In a recent trilogy of decisions concerning the high-profile insolvency of Jersey company Orb arl and its sole shareholder Gail Cochrane, the Royal Court of Jersey provided a clear endorsement of the capability of the Jersey insolvency regime to deal with complex cross-border insolvency matters. This update considers some of the salient points from the saga so far.
The three Royal Court decisions are as follows:
- First proceedings – the Royal Court declined an application by Orb's litigation funder, Harbour Fund, to place Orb into English law administration. On examination of the facts, it saw no advantage in using English administration in favour of bankruptcy in Jersey, particularly in circumstances where there was no expressed desire to maintain Orb as a going concern.(1)
- Second proceedings – Harbour duly returned to the Royal Court to seek declarations of bankruptcy for Orb and Cochrane. Notwithstanding the potential scope and complexity of the two bankruptcies and the burden that would be imposed on the viscount (the official insolvency officeholder of Jersey) and her department in respect of dealing with global assets and actions, the Royal Court declared both Orb and Cochrane bankrupt. The court stated that it was important that Jersey, as a well-respected financial centre, discharged its responsibility for dealing with the affairs of a Jersey company and its resident.(2)
- Third proceedings – the viscount sought and was granted two letters of request to be issued by the Royal Court to the High Court of England and Wales, requesting the High Court's assistance in accordance with Section 426 of the Insolvency Act 1986 in respect of the bankruptcies of Orb and Cochrane. The letters of request broadly sought the recognition of the viscount in England with authority to:
- exercise various powers to ascertain information about the assets of Orb and Cochrane;
- gather relevant documents; and
- exercise various powers of investigation.(3)
The letters of request are being sent to the English courts.
In Autumn 2002 Orb underwent a corporate reorganisation and became the holding company of a group of companies with various interests in hotels, commercial and warehouse properties, transport and logistics businesses, and venture and private capital.
In or around late 2002 Gerald Smith, Cochrane's former husband and then-chief executive of Orb, stole approximately £35 million from a company called Izodia in which Orb held approximately 30% of the shares and misapplied the majority of these monies to the benefit of Orb. Following investigations by the Serious Fraud Office, Smith faced criminal charges and by 2003 Izodia had issued proceedings against Orb and Smith for recovery of the stolen sums transferred from Izodia's bank account. Following the discovery of the theft, a substantial proportion of Orb's assets were sold to Andrew Ruhan and companies owned or controlled by him. Between 2004 and 2005 Ruhan settled the acquired assets into a complex structure ultimately owned by the trustee of an Isle of Man settlement.
In 2006 Smith pleaded guilty to a number of charges relating to the theft and was sentenced to eight years in prison. In 2007 a £41 million confiscation order was made against him in England.
Following Smith's release from prison in 2012, Orb and others instituted proceedings against Ruhan in England alleging there had been an oral agreement that Orb would share in the profits made from the sale and development of certain of its assets and that Ruhan had concealed or sold the assets for his own benefit and failed to compensate Orb for its share of the profits as agreed. To ensure that Smith continued to assist Orb in the proceedings, Orb, together with its joint claimants, agreed with Smith that in return for his cooperation they would transfer him 50% of any sums recovered from Ruhan up to the amount of the confiscation order.
A final complexity worthy of note is that ancillary proceedings were commenced in the Isle of Man in 2013 in respect of the assets under the Isle of Man settlement. These proceedings were settled and the terms of the settlement involved the transfer of the assets in the Isle of Man settlement to Cochrane in her personal capacity. Ruhan counterclaimed in the English proceedings, asserting that the assets in relation to the Isle of Man settlement were beneficially owned by him and that the transfer of the assets to Cochrane was a misappropriation. Harbour was Orb's litigation funder in respect of the English proceedings under the terms of a funding agreement, which provided it with security over all of Orb's assets and a guarantee of Orb's liabilities by Cochrane.
Careful consideration of connections to England
In the first proceedings, the Royal Court found that there was no advantage to using English administration in favour of bankruptcy. Further, it did not accept that Orb had substantial connections with England.
Although evidence from an English accountancy firm identified some properties in London, it was deemed unclear as to whether Orb had an interest in these properties. Further, the majority of assets listed by the accountant were situated outside England and Wales. Accordingly, the Royal Court held that initiating the English administration process over a Jersey company that had no substantial connection to England was unjustified.
The court made its finding despite the fact that Orb satisfied all of the established criteria for placing a Jersey company into English law administration, namely:
- undisputed insolvency;
- a liquidated claim against it by Harbour;
- UK assets; and
- an opinion of English counsel confirming that the application for administration would likely succeed.
The Royal Court has put a clear marker down that going forward it will be closely examining whether, in substance, a company has a close connection with England when considering whether English law administration is appropriate for a Jersey company. It was also concerned about allowing an English administrator to exercise powers in Jersey that are unavailable under Jersey law to the viscount, such as the power available to an administrator to keep the company trading as a going concern, labelling it as being "administration by the back door".
Royal Court will not readily permit frustration of bankruptcy proceedings
Before the second proceedings, Harbour made a formal demand on Orb for a liquidated sum of £5.2 million and a further disputed claim of £28 million. As Orb was unable to pay, Harbour issued a formal demand to Cochrane, as guarantor of Orb's debt. The debt remained unpaid; therefore, Harbour issued the second proceedings and sought declarations of bankruptcy for both Cochrane and Orb.
Two days before the hearing, a claim was filed in the English courts by Cochrane and Orb against Harbour for £73 million. Thereafter, Cochrane and Orb instructed Jersey advocates to assist with resisting Harbour's application for a declaration of bankruptcy.
The Royal Court refused to allow Cochrane and Orb to frustrate the Jersey bankruptcy process by engaging in English proceedings that it considered to be a 'last gasp' attempt to avoid bankruptcy and accordingly refused to adjourn Harbour's application to declare Cochrane and Orb bankrupt. Not impressed by the conduct of Cochrane and Orb, the court concluded that the English proceedings did not represent a genuine claim.
Royal Court will request assistance from English High Court
In the recent third proceedings, the Royal Court gave further support to the view that Jersey, as a well-respected financial centre, should discharge its responsibility in relation to the affairs of a Jersey resident company or resident by granting the viscount's application to the Royal Court for the issue of letters of request, pursuant to which the viscount sought recognition in England to administer the bankruptcy of Cochrane and Orb. It is estimated that Cochrane and Orb owed creditors the combined sum of £1.3 billion.
The court made a wide request for assistance, including asking the English court to authorise the viscount to exercise her powers and functions as may be necessary (including the power to intervene in, prosecute, defend or apply for a stay in various sets of proceedings before the English courts and to ascertain information and gather relevant documents relating to the assets of Cochrane or Orb). If the request is accepted, it will be the first time that Jersey's viscount has been recognised by the English High Court for nearly 40 years.
The trilogy of cases has provided a salutary reminder to the international insolvency community and to creditors of Jersey companies that Jersey has a sophisticated insolvency regime which will be used in cross-border insolvencies. It is unclear whether these decisions will buck the trend of placing Jersey companies into English law administration, but they certainly demonstrate that it cannot be assumed that the door to UK administration is always going to be open and the court will closely examine the facts in order to determine whether English law administration is in fact suitable for a Jersey company in all the circumstances.
For further information on this topic please contact Nick Williams at Ogier by telephone (+44 1534 514 000) or email ([email protected]). The Ogier website can be accessed at www.ogier.com.