Alex Horsbrugh-Porter Michael Rogers December 7 2017 Scope of powers for trustee in bankruptcy where concurrent domestic insolvency proceedings exist Ogier | Private Client & Offshore Services - Guernsey Alex Horsbrugh-Porter, Michael Rogers Private Client & Offshore Services BackgroundFactsCommentBackgroundThe recognition of the powers of an English trustee in bankruptcy in Guernsey is generally pursued either by way of a letter of request issued by the foreign court pursuant to Section 426 of the Insolvency Act 1986 or an application via common or customary law. The decision in Lee Douglass (in bankruptcy)(1) examines the position – not previously encountered in Guernsey – of an application for recognition under common law in a situation where there were already désastre proceedings in Guernsey. The position was further complicated by the timeline of events, which meant that the Office of Her Majesty's Sheriff and had already sold the judgment debtor's assets and the court had to consider the status of those funds and whether they formed part of his or her estate in bankruptcy. If those funds no longer formed part of his estate in bankruptcy, the implication for the trustee in bankruptcy would be that even if his or her powers were recognised, there would be no Guernsey situs available.FactsIn Guernsey, Mr Douglass was a party to earlier proceedings and various judgments – in aggregate of nearly £2 million – were entered against him. The acts of court were passed to the sheriff's office, with the arrest of Douglass's assets subsequently taking place on January 9 2015. The indebtedness under these judgments was assigned to a Guernsey company (arresting creditor). In England, Mr Douglass was declared bankrupt on January 4 2017 and a joint trustee in bankruptcy was appointed on March 22 2017. Advocates for the joint trustee in bankruptcy initially wrote to the sheriff's office to ascertain whether the assets held by the sheriff's office could be paid directly to the joint trustee, on the basis that there was limited liquidity in the bankrupt's estate to pursue a formal application and that under English law, the bankrupt party's assets automatically vest in the joint trustee. The arresting creditor summonsed the sheriff's office to pay the proceeds of the assets following the sale. Those proceedings were then adjourned as there were clearly competing interests between the joint trustee in bankruptcy and the arresting creditor.The joint trustee applied (under common law) for recognition, closely following Section 311 of the Insolvency Act (possession of books and records relating to the bankrupt party's affairs) and consequently sought the recognition of powers that they already had available to them under English law. Under the principle of modified universalism, the Royal Court recognised that it would provide assistance to foreign insolvency office holders under principles of comity, but that assistance would need to be balanced against certain limitations relating to form and nature, which are dependent upon the consequences that flow from the recognition of the joint trustee and the existing law in Guernsey.In considering these factors, the court referred to the earlier decision of Batty v Bourse Trust Company Limited(2) and explained that under Section 426 of the Insolvency Act, "there is a duty and not a discretion to act in aid of and be auxiliary to the High Court in England" and:"the sources of law under section 426 of the 1986 Act as extended are (a) this Court's general jurisdiction and powers, (b) the provisions of Guernsey insolvency law, which would be an updated list of the laws mentioned in section 426(10)(a), as extended and modified, and (c) so much of the law of England and Wales as corresponds to that comprised in (b)."If the joint trustee in bankruptcy had brought an application under Section 426 of the Insolvency Act, the court would have been able to confer all of the joint trustee's powers under English law, to enable it to conduct those powers in Guernsey. However, in applying its discretion on an application under common law, the court noted that the powers which follow from recognition do not happen automatically and that consideration must be given to whether it was appropriate to permit the joint trustee to exercise particular powers in the instant case.The court considered the extent of assistance in cross-border insolvencies which was recently examined by Lieutenant Bailiff Hazel Marshall in Brittain v JTC (Guernsey) Limited.(3) The lieutenant bailiff gave an indication that the she preferred the minority reasoning of Lord Neuberger and Lord Mance in Singularis(4) and said that as a matter of preference:"I would find against the existence of any common law power in this context, ie an inherent jurisdiction to treat a power conferred only by statute as being available in a case which is not within the statute, relying on some combination of usefulness, a generous assessment of analogy, and resort to a supposed beneficial principle of "modified universalism" of insolvency law, of indefinite and necessarily presupposed extent."(5)The powers sought by the joint trustee in bankruptcy were considered by the court to be the ordinary consequences of recognition, rather than a power with no identifiable equivalent outside of the statutory framework. The court grappled with whether:the désastre procedure had already been activated and the court was therefore in a precarious position regarding the powers asserted by the joint trustee over the bankrupt party's estate; andthe property in the estate was already part of the désastre proceedings.Counsel on behalf of the arresting creditor, the joint trustee in bankruptcy and the sheriff's office analysed the legal effect of Section 7(3) of the Preferred Debts, Désastre Proceedings and Miscellaneous Provisions (Guernsey and Alderney) Law 2006, which states that where the sheriff's office has executed an arrest on any goods and sold the goods:"…a bona fide purchaser for value of the goods without notice of any ground on which such an application might have been made shall be deemed to have acquired good title to them."All three counsel advanced different interpretations of this section of the preferred debts law as follows:Counsel for the arresting creditor supported the contention that the bankrupt party had lost the legal interest to both former assets and the proceeds once they had been sold and proposed the analogy that the effect of the sale was similar to a situation where the assets of a person are administered by another.Counsel for the joint trustee in bankruptcy was of the view that following the sale of the assets, the bankrupt party had a continuing and enforceable interest in the proceeds of sale.Counsel for the sheriff's office was of the view that either the analysis led to the creation of a constructive trust or that there was a separation of possession and ownership under the customary law (derived from Roman law) with the result that the assets of the bankrupt party and the proceeds of sale would not fall within his estate.The court preferred the analogy of the arresting creditor under the Guernsey customary law maxim of 'le mort saisit le vif'. This maxim is applied by executors and means that the heirs are the true owners of the deceased's property and that, in a similar way, the sheriff's office takes possession of a judgment debtor's property on the understanding that it will administer that property on the directions of the court.The court considered that when the sheriff's office was provided with the act of court to conduct enforcement services, that was considered sufficient to engage the office holder on behalf of the judgment creditor in the first instance. When goods are arrested, the judgment debtor is afforded a further opportunity to satisfy the debt or face the consequences of failing to do so. Where the judgment creditor has not received satisfaction for the debt and returns to the court to confirm the arrest and seeks permission for the sheriff's office to sell those assets, that step should be viewed as bringing the matter under the jurisdiction of the court. The fact that the arrested goods cannot be sold without a direction or order from the court confirms that title to them has not passed to a third party. In order to sell the goods, the court must intervene before the judgment debtor loses the ability to demand the goods' return. Therefore, permission to sell the goods confers a provisional entitlement on the sheriff's office to pass title to a third party. However, once the goods are sold, title would vest in the third party and the judgment debtors' title to the goods would be lost.In this case, the court found that the bankrupt party's interest in the assets ended when they were sold. At the time of sale, the proceeds were not held by the sheriff's office as a direct replacement for the sold goods on the same terms. Instead, they were held as part of a court-directed enforcement process and the normal route would follow of having the proceeds of sale paid to the judgment creditor and for them to be dealt with through the désastre process. Therefore, when the joint trustee in bankruptcy sought to be recognised in Guernsey, the proceeds of the sale did not form part of the bankrupt party's estate.CommentIn circumstances where a foreign insolvency office holder is seeking to obtain recognition and conduct their duties of office in Guernsey, a formal letter of request should be issued from the foreign jurisdiction and the application should follow the route outlined in Section 426 of the Insolvency Act. It is also important to consider the stage of any domestic insolvency proceedings as, depending on his or her status, the foreign office holder may not have title to the assets over which recognition may be exercised.For further information on this topic please contact Alex Horsbrugh-Porter or Michael Rogers at Ogier by telephone (+44 1534 514 000) or email ([email protected] or [email protected]). The Ogier website can be accessed at www.ogier.com.Endnotes(1) Lee Douglass (in bankruptcy) (judgment 32/2017).(2) (Unreported, March 23 2017).(3)  GLR 248.(4) Singularis Holdings Limited v PriceWaterhouseCoopers  2 WLR 971.(5) Brittain v JTC (Guernsey) Limited (judgment 36/2015).