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Irwin Mitchell Acts On Significant Case For Insolvency Office Holders

A significant judgment in relation to how insolvency office holders enforce section 236 1A 1986 orders in other jurisdictions has recently been handed down.

The case in question focuses on Mercury Tax Group Limited (“Mercury”) which is in liquidation. The business marketed and promoted tax planning schemes and one of the schemes promoted referred to as the “Liberty” scheme.

Around 2,000 of its clients sought to take the benefit of the Liberty scheme and approximately 97 of them took the benefit of insurance through the cell of a Gibraltarian company. Those contributions were thought to have been paid to fund the payment of premiums to purchase reinsurance to cover the entire risk.

One of the respondents, Sydney Charles Insurance Advisers Limited, a Guernsey based insurance broker was involved in setting up that insurance. If the Scheme did not work due to being successfully challenged by HMRC, the clients would get all of their money back.

The crux of this case was that the liquidators, Maxwell & Klempka, had no information or visibility as to how the contribution monies, including a significant sum from Mercury, were used by Sydney Charles Insurance Advisers. In particular, there was no detail as to whether any reinsurance was purchased, and if so on what terms.

An additional aspect of the case related to a possible split of profits between the companies if the scheme ‘worked’.

The liquidators requested the required information over a period of several years, but ultimately they felt that the information provided by the respondents had been inadequate. The assistance of the Court was needed to help them discover the truth in relation to the above queries.

The liquidators at the time decided not to proceed with an application under section 236 IA 1986, as it was doubtful as to whether this section has extra-territorial effect and so whether permission could have been given to serve a s236 application out of the jurisdiction.

Earlier this year in March, the liquidators issued an application notice requesting the court to send a letter of request to the Royal Court of Guernsey asking it to make an order in accordance with s236 IA 1986 to compel the respondents to disclose the information and supporting documentation identified in the draft letter of request.

When considering the application of s426 IA 1986 and his ability to make an order to issue the letter of request to the Royal Court of Guernsey for its assistance, His Honour Judge Malcolm Davies-White indicated that he had to decide whether he would be prepared to make an order under s236 IA1986 if the application was made in England. The authorities were not clear on this, but the starting point was British & Commonwealth Holdings plc v Spicer and Oppenheim [1993] AC 426 (HL).

The first argument raised by the respondents was that Mercury did not have a contractual relationship with the Gibraltarian insurance cell or the reinsurer, and so was not entitled to any information on that basis.

They also argued that the information requested would go beyond reconstituting the knowledge of the company; as the information could have been provided by the company’s directors.

Finally it was said that the insurance company was a third party and sufficiently removed from the company to make the request for information burdensome.

The first two points were dismissed as they were not specified in section 236 IA 1986 as a bar to issuing an order under s236.

On the third point, the judge said the liquidators had exhausted their attempts to seek information from the directors, who had been wholly uncooperative. In relation to the final argument, it was said that the insurance company acted as agent for Mercury in respect of the scheme, and so the relationship was not considered to be removed.

Due to these reasons, the order was agreed and the letter of request would be issued to the Royal Court of Guernsey.

Comment from IM

This is significant to insolvency office-holders who wish to enforce s236 orders in other jurisdictions and confirms both the relevant process and the test.

It was established that the Royal Guernsey Court has jurisdiction to make an order under s236 IA 1986 (see Slinn v the Official Receiver and Liquidator of Seagull Manufacturing Company Ltd [2000] BPIR 847 (Court of Appeal of the Royal Court of Guernsey).

The application was not made under section 236 IA 1986 but since, what was ultimately sought from the Guernsey court was an order under that section (further to the Guernsey Court’s authority under s426(5) (as extended by the Insolvency Act 1986 (Guernsey) Order 1989, SI 1989/2409) it was decided that the court should issue the letter of request if it would make a s236 IA 1986 Order were the Respondents in England.