Sunny places for shady debtors
If we were to empty one of our filing cabinet draws on the floor, what would we find? Amongst others, we have one case where we act for a liquidator who has a potential six figure claim against a director with an overdrawn loan account. Another file relates to a bankrupt who transferred his share in a property, for no consideration, to his wife. Nothing unusual there I hear you say.
However the common denominator is that the director resides abroad and the properties referred to above are located in Spain. With growing globalisation and the current economic climate, these types of situations are all too prevalent. This article looks at the use of the domestic courts to obtain orders relating to overseas property.
The duet of cases concerning the inter-relationship of English bankruptcy laws with the Brussels Convention has become a trio by virtue of a decision emanating from the unexpected surroundings of the Family Division.
The latest case, reported as R v R and S [2008] BPIR 647, is the first in which the Article 1 exception has been found to apply. Its predecessors are In re Hayward [1997] Ch 45 and Ashurst v Pollard [2001] Ch 595. These cases are important in their consideration of the extent to which a trustee in bankruptcy can make use of the domestic courts when asserting rights relating to property abroad.
The Brussels Convention/ the Judgments Regulation
As the references in the case law are to the Brussels Convention, for ease we will continue those references; however, note that it is now the Judgments Regulation (Council Regulation (EC) No.44/2001) and it is Articles 1.2(b), 22.1 and 22.3 which will now apply. The relevant wording is identical.
Article 1 provides boldly that the Convention ’shall not apply to … bankruptcy’. Accordingly, if the Article 1 bankruptcy exception is made out, a domestic court will be seised of a matter if any of the common law rules relating to jurisdiction apply (for example, if a defendant is served in the jurisdiction).
Article 16 says: ‘The following courts shall have exclusive jurisdiction, regardless of domicile: (1)(a) in proceedings which have as their object rights in rem in immoveable property … the courts of the Contracting State in which the property is situated… (3) in proceedings which have as their object the validity of entries in public registers, the courts of the Contracting State in which the register is kept’ (our emphasis).
Accordingly, if the Article 1 exception is not made out and the case has as ‘its object’ either of these matters, the trustee must litigate wherever the property or public register is situated.
Hayward
In the case of Hayward, Rattee J was faced on appeal with a wide-ranging application by a trustee in bankruptcy in relation to a Minorcan property. In 1986 the Bankrupt bought the property jointly with H. The next year he suffered the triple misfortune of bankruptcy and an intestate death. In 1992 his widow (’W') declared in Spain that she was entitled to B’s half-interest in the property, and transferred it to H in settlement of debts she owed to him for maintenance of the property. H thereupon became the sole registered proprietor. The trustee issued an application in the Walsall County Court seeking, among other things, declarations that B’s interest had vested in him as trustee, that the transfer of B’s interest to W was void, and that the transfer between W and H was void; and orders that W and H cause the Spanish property register to be rectified, and that the property be sold.
The trustee argued that as he only had a claim because B had been bankrupted, so his application fell within the Article 1 exception so the Convention did not apply. He failed for reasons approved by Jonathan Parker LJ in Ashurst at [29-31], namely that Article 1 is met only when bankruptcy is the principal subject-matter of the proceedings. The claim in Hayward was ‘essentially a claim by the trustee to recover from a third party … assets said to belong to the bankrupt’s estate and, therefore, to be vested in the trustee.’ In other words, the fact that the title of the trustee derived from bankruptcy did not mean that any proceedings he brought were necessarily bankruptcy proceedings for the purposes of Article 1.
That notion of determining the application of the Convention through a precise analysis of the nature of the claims being made is what runs through this trio of decisions, both in relation to Article 1 and Article 16. In Hayward Rattee J went on to hold that as the trustee was seeking to claim, protect and perfect title to half of the property the proceedings did fall within both Articles 16(1) and 16(3), and were therefore justiciable in Spain. Given the breadth of the relief sought, that must be correct.
Ashurst
Ashurst was a classic sale application by a trustee, including a direction that the wife and bankrupt husband concur in the sale; the twist was that the property was in Portugal.
The trustee’s Article 1 point failed: this was, after all, an application made by a beneficiary (the trustee) against his co-beneficiary (the wife) and trustees (the wife and the bankrupt).
On Article 16, though, the trustee succeeded. Jonathan Parker LJ admitted that the ‘concept of proceedings which have as their “object” a particular category of right is not a concept which I find entirely easy to grasp’. After reviewing the European authorities he concluded at [53] that there were four factors to be considered in analysing whether proceedings had a right in rem as their object, namely:
- i. that as the effect of Article 16 was to restrict the parties’ choice of forum, it should be interpreted restrictively;
- ii. that the courts of the contracting state in which the property in issue was situated might be better placed to conduct a factual investigation, and would be better placed to make a decision in accordance with local law if that was what applied to the agreement in question;
- iii. that ‘which have as their object’ was synonymous with ‘which have as their principal subject matter’; and
- iv. that ‘subject matter’ was not to be confused with aim or ultimate purpose.
So in Ashurst orders made in personam between the parties would not fall within Article 16(1): there was no need to consider Portuguese law or practice, and no factual issue which might more appropriately be resolved in Portugal; neither were the rights of anybody except those internal to the trust in issue. Thus the trustee succeeded in obtaining in personam relief in the domestic courts that related to overseas property.
R v R
In R v R, H was bankrupted in 1997 and a trustee appointed. H was involved in bitter ancillary relief proceedings. In 2002 these were compromised through a consent order by which H was to transfer all his interest in an unregistered property in Spain to W, who was in return to pay certain lump sums. By Autumn 2006 the property remained unregistered, and W had failed to pay all that was due. At that point, and for the first time, W informed H’s trustee of the existence of the consent order and the fact that H had had an interest in the property at the commencement of his bankruptcy.
The trustee therefore issued an application to be added as a party to the ancillary relief proceedings for the limited objects of obtaining a declaration that H’s interest in the property had vested in him and an order setting aside that paragraph of the consent order which purported to deal with the property.
R v R is an important case for its analysis of the inherent jurisdiction of the Family Division, but for our purposes what is notable is that this is a rare case in which the Article 1 bankruptcy exception was made out. The Judge determined that bankruptcy was the principal subject matter of the application because the application sought to establish the trustee’s right as trustee to H’s interest in the property, a right which derived solely from the vesting provisions of bankruptcy law; any setting-aside of the consent order would be merely consequential on the establishment of that right. Note that the trustee was not seeking any wider orders connected with the property, for example orders for sale, which might have tended to an analysis that he was exercising rights derived from beneficial ownership.
The judge also found that even had the Article 1 exception not been established, Article 16 would not have conferred jurisdiction on the Spanish courts, both for the same reasons that Article 1 was found to apply, and because the trustee’s application raised only personal issues between the trustee and H: that the property was situate in Spain was irrelevant.
So, whilst it would be a brave person who claimed that the jurisdictional analysis has become straightforward, we can at least now discern the marker posts. In particular, office holders should not assume that just because property is situate abroad, they will not be able to obtain useful in personam orders in the domestic courts.
If those cases were at the back of your filing cabinet because you thought that realisation would necessarily have to be in a foreign court, it is worth thinking again.
Jeremy Boyle is the founding member of Summit Law LLP and Welbeck Law LLP. Jeremy specialises in insolvency litigation.
He speaks fluent Spanish and is a member of the British Spanish Law Association.
Sebastian Prentis is a Barrister at New Square Chambers, Lincoln’s Inn, and specialises in insolvency and company law. He appeared for the trustee in R v R and for the bankrupt and his wife in Ashurst. He is recommended as a leading company law junior in Chambers and Partners and Legal 500.
- Categories: International Law
