October 30, 2012 - The UK Supreme Court has released a decision that significantly impacts cross-border insolvency proceedings: Rubin v. Eurofinance SA and New Cap Reinsurance Corporation v. A E Grant [2012] UKSC 46.

In the decision, the UK Supreme Court stuck to its common law guns, refusing to expand the rules on the recognition and enforcement of foreign judgments in the context of insolvency proceedings.  In doing so, it rejected the Supreme Court of Canada’s “real and substantial connection” test and found no comfort in the principles of comity and cooperation that underpin the cross-border insolvency provisions found in the Companies’ Creditors Arrangement Act, the Bankruptcy and Insolvency Act, and the US Bankruptcy Code.  The judgment reflects the ongoing struggle insolvency practitioners face in facilitating cross-border insolvency proceedings with their UK counterparts.

The Rubin appeal concerned a judgment of the United States Bankruptcy Court for the Southern District of New York.  The judgment, for approximately US$10million in connection with alleged fraudulent conveyances and transfers, was granted in default of appearance.  The New Cap appeal concerned a default judgment of the Australian New South Wales Supreme Court for approximately US$8million in respect of unfair preferences. In both cases, the UK Supreme Court refused to recognize and enforce the foreign judgments since the defendants had not submitted to the jurisdiction of the foreign court as required under English common law.

In the Rubin appeal, the respondents questioned whether the common law rules on the recognition and enforcement of foreign judgments were outdated for modern global commerce.  The UK Supreme Court acknowledged that the common law approach has been rejected in Canada, where a judgment given against a person outside the jurisdiction is recognized and enforced if the subject matter of the action had a “real and substantial connection” with the jurisdiction in which the judgment was given:  Morguard Investments Ltd. v. De Savoye [1990] 3 SCR 1077; Club Resorts Ltd. v. Van Breda, 2012 SCC 17.  This approach has been applied to the recognition of an English order convening meetings in a scheme of arrangement: Re Cavell Insurance Co. (2006) 269 DLR (4th) 679 (Ont. C.A.), and has been codified in British Columbia by the Court Jurisdiction and Proceedings Transfer Act, SBC 2003, c-28.

Canadian courts have generally demonstrated a willingness to take a global view of a debtor’s financial distress, providing recognition to foreign proceedings and cooperation with foreign courts and insolvency representatives in order to facilitate successful restructurings.  The CCAA and BIA cross-border provisions, based upon the UNCITRAL model, provide that a foreign representative can apply to the Canadian court for recognition of a foreign proceeding.  Where an order recognizing a foreign proceeding is granted, there is an obligation on the Canadian court to cooperate, to the maximum extent possible, with the foreign court and representative.  This has been achieved through the use of cross-border protocols;  see Re AbitibiBowater Inc. 2010 CarswellQue 2338 (Q.S.C.), for an example of cooperation between the Superior Court of the Province of Quebec and United States Bankruptcy Court for the District of Delaware.

Despite the acknowledged expansion of cross-border cooperation and comity, the UK Supreme Court rejected the Canadian approach, taking the view that the introduction of judge-made law extending the recognition and enforcement of foreign judgments would be to the detriment of UK businesses, and without any corresponding benefit.

This regrettable judgment now sits at odds with the general global trend of facilitating cross-border restructurings and insolvency proceedings, and creates additional hurdles for practitioners seeking certainty in negotiating and implementing multi-national restructuring arrangements involving UK parties.