local law for the commencement of secondary local proceedings. But the inevitable consequence of that will be the uncoordinated destruction of the individual businesses in the separate secondary proceedings, and the frustration of the purpose of the primary proceedings, which is the preservation and rescue of the businesses (or their orderly and co-ordinated wind-down with a view to maximising realisations in each)."
Norris J found a solution to the problem in the powers conferred on administrators by schedule B1 to the Insolvency Act 1986. Those powers, Norris J held, were wide enough to allow an administrator "to depart from the strict ranking of claims if he thinks it likely to assist achievement of the broader purpose of administration" (see paragraphs 13 and 14). Whether the administrators of a company chose to exercise their powers was "entirely a commercial decision for the joint administrators in each case". The administrators would, Norris J explained (in paragraph 16), "have to make the judgment whether the likely benefit to an individual national sales company resulting from the continuation of the administration exceeds the cost of avoiding a liquidation in that Member State".
- In Re MG Rover Belux SA/NV, the question was whether the administrators should be authorised to distribute assets to unsecured creditors after provision had been made for creditors who had preferential status under the local (i.e. Belgian) law. Norris J (again, as Judge Norris QC) decided that he should give such permission pursuant to paragraph 65(3) of schedule B1 to the Insolvency Act 1986. He said (in paragraph 10):
"By approving the proposed distribution the Court is approving the indirect application of Belgian insolvency rules (the adoption of those rules having previously come about because the administrators saw commercial advantage to the administration process in so doing). The recipients of the intended distribution are defined by reference to the class of preferential creditors determined by reference to Belgian law (their claims having been met or provided for). But I have no hesitation in giving that approval. The object of Article 3 [of the Insolvency Regulation] is to determine which shall be the supervising jurisdiction and choice of law in Community insolvencies: but it does not oblige the supervising court to insist upon the adoption of its domestic law to every aspect of the insolvency or to insist that local rights can only be taken into account if secondary insolvency proceedings are commenced. I can accordingly give permission for a payment that does not strictly accord with English law if it is just and convenient to do so and helps achieve the objective of the administration. In my judgment the conduct of the Belux administration demonstrates just how flexible Article 3 of the EC Regulation and the provisions of the Insolvency Act 1986 can be when approached with the spirit of co-operation (on which the administrators and the Belgian creditors' committee and their respective advisers are to be commended)."
- Re Collins & Aikman Europe SA was a similar case. Administrators appointed in this jurisdiction had given assurances that, if there were no secondary proceedings, the positions of creditors with preferential status under the laws of the countries of incorporation would so far as possible be respected. Lindsay J concluded that he could and should authorise the administrators under paragraphs 65 and/or 66 of schedule B1 to the Insolvency Act 1986 to give effect to their assurances. Lindsay J added (in paragraph 34) that he agreed:
"with Judge Norris' view in MG Rover Belux that where, as here, the law of the main jurisdiction is sufficiently flexible, as English law is, to acknowledge that in the particular circumstances of an administration it is the provisions of a local non-English law that may have (albeit indirectly) to be respected, then there is nothing in Art.3 of the [Insolvency] Regulation …, that precludes that respect".
- Miss Hilliard submitted that these three cases showed the willingness of the English Courts to adapt English law to accommodate the ambition and purpose of the Insolvency Regulation. As, however, was pointed out by Mr Ramel, the cases involved distributions being made in accordance with the laws of countries in which secondary proceedings had been brought. In the present case, the reverse is proposed: that assets should be applied in accordance with the law applicable to the main proceedings rather than that governing secondary proceedings. Further, it was important in the MG Rover and Collins & Aikman cases that the companies in question were in administration. The MG Rover decisions depended on the proposed payments advancing the purposes of the administrations: as already mentioned, in MG Rover Espana Norris J spoke of an administrator being able to depart from the strict ranking of claims if he thinks it likely "to assist achievement of the broader purpose of administration", and in MG Rover Belux he said that he could give permission for a payment if it "helps achieve the objective of the administration". Similarly, the assurances at issue in Collins & Aikman had been given to further the purposes of the administration. The present case, in contrast, involves a compulsory liquidation. In the circumstances, I do not think the MG Rover and Collins & Aikman cases are of much help on the issues I have to decide.
- The essential difficulty with Miss Hilliard's argument on co-operation is to be found, as Mr Ramel submitted, in the terms of the Insolvency Regulation itself. Article 31(2) of the Regulation, which is the source of the duty of co-operation, opens with the words, "Subject to the rules applicable to each of the proceedings", and other Articles of the Regulation envisage that assets within the scope of secondary proceedings will be distributed in accordance with the local law. Article 28 states in terms that the law applicable to secondary proceedings is to be "that of the Member State within the territory of which the secondary proceedings are opened". Article 4 likewise provides for insolvency proceedings opened in a Member State to be governed by that State's law (including in relation to "the distribution of proceeds from the realisation of assets"). Further, a judgment opening main proceedings is to produce the same effects in another Member State only "as long as no proceedings referred to in Article 3(2) [i.e. secondary proceedings] are opened in that other Member State" (Article 17), and a liquidator in main proceedings is to be able to exercise his powers in another Member State only "as long as no other insolvency proceedings have been opened there" (Article 18).
- While, therefore, proceedings opened in the Member State of a debtor's COMI are regarded as the "main" proceedings (as their name indicates), the Insolvency Regulation provides for assets within the scope of secondary proceedings to be disposed of in accordance with that Member State's law. What Miss Hilliard is suggesting is thus that the duty of co-operation extends to requiring the Liquidators to apply assets in a manner different from that for which the Regulation itself provides. I do not think that that can be right, especially when the duty of co-operation is expressly subject "to the rules applicable to each of the proceedings".
The principle in Ex parte James
- This principle takes its name from Ex parte James (1874) LR 9 Ch App 609. There, a creditor had made a payment to a trustee in bankruptcy under a mistake of law. The trustee was ordered to repay the money. James LJ (with whose observations Mellish LJ agreed) said (at 614):
"I am of opinion that a trustee in bankruptcy is an officer of the Court. He has inquisitorial powers given him by the Court, and the Court regards him as its officer, and he is to hold money in his hands upon trust for its equitable distribution among the creditors. The Court, then, finding that he has in his hands money which in equity belongs to some one else, ought to set an example to the world by paying it to the person really entitled to it. In my opinion the Court of Bankruptcy ought to be as honest as other people."
- An attempt to invoke the principle in relation to a voluntary liquidation failed in In re T. H. Knitwear (Wholesale) Ltd [1988] Ch 275 on the ground that it applied only to officers of the Court. Slade LJ, with whom the other members of the Court expressed agreement, said (at 289):
"The entire basis of the principle, as I discern it from the cases, is that the court will not allow its own officer to behave in a dishonourable manner. There is no doubt much to be said in favour of the principle. However, where it is invoked it is likely, save in the most obvious cases, to introduce a less welcome element of uncertainty. As Salter J. commented in In re Wigzell [1921] 2 K.B. 835, 845:
'Legal rights can be determined with precision by authority, but questions of ethical propriety have always been, and will always be, the subject of honest difference among honest men.'
The principle is itself anomalous. I would not for my part extend the anomaly and the inevitable uncertainty which it involves by holding that it applies to liquidators in a voluntary winding up, or indeed to ordinary trustees or personal representatives or anyone other than an officer of the court."
- In the present case, Miss Hilliard argued that the honourable and right-minded course for the Liquidators to take is to pay the English employees in full consistently with the arrangements made by a fellow office-holder in main proceedings before their own appointment. It would be wrong, Miss Hilliard submitted, for the assets in the secondary proceedings to be enlarged because payments to employees had not yet been made when the company was put into compulsory liquidation.
- I have not, however, been persuaded that the principle in Ex parte James is applicable in the present case. My reasons include these:
i) The principle in Ex parte James is "anomalous" (as Slade LJ said in T. H. Knitwear), and the Courts should be cautious about extending it;
ii) In Ex parte James itself, the trustee in bankruptcy had received money to which the estate was not in law entitled. That is not the case here;
iii) The fact that the sums standing to the credit of the Barclays accounts are within the scope of the English liquidation does not arise either from any conduct on the part of the Liquidators or from events subsequent to the making of the winding-up order;
iv) The evidence suggests that the English employees will be paid in full regardless of the outcome of these proceedings (see paragraph 13 above). On that basis, the question is whether money in the Barclays accounts is distributed (a) to unsecured creditors (in accordance with English law) or (b) to creditors with priority under Italian law (as to the identity of whom, there is no evidence). There is no reason to regard the former possibility as inherently inequitable;
v) The Liquidators are doing no more than contend for the application of the Insolvency Regulation according to its terms;
vi) I cannot see, in all the circumstances, that there is any question of the Liquidators behaving "in a dishonourable manner". Miss Hilliard fairly said that she was not accusing the Liquidators of so behaving.
Ancillary liquidations
- Finally, Miss Hilliard relied on cases concerned with whether, where an English liquidation is ancillary to a foreign liquidation, the English liquidator can remit assets to the principal liquidator. It was Miss Hilliard's submission that the law relating to ancillary liquidations applies in the present case except in so far as inconsistent with the Insolvency Regulation.
- Miss Hilliard focused, in particular, on the decision of Scott V-C in In re Bank of Credit and Commerce International SA (No. 10) [1997] Ch 213. In that case, it was held that the English liquidators of a company incorporated in Luxembourg should not remit the funds in their hands to the company's Luxembourg liquidators without making provision for the sums to which creditors would be entitled under English rules as to insolvency set-off. In the course of his judgment, Scott V-C noted (at 246) that "[w]here a foreign company is in liquidation in its country of incorporation, a winding up order made in England will normally be regarded as giving rise to a winding up ancillary to that being conducted in the country of incorporation". He observed, too, that in such a case "it will be the liquidators in the principal liquidation who will be best placed to declare the dividend and to distribute the assets in the pool accordingly". He went on to say (at 247):
"The accumulation of judicial endorsements of the concept of ancillary liquidations have, in my judgment, produced a situation in which it has become established that in an 'ancillary' liquidation the courts do have power to direct liquidators to transmit funds to the principal liquidators in order to enable a pari passu distribution to worldwide creditors to be achieved."
- On the other hand, Scott V-C also said (at 246):
"None the less, the ancillary character of an English winding up does not relieve an English court of the obligation to apply English law, including English insolvency law, to the resolution of any issue arising in the winding up which is brought before the court."
Earlier in his judgment (at 239), Scott V-C had said:
"The courts have, in my judgment, no more inherent power to disapply the statutory insolvency scheme than to disapply the provisions of any other statute."
- I was also referred to the decision of the House of Lords in In re HIH Casualty and General Insurance Ltd [2008] UKHL 21, [2008] 1 WLR 852. In that case, the English provisional liquidators of a group of Australian companies were directed to remit assets to liquidators appointed in Australia even though the principles on which the assets would be distributed under Australian law differed from those applicable under English law. In the course of his speech, Lord Hoffmann, with whom Lord Walker agreed, expressed the view (at paragraph 24) that "the court had jurisdiction at common law, under its established practice of giving directions to ancillary liquidators, to direct remittal of the English assets, notwithstanding any differences between the English and foreign systems of distribution". He also said (at paragraph 30):
"The primary rule of private international law which seems to me applicable to this case is the principle of (modified) universalism, which has been the golden thread running through English cross-border insolvency law since the 18th century. That principle requires that English courts should, so far as is consistent with justice and UK public policy, 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."
- Lords Scott and Neuberger, however, did not agree with Lord Hoffmann on the common law position. Lord Scott, adhering to his conclusions in the BCCI case, said (in paragraph 59):
"The English courts have a statutory obligation in an English winding up to apply the English statutory scheme and have, in my opinion, in respectful disagreement with my noble and learned friend Lord Hoffmann, no inherent jurisdiction to deprive creditors proving in an English liquidation of their statutory rights under that scheme."
Lord Neuberger expressed similar views.
- Lord Phillips, the fifth Law Lord, declined "to stray from the firm area of common ground onto the controversial area of whether, in the absence of statutory jurisdiction, the same result could have been reached under a discretion available under the common law" (paragraph 44). The directions to the English liquidators were accordingly given under section 426 of the Insolvency Act 1986 rather than pursuant to any common law power.
- In the circumstances, the HIH Casualty and General Insurance case cannot be taken as authority for the proposition that there is a common law power to order an English liquidator to remit assets to a foreign liquidator even where they will then be distributed otherwise than in accordance with English rules. The decision shows the breadth of the discretion conferred by section 426 of the Insolvency Act, but that provision is inapplicable in the present case.
- There was mention too of Cambridge Gas Transportation Corpn v Official Committee of Unsecured Creditors of Navigator Holdings plc [2007] 1 AC 508. I do not think, however, that this case adds anything of importance in the present context.
- Standing back from the detail, I can see attractions in the outcome for which Miss Hilliard contended. It would involve assets being applied in accordance with the law of the country in which Alitalia was incorporated and in which it had its COMI. It would mean that assets were used in the manner that the liquidator in the main proceedings had intended when entering into arrangements to facilitate a sale in the overall interests of creditors of Alitalia. It would be in keeping with the inclination of English Courts to favour a "principle of (modified) universalism". It would not involve any creditor with preferential status under English law going unpaid.
- None the less, I have not been persuaded that the law relating to ancillary liquidations entitles Miss Hilliard to the relief she seeks. Had the views expressed by Lord Hoffmann in HIH Casualty and General Insurance received wider support from the House of Lords, Miss Hilliard could have argued that the law to be applied to the English proceedings pursuant to Articles 4 and 28 of the Insolvency Regulation included an inherent power to remit assets to a foreign office-holder even if that meant that the assets would be distributed otherwise than in accordance with domestic insolvency law. Given, however, the division of opinion in the House of Lords, I think I should follow the decision of Scott V-C in the BCCI case and so proceed on the basis that there is no such power at common law; in fact, I did not understand Miss Hilliard to argue that I should prefer Lord Hoffmann's views to Lord Scott's. On that basis, the law which the Insolvency Regulation requires to be applied to the distribution of assets within the scope of the English liquidation must be domestic law (in particular, the Insolvency Act 1986).
- I should add that I would have hesitated before applying ancillary liquidation principles in the present case even if I had thought that I should adopt the views of Lord Hoffmann. In the first place, while Professor Fantozzi is a "liquidator" as that term is defined in the Insolvency Regulation, the Italian proceedings are not, strictly, a liquidation; the English liquidation cannot therefore be seen as ancillary to a "principal liquidation" in a conventional sense. More importantly, perhaps, I am aware of no case other than HIH in which it has hitherto been suggested that assets should be remitted to be applied otherwise than on a pari passu basis in accordance with English law principles.
Stay
- Professor Fantozzi's evidence included a request that the English liquidation be stayed for a period of up to three months pursuant to Article 33 of the Insolvency Regulation. However, Miss Hilliard explained during her submissions that this request depended on my concluding that money in the Barclays accounts should be used to pay the English employees; she recognised that there would be no point in my ordering a stay if I agreed with Mr Ramel's submissions. In the event, I have not accepted Miss Hilliard's submissions as to how the money in the Barclays accounts should be applied. I shall not therefore order a stay.
Creditors entitled to prove
- At one point in his submissions, Mr Ramel spoke of the United Kingdom assets being shared between United Kingdom creditors. As I understand it, however, the assets in the hands of the Liquidators will fall to be distributed between creditors of Alitalia on a worldwide basis; there is no question of the relevant creditors being limited to those in this jurisdiction. Article 32(1) of the Insolvency Regulation states that "any" creditor may lodge his claim "in the main proceedings and in any secondary proceedings", and Article 32(2) allows liquidators in main proceedings to "lodge in other proceedings claims which have already been lodged in the proceedings for which they were appointed". Those provisions are in keeping with English domestic law: in In re Bank of Credit and Commerce International SA (No. 10) Scott V-C observed (at 241-242):
"Every creditor of the company, wherever he may be resident and whatever may be the proper law of his debt, can prove in an English liquidation."
Conclusion
- I have concluded that I should grant relief along the lines sought by the Liquidators, which, as I see it, accords with the Insolvency Regulation. I should be grateful if counsel would seek to agree an appropriate form of order.
