Schmitt v Deichmann & Ors

The common law permits an English court to recognise and assist a foreign insolvency office-holder. Assistance may include doing what the English court could have done in a domestic insolvency, including permitting proceedings to set aside antecedent transactions for the collective benefit of creditors. Such proceedings are enforcement, rather than establishment, of rights. The absence of a statutory route under Insolvency Act 1986, s 426, does not necessarily exclude common-law assistance. The court retains a discretion, which should generally be exercised to promote international cooperation and a single system of distribution, unless assistance would be improper or contrary to justice or public policy.

The German administrator of Phoenix Kapitaldienst GmbH obtained a without-notice recognition order authorising him to exercise powers available to insolvency practitioners under the Insolvency Act 1986. He subsequently sought relief under s 423 against former investors, alleging that Phoenix operated a Ponzi scheme.

The investors appealed. It was common ground that the European Insolvency Regulation and the Cross-Border Insolvency Regulations did not apply, and that Germany was not a relevant country or territory for the purposes of s 426. The central issue was whether the English court had an inherent common-law jurisdiction to permit a foreign administrator to use a statutory avoidance power which did not expressly apply to him.

1. Appeal dismissed. The court had jurisdiction to recognise and assist the German administrator and to authorise him to use s 423 of the Insolvency Act 1986.
2. The authorities establish that common-law assistance extends to doing whatever the English court could have done in a domestic insolvency. Bankruptcy proceedings are collective proceedings for the enforcement, rather than establishment, of rights. Proceedings to set aside antecedent transactions are central to that collective enforcement process. The court derived these propositions from Cambridge Gas Transportation Corpn v Official Committee of Unsecured Creditors of Navigator Holdings plc, [2007] 1 AC 508, Re HIH Casualty and General Insurance Ltd, [2008] UKHL 21, New Cap Reinsurance and Another v AE Grant and Others, [2011] EWHC 677 (Ch), and Rubin v Eurofinance SA, [2011] Ch 133.
3. The observations in Al Sabah v Grupo Torras SA, [2005] 2 AC 333, suggested that inherent jurisdiction could not confer a statutory power outside the statute’s terms. In the absence of a determinative resolution of the apparent conflict, the court followed the later and more considered approach expressed by Lord Hoffmann and approved by Lord Walker in Re HIH Casualty and General Insurance Ltd.
4. Section 426 provides an additional statutory route and may enlarge jurisdiction or permit a different choice of law. The existence of that route did not prevent the common-law power from operating where s 426 did not apply. Nor was it necessary to establish that the administrator could not obtain relief in Germany.
5. The discretion should be exercised in favour of assistance. Cooperation with the country of the principal liquidation supported a single system of distribution, and refusal would have been perverse in circumstances where recoveries had been pursued in numerous jurisdictions. Any dispute about recovery of the initial investment, rather than only fictitious profits, could be addressed when the substantive s 423 application was heard, given the wide discretion under s 425.
6. Consequential matters were adjourned to a further hearing.

The appeal was from Mr Registrar Jaques’s Recognition Order of 8 April 2008. The High Court dismissed the appeal and adjourned consequential matters.