Overseas Chambers of Peter Harris

Maison de la Boucterie
Rue de la Boucterie
Saint Saviour
Jersey, JE2 7ZW

Jersey will now require certain insolvency proceedings to be carried out in Jersey under the désastre procedures rather than leaving administration to the United Kingdom. Comments ...

May 3rd 2017

 


I am seeking here to analyse in summary the current developments in cross-border insolvency and in particular assets held in or through "offshore" structures such as trusts.  I stress that it is no more than a summary for those who may be unversed in the technicalities of offshore insolvency proceedings over business, or for that matter other assets.

Offshore jurisdictions are frequently used for perfectly legitimate financing arrangements over assets which are in another  jurisdiction which does not permit the financing institution to take a charge which it understands over assets with which it is unfamiliar.  Also where the financing involved presents an issue for a bank in the jurisdiction where the asset is situated.  Here I would cite the old chestnut of French "titrisation", and the barriers that the French régime presented for French companies seeking to obtain refinancing of their loans to their French clientèle from overseas.  The offshore securitisation techniques required to access world capital in the 1980s prior to France modernising its laws bear ample witness to that. This is not "évasion de capitaux", it is more like an invasion of foreign liquid capital!

One method is for the beneficial owner of the asset in a jurisdiction which does not formally recognise trusts makes a declaration that they own the assets under or subject to a trust.  The trust can be a simple bare trust or a more sophisticated one. That method does however have limitations as to succession planning and other multi-generational issues.  The nominee method is really limited to short to medium term trusts over business assets, as was the case in Akers v. Samba to which I will revert later.

Before doing that, I would like to draw attention to a set of recent decisions of the Jersey Royal Court culminating in the "désastre" order against Orb a.r.l. ("Orb")  and a certain Dr Cochrane.

These decisions show that in certain issues, Jersey is beginning to retain jurisdiction over its own companies and their insolvencies.  Prior practice used to be to leave such matters in the hands of the English Courts and English administration under ss. 127 and 284 of the Insolvency Act 1986.

The manner in which the issues developed in the following linked cases in Orb was as follows:

 

Harbour Fund II LP v. (1) Orb a.r.l. (2) Litigation Capital Funding [2017]JRC171 ("the 1st judgment")

Harbour Fund II LP v. (1) Orb a.r.l. (2) Dr Gail Cochrane [2017]JRC007 ("the 2nd judgment")

Representation of the Viscount re Cochrane and Orb a.r.l. [2017]JRC025 ("the 3rd judgment")

The cases have supplied some additional light on the prior use of English Administration by Jersey and the development of the historical use of Letters of Request (lettres rogatoires) by the Crown Dependencies to foreign jurisdictions.  The Island used to allow Jersey Companies in insolvency to be administered out of England by the English Courts, but Jersey is now taking its own law into its own hands.

Background

Dr Cochrane is the sole shareholder in Orb, a company registered in Jersey. Orb first "ran into difficulties" when Gerald Smith, who was at the time the chief executive of Orb and Dr Cochrane's husband, misappropriated funds in the region of £35 million from a company in which Orb owned a large proportion of shares. Criminal and civil proceedings were brought against Mr Smith and Orb, but not before significant assets belonging to Orb were sold to a certain businessman Andrew Ruhan. Mr Smith, previously a GP,  will need no further introduction to readers of     The Evening Standard.

Proceedings were issued in both the Manx and English courts on the basis that there was an oral agreement between Orb and Mr Ruhan to share in the profits of these assets.  The veracity of these assertions remains yet to be proven.

Harbour Fund II LP ("Harbour") was the litigation funder for Orb, and had the benefit of fixed and floating charges over Orb's assets and a personal guarantee from Dr Cochrane. To avoid confusion, Litigation Capital Funding which is also mentioned in the judgments, was an entity run by Mr Smith's brother out of New York.

As a result of a settlement agreement in the Isle of Man, some assets were transferred to Dr Cochrane in her personal capacity. Harbour therefore issued a demand for payment under the funding agreement and then sought to place Orb into insolvency proceedings.

The 2nd judgment

Harbour applied to the Royal Court seeking a letter of request to place Orb into English Administration as there was no apparent equivalent procedure under Jersey law. Whilst this is an established procedure used successfully in the past in both Jersey (HSBC v. Tambrook [2013]) and the Isle of Man (Capita Asset Services v. Gulldale Limited [2014]), it is not the only methodology available as the Orb procedures now show. The Royal Court was not duped into taking this path, the Norman influence does tend to counter English attempts at formalism.

Whilst it is clear that Jersey has acquiesced in the transferred proceedings and administration  to the UK where there was a chance of the failed company being resuscitated, it is clear that  the Royal Court is perfectly prepared to stand and hand jurisdiction over the proceedings to the Viscount, a particular function governed both by Customary law and statute which can act outside the usual concepts of English trusteeship in bankruptcy. The customary law of the Island can be an advantage here.

It is not yet established whether the notion of "going concern" will be a factor influencing any further decisions. Here there is no doubt that that fraud perpetrated emptied Orb of any viable future.

The Royal Court declined to accept the transfer of any administration to England for the following reasons:

  1. There were doubts over a substantial connection to England and whether there were any assets;
  2. Inevitably whoever was appointed would have to investigate this issue and the Viscount could do this through désastre; and
  3. The main difference between Administration and désastre was the ability to rescue Orb as a going concern but that was not the case here.

Following the 1st  judgment, Harbour then sought a declaration "en désastre" against both Orb and relying on the personal guarantee, against Dr Cochrane. These proceedings were opposed, but the Court made both declarations on 24 November 2016, with reasons given in the January judgment.

The Court acknowledged that, given the complexity and size of the désastres, a significant burden would be placed upon the Viscount who is responsible for the administration of all désastres. However, the Court "felt it was important that the Island, as a well-respected financial centre, discharged its responsibility for dealing with the affairs of this Jersey registered company and Jersey resident."

The 3rd judgment

The Viscount then made an application to the Court seeking a Letter of Request to the English High Court for assistance with the désastre. The grounds for this application were founded upon the complexities that the Court had noted in the 2nd judgment. In particular, Dr Cochrane now claimed that significant assets were not owned by her but by linked companies in the US and Panama, and both Dr Cochrane and Orb were subject to at least five sets of legal proceedings in the English courts. In essence the Viscount was seeking recognition in England and Wales and to have certain persons summonsed to the High Court in England for an examination should they not voluntarily attend upon the Viscount. In the light of this information, the Court granted the application.

The Royal Court then proceeded to formally confirm its declaration of 24th November, 2016 that both Dr Cochrane and Orb were "en désastre".

 

Comment and the jurisprudential linkage to Akers v Samba

The Orb procedures have shown that obtaining a Letter of Request from the Court in Jersey for English Administration requires strong evidence as to why administration would be preferable to désastre, and what if anything is the substantial connection to England.

The Royal Court is concerned that the insolvency regime in Jersey was in danger of being disregarded, and would prefer that proceedings continue under Jersey law even where there is significant complexity. The Court's decision to then allow a Letter of Request for assistance is clearly indicative of the staged approach the Jersey Court will consider.

How does this fit in with certain other recent United Kingdom decisions on the scope of s. 127 of the Insolvency Act in particular Akers v. Samba?

That case involved an issue of a nominee trust established under Cayman Law over assets situated in Saudi Arabia.  The case was decided by the Supreme Court on an in limine  jurisdictional basis, so it is of limited authority as to the actual substantive issues of the case, but of highly significant authority on the application of English principles of trust law over assets which are situated in and governed by the laws of jurisdictions which do not recognise the trust: here Saudi Arabia.

Again the issues as to substantive law were not argued or indeed arguable, as the matter was an in limine issue as to whether the English Court had jurisdiction under ss. 127 or even 284 Insolvency Act 1986 to impose a trust in Insolvency or Bankruptcy proceedings.

The Supreme Court judgment makes interesting reading, as it compiles the otherwise conflicting authorities as to whether an "equitable interest" is a proprietary one, or a personal obligation. This is of great significance for civil lawyer's understanding of the concept, as the French in particular can get very confused about it when they attempt to tax trusts and beneficiaries. The result is that the French administration then tends to fix its own "certainties", which are way off the mark ...

Those wishing to read a summary of the Akers judgment can refer to the recent Chancery Bar Association Lecture by Lord Briggs which I have posted on the resources page.

His main comments addressed :

Their Lordship's summary of the effect of the Hague Convention and the implementing British legislation, which was not applicable;

The very effective statement that considerations of whether the trust was recognised as such in the jurisdiction where the asset in question was situated, in other words under its Governing Law, was no fatal to the trust, which could notwithstanding be enforced against the "trustee" themselves, thus requiring the trustee to act in relation to the asset so as to give effect to the trust to which they were subject.

He directed his address as to the issue of the meaning of the term "disposition" in s.127 Insolvency Act 1996. In my view that means that The Supreme Court's decision may not therefore be immediately transposable to other jurisdictions.

Most importantly, both the Supreme Court and Lord Briggs addressed the jurisprudential dichotomy of the trust as being either a set of personal obligations, or a proprietary issue.  The Supreme Court were able to concentrate on the meaning of "disposition" in s. 127 IA 1986, and the effectiveness of the transfer to the Third Party to avoid coming to any conclusion on that point in what was not a decision the substance of the case.  My view is that a trust's effects amount to both, but that principally a trust is a proprietary matter, defined by the Courts by reference to equitable rights giving rise to obligations which are enforced both in rem and in personam by the Courts, subject to the proprietary freedoms of the common law and the bona fide purchaser for value without notice,  or equity's darling.  At the risk of misplaced wit,  I personally prefer Professor Farrand's term "Equity's blue-eyed boy" as there is usually a more or less believable protestation of innocence and clean handedness involved before an English Court, the latinate root of mani pulente refers.

I stress here, as an aside,  that to treat a trust as if it were a "contrat" as distinct from a matter of property law is a pure heresy, and that that is one of the flaws in the French tax legislation which should be considered to be fatal to it.

This is where Jersey remedies become both comparable and yet distinct.

The Trusts Law (Jersey) 1984 had to define the legal status of an interest in a trust, as the British notion of equity simply is not the same as équité in Norman customary law.  Article 10 (10) of the Law defines a beneficiary's interest in a Jersey trust as a movable property right, thus in a sense defining the Royal Court's position, whilst leaving the matter of remedies untouched by statute.

Taken in that light, the likely outcome of a Jersey decision is perhaps foreseeable with more certainty than the English.  Lord Briggs clearly admits that it is as much a question of intimate gut feeling for an English lawyer, as opposed to any foreign desire for legal definition and certainty.

Jersey is an ideal jurisdiction in which to attempt to reconcile such jurisdictional incompatibilities, as whilst the Island recognises trusts, it has a non-trust customary law.  What is more the Viscount has been confirmed by the Royal Court as not being bound by the same fiduciary duties of care and accountability as a trustee in bankruptcy.  The office and function of Viscount is not a trustee function.

Quite whether that can be stretched to accommodate passing a simpler "going concern" procedure into the hands of the Viscount is another issue, but it might give openings to those seeking reparation in cases of cross-border fraud and fraudulent conversion to any extent that assets have not been fully disbursed or otherwise concealed.