Insolvency: Court Conduct

As the administration of the Collins & Aikman group of companies moves to the point of creditor distributions, a further High Court decision in this matter has been handed down which has broad implications for the efficient conduct of European group insolvencies in the context of the European Insolvency Regulation (EIR). The judgment delivered by Mr Justice Lindsay on 9 June, 2006, in relation to distributions in administration firmly establishes England as the most flexible and pragmatic European jurisdiction through which to conduct a group-wide insolvency under the EIR.

In May 2005, Collins & Aikman, a global automotive components manufacturer, filed for Chapter 11 reorganisation in respect of its US operations. On that filing, the US companies withdrew their financial support for the European group and on 15 July, 2005, the English High Court placed 24 of Collins & Aikman’s European companies in 10 European countries into an English administration on the basis that the centre of main interests of each was in England, and accordingly that each of those proceedings were main proceedings for the purpose of articles three and four of the EIR.

By recognising that the European group operated as a cohesive unit, the joint administrators and their lawyers believed that the maintenance of English administration proceeding as the single, main proceeding would significantly improve the ability for the administrators to achieve the statutory purposes of the administration. In this context, the administrators had a real concern that the opening of secondary proceedings in the local European jurisdictions and the resultant appointment of local insolvency practitioners (while specifically authorised by the EIR) would fragment the group-wide process, leading to the absence of a common strategy and increased costs to the estate. Critically, they also believed it would ultimately negatively impact the prospect of effecting a value enhancing sale of all, or substantially all, of Collins & Aikman’s European operations to a single, or as few purchasers, as possible.

To minimise the risk of creditors opening local secondary proceedings, the administrators gave assurances to creditors in each of the local jurisdictions that if there were no secondary proceedings in their relevant local jurisdiction then their respective priorities as creditors under the local law would be respected in the English administration.

The result was an overwhelming success. Just 16 months after the administration commenced, there has been only one involuntary secondary proceeding (Austria), and the maintenance of the English administration as the primary, main proceeding in respect of the remainder of the companies enabled the administrators to achieve their objectives. Most importantly, a sale of most of the European business was achieved at a higher price than all initial estimates (and almost all of the employees’ jobs have been saved).

Following the completion of the sale, in April 2006 the administrators filed an application to the English court for directions to make distributions to creditors in accordance with the assurances, to consult with creditors’ committees in relation to those distributions, and to return to court to examine any objections by creditors and to hand down final orders. As no objections were submitted, Lindsay made final orders on 6 June, 2006.

The application was made on the basis that the English court and the administrators were empowered to honour the local assurances and thereby comply with local law on three grounds.

First, that the rule in Ex parte James permitted them to do so. The rule in Re Condon, ex parte James [1874] was aptly described by Lord Justice Slade in Re TH Knitwear (Wholesale) [1988] (referred to by Lindsay at paragraph 15) as "the entire basis of the principle, as I discern it from the cases, is that the court will not allow its own officer to behave in a dishonourable manner. There is no doubt much to be said in favour of the principle".

In the context of Collins & Aikman, the administrators argued that the rule in Ex parte James meant that they were authorised, with the permission of the court, to honour their assurances to creditors. Lindsay held that the rule does not have any weight where statutory provisions prevent the course of conduct which the rule would otherwise have supported. In the event, the statutory provisions did permit the course of action being taken, and Lindsay held that the rule made "a strong contribution to the propriety of the directions being given whereby the joint administrators should be free to make distributions in implementation of their promises".

The second ground was that the High Court’s inherent jurisdiction permitted the court to sanction of the administrators’ application. The key question for the court in the context of this submission was how far the court’s inherent jurisdiction extend given the existence of relevant, applicable legislative provisions. As Lindsay stated in paragraph 20, it is "not the case that the mere existence of the express (a statutory provision) here displaces the tacit (the inherent jurisdiction); to have that consequence the former must be such as to be inconsistent with the continued existence of the latter".

This the court could only examine the scope of the inherent jurisdiction by conducting a careful analysis of the relevant legislation. Lindsay ultimately held that where the statutory provisions alone suffice to enable the court to direct the administrators in the way they invite direction.

The third ground, and perhaps most significantly, was that the new purpose and distributions provisions within schedule B1 provided a sufficient basis for the administrators to give the assurances and to implement those assurances, and for the court to sanction the implementation of the assurances.

In terms of giving the assurances, Lindsay commented that no party had come forward to suggest that the giving of the assurances was wrong, nor had anyone doubted that the exercise was for a purpose other than the statutory objectives as set out in schedule B1, paragraph 3(1)(b) of the Insolvency Act 1986 and with a view to performance within paragraphs 3(2) and (3)(b). Indeed, Lindsay affirmed his view given in the April 2006 hearing that the giving of the assurances was entirely proper.

As to the implementation of the assurances, the administrators applied on two legislative bases — schedule B1, paragraph 65 and paragraph 66. Lindsay held that distributions to creditors under paragraph 65 were intended to apply to English law preferential creditors, but that an investigation into whether any local creditors were preferential creditors within this meaning was unnecessary given that so long as those who were preferential creditors under local law were provided for, a direction could be given under paragraph 65(3) for payments to those creditors without enquiry as to whether they were preferential creditors for the purpose of English law.

As to paragraph 66, however, Lindsay held that it contained no limit related to payment of secured or preferential creditors and was wide enough to include the distributions intended, provided the administrators regarded them to be "likely to assist achievement of the purpose of administration" as stated in that paragraph. Here, he found that to be the case.

Lindsay also conducted an analysis into whether he should exercise his discretion to make the directions applied for, and largely on the basis that any party who may be disadvantaged by applying local law having been made aware of the hearing did not appear and object, exercised his discretion in favour of the administrators.

This judgment and the Collins & Aikman administration generally are not simply about distributions according to local law priorities. The importance of this decision is that it represents the increasingly pragmatic approach being taken by the English High Court in assisting insolvency professionals in achieving the purposes of the applicable insolvency.

While the court will always conduct a careful analysis into whether the purposes of the insolvency are truly being achieved and, most critically, whether the steps being taken are within the bounds of relevant legislation, the court will take appropriate steps to assist as far as possible provided the intentions are honourable and adversely affected parties are on notice.

With extensive experience of the approaches to insolvency under the EIR being taken by various courts throughout Europe, in particular as counsel for the administrators, the authors believe that the English High Court is at the forefront of this increasingly flexible approach.

Lyndon Norley and Richard East are partners at Kirkland & Ellis. Associates Kon Asimacopoulos and Natasha Watson assisted in the writing of this article.