Joint Administrators of Heritable Bank plc v The Winding-Up Board of Landsbanki Islands hf (Scotland)

Under the European regime for the insolvency of credit institutions, each institution is wound up on a strict entity basis under the law of its home EEA State. Recognition of a foreign insolvency measure preserves that State’s exclusive jurisdiction over the foreign institution. It does not import the foreign insolvency law into a separate United Kingdom insolvency.

Accordingly, the conditions for set-off and the admission and ranking of claims in the administration of a United Kingdom credit institution are determined by the applicable United Kingdom insolvency law. The extinction of a cross-claim for the purposes of a foreign winding-up does not prevent that claim from being used by way of insolvency set-off in the domestic administration.

Landsbanki Islands hf, an Icelandic credit institution, and its Scottish subsidiary, Heritable Bank plc, entered insolvency proceedings in Iceland and Scotland respectively. Each institution asserted claims against the other. Heritable’s administrators rejected Landsbanki’s revolving-credit-facility claim by applying the Scots law balancing of accounts in bankruptcy.

Heritable submitted cross-claims in Landsbanki’s Icelandic winding-up but later withdrew them. Under Icelandic insolvency law, they consequently ceased to be provable in that winding-up. Landsbanki argued that regulation 5(1) of the Credit Institutions (Reorganisation and Winding up) Regulations 2004 required that extinction to be recognised in Heritable’s Scottish administration.

The Lord Ordinary accepted Landsbanki’s construction: [2010] CSOH 100. The First Division reversed him: [2011] CSIH 61. The central issue was whether Icelandic law prevented Heritable from maintaining its cross-claim by way of set-off in its own Scottish administration.

1. Appeal dismissed unanimously. Lord Hope delivered the judgment, with which Lord Walker, Lord Kerr, Lord Reed and Lord Carnwath agreed. The First Division’s interlocutor was affirmed.

2. The Directive adopts principles of mutual recognition, unity and universality, but applies them on a strict entity basis. The home EEA State has exclusive jurisdiction over the insolvency of the credit institution located there. No home State has priority over the others where separate institutions are in insolvency proceedings in different States. The extinction of Heritable’s claims for the purposes of Landsbanki’s Icelandic winding-up therefore had to be recognised in Scotland, but that did not determine their availability in Heritable’s own administration.

3. Regulation 5(1) of the Credit Institutions (Reorganisation and Winding up) Regulations 2004 preserves the integrity of the foreign home State’s exclusive jurisdiction. A foreign insolvency measure affects the foreign institution’s branches, assets, debts and liabilities in the United Kingdom as if it formed part of United Kingdom insolvency law. Its scope is confined to the insolvency of that foreign institution. It does not incorporate foreign insolvency law into the separate administration of a United Kingdom credit institution.

4. Heritable’s administration was instead governed by Parts 3 and 4 of the Regulations. Regulations 7 and 22, implementing article 10 of Directive 2001/24/EC, required the relevant United Kingdom insolvency law to determine the conditions under which set-off could be invoked and the admission and ranking of claims. Regulation 28, implementing article 23, preserved creditors’ set-off rights where permitted by the law applicable to the affected institution’s claim.

5. The Scots law balancing of accounts in bankruptcy was, in substance, set-off for these purposes. It enabled Heritable’s administrators to strike a balance between the parties’ claims when determining the amount, if any, recoverable by Landsbanki in Heritable’s administration.

6. Landsbanki’s construction would arbitrarily require a creditor to maintain a claim in a foreign insolvency even where recovery was hopeless. It would give priority to whichever insolvency process produced a decision first and encourage forum shopping. Those consequences reinforced the construction derived from the scheme of the Directive and Regulations.

1. United Kingdom Supreme Court: The appeal was dismissed unanimously and the First Division’s interlocutor was affirmed: [2013] UKSC 13.

2. Inner House of the Court of Session, First Division: The court recalled the Lord Ordinary’s interlocutor. It held that the conditions for set-off in Heritable’s administration were governed by United Kingdom insolvency law under regulation 22(3)(d): [2011] CSIH 61, 2012 SC 209.

3. Outer House of the Court of Session: The Lord Ordinary rejected Heritable’s challenge. He held that a final and binding Icelandic ruling concerning Heritable’s claims had to be recognised and given effect in the United Kingdom: [2010] CSOH 100, [2011] 2 BCLC 437.