The impact of foreign insolvency proceedings on English law bank guarantees: ascertaining foreign law, the scope of the European Insolvency Regulation and the effect of pending actions

Shail Patel acted for the successful defendants at trial in Bank of Baroda v Maniar [2019] EWHC 2463 Comm, in resisting claims by the bank on personal guarantees. The case raised a number of important points of European cross border insolvency law under the European Insolvency Regulation, and the English Court’s exercise of a foreign law judicial power.

Ben Archer explains the facts, the court’s rulings and the implications of the decision.

Facts

The Defendants were personal guarantors of a credit facility made available by the Claimant bank to a company of which they were directors. The guarantees were subject to English law.

The company subsequently entered into examinership, an Irish insolvency procedure. Under the relevant examinership legislation, section 549 of the Companies Act 2014, the bank could only enforce those guarantees if it were to serve a notice on each of the Defendants personally within a stipulated period of time.

The bank sent a notice to the Defendants by registered post and by e-mail to the solicitors acting for the company in the examinership. The e-mail was copied to Mr Maniar.

The e-mail to Mr Maniar rebounded as undeliverable. The solicitors had only acted for the company in the examinership; not the Defendants in their personal capacity. By the time the letter had been received, the period under section 549 had long expired.

The bank brought proceedings in England on the guarantees. The Defendants denied that good service had been effected under section 549 such that the guarantees, as a matter of both English and Irish law, were unenforceable.

There were also arguments around the effect of supervening Irish Debt Settlement Agreements (a personal insolvency arrangement), and the effect of Article 15 of the Insolvency Regulation (lis pendens).

The Decision

Although the guarantees were governed by English law, the English court held that it was required to recognise the effects under Irish law of a failure to properly serve the section 549 notice. The section 549 procedure was part of ‘the law applicable to insolvency proceedings’ in Ireland within the meaning of Council Regulation No 1346/2000 on Insolvency Proceedings. Accordingly, the Regulation required that Irish law have primacy in the English proceedings.

The absence of proper notice under section 549 would therefore be fatal to the enforcement of the guarantees as a matter of English law.

But, as a matter of Irish law, service under section 549 could only be effected if the Defendants had actually received the notice or if they were otherwise aware that the bank had been trying to serve it upon them and, in general terms, the nature of its contents. That is because the nature of ‘service’ in Irish law is, in fact, very different from the position in English law where proof of transmission in accordance with procedural rules generally suffices. In Ireland, the emphasis is instead placed firmly upon whether the recipient was actually aware of the contents of the document.

The court held that there was insufficient evidence to contradict the Defendants’ position that they had not received the notice before the expiry of the relevant period, or that they were not otherwise aware of the bank’s attempts to serve them. Although it was alleged that the Defendants had attempted to evade service, that argument could not be sustained on the evidence.

Despite the attempts by the bank, the court therefore found that service had not actually been effected within the relevant time.

The court however recognised the inherent problems with a litigant having to prove actual service. In Irish proceedings, any hardship is able to be offset by the exercise of that court’s inherent power under Order 9, Rule 5 of 15 of the Rules of the Superior Court. That power enables service to be deemed ‘good’ if proper attempts have been made.

But, could an English court exercise the Irish deeming power in considering the enforceability of the guarantees?

The court concluded that it was not only open to the English court to exercise the deeming power, but that it was in fact necessary to do so.

Generally, an English court applying foreign law is required to apply the whole of the foreign law material to the case, as opposed to any truncated version. To do otherwise may introduce absurdity. But conceptually the court was not, as a matter of law, exercising the Irish court’s discretion. It was simply determining how the Irish court would exercise its own discretion.

However it was the bank who bore the burden of persuading the court to exercise the discretion. The various factors in play in this case were finely balanced. In those circumstances it was held that the Defendants were to have the benefit of the doubt.

The court therefore declined to deem service ‘good’, to the effect that the notice requirements of section 549 had not been properly complied with.  The guarantees were unenforceable and the claim failed.

The bank also argued that under the decision of Knowles J in Edgeworth Capital v Maud [2015] EWHC 3463 the provisions of Irish law rendering a third party guarantee unenforceable in certain circumstances was not a provision of insolvency law falling within the Insolvency Regulation. The court rejected that argument on the basis that the Irish law provisions had a significant connection with the conduct of the examinership itself. That brought it within the ambit of Article 4.

The court therefore concluded that section 549 was an insolvency law falling within the Insolvency Regulation

On the subject of the DSAs the Court accepted the Defendants’ argument that, although the English proceedings were lis pendens for the purposes of Article 15 EIR (which provides that “The effects of insolvency proceedings on a lawsuit pending concerning an asset or a right of which the debtor has been divested shall be governed solely by the law of the Member State of which that lawsuit is pending”), the effect of that was procedural and not substantive. Thus the substantive legal position brought about the by the DSA, namely a discharge of personal liability, had to be recognised by the English Court despite the English proceedings commencing before the DSA was entered.

The court concluded that the impact of Article 15 on pending actions was procedural only, and not substantive.

Comment

This authority is undoubtedly a cautionary tale for those creditors with English law guarantees, who should not assume that they will go unaffected by foreign insolvency proceedings.

It provides welcome clarification as to the general approach of the English court to the interpretation and application of foreign law in domestic proceedings, where insolvency processes governed by the EIR or the Recast Regulation are opened in the jurisdiction of another member state. The pervasive nature of the cross-border insolvency mechanisms can often demand that a court, perhaps with some discomfort, place itself in to the shoes of a foreign equivalent. This judgment makes clear that the English court will not shirk that responsibility where it is required to do so. The fundamental principles with which the court grappled plainly have wider application, and the case will therefore be of interest to practitioners confronted with any question of the interpretation of foreign law in the context of domestic proceedings.

On the interpretation of section 549 itself, the case offers useful guidance where questions as to the effectiveness of service arise. Perhaps most importantly of all it provides a suitable reminder to creditors with the benefit of a personal guarantee of an Irish company’s debts. Those advising creditors should have section 549 in mind and be prepared to act quickly if the company enters examinership. Crucially, they should ensure that all reasonable steps are taken to effect service of the notice, to put the matter beyond dispute.