MCGRATH AND ANOTHER v RIDDELL, House of Lords, 9 April 2008
The liquidators of the HIH group of Australian insurance companies appealed against the decisions of the High Court and the Court of Appeal that certain assets of the HIH group, mostly reinsurance claims on policies taken out in the London market, should not be remitted to Australia. The courts instead ordered that the assets should remain in England and be distributed to creditors in accordance with English insolvency laws.
The High Court had found that it had no jurisdiction to order the transfer. If the assets were remitted to Australia then, under Australian insolvency law, insurance and reinsurance creditors would be paid in priority to ordinary creditors. This is rather than all ordinary creditors being paid pari passu, as would happen under English law, ie, English insolvency law would not be applied.
The Court of Appeal reached the same conclusion as the High Court but for a different reason. It considered that it had jurisdiction to order the transfer of the assets, but that it should not exercise its discretion to make such an order since a significant number of creditors would be prejudiced. The House of Lords allowed the liquidators’ appeal and held that the assets should be remitted to Australia for distribution in accordance with Australian insolvency law. However, the Law Lords unanimous verdict was characterised by a divergence of reasoning.
Lords Philips, Scott and Walker considered that the English court had statutory jurisdiction (under section 426 of the Insolvency Act 1986) to permit the transfer of assets to a "relevant country or territory" as designated by the Secretary of State, which included Australia. It was generally desirable that there should be one universally applicable scheme of asset distribution. If the principal country in which the winding up is being conducted is a "relevant country or territory" and the liquidators of that country have requested that assets be remitted to them, that is a request which, in principle, the English liquidators ought to accede.
In contrast, Lords Hoffman and Philips considered that the court had an inherent discretion under the common law to permit the transfer. The English liquidators’ role was ancillary to that of the Australian liquidators, as the HIH group of companies were incorporated and the majority of their assets and liabilities were located in Australia. The principle of universalism required that the English court should, so far as is consistent with justice and UK public policy, cooperate with the courts of the country of principal liquidation to ensure that all of the insolvent company’s assets are distributed to its creditors under a single system. The Law Lords considered that policy holders and creditors dealing with an Australian company would expect that in the event of insolvency their rights would be determined by Australian law and that UK public policy was not prejudiced by the application of Australian law to the distribution of English assets.
Whilst the reasoning of the Law Lords varied, it appears from this case that generally an English court will cooperate with a foreign court in cross-border insolvency disputes. However, whether or not the judgment paves the way for foreign liquidators to seize English assets in cross-border insolvency disputes in practice remains to be seen.