Insolvency-related litigation following the 2008 crash


December 2014 Issue

December 2014 Issue

One of the aftershocks of the 2008 market crash has been the increase in multi-jurisdictional insolvency-related litigation. This article outlines two recent Channel Island cases which highlight the particular challenges of cross-border proceedings and the wider ramifications of the trend.

BC Capital – modified universalism – a Guernsey perspective

A renowned offshore financial centre, Guernsey has been the stage for an increasing number of ground-breaking disputes in recent years. By the very nature of the jurisdiction, the vast majority of these cases involve cross-border issues, in respect of which the island’s Royal Court is well-versed.

The challenges involved in such proceedings revolve around issues such as service of proceedings out of the jurisdiction, conflicts of applicable laws, applications for security for costs against non-resident litigants and enforcement of judgments obtained overseas.

The Royal Court has been dealing with a complex cross-border dispute between a receiver appointed by a US Court in relation to the assets of Nikolai Battoo and the BC Capital group of companies and liquidators appointed over certain BVI investment funds. The litigation has so far resulted in a number of seminal decisions, including those in relation to the recognition of foreign office holders in Guernsey, the role of foreign government agencies in litigation and the scope of assistance that can be provided following the principle of modified universalism (providing assistance to foreign insolvencies).

Proceedings were initially instituted in the US against Mr Battoo and the BC Capital companies by the US Commodity Futures Trading Commission (CFTC). The allegation was that a Ponzi-like scheme was employed by Battoo and others in order to defraud investors. The funds engaged a number of custodians, including a private bank in Guernsey, which commenced interpleader proceedings on the island as a consequence of being faced with competing claims to the funds’ assets by the US receiver and the BVI liquidators.

The Royal Court declined to allow the US Securities and Exchange Commission (SEC) to join the proceedings on the basis that it was not asserting a claim to title and its interests were aligned with the CFTC (represented by the receiver). Recognition of the receiver was granted on limited grounds on appeal with the Court noting that refusal would have prevented the receiver from participating in the proceedings. The BVI Liquidators’ submissions that the principle of modified universalism applies in Guernsey were accepted, but a stay was declined on the circumstances of the case.

The case has demonstrated that the Royal Court of Guernsey will apply a pragmatic approach to assisting foreign office holders in the course of their duties (UK office holders can rely on a statutory provision) and, for the first time, it has confirmed the principles that will be applied when considering extending assistance to foreign office holders. The Court has also recognised the development of a body of international law to streamline disputes and insolvency processes, and has imported the relevant principles into Guernsey’s common law.

These developments will be of great interest to those appointed in relation to cross-border matters. The case provides certainty in a time of radical global change and recognises Guernsey’s part in the future.

Debt purchaser vs. Property Co

Jersey also felt the impact of the 2008 financial crisis but, without a creditor-instigated winding up remedy, the Island did not experience a rush to the Court to liquidate businesses without regard to long-term prospects.

But the crash did see the development of a previously rarely used process of applying for the issue of a Letter of Request, which is now seen on a far more regular basis. One case combined the Letter of Request authority with the distressed debt purchase – another aspect of the post-2008 environment. The case was issued in the Royal Court of Jersey but was compromised before trial and remains adjourned for the time being. For the purpose of this article it is therefore referred to as Debt Purchaser vs. Property Co.

It had been recognised for many years that the Royal Court had an inherent jurisdiction to issue a Letter of Request asking assistance from the English High Court or the Scottish Court of Session by way of an order for the appointment of an Administrator currently under Schedule B1 of the UK Insolvency Act 1986 (See In OT Computers Limited [2002/029] and more recently in Metropolitan Life Assurance Co. v. Dalton Airfields Estates Limited [2012] JRC 192).

In Debt Purchaser vs. Property Co, as part of a larger debt sale a lender to a UK property development company sold on a substantial property development loan package, which was funding the development of a large UK retail, residential and hotel complex. Although there was little doubt as to the ultimate viability of the project, Debt Purchaser applied for the appointment of an Administrator to sell and market the unfinished development which, like many similar projects at the time, was having difficulty securing roll-over funding.

Property Co wanted to contest the application for a Letter of Request. The starting point for the opposition was to establish that the process, which had previously been considered non-contentious, should in this case be viewed as contentious.

English Leading Counsel’s opinion is an integral part of the Letter of Request process and is required to establish that, if the request for assistance was made, the receiving Court would be disposed to granting the assistance – this being a way to avoid inter-judicial embarrassment.

In this case, Property Co sought and obtained Leading Counsel’s opinion that once the Letter of Request was issued, the process of the appointment of the Administrator would not involve an examination of the merits. In light of that opinion, the Jersey process became a contentious one, as it would be the only opportunity for a Court to consider whether the dissolution of Property Co and the subsequent destruction of any value held by the current owners would be a proper exercise of its inherent authority.

The intention would have been to lay out a broad argument that it was not a proper exercise of the Royal Court’s discretion to appoint a UK Administrator to do what could be done in Jersey via the désastre process, but could not be done under the control of the creditor, given the absence of a creditor instigated liquidation remedy. Property Co would also have added the public policy arguments surrounding the distressed debt purchase business and the fallout from La Générale des Carrières et des

Mines vs. F.G. Hemisphere Associates LLC [2012] UKPC 27. The argument has subsequently been successfully made to the detriment of a distressed debt purchaser in Fisker Automotive Holdings Inc. (US Bankruptcy Court, District of Delaware 17 January 2014).

What might have been obtained from this case was a clear indication from the Royal Court as to the limits – or absence of limits – of what could be taken into account when exercising the Court’s inherent jurisdiction to issue a Letter of Request. It would also have been an opportunity for the Royal Court to explain how it perceived the hierarchy between the numerous Jersey domestic insolvency remedies and the importation of a very different foreign authority.

As the case was, perhaps sensibly, compromised before trial, the scope and range of the remedies in issue remain undefined. Even without a final judgement, and with the waves of the financial crisis dispersing, we expect the Letter of Request process to remain popular, at least until the law of Jersey has its own insolvency process that can be commenced and controlled by the creditor.

The above cases show the Royal Courts’ recognition that while there is a pressure to maintain local law traditions and independence, there is also a commercial need to respond to global developments and to ensure that the Channel Islands are not left behind in terms of the international market.

There have been a number of high-profile disputes arising, largely as a consequence of the Islands’ popularity in terms of managing and administering funds and for their asset-holding structures. In cases where the substantive heart of the dispute may lie elsewhere, the ability of the Islands’ courts to facilitate the progress of foreign proceedings (where appropriate to do so) is vitally important to ensuring consistency across the jurisdictions.


John Greenfield is a partner, and Richard Field and Jeremy Garrood are senior associates, at Carey Olsen. Mr Greenfield can be contacted on +44 (0)1481 732026 or by email: Mr Field can be contacted on +44 (0)1481 741572 or by email: Mr Garrood can be contacted on +44 (0)1534 822360 or by email:

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John Greenfield, Richard Field and Jeremy Garrood

Carey Olsen

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