Jennifer Andrew

A recent decision of the Court of Session has found that a Scottish administration can be declared as ancillary to an insolvency process in another jurisdiction. This means that the insolvency proceedings in one jurisdiction are considered as the main insolvency proceedings, while the ancillary proceedings in the other jurisdiction are restricted to dealing with the company’s assets located there. 

Background

An application to court requesting directions was made by the joint administrators of a company registered in Luxembourg but having its principal asset in the form of a lease of property located in Scotland.

Joint administrators had been appointed to the company in Scotland on 13 March 2024. Two days later a bankruptcy receiver was appointed to the company in Luxembourg. Neither insolvency process was declared ancillary to the other.

The joint administrators were made aware of the appointment in Luxembourg on 19 March 2024 and thereafter entered into discussions with the Luxembourg insolvency practitioner to negotiate a draft co-operation protocol - an agreement that was intended to be binding on both parties and allow them to work together to realise the company’s assets for the benefit of its creditors.

The joint administrators sought directions from the court in respect of whether it would be appropriate for them to enter into the co-operation protocol.

The court’s decision

The court, having raised a number of concerns about the effect of the co-operation protocol, was not willing to approve the joint administrators entering into the protocol but did recognise that directions from the court were required to resolve the difficulties created by the two insolvency processes.

The question before the court was whether the Scottish administration could be recognised as ancillary to the Luxembourg insolvency process to allow the objective of the administration to be achieved and allow departures from otherwise mandatory provisions of the insolvency legislation. Whether the Scottish administration could and should be recognised as ancillary was a matter for the express determination of the court.

The court noted that ancillary winding up was recognised in Scotland. This has the effect that the duties of the liquidators in the ancillary process should be limited to ingathering local assets and determining local claims; the usual statutory trusts and duties that apply to liquidators and the assets they ingather would not apply beyond those specific tasks. Having identified the nature of an ancillary winding up the court turned to consider whether there could be such a thing as an ancillary administration. They held that whilst there could be difficulties in an administration being ancillary, depending on the objective of the administration in terms of the Insolvency Act 1986, there is no reason that an administration cannot be ancillary.

The court considered that insolvency should ideally be regarded as universal and subject to a unitary process, and that there was no reason not to recognise Luxembourg (being the place of incorporation of the company) as the more appropriate forum to deal with the overall insolvency of the company in declaring the Scottish administration as ancillary. This has the effect that the powers and duties of the joint administrators are limited to the realisation of the company’s property in Scotland and the determination of secured or preferential creditor claims.

The decision made clear that once the company’s interest in the Scottish property has been realised and the claims of secured or preferential creditors according to Scots law have been determined further directions will need to be sought from the court as to whether realisations should be retained in Scotland, whether they should be distributed in Luxembourg, or whether a middle ground may be considered.

Comment

The court has a wide discretion when giving directions in insolvency matters and what is clear from this judgment is that when it comes to concurrent proceedings in different jurisdictions, the court will try to apply a degree of flexibility to direct a way forward that in so far as possible facilitates a unitary process in what could otherwise be competing insolvency processes.

This judgment also serves as a useful reminder that if faced with concurrent insolvency proceedings or another issue in respect of which directions from the court are likely to be required, then directions should be sought at the first opportunity as the court noted here that it would have been preferable that directions had been sought just after the proceedings in Luxembourg came to light.

It is also worth noting that whilst the court was willing to direct that the existing administration in the case at hand be ancillary, the court commented that where a court is being asked to put a company into administration (rather than dealing with an existing administration) it may be wary of doing so if they know that the administration is going to be ancillary to another insolvency process elsewhere. This would of course be considered on a case-by-case basis and the court would need to be satisfied that an ancillary administration would serve one of the objectives set out in the Insolvency Act 1986, and that the administration of the company is a useful or economical solution to the situation. 

Jennifer Andrew is a senior associate at MFMac