McMahon & Ors v McGrath & Ors

In an ancillary English liquidation of a foreign company, the court may generally remit locally realised assets to the principal foreign liquidation to facilitate a pari passu distribution. That power does not permit the court to bypass substantive English insolvency rules. Transfer is unavailable where the foreign distribution regime is materially different from the English regime and would prejudice creditors’ statutory rights. Section 562A of the Corporations Act 2001, which ring-fences reinsurance recoveries for insurance creditors, created such a material difference. Distributions under section 562A remained subject to English hotchpot principles. The same limitation applied while the companies were in provisional liquidation, because there was a significant prospect that English winding-up orders would be made.

Four Australian insurance companies were being wound up in New South Wales and were subject to English provisional liquidation orders obtained pursuant to letters of request. The English provisional liquidators had collected substantial assets in England. The parties proposed interdependent schemes of arrangement in Australia and England, but disputed whether English assets should be remitted to the Australian liquidators for distribution under Australian law.

The dispute centred on the different effect of section 562A of the Corporations Act 2001 and section 116 of the Insurance Act 1973, compared with English pari passu principles. The court also had to determine whether hotchpot applied to Australian distributions and whether section 426 of the Insolvency Act 1986 or the provisional status of the English proceedings altered the position.

1. Transfer in an ancillary liquidation. The court applied Re BCCI (No 10). An English liquidation of a foreign company will normally be ancillary to the principal liquidation in the place of incorporation, and the court may direct transmission of assets to facilitate a worldwide pari passu distribution. The court must nevertheless apply English law, including the substantive statutory insolvency scheme.
2. The power to remit assets cannot be exercised where the principal liquidation would distribute them on a basis materially different from English pari passu distribution. Section 562A of the Corporations Act 2001 ring-fenced reinsurance recoveries for insurance creditors and created a materially different regime. Section 116 of the Insurance Act 1973 reinforced the difference. The English court therefore would not authorise transfer unless the assets could be distributed as if in an English liquidation.
3. English creditors have personal statutory rights to administration and distribution in accordance with the English insolvency scheme. Those rights include preferential creditors’ rights and the right of ordinary unsecured creditors to pari passu treatment. The court could relax procedural arrangements to facilitate a single global liquidation, but could not disapply substantive rights.
4. Hotchpot applied to dividends received under section 562A. The reinsurance recoveries remained part of the estate of the same company. A statutory priority did not create an English-law security interest for hotchpot purposes. Creditors receiving Australian distributions therefore had to bring them into hotchpot before receiving a dividend in England.
5. Section 426 of the Insolvency Act 1986 imposed a duty to assist, but assistance could be given only where the relief was properly available under the applicable law. The Australian request was an important factor, not a conclusive direction. The English court could not use section 426 to authorise a transfer that would undermine mandatory English insolvency rules.
6. The absence of English winding-up orders did not justify transfer. There was a significant prospect that orders would be made if schemes were not sanctioned, and the provisional liquidators’ function was to safeguard assets pending that possibility. They were therefore not directed to transfer the collected assets, and their powers were not extended for that purpose.
7. The provisional liquidators could propose a scheme distributing English assets under English insolvency law with hotchpot. The court had jurisdiction to sanction a scheme giving effect to the Australian priorities, but the question whether such a scheme should be proposed was left open. Such a scheme would require more than one creditor class because it materially enhanced the rights of some creditors against others.