In a ruling earlier this month, the UK Supreme court reaffirmed the application of common law rules on the enforcement of foreign insolvency judgements.
Andrew Thorp, litigation partner at offshore law firm Harneys, tells PE Manager how this could affect private equity funds on the Cayman Islands and British Virgin Islands.
What has been decided?
Courts in common law jurisdictions have traditionally declined to enforce foreign courts’ judgements unless the judgment debtor had submitted to the foreign court (for example by way of a dispute resolution clause or by entering an appearance).
What the Supreme Court specifically examined was whether a foreign judgement made pursuant to an insolvency proceeding should be treated differently from that of an ordinary debt, and established principles of common law.
Could, for example, a foreign judgement be enforced over a vehicle's assets, even when that vehicle had not submitted to the jurisdiction of that Court and the judgement was in effect “in default”?
Why has that decision been reached?
The Supreme Court took a restrictive approach and found that insolvency proceedings did not create a special rule. That kind of global enforcement of court decisions was really a matter for legislation and not for judge-made law and creating an exception to the normal common law enforcement rules for insolvency-based judgements would give an unfair procedural advantage to insolvency proceedings.
A lower court decision had supported a more Universalist approach, reflecting a trend that insolvency proceedings be centred in one jurisdiction, with decisions there binding parties globally. This had been largely supported as a means of simplifying insolvency proceedings and avoiding a multiplicity of regimes and legal actions spanning the globe.
What impact does that have on the BVI and Cayman?
The decision will be welcomed offshore. Firms utilising Cayman and BVI vehicles will feel less vulnerable to foreign judgements being deployed against them without reference to local courts.
Investors and corporate entities choose jurisdictions with the knowledge that they have mature insolvency regimes that will apply in the event of insolvency. The potential to be made subject to a foreign insolvency process and the subsequent enforcement of its judgements, without submission to that jurisdiction, or recourse to local procedure, would have made for greater uncertainty and potential injustice.
What about other jurisdictions?
The decision is likely to shift focus towards further legislative change if the momentum towards universal insolvency regimes is to be maintained.
Offshore jurisdictions, and how firms go about choosing a fund domicile, is the topic of PE Manager's November supplement.