An opinion issued this week is the first examination by a Scottish court of the principle of 'modified universalism' and the requirements for an enforceable floating charge where all the company's property is situated in a non-UK jurisdiction.

This opinion by Lord Tyre in the Court of Session concerns three companies incorporated in Scotland, but which carried on business in India.

An administrator was appointed to all three companies under the Insolvency Act 1986, but the companies were also subject to various orders made in India which prohibited them from dealing with or granting charges over their assets. One of the companies had also already been placed into liquidation in India, and there was a pending Indian winding up application in respect of another. The holder of floating charges granted by the companies sought various declaratory orders concerning its rights under Scots law arising out of contracts entered into with the administrator.

However, these orders were opposed by a creditor of the companies who also disputed the validity of the floating charges.

Against that complex background, the Court of Session had to consider 3 key issues:

  1. Whether the principle of 'modified universalism' (namely, that a court has a common law power to recognise and grant assistance to foreign insolvency proceedings so far as it properly can) meant the powers of an administrator under the 1986 Act, in relation to assets in India or governed by Indian law, are limited by an Indian liquidation process, such that those powers are only exercisable to the extent that their exercise is recognised as legally valid by Indian law. Applying this principle, it was argued by the creditor that the Scottish court should give assistance to the Indian winding up by refraining from granting any order which hindered or was likely to hinder the Indian winding up;
  2. Where the whole of the property of a Scottish company is situated in, or governed by the law of, a non-UK jurisdiction such as India, in order to be a 'qualifying floating charge' within the meaning of paragraph 14 of Schedule B1 to the 1986 Act, does that floating charge require to be legally effective in securing the whole, or substantially the whole, of the company's property under the law of India as well as the law of Scotland? It was argued by the creditor that it did; and
  3. Whether such a floating charge is only 'enforceable' within the meaning of paragraph 16 of Schedule B1 if it is also enforceable under the law of India. Again, it was argued by the creditor that such a charge also required to be enforceable under Indian law.

Modified Universalism

Lord Tyre recognised the principle of modified universalism as applying in Scots law and commented that there was nothing new in a Scottish court lending assistance to foreign winding up proceedings. However, he found no support for that principle applying beyond the situation where the court exercising insolvency jurisdiction in the place of the company's incorporation required assistance to conduct an orderly winding up of its affairs on a worldwide basis. Accordingly, he rejected the creditor's argument that the powers of the administrator were only exercisable in relation to the Indian property to the extent recognised as valid under Indian law. He went on to comment that, on the contrary, the principle meant that any insolvency proceedings in India must be regarded as ancillary to the principal insolvency proceedings in Scotland.

Interpretation of paragraph 14

In order to be a qualifying floating charge within the meaning of paragraph 14, Lord Tyre stated that the formal requirements set out in that paragraph (concerning the terms of the instrument and the extent of the property covered by the charge) must be complied with. In his opinion, there was nothing to indicate that any inquiry beyond the terms of the instrument creating the charge - such as inquiry as to the validity and/or practical enforceability of the security with regard to property situated outside the jurisdiction - was required. In his view, the consequence of such an interpretation in cases where a floating charge was created by a company with property overseas, could be to render the validity of the administrator's appointment uncertain, with such uncertainty depriving the administrator of the ability to effectively carry out his duties. As such, he held that the formal validity and practical enforceability under Indian law of the floating charges were irrelevant.

Interpretation of paragraph 16

Paragraph 16 states that an administrator may not be appointed while a floating charge on which the appointment relies is not enforceable. In Lord Tyre's opinion, that provision simply envisaged that there would be a time during which a floating charge is not enforceable followed by a time during which it is, eg. following an event of default entitling the charge-holder to make an appointment. Again, Lord Tyre rejected the proposition put forward by the creditor and held that paragraph 16 did not preclude the appointment of an administrator unless or until it could be established that the charge would be treated by the Indian court as enforceable in relation to property situated in India or otherwise subject to Indian law.

For the full text of the opinion, please click here.