Extra-territorial effect of sections 236 and 237(3) Insolvency Act 1986 examined by High Court
Office holders of insolvent companies are under a duty to investigate the pre-insolvency affairs of the companies over which they are appointed. However, in some instances, records of the company's dealings may no longer be in the company's possession or control. The only copies available may be in the custody of a third party such as HMRC.
Section 236 Insolvency Act 1986 ("IA 1986") is therefore a useful tool for officeholders whereby, upon an application to the Court, persons who may have information or documents relating to the company can be summoned to appear before the Court. Any such person may be ordered to submit an account of his dealings with the company, or produce copies of documents in his possession or control relating to the company or its property.
Section 237(3) of the IA 1986 provides that persons who are not within the jurisdiction (but would be liable to be summoned to appear before the Court under section 236) may be subjected to an order for examination either within the UK or outside the UK.
Applications for orders under section 236 are typically made at the investigatory stages of insolvencies and can be extremely useful for gathering evidence upon which to later base proceedings.
Re MF Global UK Ltd  EWHC 2319
The High Court has recently been asked to examine whether section 236 has extra-territorial effect and, if not, whether an order under section 237(3) could be made for examination outside the UK.
MF Global UK Ltd was placed into special administration on 31 October 2011. The company had been engaged in trades which were open at the time of administration but were later closed out by other parties including a French company called LCH Clearnet SA. The closing out of the trades caused MF Global significant losses.
The administrator made an application that LCH Clearnet produce information and documentation relating to the process whereby the closing out of the trades had been undertaken. LCH Clearnet resisted the application.
The Insolvency Regulation
Cross border insolvency proceedings in the EU are governed by the EC Regulation on Insolvency Proceedings 2000 (1346/2000) (the "Insolvency Regulation"). Under the Insolvency Regulation, the law applicable to insolvency proceedings shall typically be that of the Member State in which proceedings are opened (Article 4). The Insolvency Regulation also provides for the recognition of insolvency proceedings opened in one member state in all other member states (Article 16).
Crucially, however, in MF Global the parties agreed that the Insolvency Regulation did not apply to the special administration as the company was an investment undertaking and was therefore excluded from the scope of the Insolvency Regulation (Article 1).
In considering the application in circumstances where the Insolvency Regulation did not apply, the High Court referred to the authority of Re Tucker  Ch 148. That case concerned a pre-IA 1986 bankruptcy, but the Court of Appeal was asked to consider whether the equivalent provisions of sections 236 and 237 IA 1986 in the Bankruptcy Act 1914 had extra-territorial effect.
The Court of Appeal in Re Tucker held that the forerunner of s236 was applicable to British subjects or to others who, by coming to the UK, made themselves subject to British jurisdiction but it did not have ex-territorial effect. In relation to the forerunner of section 237(3), the Court of Appeal held that an order could be made against a person not in the jurisdiction, provided proper procedural machinery for such an order was in place in the jurisdiction in question.
In MF Global the High Court held that, in the light of Re Tucker, section 236 IA 1986 does not have extra-territorial effect. Accordingly, no order could be made under section 236 against a person who was not in the jurisdiction.
The Court then went on to consider the issue of section 237(3). In accordance with the principles set by Re Tucker, the Court needed to be satisfied that France was a jurisdiction in which available procedural machinery was in place by which LCH France could be compelled to produce information and/or documents. In consideration of this point, the Court turned to Regulation (EC) 1206/2001 (the "Evidence Regulation") which allows Courts of an EU member state to request Courts of another EU member state to help obtain evidence from a witness for the purpose of a civil or commercial trial that is taking place in the relevant member state.
Crucially, under Article 1(2) of the Evidence Regulation, requests may only be made for evidence which is intended for use in judicial proceedings which have been commenced or are contemplated.
In this instance, the Court held that the Evidence Regulation did not apply because the administrators were 'fact finding' and proceedings were not in progress or contemplated. The assertion that the administrators sought the documentation to consider whether it may be appropriate to bring proceedings was not sufficient. The administration itself did not amount to proceedings for the purpose of the Evidence Regulation.
The effect of the decision
The decision highlights that it is important to establish in applications under section 237(3) that appropriate machinery exists in the jurisdiction in which the respondent resides to make such an order. Furthermore, when dealing with non-EU respondents, or respondents in EU member states in insolvency proceedings not covered by the Insolvency Regulation, it will be crucial to establish that proceedings are either underway, or that they are being contemplated, before the Court will make an order. As set out above, fact finding will not amount to contemplation and therefore applicants will have to adduce evidence to the Court that proceedings are indeed being contemplated.
It should be noted that the decision does not sit easily with the recent decision of the Supreme Court in SA v Bilta  UKSC 23 whereby it was held that section 213 IA 1986 does have extra territorial effect for basing fraudulent trading claims.