15 February, 2017
On 1 February 2017, the Supreme Court of Singapore and the United States Bankruptcy Court for the District of Delaware announced that they will formally implement the Guidelines for Communication and Cooperation between Courts in Cross-border Insolvency Matters ("Guidelines").
The Guidelines function as a framework setting out best practice on how to facilitate the processes and procedures of cooperation and communication between courts. Whilst they do not deal with substantive legal matters, the potential impact of a well-structured framework for coordination cannot be underestimated, particularly in complex cross-border insolvency matters.
Background
The Guidelines were established by the judges of several jurisdictions who had participated in discussions at the first meeting of the Judicial Insolvency Network (“JIN”) held in Singapore in October 2016. These seek to provide a framework for cooperation and common communication in international insolvency proceedings, and are noteworthy as they represent the first time that a standing formal common framework has been adopted by courts for the purposes of coordination and communication in cross-border insolvency matters.
The Guidelines
Courts should consider whether and how to implement the Guidelines in each case involving proceedings relating to insolvency or adjustment of debt commenced in more than one jurisdiction (ie parallel proceedings). In Singapore, the Guidelines supplement all legislation, rules and procedure relating to insolvency, and should be considered in any case involving parallel proceedings related to the same insolvency commenced in Singapore and Delaware.
The overarching objective of the Guidelines is to improve efficiency in such complex cases which, it is hoped, will in turn minimize litigation, time and expense to the benefit of all stakeholders.
The Guidelines envisage that a protocol or an order of court will give effect to and implement the Guidelines (whether in whole or in part and with or without modifications) in individual cases to which they apply.
The Guidelines state, amongst other things:
- the manner in which communications between the courts should take place. Unless otherwise directed by any court involved, communications should take place via open communication such as telephone or video link, with counsel present for procedural matters such as hearings. Administrative communications and sharing of documents related to the matter may however take place directly between the courts;
- that there should be judicial encouragement for cooperation between administrators (which would include a liquidator, trustee, judicial manager or administrator) in parallel proceedings, who should also notify the courts of issues that would benefit from coordination and communication between courts;
- that a party to proceedings before one court may appear before the corresponding court without becoming a party to, or submitting to the jurisdiction of, that court's proceedings. The Guidelines also provides a structure for joint hearings to facilitate parallel proceedings.
The Guidelines are formulated such that they can be implemented by Courts in other jurisdictions, so that any acceding courts will be able to communicate and coordinate in respect of parallel proceedings in their jurisdictions. The Guidelines provide for implementation in each jurisdiction in such manner as the jurisdiction deems fit, for instance by means of a practice direction.
Utility of the Guidelines
Prior to this development, communication between courts involved in parallel insolvency proceedings was often poor or non-existent. Even if such communication took place, this was usually carried out on an ad hoc and unpredictable basis. This resulted in significant delays and uncertainty. The difficulty in ensuring that courts were fully aware of what was happening in other jurisdictions also resulted in the issuance of court orders which conflicted or hindered these proceedings.
An example of this is the Belmont Park litigation in the Lehman collapse (see Belmont Park Investments PTY Ltd v BNY Corporate Trustee Services Ltd & Anor [2011] UKSC 38). There, the validity of a "flip clause" in a CDO, which lowered the payment priority of a Lehman affiliate as a result of that affiliate's bankruptcy filing, was litigated in the US Bankruptcy Courts and the English High Court, with opposite results. This resulted in a new group of aggrieved investors bringing fresh proceedings in New York seeking to enforce the English decision, which decided that the flip clause was enforceable under English insolvency law, on the basis of comity.
The administration of Nortel led to a similar story. After Nortel's administrators completed an asset sale in 2011, it took a number of years, including the establishment of an ad hoc communication and cooperation protocol between the Ontario and Delaware bankruptcy courts, to overcome the hurdles that arose from competing proceedings. Nortel's distribution plan finally received approval in a joint hearing in January 2017.
The communication and cooperation contemplated by the Guidelines will facilitate a more orderly, efficient and timely determination of relevant issues. Complex cross border insolvencies such as Lehman or Nortel, which involve issues that might otherwise need to be determined in separate proceedings, can (in appropriate cases) be more efficiently and effectively determined by parallel joint proceedings from a procedural perspective. Even where separate proceedings are required, there can be significant gains in terms of efficiency, certainty and transparency from the courts coordinating matters such as scheduling and the gathering of evidence.
Onward and upward
The establishment of the Guidelines is therefore a welcome development, and consistent with Singapore's aim to become a regional debt restructuring hub (which implicitly also means increased involvement in cross-border insolvencies). It is also consistent with the recent judicial and legislative trends in Singapore embracing the principles of universality and mutual recognition. The recent decisions in Beluga Chartering and Opti-Medix (which we previously discussed here) both involved the recognition of foreign insolvency proceedings and officers appointed thereunder. In particular, the upcoming amendments to Singapore's insolvency restructuring framework, which are expected to come into effect later this year, will see Singapore adopting the UNCITRAL Model Law on Cross-Border Insolvency. This is another example of Singapore and its courts taking a leading role in furthering developments in this area.
It is expected that the Guidelines will shortly be formally implemented across a number of key jurisdictions, including the US, UK, Australia and the BVI. Meanwhile, Chief Justice of Singapore Sundaresh Menon has promised that the JIN, which was only established last year, will continue to “develop other initiatives to promote judicial cooperation relating to cross-border insolvency cases".
For further information, please contact:
Alastair Henderson, Partner, Herbert Smith Freehills
alastair.henderson@hsf.com
