Credit Management July and August 2020

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LEGAL MATTERS BORDER POINT In a case of liquidation, can the courts insist on records being returned that are kept overseas? AUTHOR – Peter Walker H G Wells thought in his book ‘The Outline of History’ that language ‘is the instrument of thought as bookkeeping is the instrument of business.’ Bookkeeping can also provide useful information in an insolvency, and it was a consideration for a High Court judge in the case In re Carna Meats (UK) Ltd (2020) 1WLR 1176, where the accounting records were abroad in Ireland out of the court’s jurisdiction. The consideration for the liquidator of a UK meat wholesaler was the lack of bookkeeping records in the country. He knew that, according to the latest accounts filed at London’s Companies House, the value of the debtors was in excess of £800,000, a ‘significant asset in the liquidation’. The directors did not have the records, but they said that a company had dealt with the accounts. There was also a bookkeeper, but he was across the border in Southern Ireland. The company which had dealt with the accounting records responded that it did not have them. The bookkeeper in Ireland did not respond to correspondence. The liquidator through its solicitors eventually threatened to apply to the court for an examination of the bookkeeper under the provisions of the Insolvency Act 1986. This time the bookkeeper responded. He did not deny that he had been the bookkeeper nor that he had access to the accounting records. He asserted instead that the company owed him ‘a considerable sum of money’. The solicitors asked for proof of debt and reminded him of his statutory duty to the liquidator. They requested the bookkeeper to answer the liquidator’s enquiries but heard nothing back. The liquidators therefore completed an application notice seeking a court order that the bookkeeper deliver all documents, books and records of the company in his control or possession. They listed examples of what was required, such as the annual accounts, management accounts, breakdown of debtors, Sage accounting records, cash book, and more. The bookkeeper would be responsible for the costs of the application. He, of course, was outside the UK, and not in the jurisdiction, so the application included Form N510, being a ‘Notice for service out of the jurisdiction where permission of the court is not required’. The bookkeeper was in Southern Ireland, a country subject to the Lugano Convention. After the completion of Brexit, on whatever date that may be, the UK will usefully remain a member of that Convention. The documents were served both on the Court in County Monaghan and by registered post to the bookkeeper’s last known address in that County. Liquidators usually need bookkeeping records to do their job properly, and in the cosmopolitan UK companies sometimes have overseas connections. ENQUIRY INTO A COMPANY’S DEALINGS This was part of the liquidator’s enquiry into the Company’s dealings, etc., under the authority of section 236 of the Insolvency Act 1986. On the application of ‘the office-holder’, i.e. the liquidator in this case, the court may summon various people to appear before it. Those people include any officer of the company, anyone in possession of the company’s property, or is indebted to it, or anyone capable of giving specified information as to the company’s affairs. The court may then require any such person to provide an account of his or her dealings with the company. He or she may have to produce relevant papers or documents (section 236(3)). The court has additional powers, and it may order that the person may be examined in any part of the United Kingdom ‘or in a place outside the United Kingdom’ (s 237(3)). That seems to be welcomingly broad, although this time the liquidator just wanted the bookkeeping records in accordance with section 236(3). Lord Slynn in another case, In re British and Commonwealth Holdings plc (Nos 1 and 2) (1993) AC 426, pointed out that the court’s power under section 236 was a discretionary one. The requirement to produce documents, for example, must not put an unreasonable burden on the person asked to produce them. In that case Adam Johnston QC thought that this would not be an obstacle, but he then turned to the question of whether the court had jurisdiction. He questioned the basis on which service was made, and he reviewed the decisions in cases such as In re MF Global UK Ltd (No 7) (2016) Ch 325. In the Chancery Division of the High Court Richards J also considered an order made under section 236. The Joint Special Administrators wanted documents from a French company. Richards J was guided by a decision of the judges of the Court of Appeal, In re Tucker (RC) a bankrupt) ex p Tucker KR (1990) Ch 148. The Trustee in Bankruptcy wanted an order against the bankrupt’s brother living in Belgium. The alleged authority was section 25 of the Bankruptcy Act 1914. The Court of Appeal judges analysed the wording, and they decided that it did not allow for service outside the jurisdiction. This was significant in the MF Global case, where Richards J ruled that section 25 of the Bankruptcy Act was in ‘substantially the same terms as sections 236 and 237’ of the Insolvency Act 1986. It did not look good for the liquidator in the Carna Meats case. DIFFERENT POINTS OF VIEW Perhaps what was needed was a judge who had a different view of section 236, The judges of the Court of Appeal in the case In re Mid East Trading Ltd (1998) 1 All ER 577 considered the winding up of a Lebanese company in England. The liquidators wanted Lehman Bros in New York to produce some documents, which might throw some light on a fraud relating to the company. Chidwick LJ said that the court could exercise the power subject to certain conditions. The applicant had to show that there was a proper case to make the order. This meant that the liquidator reasonably needed to Advancing the credit profession / www.cicm.com / July & August 2020 / PAGE 24
LEGAL MATTERS AUTHOR – Peter Walker see the documents in order to exercise his or her statutory functions. The order must not ‘impose an unnecessary or unreasonable burden’ on the person who is obliged to produce the documents required. There were other considerations, such as breach of confidence or criminal penalties. All things considered the judges of the Court of Appeal would give extraterritorial effect to section 236. So, some judges will, and some judges won’t. Judge Hodge QC was sitting as a judge in the Chancery Division of the High Court, and he was faced with an application under section 236 in the case In re Omni Trustees Ltd; Official Receiver v Norriss (2015) BCC 906. A company was trustee of an occupational pension scheme, and it transferred some £3.7m to a Hong Kong based scheme, the Secretary of State petitioned to wind up the company on public interest grounds. The liquidator wanted to find out what had happened to the £3.7m in the form of a witness statement by a Trustee of the Hong Kong scheme. The Trustee objected on the grounds that the English Court had no jurisdiction to make the order, and that the order went beyond what was permissible. The High Court made the order. Section 236 had an extra-territorial effect, and it only required information about the transactions from the Company to the Hong Kong scheme. Judge Hodge QC criticised, or perhaps distinguished, the decision in the MF Global case. Section 236 was not the same as section 25 of the Bankruptcy Act. The judge thought that it was structured differently, because it separated the powers to order an examination (section 236(2)) and to produce documents (section 236(3)). There were other judgments questioning a restrictive interpretation of section 236. There was the case re Casterbridge Properties Ltd (2002) BCC 453 not cited in the Carna Meats case. There too was the Secretary of State that had petitioned for a winding up petition on a public interest petition. It alleged that the company had committed a time-share fraud. The Official Receiver wanted an examination of one of the directors in St Vincent, but there were complications. There was, for example, a St Vincent statute forbidding such an examination without the consent of a St Vincent Court. During the course of the litigation Burton J considered section 236 and the various conflicting judgments of the English courts. He cautiously asserted that there was no doubt about ‘the partial extra-territorial effect of section 236’. CONCLUSION Judgments like these influenced the decision of Johnson QC in the Carna Meats case with reference to section 236(3), to the power of the court to require a person to submit an account of his or her dealings with the company, or to Liquidators may need power to get at bookkeeping and other records from countries outside the jurisdiction of the local courts in the UK. This is important now that the coronavirus lockdown is likely to result in business bankruptcies. produce documents, etc. The power could be exercised abroad provided that the person involved had this sufficient connection with the jurisdiction. The Irish former bookkeeper had that connection. A sensible conclusion! Liquidators usually need bookkeeping records to do their job properly, and in the cosmopolitan UK companies sometimes have overseas connections. Liquidators may need power to get at bookkeeping and other records from countries outside the jurisdiction of the local courts in the UK. This is important now that the coronavirus lockdown is likely to result in business bankruptcies. Peter Walker is a freelance business writer specialising in legal matters relating to credit management. Advancing the credit profession / www.cicm.com / July & August 2020 / PAGE 25
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