A recent court decision in the United Kingdom relating to the collapse of the Stanford business empire may have relevance here due to the similarity between UK law and the New Zealand Insolvency (Cross-border) Act.
Although the New Zealand Act came into force last year, no cases have yet been brought under it.
This Brief Counsel looks at the Stanford case and what it may mean in the New Zealand context.
The Insolvency (Cross Border) Act 2006 (the Act) provides a framework for insolvency proceedings across more than one jurisdiction and reflects the United Nations Commission on International Trade Law (UNCITRAL) model. The aim is to provide greater legal certainty and fairness among the parties by establishing their relative rights and status.
Core concepts are:
whether a “foreign proceeding” will be recognised in the local country. The key to this is whether there is “a collective judicial or administrative proceeding in a foreign state...pursuant to a law relating to insolvency...for the purpose of reorganisation and liquidation”, and
if a foreign proceeding is recognised, whether it is a “foreign main proceeding” or a “foreign non-main proceeding”. A foreign main proceeding takes place in the country where the debtor has the centre of its main interests. For a foreign non-main proceeding, the debtor needs only to have an establishment in that country.
The background to the case
Sir Allen Stanford’s business empire collapsed due to allegations that Stanford and his associates engaged in a fraudulent Ponzi scheme, defrauding investors internationally.
On 16 February 2009, the United States Securities Exchange Commission filed a complaint alleging, among other causes of action, the violation of securities laws and securities fraud. On the same day, the US District Court (in Texas) appointed a receiver over the assets worldwide of Stanford International Bank (SIB), Sir Allen, other Stanford group entities, and all entities owned or controlled by Sir Allen and any of his associates (the Receiver). On 15 April 2009, the Antiguan Court made a winding up order on the petition of the Antiguan regulatory authorities and appointed two liquidators of SIB (the Liquidators). These individuals had previously been appointed as receiver-managers on 19 February 2009 (by the Antiguan regulators) and then as receivers on 26 February 2009 (by the Antiguan Court).
The case - Re Stanford International Bank Limited & Ors  EWHC 1441 (Ch) 3 July 2009 – involved competing applications filed in the UK Courts, between the Receiver appointed in Texas and Liquidators appointed in Antigua.
Each asserted that the proceedings in their home country were foreign “main” proceedings.
Status of the US receivership proceeding
As the US Receiver’s authority derived from the US District Court order, the question hinged upon the powers and duties conferred or imposed on the Receiver by the terms of that order.
It was held that the Receivership was not a foreign proceeding for the following reasons:
the Court was concerned with preventing detriment to investors
the underlying cause of action had nothing to do with insolvency
the powers and duties of the Receiver under the order were to gather in and preserve assets, not to liquidate or distribute them
the Receiver would need to make a further application to the court for the power to make an asset distribution
the general body of common law or equitable principles applying to the receivership was not “a law relating to insolvency” since it applies in various situations, many of which have nothing to do with insolvency.
Status of the Antiguan liquidation proceeding
The Antiguan liquidation met the foreign proceeding test in that it was a collective proceeding and that the liquidators had been appointed pursuant to “a law relating to insolvency” to liquidate the assets of SIB. The issue was whether it was taking place where SIB had “the centre of its main interests” and was therefore a “foreign main proceeding”.
Centre of main interests
The centre of a debtor’s main interests is presumed, in the absence of proof to the contrary, to be where the registered office is located or – in the case of an individual – that person’s habitual residence. The UK court ruled in Re Eurofood IFSC Ltd  Ch 508 that to rebut this presumption would require evidence which was both objective and ascertainable by third parties.
Information the judge took into account in the Stanford case included the Disclosure Statement, marketing material, referral and other agreements with financial advisors and service providers, the location of headquarters, where the deposited funds were invested and the location of assets.
The judge held that:
the relevant question is where SIB’s main interests were (not those of the alleged fraudsters, Sir Allen Stanford’s or his associates’)
since SIB’s physical headquarters were registered in Antigua, it is presumed in the absence of proof to the contrary, that its centre of main interests is in Antigua, and
the burden on the Receiver is to rebut this presumption by factors that are objective and ascertainable by third parties.
The arguments relied upon by counsel for the Receivers in trying to rebut this presumption were:
the location of the fraudsters was in the USA (but this was not ascertainable by third parties)
most of the directors were located in the USA and none in Antigua (this factor was ascertainable by third parties as directors’ nationalities were set out in marketing material)
the principal place of business was in the USA, because of the marketing of certificates of deposit and the provision of services to SIB by other Stanford companies (however, as paperwork for investments was processed in Antigua and the certificates of deposit were executed in Antigua, this factor was not clear)
purchasers of certificates of deposit were all residents and citizens of countries other than Antigua (this was ascertainable by third parties but does not point in favour of SIB having its centre of main interests in any single state other than Antigua as it is not possible for a company to have a worldwide centre of main interests)
the real management of SIB was carried out by employees in the USA (this was not ascertainable to third parties)
location of books and records relating to investments was in the USA (this was not clear as books and records relating to investors themselves were kept in Antigua), and
SIB’s assets were located outside Antigua and mostly in the USA (this factor was also not clear as more assets were located in the UK and Switzerland than in the USA).
On this basis, the judge found that the Antiguan Liquidators were entitled to recognition as foreign representatives of a “foreign main proceeding”.
Where to from here
UK cases will have significant precedent value in New Zealand since both sets of regulations are based on the UNCITRAL model and are therefore substantially the same. Chapman Tripp will continue to monitor the application of the UNCITRAL regime overseas and will report developments as they occur.