England: Cross Border Restructuring and Insolvency Update - July 2013
In re Paul Zeital Kemsley  Case No 12-13570 (JMP), U.S. Bankruptcy Court, Southern District of New York
Kemsley v Barclays Bank Plc  EWHC 1274 (Ch)
Courts in England and the United States held that a creditor may pursue an insolvent individual in the United States notwithstanding the existence of bankruptcy proceedings in England.
These two related cases, recently heard in New York and London, concern Paul Kemsley, the property developer and former Vice-Chairman of Tottenham Hotspur Football Club.
Mr Kemsley lived in London until 2009, when his business collapsed and he moved to the United States with his family. He lived successively in Florida, New York and California, and remained in New York when his wife returned to London with their children in June 2012.
In January 2012, Mr Kemsley petitioned for bankruptcy in London, facing debts of tens of millions of pounds. At the same time, he was being pursued in separate proceedings in the United States by Barclays Bank, which sought to recover £5 million it had lent him.
In August 2012, with Mr Kemsley's support, his English Trustee in Bankruptcy filed a petition with the U.S. Bankruptcy Court to have his English Bankruptcy proceedings recognised in the United States. Such recognition would impose an automatic stay on the American proceedings brought by Barclays.
Around the same time, Mr Kemsley applied in the English High Court for an order restraining Barclays from pursuing the proceedings in the United States.
In deciding whether to grant recognition to the English proceedings, the U.S. Bankruptcy Court had to determine where Mr Kemsley’s COMI was located. The Court held that the critical date for this question was January 2012, when he petitioned the English Court for bankruptcy. At that date, the Court found, Mr Kemsley was living with his family in Los Angeles, his children were attending school there, and he had no intention of returning to the UK. Accordingly, his habitual residence was in the United States, the English proceedings would not be recognised, and Barclays' American proceedings would continue.
The English High Court heard Mr Kemsley's application before the judgment of the U.S. Bankruptcy Court was given, but its judgment was handed down afterwards. The High Court held that it was "wholly inappropriate" to restrain Barclays from pursuing proceedings in the United States. First, Barclays had undertaken to transfer to Mr Kemsley's Trustee any assets recovered, so it would not gain an unfair advantage over his other creditors. Secondly, if Mr Kemsley were found by the New York Court to have his COMI in the United States, then it would not be appropriate for the English Court to intervene by preventing Barclays from pursuing its case there. This was very different from cases in which an anti-suit injunction had been granted where the creditors' conduct was unconscionable.
In finding against Mr Kemsley, both the English and U.S. Courts appear to have been motivated by a desire to do justice to his creditors. As the Judge in New York remarked, "Mr Kemsley is a bankrupt who does not live like one."
Olympic Airlines SA Pension and Life Assurance Scheme v Olympic Airlines SA  EWCA Civ 643
The Court of Appeal found that there had been no "establishment" and therefore no jurisdiction for winding up proceedings to be commenced.
In our June 2012 bulletin, we reported on the English High Court's decision that it had jurisdiction to wind up Olympic Airlines' UK-based operations.
Main liquidation proceedings had already been commenced in Greece. In deciding whether secondary insolvency proceedings could be opened in England, the High Court examined whether, at the time the winding up petition was presented, Olympic Airlines' London office met the criteria for an "establishment" under the European Insolvency Regulation.
The High Court applied the Interdil definition of establishment: "a structure with a minimum level of organisation and a degree of stability necessary for the pursuit of an economic activity".
Olympic Airlines' UK office had 27 employees until the week before the winding up petition was presented, and had kept a skeleton staff and an office for several months afterwards. The High Court held that this constituted economic activity and the branch office was an "establishment".
The Court of Appeal has overturned the High Court's decision. It found that, at the time the winding-up petition was presented, Olympic Airlines did not have an establishment in England and so the English Court did not have jurisdiction to open secondary proceedings.
The Court of Appeal held that the High Court had erred in applying the Interdil definition of establishment. The Court of Appeal considered the rationale of secondary proceedings and the Virgos-Schmit Report. It held that the purpose of secondary proceedings is to protect local interests, i.e. creditors who had been dealing with an establishment up to the date in question. If an establishment could be constituted by just the winding up of a business with a former place of operations not yet disposed of, there would hardly ever be a case where secondary proceedings would not fall within the definition. This was plainly not intended to be the case.
The Court had to determine whether there was a location which was still, at the critical date, a business operation that would justify secondary proceedings.
For secondary insolvency proceedings to be commenced under the European Insolvency Regulation an "establishment" required more economic activity than just the presence of an office or branch or the mere process of winding up. A place of operations with economic activity exercised externally to the company and involving human and physical resources was required.
On the facts, no economic activity was being undertaken at the time the English winding-up petition was presented. Olympic Airlines had been in liquidation for 10 months, had ceased commercial operations and had dismissed and paid off its employees. Thereafter, the skeleton, ad-hoc, staff was maintained only for the purposes of the winding-up and the London office did not have assets of any real value.
Updates from around the World
In The Joint and Several Liquidators of QQ Club Ltd (in liquidation) v Golden Year Ltd (HCCW 245/2011), the Court of First Instance in Hong Kong held that the Liquidators' costs in an application to have an unfair preference set aside is an expense of the liquidation, and therefore has priority over other payments.
Having entered bankruptcy protection in 2012, Bahraini investment firm Arcapita Bank has had plans to liquidate its private equity investments in conformity with Sharia law approved by U.S. Bankruptcy Court.
The Luxembourg Chamber of Deputies has passed a new law which will allow customers to recover their data if their IT provider becomes bankrupt. The data in question must be separable from other data, and the customer will be responsible for the cost of recovery.
The Irish Government has nominated six county registrars to be appointed as specialist judges of the Circuit Court, a new role created under the Personal Insolvency Act 2012.
If you would like further information please contact:
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