The Long Arm of English Insolvency Law: Does Section 236(3) of the Insolvency Act Extend to Persons Abroad?

The recent decision of the High Court of England and Wales in Wallace v Wallace [2019] EWHC 2503 (Ch) (‘Wallace’) explores the interesting question of whether the evidence gathering powers available to a Liquidator under section 236(3) of the Insolvency Act 1986 (UK) (‘IA’) have extraterritorial application to a resident abroad.

Section 236 IA (‘Inquiry into company’s dealings, etc.’) has been recognised as being a “vital part of the statutory insolvency regime” which is “designed to meet the difficulties faced by liquidators in finding out what has happened to the company’s assets and what has caused the failure of the company”.  The nature and scope of the power has been described as “extraordinary and sui generis”, standing on a footing different to that on which inter-partes litigation is conducted in accordance with ordinary procedural rules.

Section 236 provides that:

1. This section applies as does section 234; and it also applies in the case of a company in respect of which a winding-up order has been made by the Court in England and Wales as if references to the office-holder included the official receiver, whether or not he is the liquidator.
2. The court may, on the application of the office-holder, summon to appear before it –

   (a)  any officer of the company,

   (b) any person known or suspected to have in his possession any property of the company or supposed to be indebted to the company, or

   (c) any person whom the court thinks capable of giving information concerning the promotion, formation, business, dealings, affairs or property of the company.

3. The court may require any such person as is mentioned in sub-section 2(a) to (c) to submit to the court an account of his dealings with the company or to produce any books, papers or other records in his possession or under his control relating to the company or the matters mentioned in paragraph (c) of the sub-section.

In Wallace, the principal issue for determination was the extraterritorial scope of s. 236 IA – in particular, whether it empowered the Court to make an order for production of documents against a respondent who was resident in the Republic of Ireland.

A winding up order had been made against Carna Meats (the ‘Company’), a meat wholesaler, and a Liquidator was appointed.  The Company’s centre of main interests was in England and Wales, and the company’s winding up fell within the scope of Council Regulation (EC) No. 1346/2000 of 29 May 200 on Insolvency Proceedings (the ‘2000 Regulation’).  The winding up was therefore entitled to recognition in all other Member States, including the Republic of Ireland.

The Liquidator’s investigations into the Company’s affairs had been hampered by a lack of any books and records.  Despite repeated requests, the Company’s former bookkeeper, who was a resident of the Republic of Ireland, refused to cooperate. Accordingly, pursuant to s. 236(3) IA, the Liquidator applied to the High Court of England and Wales seeking an order requiring the respondent bookkeeper to deliver up all Company books and records in his possession within 28 days.

The Court granted the Liquidator’s application, finding that the power to compel the production of documents under s. 236(3) IA had extraterritorial operation and that the respondent, although resident in the Republic of Ireland, was sufficiently connected with England such that it was just and proper to make the production order (at [55]).  The Court was not asked to, and did not, determine the issue of whether the power in s. 236(2) IA empowered the court to summon a person out of jurisdiction for examination.

In considering the extraterritorial operation of s. 236(3) IA, Mr Adam Johnson QC (sitting as a Judge of the High Court) reviewed existing authority, which presented a “somewhat fragmented picture” (at [46]).

Judge Johnson QC’s analysis of the extraterritorial question began with the presumption that English statutes did not have extraterritorial effect.  Mr Johnson QC acknowledged that the presumption against extraterritoriality had been rebutted in insolvency cases in relation to the setting aside of transactions which had contributed to the insolvency (at [53]).  In Re Paramount Airways Ltd [1993] Ch 223, the Court of Appeal held that s. 238 IA applied extraterritorially such that applications could be made against “any person” to set aside transactions at an undervalue. However, in exercising its discretion to make an order which applied extraterritorially, the Court would need to be satisfied that there was a “sufficient connection” with England and Wales.  The Supreme Court adopted the same analysis in Bilta (UK) Ltd v Nazir (No. 2) [2016] AC 1 to arrive at the conclusion that the fraudulent trading provision in s. 213 IA  was not subject to any territorial limitation.

In the earlier decision of In Re Tucker (RC) (A Bankrupt), ex p Tucker (K.R.) [1990] Ch 148 (‘Re Tucker’), the Court of Appeal had found that s. 25 of the Bankruptcy Act 1914 (UK) (a predecessor of s. 236 IA which could be enforced by a trustee in bankruptcy) was territorial in scope.  This was on the basis that the power to compel the production of documents in s. 25(1) was “inextricably linked” to the power to summon persons before the Court in s. 25(1) (both powers being located in the same sub-section (1)).  The present case was distinguished from Re Tucker on the basis that s. 236 IA was drafted in a way such that the examination power in s. 236(2) IA operated independently of and was “divorced from” the document production power in s. 236(3) IA.  Accordingly, the Court held that the power to order production of documents and information could be exercised irrespective of whether an examination summons was issued (at [54(ii)-(iii)]). The Court also found that requiring the production of documents was less invasive than the exercise of the Court’s examination power (at [54(iii)]), and noted that a further point of distinction from Re Tucker was that the court there had recognised that “section 25 of the 1914 Act is really concerned with enforcing attendance of persons before the Court” (at [54(i)]).  Here, the Court was only concerned with the production of documents in s. 236(3) IA (at [54(iii)].

Judge Adamson QC also considered a number of decisions which supported the view that s. 236 IA had extraterritorial operation, including:

• Re Seagull Manufacturing Co. Ltd [1993] Ch 345 (CA): s. 133 IA – ‘Public examination of officers’ – held to compel a English citizen living in the Channel Islands to appear before Royal Courts of Justice for public examination before the Official Receiver of an English company);
• Re Mid East Trading Ltd [1998] 1 All ER 577 (CA) (‘Mid East Trading’): s. 236(3) IA held to compel the production of documents held by a Lehman Brothers entity in New York to the Liquidators of a company incorporated in Lebanon which was the subject of winding up proceedings in England;
• Re Omni Trustees Ltd (sub nom Official Receiver v Norriss) [2015] BCC 906, [2015] EWHC 2697 (Ch) (‘Omni’) – s. 236 IA(3) held to compel a Hong Kong resident to produce a witness statement, with supporting documents, detailing his knowledge in relation to certain transactions to the Liquidator of an English company; and
• Willmont & Sayers v AS Citadele Banka [2018] EWHC 603 (Ch) (‘Willmont’) – s. 366(1)(c) IA – the direct successor to s. 25(1) of the Bankruptcy Act 1914 (UK) – held to compel a Latvian bank to provide a written account of information concerning certain bank accounts associated with the English bankrupt to the Trustee in Bankruptcy.

In considering whether s. 236(3) IA could apply to compel a person outside of the jurisdiction to produce documents to a Liquidator, the Court remarked that (at [54(iii)-(iv)]):

“In the modern world of cross-border business practices, it is natural to construe that power [to require the production of documents] as extending to any of the categories of person identified, whether within or outside the jurisdiction. …

That is not to say, however, that the power should be exercised in respect of a person abroad without regard to the international dimension. … The relevant safeguard, it seems to me, … is for the Court to ask itself whether, in respect of the relief sought against him, the respondent is sufficiently connected with the jurisdiction for it to be just and proper to make an order despite the foreign element. …

… [I]n a case involving a respondent overseas, it is important that in exercising its discretion the Court should take account of the international dimension in assessing whether an order should be made at all, and must be wary of making orders which seek to regulate the conduct of third parties abroad in respect of matters having no real connection with this jurisdiction.

The Court concluded that the respondent, although resident in the Republic of Ireland, was sufficiently connected with England such that it was just and proper to make the production order sought by the Liquidator (at [55]).  In reaching this conclusion, Judge Adamson QC placed emphasis on a number of factors, including:

• The Court had international jurisdiction over the Company’s winding up pursuant to the 2000 Regulation, the provisions of which “expressly recognise the English Liquidator’s legitimate interest in taking actions abroad, within other Member States, in the exercise of his statutory function” (at [55](i)]);
• The respondent “is not a third party at some remove from the Company’s business. He is not in a position analogous to the third party bank in [MacKinnon v Donaldson Lufkin and Jenrette Securities Corp [1986] Ch. 482 – which concerned document production orders against an American Bank with offices in England and Wales].  It seems that he, and no-one else, has or may have documents and information which are critical to the Liquidator properly administering the winding-up of the Company” (at [55(ii)];
• It did not lie in the mouth of a person who took on the role of bookkeeper to an English company, and in that capacity was in possession of the company’s books and records, subsequently to complain that an order requiring him to produce those documents to a Liquidator on a winding-up involved an excess of jurisdiction by the English court. The Court had an “entirely legitimate interest in regulating [the bookkeeper’s] conduct abroad, and in requiring him to make such documents and information available to the Liquidator” (at [55(ii)]); and
• The Court’s decision was not without precedent, and was consistent with previous authority, namely Mid East Trading, Omni and Willmont (at [55(ii)]).

Judge Adamson’s QC decision is to be welcomed and will be of assistance in meeting the difficulties faced by liquidators in finding out what has happened to the company’s assets and what has caused the failure of the company in situations of information asymmetry.

The decision is consistent with the expansive scope of s. 236 which has been recognised in previous decisions, including those decisions which have recognised that the permissible reach of s. 236(3) is such that it can even empower an overseas Liquidator to compel the production of documents from persons or entities resident in the United Kingdom: see, for example Re Chesterfield United Inc [2012] BCC 786, [2012] EWHC 244 (Ch).