COUNSEL: David Steel Q.C. and Charles Haddon-Cave for F.D.R.

William Norris for F.L.

Jonathan A. Harvie for E.C.T.

Geoffrey Brice Q.C. and Nigel Meeson for the defendants, U.S.L.

 

SOLICITORS: Westhorp Ward & Catchpole, Ipswich; Simon Osborne; Norton Rose Botterell & Roche; Hill Dickinson & Co.

 

DATES: 1987 Feb. 12, 16, 26, 27; March 12

 

JUDGE: Hirst J.

 

Cur. adv. vult.

 

12 March. HIRST J. read the following judgment.

 

Introduction

 

These are two summonses by the defendants, United States Lines Inc. (“U.S.L.”), to set aside Mareva injunctions for sums totalling £650,000 granted against them in two actions in which the respective plaintiffs are Felixstowe Dock & Railway Co. (“F.D.R.”) and Freightliners Ltd. (“F.L.”). [*363]

 

The basis of each summons is that U.S.L. were, on 24 November 1986, granted a restraining order under chapter 11 of the United States Federal Bankruptcy Code by Judge Howard C. Buschman in the United States District Court for the Southern District of New York (in Bankruptcy).

 

The purpose of such an order, in a nutshell, is to enable an insolvent company to survive as a going concern, while undergoing a major programme of reorganisation and retrenchment under the supervision of a creditors’ committee and the court, maintaining an even-handed balance of the interests of all its creditors, all claims against the company being frozen meantime.

 

The main foundation of this application, as originally presented by Mr. Brice on behalf of U.S.L. is that, on grounds of international comity, the English courts should recognise the order of the United States bankruptcy court, and allow it to govern the disposition of U.S.L.’s assets in England, so as to enable them to be dealt with in accordance with that order; that the Mareva injunctions, by retaining assets here, prevents those assets being administered in accordance with the intentions of the chapter 11 scheme, and that if the Mareva injunctions continue the plaintiffs will gain priority over other creditors.

 

Mr. Steel and Mr. Norris, on behalf of F.D.R. and F.L. respectively, resist the applications on the grounds that it is for the English courts to deal in the insolvency context with the disposition of assets in England; that the Mareva injunctions were ancillary to claims properly brought here by English companies in respect of debts incurred by U.S.L. in England; that the continuance of the Mareva orders will in no way give the plaintiffs any priority over other creditors; and that, by contrast, the discharge of the Mareva injunctions will cause the plaintiffs serious prejudice, including as originally contended the risk of exposing themselves to contempt proceedings in the United States and wasted legal costs here.

 

The case thus raises issues of far-reaching general importance and it is for that reason that I am, at the request of all counsel, delivering this judgment in open court.

 

On the day before the final resumed hearing another creditor of U.S.L., a Dutch company called Europe Container Terminus (B.V.) (“E.C.T.”), were granted a 24-hour ex parte Mareva injunction by Evans J. similar to that already obtained by the other two plaintiffs, though for a considerably larger sum. This application, presented by Mr. Harvie on behalf of E.C.T. is also now before me and, subject to one or two points, stands or falls on the same consideration as applies to the other two.

 

In future when I refer to the plaintiffs I mean all three plaintiff companies: and any future references to English creditors or the like of course include E.C.T.

 

The history of this application

 

This application was opened on Thursday 12 February 1987, and, as already noted, was based essentially on comity between the United States bankruptcy court and the English courts, and also, of course, on general considerations of discretion which always underlie applications in this field.

 

The hearing continued on Monday 16 February, when this application remained on [*364] in the United States, Messrs. Milbank, Tweed, Hadley and McCloy, in response to the submissions made on behalf of the two plaintiffs, radically altered their stance in relation to the contempt aspect of the United States proceedings, and this departure was presented by Mr. Brice on their behalf to the court. There had been no opportunity for the plaintiffs to investigate the significance of this change, or to obtain the advice of their United States lawyers, Messrs. Healy and Baillie, and consequently it was necessary to adjourn the application for this purpose.

 

The adjourned hearing resumed on Thursday 26 February, and a good deal of further evidence pertaining to the above problem and other discretionary aspects was placed before the court. In addition, and much more importantly (i) U.S.L. placed before the court a substantial variation of the restraining order made by Judge Buschman on U.S.L.’s application three days before on 23 February; and (ii) U.S.L. for the first time mounted a new and fundamental attack on the Mareva orders, to the effect that the court had no jurisdiction to make or continue such orders, on the grounds that U.S.L. by virtue of the restraining order had ceased to be the beneficial owners of their property, and that therefore such property was no longer amenable to the Mareva jurisdiction.

 

If, of course, this contention was correct, it would totally undermine the injunctions, and all the arguments based on comity and general discretion would become completely irrelevant. I shall consider it straight away. The argument was based on one of two recent authorities decided in the Hong Kong Supreme Court, namely a decision of Trainor J. in Modern Terminals (Berth 5) Ltd. v. States Steamship Co. [1979] H.K.L.R. 512, in which he specifically declined to follow a decision of the previous year by Cons J. in Mobil Sales and Supply Corporation v. Owners of Pacific Bear [1979] H.K.L.R. 125. Each of these cases concerned chapter 11 proceedings in relation to different United States shipping companies, and each depended on the consideration of a number of United States decisions in lower courts. Trainor J. held that the proper interpretation of these United States cases was to divest the subject company of its beneficial ownership in its assets and to revest them in the company in a different capacity as a trustee for the benefit of the creditors. Cons J., on consideration of the same authorities, had reached the diametrically opposite conclusion, and held that the subject company remained in beneficial ownership.

 

The theory adopted by Trainor J. became known as the “new entity” theory, and was treated with considerable reservation in subsequent cases in the lower courts in the United States.

 

Finally, the matter was considered by the United States Supreme Court in National Labor Relations Board v. Bildisco & Bildisco (1984) 465 U.S. 513. The majority opinion of the court, delivered by Rehnquist J., stated at p. 1188:

 

“Much effort has been expended by the parties on the question of whether the debtor is more properly characterised as an ‘alter ego’ or a ‘successor employer’ of the pre-bankruptcy debtor, as those terms have been used in our labor decisions … We see no profit in an exhaustive effort to identify which, if either, of these terms represents the closest analogy to the debtor-in-possession. Obviously if the latter were a wholly ‘new entity,’ it would be unnecessary for the Bankruptcy [*365] Code to allow it to reject executory contracts, since it would not be bound by such contracts in the first place. For our purposes, it is sensible to view the debtor-in-possession as the same ‘entity’ which existed before the filing of the bankruptcy petition, but empowered by virtue of the Bankruptcy Code to deal with its contracts and property in a manner it could not have employed absent the bankruptcy filing.”

 

On the strength of this decision by the court of highest authority, Messrs. Healy and Baillie expressed the view that the “new entity” theory had been discredited and was no longer viable. U.S.L.’s United States’ advisors sought to distinguish the Bildisco case, 465 U.S. 513 by reference to two other earlier Supreme Court authorities, namely United States v. Whiting Pools Inc. (1983) 462 U.S. 198 and Wolf v. Weinstein (1963) 372 U.S. 633.

 

Suffice it to say that, having considered both these cases, they do not seem to me to touch in any way on the critical point. Consequently I have come to the conclusion that Healy and Baillie’s interpretation of the Bildisco case is the correct one, that the “new entity” theory is indeed discredited, and that in consequence U.S.L. remain in beneficial ownership of their assets, while of course remaining obliged to operate their business in accordance with the provisions of chapter 11, and under the supervision of the creditors’ committee and the court. If the position were otherwise, it is very difficult to see why all the elaborate provisions of the restraining order quoted below were in any way necessary. Consequently the jurisdiction point fails, and the case ends, as it began, turning on the crucial issues of comity and discretion.

 

United States Lines Inc.

 

U.S.L. have for many years carried on a very large world-wide shipping business. They are incorporated in the State of Delaware, United States, their operational headquarters being in Cranford, New Jersey. They also carry on business in England from an address in Knightsbridge, together with a local office in Felixstowe, and are registered as an overseas company under section 691 of the Companies Act 1985. Their holding company is a New York registered company called McLean Industries Inc.

 

In 1986 U.S.L. encountered very severe financial difficulties, as a result of which they petitioned the United States bankruptcy court under chapter 11 on 24 November, and on the same day Judge Buschman made the restraining order, to which I shall in due course refer in more detail.

 

The chapter 11 petition contained details of U.S.L.’s financial position on a consolidated basis as at 27 September 1986, showing assets totalling U.S. $1.250 billion, and liabilities totalling U.S. $1.272 billion, i.e., an excess of less than 2 per cent. of liabilities over assets. So far as England is concerned, its total liabilities (i.e. liquidated claims) amount to £2.4 million (including those of the plaintiffs) and there are believed to be still further creditors. The company’s total English assets amount to approximately £720,000, so that there is a very substantial imbalance between English assets and liabilities, the latter exceeding the former by a factor of about 3.3, while of course only constituting a minute percentage of the global total which runs into over a thousand billion dollars.

 

It is common ground that under the chapter 11 reorganisation and retrenchment it is the intention of U.S.L. to close down entirely their [*366]

 

English and European operations and concentrate their shipping activities mainly in North America. This is a consideration of great importance, as will ultimately appear.

 

The plaintiffs’ claims and the Mareva injunctions

 

F.D.R. are a statutory body responsible for the operations of the dock and railway at Felixstowe. Up to the end of 1986 U.S.L. vessels had for several years loaded and discharged at Felixstowe. F.D.R.’s claims totalling £367,922.44 comprise run-of-the-mill charges which remained unpaid for berthing and dock facilities, together with stevedoring and wharfage services for U.S.L. vessels at Felixstowe. While not formally conceded, no defence to this claim has been foreshadowed, and F.D.R. intend to proceed under R.S.C., Ord. 14 unless the effect of my order makes such a course effectively valueless. F.D.R.’s Mareva injunction was sought, and granted ex parte by Leggatt J., on 25 November 1986, i.e., the day after the chapter 11 restraining order, and the existence of that order was very properly disclosed to the judge in F.D.R.’s affidavit in support. The Mareva restrained removal from the jurisdiction of assets so as not to deplete them below £400,000.

 

F.L. are a container company based in London, which provided, maintained and inspected containers used by U.S.L. F.L.’s claim totalling £236,717.20 was in respect of run-of-the-mill charges for such services which remained unpaid, and of which, as I am informed by counsel, upwards of £200,000 is almost certainly undisputed, so that F.L. also intend to proceed under Order 14 subject to the same reservation. F.L.’s Mareva injunction was granted by Ognall J. on 18 December 1986 and here again the existence of the chapter 11 order was very properly drawn to the judge’s attention. Originally the F.L. Mareva prohibited removal of any of U.S.L.’s assets from the jurisdiction save with the consent of the plaintiffs’ solicitors, but this was varied on 2 January 1987, also after full proper disclosure, by Hoffmann J., so as to enjoin any depletion of assets below £650,000, with the express purpose of giving combined Mareva protection to F.D.R. and F.L.

 

E.C.T. are registered in the Netherlands, and provided stevedoring and allied facilities for U.S.L. vessels over the period May 1983 to December 1986. Their claims total approximately 5.4 million Dutch florins, equivalent to approximately £1,692,000. They duly served proceedings on U.S.L. in this country, and subsequently U.S.L. entered an appearance and served a defence. Procedurally, therefore, their action here is soundly based and they also intend to take Order 14 proceedings. Mr. Harvie adopted all the arguments of Mr. Steel and Mr. Norris, many of which had been developed before his clients appeared on the scene.

 

Chapter 11 proceedings

 

The evidence concerning the operation of chapter 11 in United States bankruptcy law is derived from two sources. These are (i) a most helpful opinion of Judge Buschman himself, delivered at a status conference on 11 February 1987 (i.e., the day before the start of the present hearing) and directed by him to be furnished to this court; (ii) a memorandum by the defendants’ United States legal adviser, Mr. John G. Gellene, of Milbank [*367] Tweed, which is accepted by all parties to be accurate. This is such an important aspect of the case that I think it right to quote the salient parts of this evidence verbatim rather than attempting to summarise.

 

First I quote some of the opening passages of Mr. Gellene’s memorandum:

 

“Chapter 11 of the United States Bankruptcy Code provides a procedure for placing a financially distressed company under court protection so that the company can attempt to reorganize its financial condition and make provision for paying its obligations. In a chapter 11 case, the company becomes subject to the supervision of the United States bankruptcy court, a ‘unit’ or division of the United States District Court, the general federal trial court. The provisions of the United States Bankruptcy Code, along with orders of the bankruptcy court which may be issued from time to time, impose certain duties and restrictions upon the company’s management which would not otherwise exist. In a chapter 11 case, management of the debtor continues to operate its business as a ‘debtor in possession’ unless the bankruptcy court appoints a trustee. Generally speaking, a trustee is only appointed upon a showing of fraud, dishonesty or gross mismanagement … An important feature of chapter 11 is that a Ɵdebtor in possession’ has the same duties and powers as a trustee. A debtor in possession is therefore obligated to treat similarly situated creditors equally, and to refrain from conduct that is not in the best interests of creditors. If the status of a United States bankruptcy trustee is recognized under the law of another country, there may be grounds for recognizing the status of a ‘debtor in possession’ as the equivalent of a trustee for purposes of foreign law.”

 

The judge prefaced his opinion as follows:

 

“Counsel for U.S.L. has informed the court that the debtor shall be making application to the English court to modify or vacate such injunctions. In connection with that application, counsel has advised that it may be useful for the English court to have this court’s view on certain general matters of United States bankruptcy law. These matters are: first, the extent of this court’s jurisdiction over the assets and property of a debtor in a case under chapter 11 of the U.S. Bankruptcy Code; second, the issue of reciprocity, namely, whether this court would extend comity to the orders and judgments of a foreign court, specifically an English court, in bankruptcy matters; third, whether there may be any adverse discrimination in a chapter 11 case in the treatment of the claims of foreign creditors - specifically, English creditors located in the United States. Counsel has requested that the court express its view on these subjects in a manner that could be conveyed to the English court. While the request is unusual, perhaps unprecedented, this court is disposed to entertain it. The courts in the United States have repeatedly recognized that relations among nations are furthered by recognition of and giving comity to proceedings in other countries. In this circuit, for example, an admiralty arrest of a vessel belonging to a company involved in a Swedish bankruptcy proceeding was dismissed so that the Swedish proceeding could [*368] administer that property: Cunard Steamship Co. Ltd. v. Salen Reefer Services A.B. (1985) 773 F. 2d 452. If this court were in the position of the English court being presented with the application of U.S.L. the views of a jurist in another country to whom a bankruptcy or reorganization proceeding has been assigned would be welcomed as a means of providing general guidance in matters of foreign law. In the spirit of furthering the relations among nations, I shall address myself generally to the three subjects raised by counsel.”

 

Judge Buschman describes the source and scope of the bankruptcy jurisdiction of his court as follows:

 

 

“The intended scope of bankruptcy and reorganization jurisdiction extends beyond the borders of the United States … The nature of the jurisdiction is in rem. The res, the estate of the debtor created by the commencement of a bankruptcy or reorganization case, is viewed as a single entity to be dealt with in a single proceeding. The claims and interests of all creditors, foreign and domestic, are to be addressed in the course of the proceeding. The broad scope of bankruptcy jurisdiction under United States law is intended to permit similarly situated creditors, regardless of where they are located, to be treated equally in a bankruptcy or reorganization case. Discrimination on the basis of citizenship is not permitted. All creditors are given the opportunity to file claims against the estate and their recovery is not limited to the assets in their own country. To achieve equality of treatment of all similarly situated creditors, wherever located, United States law contains several provisions. Central to that goal are the requirements that claims arising prior to the filing of the petition are to be paid after the estate has been administered. If the debtor is liquidated, the proceeds are distributed rateably. If the debtor is to be reorganized, creditors are to be paid pursuant to a plan of reorganization. Concomitantly, a debtor is generally prohibited from paying claims of foreign and domestic creditors which arise prior to the filing of the petition except through such a distribution or plan. Fragmentation is not contemplated for it would defeat the purpose. Another measure designed to promote equal treatment among all similarly situated creditors is the ‘automatic stay’ which comes into force on the commencement of a bankruptcy or reorganization case with the filing of the petition. Under section 362 of Title 11, United States Code, all creditors are generally stayed and restrained from commencing or continuing judicial action against the debtor that was or could have been commenced pre-petition. All creditors are also generally stayed and restrained from enforcing their claims against any property of the debtor until and unless relief from the automatic stay is obtained for cause shown. By these provisions creditors do not obtain preferred treatment through enforcement actions begun after the commencement of the chapter 11 case and the estate is able to be administered. In addition, United States law recognizes that it may often be impracticable for creditors, because of the amount they are owed or for other reasons, to examine the myriad of matters that do not directly affect their interests by requiring in all reorganization [*369] cases, of which U.S.L. is one, the appointment of an unsecured creditors’ committee charged with the fiduciary duty of representing all unsecured creditors in matters that concern that group as a whole. Principal among the duties of such committees is the negotiation of a plan of reorganization providing for a return to unsecured creditors. The expenses of the committee are borne by the debtor. These include counsel and accountants’ fees and the fees of other professionals such as investment brokers. All plans for reorganization must be submitted to all creditors for their consideration and vote before they can be confirmed by this court and thereby have binding effect. Each creditor, regardless of citizenship, has one vote and, also, an equal opportunity to be heard in opposition to the plan.”

 

Reverting now to Mr. Gellene, the formulation of a plan of reorganisation under chapter 11 is described as follows:

 

“The goal of a chapter 11 case is a ‘plan of reorganization,’ which provides for the treatment of the claims of creditors and of the interest of equity security holders. In general, the formulation of a plan of reorganization involves negotiations among the debtor, the official creditors’ committee, other committees which may be appointed to represent specific categories of creditors and equity security holders, and other interested parties. A plan of reorganization will generally divide creditors into one or more classes, depending upon whether they are secured or unsecured and whether unsecured claims have statutory priority in right of payment … Under a plan of reorganization, an unsecured creditor, including secured creditors to the extent that the value of collateral is insufficient, is entitled to receive property of a value at least equal to what the creditor would receive in the event of the debtor’s liquidation, taking into account the statutory priorities just described. A secured creditor under a plan is entitled to property at least equal in value to the value of its security interest in the debtor’s property. However a secured creditor is not necessarily entitled to realize its claim upon collateral subject to its security interest if the debtor can otherwise provide at least equivalent value. The debtor has the exclusive right to propose a plan of reorganization for 120 days following the filing of its chapter 11 petition. This exclusive time period can and often is extended upon request of the debtor, particularly in large, complex cases such as that of U.S.L. Once this exclusive period lapses, creditors or other interested parties may propose a plan. A plan of reorganisation must be submitted to creditors and equity security holders for their acceptance … A plan of reorganization may be approved or ‘confirmed’ by the bankruptcy court if it meets the statutory requirements of the Bankruptcy Code and, in particular, if it is accepted by each class of creditors and equity security holders.”

 

Towards the end of his opinion, the judge reverts to the question of comity in the following terms:

 

“As to the question of comity being afforded in the United States to proceedings under foreign bankruptcy law, particularly English law, [*370] reference is made to the recent case in Cunard Steamship Co. Ltd. v. Salen Reefer Services A.B. (1985) 773 F. 2d 452, and to the long established decision of the United States Supreme Court in Canada Southern Railway Co. v. Gebhard (1883) 109 U.S. 527. These show that this country early on recognized that United States citizens should be bound by foreign debtor-creditor arrangement proceedings and now recognizes that to permit arrests or attachments by United States citizens of debtor property would defeat that purpose.”

 

I shall return later to these two United States authorities.

 

The restraining order

 

The imposition of the “automatic stay” was achieved by a restraining order issued by Judge Buschman on 24 November 1986 on the application, inter alia, of U.S.L. as follows, so far as relevant:

 

“It is … ordered, that all persons, entities and governmental units, wherever located, including those located outside the United States, and all persons acting on their behalf, including sheriffs, marshalls, constables and other or similar law enforcement officials, are hereby stayed, restrained and enjoined, effective immediately from the following: (1) commencing or continuing a judicial, administrative or other action or proceeding against any of the debtors that was or could have been commenced on or before 24 November 1986; (2) commencing or continuing a judicial, administrative or other action or proceeding against any of the debtors to recover a claim against any of the debtors that arose on or before 24 November 1986; (3) issuing, serving or otherwise employing legal process of any type, including writs or orders of attachment, arrest, sequestration or foreclosure, in connection with an action or proceeding against any of the debtors referred to in paragraphs (1) or (2); (4) any act enforcing a judgment obtained on or before 24 November 1986 against any of the debtors or their property, wherever located, including vessels and other property of the debtors located outside the United States; (5) any act to obtain possession of or exercise control over property of the debtors’ estates, including vessels, cargo, containers, chassis and other equipment in the possession or under the control of the debtors, whether such property is located within or outside the United States; (6) any act to create, perfect or enforce any lien against property of the debtors’ estates, including vessels, cargo, containers, chassis and other equipment in the possession or under the control of the debtors, whether such property is located within or outside the United States; (7) any act to collect, assess or recover a claim against any of the debtors that arose on or before 24 November 1986; and (8) the set-off of any debt owing to one of the debtors that arose on or before 24 November 1986 against any claim against such debtor; …”

 

The Insolvency Act 1986

 

This very recent enactment, applicable in England and Scotland, was based on the recommendations of the Cork Committee in their report [*371] entitled “Insolvency Law and Practice” (1986) (Cmnd. 8558). It is convenient to refer at this stage to the relevant sections which establish a new bankruptcy procedure called an “administration order.” The Act of 1986 came into force as recently as 29 December 1986. The procedure for administration orders is contained in Part II of the Act, and the material sections, so far as relevant. are:

 

“8(1) Subject to this section, if the court - (a) is satisfied that a company is or is likely to become unable to pay its debts (within the meaning given to that expression by section 123 of this Act), and (b) considers that the making of an order under this section would be likely to achieve one or more of the purposes mentioned below, the court may make an administration order in relation to the company. (2) An administration order is an order directing that, during the period for which the order is in force, the affairs, business and property of the company shall be managed by a person (‘the administrator’) appointed for the purpose by the court. (3) The purposes for whose achievement an administration order may be made are - (a) the survival of the company, and the whole or any part of its undertaking, as a going concern; … (d) a more advantageous realisation of the company’s assets than would be effected on a winding up; and the order shall specify the purpose or purposes for which it is made.

 

“10(1) During the period beginning with the presentation of a petition for an administration order and ending with the making of such an order or the dismissal of the petition - (a) no resolution may be passed or order made for the winding up of the company; (b) no steps may be taken to enforce any security over the company’s property, or to repossess goods in the company’s possession under any hire-purchase agreement, except with the leave of the court and subject to such terms as the court may impose; and (c) no other proceedings and no execution or other legal process may be commenced or continued, and no distress may be levied, against the company or its property except with the leave of the court and subject to such terms as aforesaid.”

 

Section 11 provides that on the making of an administration order any winding up petition shall be dismissed and any administrative receiver shall vacate office. Sections 13 to 15 lay down the mode of appointment of the administrator and his powers, including the power to do all such things as may be necessary for the management of the company. Section 17 provides for the administrator’s duties, including a duty to take into his custody and control all the properties to which the company appears to be entitled, and to manage the affairs, business and property of the company. He is also enjoined to summon a meeting of creditors if he is requested so to do by one tenth in value of the company’s creditors or is directed to do so by the court.

 

Under section 23 he is obliged to send to all creditors and other interested parties a statement of his proposals for achieving the purposes of the order within three months (or such longer period as the court may allow) of the making of the order. Section 26 allows for the appointment of [*372]  a creditors’ committee. Section 27 lays down various provisions for protecting the interests of creditors and members.

 

Mr. Brice strongly relied on the close similarity between this new English procedure and chapter 11. The main distinction, of course, between the two procedures is that in the United States the debtor company remains in possession, while here there is an independent administrator. Mr. Harvie placed strong reliance on this contrast, and submitted that, while the administrator here was in the true sense a trustee, the fiduciary duties resting upon a company as a debtor in possession under chapter 11 were of a very low and rudimentary order, since they could only be removed from possession in cases of fraud, dishonesty or gross mismanagement. In my judgment, having regard to the provisions of section 1107 of the United States Federal Bankruptcy Code, which specifically provides that the company is bound by all the duties of a trustee, and to Judge Buschman’s opinion, this is not a valid contrast. I therefore accept Mr. Brice’s argument that, at any rate on a broad approach, the comparison between the two procedures is a valid one.

 

The basic issues

 

I now proceed to summarise the relevant authorities both English and United States, the parties’ rival submissions thereon, any relevant facts, and my general conclusions under the following headings. (1) The Marevajurisdiction. (2) Comity under English law. (3) English bankruptcy procedure. (4) The relevant United States authorities on comity and bankruptcy procedure. (5) Contempt in the United States.

 

(1) The Mareva jurisdiction

 

The general jurisdiction to grant a Mareva injunction is now, of course, to be found in section 37(3) of the Supreme Court Act 1981 which provides:

 

“The power of the High Court under subsection (1) to grant an interlocutory injunction restraining a party to any proceedings from removing from the jurisdiction of the High Court, or otherwise dealing with, assets located within that jurisdiction shall be exercisable in cases where that party is, as well as in cases where he is not, domiciled, resident or present within that jurisdiction.”

 

This, as is common ground, vests in the court a wide judicial discretion to be exercised on equitable principles, to provide interlocutory relief in personam but not giving the plaintiff any proprietary rights over the frozen assets, nor operating as a charge upon them: see Cretanor Maritime Co. Ltd. v. Irish Marine Management Ltd. [1978] 1 W.L.R. 966, 972-975, perBuckley L.J.

 

So far as the present case is concerned Mr. Brice submitted that a Mareva injunction is intended to prevent a debtor removing his assets from the jurisdiction so as unjustly to avoid meeting his liabilities, but not to be used as a mechanism to undermine the effect of an order such as one made pursuant to chapter 11.

 

Mr. Steel and Mr. Norris submitted that the fundamental purpose of the Mareva injunction is to protect the plaintiffs against the defendants [*373] transferring assets abroad so as to make themselves judgment-proof, leaving the plaintiffs with worthless judgments, and that any question of discharge or variation of the Mareva injunction in this case is essentially one of discretion; the court should have regard to all the circumstances of the case in order to determine what justice requires.

 

In my judgment it is indeed incumbent on the court to take into account all the relevant circumstances in the exercise of its discretion. In the present case, of course, the United States chapter 11 procedure is a very important circumstance, but it cannot in my judgment properly be treated in any way as an overriding consideration, so as to accord it any kind of paramountcy or dominance over all the others, as Mr. Brice’s formulation (with its reference to “undermining”) tends to do. At the end of the day, this being an application for an interlocutory injunction, the court must weigh up the competing assertions of the parties as to the irreparable prejudice which would follow from the continuance or discharge of the Mareva injunction, as the case may be, and the overall balance of convenience, applying the very well established principles laid down by the House of Lords in American Cyanamid Co. v. Ethicon Ltd. [1975] A.C. 396. I consider these aspects in the concluding sections of my judgment.

 

(2) Comity in English law

 

In Travers v. Holley [1953] P. 246 the Court of Appeal considered the question of recognition of a divorce decree granted in the courts of New South Wales applying principles similar to those applicable in England. Hodson L.J. stated, at p. 257:

 

“where it is found that the municipal law is not peculiar to the forum of one country but corresponds with a law of a second country, such municipal law cannot be said to trench upon the interests of that country. I would say that where, as here, there is in substance reciprocity, it would be contrary to principle and inconsistent with comity if the courts of this country were to refuse to recognize a jurisdiction which mutatis mutandis they claim for themselves. The principle laid down and followed since the Le Mesurier case [1895] A.C. 517 must, I think, be interpreted in the light of the legislation which has extended the power of the courts of this country in the case of persons not domiciled here.”’;

 

Somervell and Jenkins L.JJ. concurred.

 

In In re Trepca Mines Ltd. [1960] 1 W.L.R. 1273 the court considered the position of a foreign applicant in an English company liquidation where the former sought to prove a debt in respect of which he was at the relevant time the holder of a judgment in his favour in the courts of Yugoslavia. Hodson L.J. (with whose judgment Ormerod and Harman L.JJ. agreed) stated, at pp. 1280-1282:

        

 

        

 

“There was a further argument addressed to this court which derives from the decision in a matrimonial case, Travers v. Holley, where it was held in a divorce suit that where the courts of New South Wales and the English courts claimed the same jurisdiction, it would be contrary to principle and inconsistent with comity if the courts of this country refused to recognise a jurisdiction which mutatis mutandis  [*374] they claimed for themselves. Arguing from that, reliance was placed upon a dictum of Denning L.J. in In re Dulles’ Settlement (No. 2) [1951] Ch. 842, 851 … It is argued, relying on the observations of Denning L.J., that in effect we should in this case ignore the position as it has always been understood in this country since not only Emanuel v. Symon [1908] 1 K.B. 302 but other cases which have been decided, and give effect to the judgment of the Yugoslav court in toto, whether it is an action in personam or not. I find myself unable to take that step. The decision in Travers v. Holley was a decision limited to a judgment in rem in a matter affecting matrimonial status, and it has not been followed, so far as I am aware, in any case except a matrimonial case. Moreover, it is quite clear from the legislature’s recognition of the rule in the Foreign Judgments (Reciprocal Enforcement) Act 1933, that the classification of actions which was referred to by Buckley L.J. in Emanuel v. Symon has been recognised in this country. Having regard to the Act of 1933, it would be a step which I for one am not prepared to take, to say that the Travers v. Holley point really affects the whole of this question of jurisdiction as to the enforcement of a foreign judgment, and that Emanuel v. Symon ought to be treated as a case which need not be regarded as binding upon this point because the court there had not addressed itself thereto.”

 

In re Trepca Mines Ltd. [1960] 1 W.L.R. 1273 has been frequently followed, including for example in Schemmer v. Property Resources Ltd. [1975] Ch. 273 where Goulding J. rejected a claim by a foreign receiver to recover the assets of an English company in England, stating, inter alia, at p. 287:

 

“I think, however, that in view of well-known later decisions Travers v. Holley must be followed only with caution outside its own subject matter of matrimonial status.”

 

In the light of, inter alia, these authorities the law is stated in Dicey & Morris, Conflict of Laws, 10th ed. (1980), p. 741, under rule 143 and the ensuing comment:

 

“The authority of a liquidator appointed under the law of the place of incorporation is recognised in England.

 

“Comment

 

“The effect of a foreign winding up order in England has seldom been before the courts. Rule 143 is however justified because the law of the place of incorporation determines who is entitled to act on behalf of a corporation. If under that law a liquidator is appointed to act then his authority should be recognised here. A case has never arisen where recognition of a liquidator’s authority was sought by reference to an appointment made in the exercise of a foreign jurisdiction similar to that conferred on the English courts in regard to companies incorporated outside the United Kingdom. The protagonist of recognition in such a case could urge that ‘it would be contrary to principle and inconsistent with comity if the courts of this country were to refuse to recognise a jurisdiction which mutatis mutandis they [*375] claim for themselves.’ However even if an appeal to comity has any force (which is doubtful) it is improbable, with one possible exception, that the liquidator’s authority would be recognised as extending beyond those affairs of the company which are local to the country where the appointment was made. The exception is where there is no likelihood of a liquidation in the country of incorporation. This treatment of the argument based on comity is defensible because where there is a liquidation in the country of incorporation and the English courts exercise their own jurisdiction to make an order, they seem concerned to ensure that the liquidator should not go beyond dealing with the company’s English affairs without special direction. Such concern is not shown where there is no likelihood of a liquidation in the country of incorporation.”

 

Mr. Brice submits that Travers v. Holley [1953] P. 246 forms a very close analogy to the present case, and while firmly disclaiming any suggestion that the restraining order is binding or enforceable here, he argues that, having regard to that order, with its express extra-territorial effect, the position here is “betwixt and between” Travers v. Holley and In re Trepca Mines Ltd. [1960] 1 W.L.R. 1273, though with a strong bias towards the former, on the footing that the United States restraining order is in effect an order in rem affecting the status of U.S.L. He also relies on other cases cited and distinguished in Schemmer v. Property Resources Ltd. [1975] Ch. 273, under which foreign receivers and the like have been held entitled to proceed in England (e.g., Macaulay v. Guaranty Trust Co. of New York (1927) 44 T.L.R. 99 where a receiver of a foreign company appointed under an order which was described as “a combination of a winding-up order and an administration order” was held entitled to recover sums standing to the credit of the company in an English bank).

 

Mr. Steel and Mr. Norris both submitted that the proper approach to comity is that, having regard to the decision in In re Trepca Mines Ltd. [1960] 1 W.L.R. 1273 and its successors, English law while of course according recognition of the authority of foreign liquidators, does not accord recognition to any decree of a foreign court in personam or indeed in any other field outside the realm of status, which, they submit, is not applicable in the present case.

 

As all counsel of course recognise, this is not a case where U.S.L. are in terms seeking to enforce the restraining order, nor to obtain a stay of the English actions. These authorities are therefore relied upon by way of helpful analogy rather than of direct application.

 

Approaching the matter on this basis, I am quite satisfied that this is not a Travers v. Holley type case and that In re Trepca Mines Ltd. (which itself arose in the context of a company insolvency) provides the surer guide in the present context. The chapter 11 order cannot be treated as affecting the status of U.S.L. having regard to the United States Supreme Court rejection of the “new entity” theory; and I am quite satisfied that the restraining order as such, having regard to its terms, is essentially an order “in personam,” even though the nature of the United States bankruptcy jurisdiction generally is “in rem.” [*376]

 

I wish however to stress that the court would in principle always wish to co-operate in every proper way with an order like the present one made by a court in a friendly jurisdiction (of which the United States is a most conspicuous example). But whether this is appropriate in any given case, and if so the precise nature and extent of such co-operation, must depend on the particular sphere of activity in question and the English law applicable thereto as discussed in the ensuing section of this judgment, together with the overall circumstances.

 

(3) English bankruptcy procedure

 

It is not in dispute (i) that the English courts have jurisdiction to wind up U.S.L. here, both on the ground that it is registered in England and on the ground that it has assets here; and (ii) that Part II of the Insolvency Act 1986 does not give the English court jurisdiction to make an administration order in respect of a foreign company.

 

In this section I focus on the authorities which relate to English bankruptcy procedure in cases where there is a substantial foreign element, and I deal first with four cases involving foreign registered companies. In In re Commercial Bank of South Australia (1886) 33 Ch.D. 174, a petition was presented in England to wind up an Australian incorporated banking company carrying on its main business in Australia, but with a branch office in London. North J. granted the petition, stating, at p. 178:

 

“The question is whether the English creditors ought to be left to recover their debts in a winding-up of the company in Australia, their debts having been contracted here, and there being a large amount of assets here. Two winding-up petitions have been presented here, and all I know about the proceedings in Australia is, that an order has been made for the appointment of provisional liquidators. I have no proper proof that a winding-up order has been made there. At any rate, if it has been made, it was not made till at least a month after the petitions were presented here. I think, therefore, that the English creditors are entitled to have a winding-up order made by this court. I do not think it would be right to insert any special directions in the order; this is not the proper time for giving such directions. But I will say this, that I think the winding-up here will be ancillary to a winding-up in Australia, and, if I have the control of the proceedings here, I will take care that there shall be no conflict between the two courts, and I shall have regard to the interests of all the creditors and all the contributories, and shall endeavour to keep down the expenses of the winding-up so far as is possible, I think it clear that there is jurisdiction to make a winding-up order, the cases which have been cited show that there is jurisdiction …”

 

In In re English, Scottish, and Australian Chartered Bank [1893] 3 Ch. 385, 394 Vaughan Williams J., at first instance, stated in a case dealing with an English scheme connected with the winding up in Australia of an Australian-based banking company incorporated in Australia:

 

“One knows that where there is a liquidation of one concern the general principle is - ascertain what is the domicil of the company in liquidation; let the court of the country of domicil act as the principal [*377] court to govern the liquidation; and let the other courts act as ancillary, as far as they can, to the principal liquidation. But although that is so, it has always been held that the desire to assist in the main liquidation - the desire to act as ancillary to the court where the main liquidation is going on - will not ever make the court give up the forensic rules which govern the conduct of its own liquidation.”

 

The Court of Appeal (Lindley, Lopes and A. L. Smith L.JJ.) upheld this decision.

 

In In re Vocalion (Foreign) Ltd. [1932] 2 Ch. 196, 206 Maugham J. stated the general principle:

 

“Finally it must be remembered that there may be winding-up orders made in the foreign country where the company has carried on business and possesses assets. The view of this court is that the principal winding-up should be in the principal domicil of the corporation, and that any other winding-up order should be ancillary to the principal winding-up.”

 

In In re Suidair International Airways Ltd. [1951] Ch. 165, 173-174 Wynn-Parry J., in considering applications ancillary to the winding up of a South African based company incorporated in South Africa, cited the passage quoted above from Vaughan Williams J. and then proceeded as follows:

 

“It appears to me that that must be the common sense of the matter, and that that passage enunciates a principle which, so far as I know, has never been doubted. Then it is said that all that that passage refers to is questions of procedure; that section 325 concerns a question of substantive law; and that therefore the passage, when properly regarded, is not any obstacle to the adoption by the court of the argument put forward on behalf of the liquidator. To that I would make two answers: first, I do not read Vaughan Williams J., as confining himself to what, on a narrow view, may be said to be matters of procedure. I think that he intended his observations and the statement of the principle to apply to the decision of all questions arising in the ancillary liquidation. Secondly, even if that passage could be read otherwise, I should be prepared for myself to say that I can see no sound reason for distinguishing between matters of procedure viewed in that narrow sense and matters of substantive right. It appears to me that the simple principle is that this court sits to administer the assets of the South African company which are within its jurisdiction, and for that purpose administers, and administers only, the relevant English law; that is, primarily, the law as stated in the Companies Act 1948, looked at in the light, where necessary, of the authorities. If that principle be adhered to, no confusion will result. If it is departed from, then for myself I cannot see how any other result would follow than the utmost possible confusion. Who could lay down as a clear and exhaustive proposition where the court was to draw the line in any particular case between administering the English law and the law of the main liquidation?” [*378] 

 

In In re Oriental Inland Steam Co., Ex parte Scinde Railway Co. (1874) L.R. 9 Ch.App. 557 the Court of Appeal considered the position of judgment creditors in India of an English-registered company carrying on business in India, holding that they should not be entitled to attach the company’s property in India and thus secure priority over other creditors. James L.J., with whose judgment Mellish L.J. agreed, stated, at p. 558:

 

“The winding-up is necessarily confined to this country. It is not immaterial to observe, that there could now be no possibility, having regard to the decision of the Supreme Court of Calcutta, in Bank of Hindustan v. Premchand (1868) 5 Bom. O.C. 83 which we must take to be quite right, of treating this case as if there were an auxiliary winding-up in India. If this is so with regard to a company domiciled in England, but having its business and assets in India, there would be no ground for the contention on the part of the appellants that they would obtain an equitable and rateable distribution of the assets between the creditors. All the assets there would be liable to be torn to pieces by creditors there, notwithstanding the winding-up, and there would be an utter incapacity of the courts there to proceed to effect an equitable distribution of them. The English Act of Parliament has enacted that in the case of a winding-up the assets of the company so wound up are to be collected and applied in discharge of its liabilities. That makes the property of the company clearly trust property. It is property affected by the Act of Parliament with an obligation to be dealt with by the proper officer in a particular way. Then it has ceased to be beneficially the property of the company; and, being so, it has ceased to be liable to be seized by the execution creditors of the company. There may, no doubt, be some difficulty in the way of dealing with assets and creditors abroad. The court abroad may sometimes not be disposed to assist this court, or take the same view of the law as the courts of this country have taken as to the proper mode of dealing with such companies, and also with such assets. If so we must submit to these difficulties when they occur. In this particular case there is no such difficulty. There were assets fixed by the Act of Parliament with a trust for equal distribution amongst the creditors. One creditor has, by means of an execution abroad, been able to obtain possession of part of those assets. The Vice-Chancellor was of opinion that this was the same as that of one cestui que trust getting possession of the trust property after the property had been affected with notice of the trust. If so, that cestui que trust must bring it in for distribution among the other cestuis que trust. So T, too, am of opinion, that these creditors cannot get any priority over their fellow-creditors by reason of their having got possession of the assets in this way. The assets must be distributed in England upon the footing of equality.”

 

Finally in this section I should refer to a case in the House of Lords, Galbraith v. Grimshaw [1910] A.C. 508, where a somewhat different topic was under consideration, namely whether a sequestration order under Scottish bankruptcy law should override an attachment in England obtained [*379] by an English creditor prior to the Scottish order. Lord Dunedin stated, at p. 513:

 

“Now so far as the general principle is concerned it is quite consistent with the comity of nations that it should be a rule of international law that if the court finds there is already pending a process of universal distribution of a bankrupt’s effects it should not allow steps to be taken in its territory which would interfere with that process of universal distribution; and that I take to be the doctrine at the bottom of the cases of which Goetze & Sohn v. Aders Preyor & Co. (1874) 2 R. 150 is only one example. But if you wish to extend that not only to the question of recognizing a process of universal distribution but also of introducing the law of relation back, then it seems to me you at once get into rather great difficulties, because the question at once arises, according to which law will you apply the doctrine of relation back?”

 

The House of Lords held that it should be according to the local (English) law of the attachment.

 

Here of course there is no winding up proceeding as such in England, so these cases also are cited by all counsel as helpful by way of analogy, and I shall approach them in the same way.

 

Mr. Steel and Mr. Norris submit that the first four of the above cited cases show that the English practice is to regard the courts of the country of incorporation as the principal forum for controlling the winding up of a company, but that in so far as that company has assets here, the usual practice is to carry out an ancillary winding up in England in accordance with our own rules, while working in harmony with the foreign courts. Applying this principle, they submit that the English courts would not and should not favour an order which removed the English assets entirely outside their control.

 

Mr. Brice stresses that the procedure followed in these same four cases recognised the proceedings in the foreign court as the principal proceedings, and submits that the continuation of the Mareva injunction here will unjustly impede the United States chapter 11 proceedings, which are plainly the principal proceedings in this case. Mr. Brice also places strong reliance on the Oriental case, L.R. 9 Ch.App. 557, submitting that it provides a clear precedent for the order he seeks and that, 112 years on, it follows from the policy there laid down that a Mareva injunction should be refused.

 

In my judgment Mr. Steel and Mr. Norris are right in their interpretation of the first four cases, though of course it does not necessarily follow therefrom that the Mareva injunction should continue. For reasons which will appear hereafter I do not accept Mr. Brice’s argument that the continuation of the Mareva will unjustly impede the chapter 11 proceedings in the United States, although I do of course accept (as do the plaintiffs themselves) that they are the principal proceedings.

 

So far as the Oriental case is concerned, I think that it does no more than enshrine in eloquent and emphatic terms the general principle (which is not in dispute here) that the whole purpose of liquidation proceedings is to hold the scales even between the various classes of creditors by imposing [*380] a trust, and I do not think it gives any really useful guidance in the specific Mareva context.

 

The opening passage quoted from Lord Dunedin in the Galbraith case [1910] A.C. 508, 513, on which Mr. Brice also strongly relied, seems to me again to do no more than stress the same general principle, and it is significant that, while upholding it, the House of Lords still gave preference to English law when deciding whether the Scottish bankruptcy order related back in order to override the attachment.

 

(4) Relevant United States authorities on comity and bankruptcy procedure

 

In the leading United States Supreme Court case of Canada Southern Railway Co. v. Gebhard (1883) 109 U.S. 527 (cited by Judge Buschman in his opinion of 11 February 1986) the Supreme Court in 1883 considered the effect of a Canadian Parliamentary scheme of arrangement for a Canadian railway company vis-ˆ-vis its mortgage creditors. In the opinion of the court delivered by Waite C.J. the following principle was stated, at pp. 537-538:

 

“A corporation of one country may be excluded from business in another country … but, if admitted, it must, in the absence of legislation equivalent to making it a corporation of the latter country, be taken, both by the government and those who deal with it, as a creature of the law of its own country, and subject to all the legislative control and direction that may be properly exercised over it at the place of its creation. Such being the law, it follows that every person who deals with a foreign corporation impliedly subjects himself to such laws of the foreign government, affecting the powers and obligations of the corporation with which he voluntarily contracts, as the known and established policy of that government authorizes. To all intents and purposes, he submits his contract with the corporation to such a policy of the foreign government, and whatever is done by that government in furtherance of that policy which binds those in like situation with himself, who are subjects of the government, in respect to the operation and effect of their contracts with the corporation, will necessarily bind him. He is conclusively presumed to have contracted with a view to such laws of that government, because the corporation must of necessity be controlled by them, and it has no power to contract with a view to any other laws with which they are not in entire harmony. It follows, therefore, that anything done at the legal home of the corporation, under the authority of such laws, which discharges it from liability there, discharges it everywhere.”

 

This is a very important statement of general principle, but it is not directly in point here.

 

In Cunard Steamship Co. Ltd. v. Salen Reefer Services A.B. (1985) 773 F. 2d 452 (also cited by Judge Buschman) the United States Court of Appeals 2nd Circuit held that the district court properly exercised its discretion in vacating an attachment, in connection with an arbitration claim under a charterparty by the plaintiff English company, of United States assets belonging to the defendant Swedish company, in the exercise [*381] of comity towards Swedish liquidation proceedings. The judgment stated, at p. 456:

 

“The district court aptly described the question before it as ‘whether an American court, as a consequence of a Swedish court’s adjudication of the insolvency of a Swedish business entity, should vacate an admiralty attachment obtained by an English corporation in an effort to force London arbitration of an alleged debt between the Swedish and English corporations.’ … In the United States the leading case on the concept of comity is Hilton v. Guyot (1895) 159 U.S. 113. In that case, the Supreme Court described comity as: the recognition which one nation allows within its territory to the legislative, executive, or judicial acts of another nation, having due regard both to international duty and convenience, and to the rights of its own citizens or of other persons who are under the protection of its laws.”

 

And, at p. 459:

 

“Cunard has not demonstrated that the laws or public policy of the United States would be violated or in any way infringed by according comity to the Swedish bankruptcy proceedings. Indeed, the facts amply support the district court’s conclusion that the public policy of the United States would be best served by recognising the Swedish proceedings and thereby ‘facilitat[ing] the orderly and systematic distribution of the assets of Salen.’ The district court noted that comity would not be granted if it would result in prejudice to United States citizens.”

 

Earlier the court had rejected the contention of Cunard that Salen’s exclusive remedy lay under section 304 of the United States Bankruptcy Code. This lays down a procedure for ancillary bankruptcy proceedings against the assets in the United States of a debtor against whom the principal bankruptcy proceedings have been taken in another country. The judgment concluded, at p. 461:

 

“In view of the foregoing, we hold that, while an ancillary proceeding pursuant to section 304 of the Bankruptcy Code is the preferred statutory remedy, in this case, the district court properly exercised its discretion in granting comity to the Swedish bankruptcy court, and vacating the attachment of Salen’s assets in the United States. The judgment of the district court is, therefore, affirmed.”

 

Mr. Brice, of course, strongly relied on the passage which I have quoted referring to comity, and submitted that this court should reciprocate here in the same vein. This is a fair plea so far as it goes, but its effect is, in my judgment, considerably blunted by the reservation in the concluding passage of the judgment. A similar result was reached in a closely analogous case, also arising out of the Salen bankruptcy proceedings in Sweden, namely Victrix Steamship Co. S.A. v. Salen Dry Cargo A.B. (1986) 65 B.R. 466. Victrix, a Panamanian company, had attached assets in the United States in an attempt to enforce an arbitration award in England against Salen on which the Commercial Court had entered a judgment pursuant to section 26 of the Arbitration Act 1950. The United States [*382] District Court of the Southern District of New York held that “a section 304 proceeding in the bankruptcy court would be the preferable forum for this case, however it is not the exclusive forum.” They then proceeded to cite the six criteria laid down statutorily in the United States Bankruptcy Code for guidance in section 304 cases namely:

 

“(1) the just treatment of all holders of claims against or interests in such estate; (2) protection of claim holders in the United States against prejudice and inconvenience in the processing of claims in such foreign proceedings; (3) prevention of preferential or fraudulent dispositions of property of such estate; (4) distribution of proceeds of such estate substantially in accordance with the order prescribed by this title; (5) comity; and (6) if appropriate, the provision of an opportunity for a fresh start for the individual that such foreign proceeding concerns.”

 

The court held that none of these applied, and, in the case of criterion no. 2, commented: “Victrix is not a United States creditor but a Panamanian corporation whose sole contact with this country appears to be this law suit.” As a result the attachment was vacated.

 

Mr. Steel relied on this last quotation to show that in effect the United States bankruptcy court discriminates in favour of United States citizens. He also cited in support of the same proposition another bankruptcy case, In re Toga Manufacturing Ltd. (1983) 28 B.R. 165, in which the United States bankruptcy court in Chicago considered an application by a Canadian trustee of a Canadian debtor for an injunction against United States creditors from commencing or continuing actions against the debtor or its assets in the United States. Having considered the section 304 tests, and taken judicial notice of the fact that there would be no inconvenience if the United States creditors had to litigate in Canada, the court rejected the application mainly on the basis that the relevant creditors had a secured claim in the United States which would not be available in Canada, thus invoking criterion no. 2.

 

In my judgment it is the fact that the debts were secured, rather than the fact that the relevant creditors happened to be United States companies that was the ratio of the Toga case, and I do not think it is justifiable to conclude that there is any kind of unfair discrimination on the basis of either that or the Victrix case, 65 B.R. 466 particularly in the light of the unequivocal statements of Judge Buschman to the contrary.

 

However, I do think these cases show: (i) that a section 304 proceeding (i.e., an ancillary proceeding in the United States courts) is the normal preferred procedure, rather than, as in fact happened in the Cunard case, 773 F. 2d 452 and the Victrix case, 65 B.R. 466, simply handing over the whole matter including the assets to the foreign court which is conducting the principal bankruptcy proceedings. In other words, the decision made in the Cunard and Victrix cases, on which Mr. Brice places such strong reliance, is the exception rather than the rule; and (ii) that comity, albeit important, is only one of six important considerations.

 

It follows that, were a precisely reverse situation to the present to arise in the United States, I feel some considerable doubt whether the United States courts would discard the “preferred solution” under section 304 in [*383] favour of the solution reached in the Cunard and Victrix cases, since the position would be in no way comparable with that arising in those two cases.

 

(5) Contempt in the United States

 

On 29 December 1986 Judge Buschman gave a judgment, of which I have a transcript, in a case brought in connection with the present chapter 11 proceedings by U.S.L. against G.A.C. Marine Fuels Ltd., an English company. This arose out of actions in rem brought by G.A.C., after the chapter 11 proceedings and with knowledge of them, in the courts of Hong Kong and Singapore respectively, to arrest U.S.L. vessels and to recover the cost of bunkers supplied to such vessels in the ordinary course of business prior to the chapter 11 petition. This was held to constitute a civil contempt of the United States bankruptcy court, and, since G.A.C. have a presence in the United States so that they are amenable to the court’s jurisdiction, a fine of U.S. $5,000 was imposed for each day during which G.A.C. failed to take the necessary steps to vacate the Hong Kong and Singapore proceedings.

 

I am informed that this judgment is at present under appeal, but I must of course treat it for present purposes as valid. This posed no idle threat to F.D.R. and F.L. The G.A.C. case was described in the Milbank Tweed memorandum as having a significant impact upon English creditors, and placing them in peril of contempt if, having a sufficient presence in the United States, they sought to enforce their claims against U.S.L. in England. Much more important, on 12 and 18 December 1986, respectively, U.S.L.’s English solicitors threatened F.D.R. and F.L. in the most peremptory terms with contempt proceedings in the United States. These threats, and their related aspects, were of course in the forefront of the original arguments of counsel for F.D.R. and F.L. If they lost the Marevaorders, they submitted, there would be no point in continuing the English actions, although they had been perfectly properly brought to enforce straightforward English claims, and as a result substantial costs would be thrown away. They would then have no alternative but to seek to prove their claims in the United States, thus submitting themselves to United States jurisdiction and exposing themselves to the threatened contempt proceedings (at present neither F.D.R. nor F.L. has any presence in the United States). The strength of these arguments was immediately manifest.

        

        

 

As a result, over the weekend intervening between the first and second days of this hearing, U.S.L. came up with an offer contained in a letter dated 13 February 1987 from their United States’ advisors not to seek any orders for contempt and to seek modifications of the restraining order to allow these English actions to continue to adjudication, provided the Mareva injunctions are vacated and the funds transferred to the United States. This was accompanied by a letter from the counsel to the creditors’ committee, White & Case, consenting to these terms and conditions. This, to say the least of it, was a remarkable volte face. Mr. Steel and counsel appearing that day for F.L., both of whom only learnt of the offer as they entered court, were naturally concerned as to the efficacy of the undertakings, in particular as to whether U.S.L. had power of their own motion to waive contempt proceedings in a United States court. As a [*384] result, as already noted, it was necessary to adjourn the case for these matters to be investigated.

 

During the adjournment U.S.L. made a further application to Judge Buschman for a variation of the restraining order, having, I should make it clear, notified Healy and Baillie of an intention so to apply. As a result Judge Buschman made the variation order dated 23 February, beginning with a number of introductory “Findings and Determinations,” all but the last of which I need not read, since they related mainly to the “new entity” point:

 

“Considerations of fairness to foreign creditors and easing the burden to them of having to come before this court to establish the facts upon which the case rests and comity for foreign law require that provision be made for the liquidation of claims by foreign creditors of U.S.L. in the courts and tribunals of the country in which such claims arose, provided that (i) recognition would be granted to money judgments rendered in the foreign country and (ii) creditors are not thereby enabled to obtain preferential recoveries upon their claims by enforcing foreign judgments against property of the U.S.L. bankruptcy estate located outside the United States. The apparent conflict between the jurisdiction of this court and the English court should be resolved by reciprocal considerations of comity. The vesting of the property of U.S.L. in its bankruptcy estate and the prohibition on collective efforts to prevent preferential treatment of creditors should be recognized by the English court. In return the burden and inconvenience of English creditors to litigate and liquidate their claims against U.S.L. in this court should be eased by permitting them to do so in the English court, the judgments of which should be recognized by this court so that judgments obtained in the English courts will be conclusive evidence of the amounts of claims by English creditors for purposes of the chapter 11 case. Upon the foregoing findings and determinations and after due deliberation, it appearing to this court that the relief being sought by U.S.L. is in the best interests of the estate of U.S.L. and its creditors, it is ordered: 1. Subject to the conditions set forth in paragraph 2, the automatic stay provided by section 362 of the Bankruptcy Code and the restraining order issued by this court in the above-captioned chapter 11 cases dated 24 November 1986 are modified for the sole purpose of permitting (but not requiring) persons or companies domiciled in England to commence and continue lawsuits for damages against U.S.L. in the courts of England in order to fix and liquidate the claims of such persons and companies for purposes of allowances in the chapter 11 case of U.S.L. This modification shall be deemed to be effective as from 24 November 1986, so that any conduct that would otherwise constitute a violation of the automatic stay of the restraining order shall not be grounds for contempt sanctions or for claims for damages. 2. The relief granted in paragraph 1 is expressly conditioned upon the entry of a final order by the courts of England vacating [the F.D.R. and F.L. Marevainjunctions] and upon the transfer by U.S.L. of the property covered by said orders to the United States, subject to the jurisdiction of this court.” [*385]

 

Mr. Brice’s submission was that this variation totally and conclusively eliminated the plaintiffs’ objection based on the risk of contempt proceedings and the wasted costs. So far as the wasted costs are concerned, Mr. Steel and Mr. Norris of course did not demur. So far as contempt is concerned, they very properly conceded that the plaintiffs’ fears were substantially allayed, in that there was no possibility of any contempt or allied proceedings either at the instance of U.S.L. or at the instance of the United States bankruptcy court itself. However, they submitted that the risk was not entirely eliminated, having regard to the provision in section 362(H) of the United States Bankruptcy Code which provides as follows in relation to a stay under the chapter 11 procedure:

 

“An individual injured by any wilful violation of a stay provided by this section shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages.”

 

This, they submitted, might furnish a disgruntled creditor with a claim, since it is plain, and established by authority, that this jurisdiction is not contingent on a finding of contempt: see Budget Service Co. v. Better Homes of Virginia Inc. (1986) 804 F. 2d 289.

 

Mr. Brice, in response, relied on paragraph 1 of the concluding section of the variation order, and submitted that, since it was backdated to 24 November 1986, there was no possibility of any individual establishing that he had been injured by any wilful violation of a stay, since, as a result of the backdated variation, none of the plaintiffs’ actions in England could constitute any such violation. In my judgment this argument is unanswerable, and I hold that the risk of contempt or allied proceedings has now vanished entirely so far as F.D.R. and F.L. are concerned. E.C.T. are of course not specifically covered by the variation order, since they are not an English-registered company, but U.S.L.’s American advisors have given an undertaking to apply to the United States bankruptcy court for an amendment to the variation order so that it will cover them also. I feel confident that this will be granted, thus putting them in the same case as the other two plaintiffs.

 

Prejudice and balance of convenience

 

In the first place, U.S.L. contend that, if the Mareva order continues, the fair and equal treatment of creditors will be frustrated or impeded since either the present two plaintiffs or perhaps one of the other creditors would obtain judgment and then follow that up with garnishee proceedings against the bank, thus enabling them to obtain priority over the other creditors. Secondly, release of the Mareva order would result in the moneys at present frozen here being transferred to the United States and applied equitably for the benefit of the creditors as a whole under the chapter 11 scheme, always subject to the control of the creditors’ committee and ultimately of the court. Under paragraph 1102 of the United States Bankruptcy Code 1982 the plaintiffs can apply to join the creditor’s committee, or seek the appointment of a special committee. Thirdly, and more generally, Mr. Brice invited the court to approach the case from the point of view of creditors generally world-wide, rather than from the point [*386] of view of the plaintiffs, in the best interests of international trade. I shall deal with the last of these three points at the end of this judgment.

 

The anxiety underlying the first point is, I am quite satisfied, basically unsound. If the Mareva injunctions continue, the money will stay in London in the safe hands of Citibank. Moreover it is well established that, in the case of an insolvent respondent, the court will not permit the equitable remedy of a garnishee order to be used to enable a judgment creditor to gain priority over other creditors: see Rainbow v. Moorgate Properties Ltd. [1975] 1 W.L.R. 788, 793, per Buckley L.J. For good measure, I can, and shall, as a condition of continuing the Mareva orders, require notice of the chapter 11 proceedings and their consequences to be given to the bank (though they probably know all about this already): and I can and shall also require an undertaking from the plaintiffs not to take any steps to release the frozen funds until after the expiry of a reasonable period of notice to U.S.L., during which U.S.L. would, as Mr. Brice accepts, be free to apply to the English court for a winding up order; technically this would require the consent of the United States bankruptcy court, but in such circumstances that is extremely unlikely to be witheld.

 

As to the second point, I consider that the considerations there advanced, when properly analysed, tell strongly against U.S.L. rather than in their favour. If these were ordinary winding up proceedings under which U.S.L.’s assets would be collected together and distributed totally and rateably amongst all their creditors, U.S.L.’s argument under this head would have substantial force. But it is nothing of the kind. This is a scheme to re-organise the company as a going concern, but on a much narrower commercial base limited to North America. No doubt this will be of great benefit both to U.S.L. themselves, and also to their North American creditors, who may well both be able to recover their debts or at least a substantial dividend thereon, and also, if the scheme succeeds continue their commercial relationship with U.S.L. as hitherto. Meanwhile, it seems to me commercially inevitable that some of the United States creditors will be paid off at least in part in order to induce them to carry on doing business with U.S.L. during the reconstruction period; this is not contested by Mr. Brice.

 

But the position of the plaintiffs is entirely different. They are English creditors whose business is based here and does not extend at all to North America; it follows that, in view of the intended withdrawal of U.S.L. from Europe, there could be no possible benefit to them in seeing the Mareva funds repatriated to the United States, and ploughed into U.S.L.’s general funds being used in the above manner in the effort to keep U.S.L. afloat as a going concern. They could of course apply to join the creditors’ committee, and a letter from the United States Trustee of the Southern District of New York dated 19 February 1987, states that if they made such a request, and showed sufficient interest and willingness to participate in the committee’s activities and deliberations, either personally or through local representatives or counsel, the request would be considered favourably. However it seems extremely doubtful whether such effort or expense would really be worthwhile in proportion to the very small influence European creditors would be likely to be able to bring in the circumstances: [*387] naturally, and understandably, the creditors’ committee will be concentrating on North American business.

 

In Mobil Sales and Supply Corporation v. Owners of Pacific Bear [1979] H.K.L.R. 125, 134 in Hong Kong, Cons J. described the chapter 11 process as “not a process of universal distribution but a process of deliberately preferential distribution” and this description was strongly relied upon by counsel for all the plaintiffs. In my judgment this somewhat pungent comment has more than a grain of truth in it, provided it is not interpreted as connoting any criticism of the chapter 11 system, or any suggestion of unfair discrimination. Indeed, I would stress that it is difficult to see how either a chapter 11 scheme or its English counterpart can operate successfully on any other footing during the convalescence of the company; but where, as here, the plaintiffs will, for perfectly sound commercial reasons from U.S.L.’s point of view, be entirely outside the scope of the reconstruction, they can have nothing to gain and much to lose from the transfer of their Mareva funds to the United States; it follows that such transfer must, in my judgment, redound substantially to their prejudice.

 

Moreover, whereas the retention of the Mareva funds here will give the plaintiffs and their fellow European creditors security for a worthwhile percentage of their debts, this same fund, if transferred to the United States, will be a mere drop in the ocean of the total assets, and therefore no more than the slimmest marginal benefit to U.S.L. and the United States creditors. Furthermore, even assuming the worst case from U.S.L.’s point of view, namely an English winding up and distribution of the English assets exclusively to the European creditors, there will be no significant prejudice to the United States creditors having regard to the great disparity between the asset-to-liability ratio here and the same ratio overall.

 

It is of course central to U.S.L.’s case that, in principle, there should be one single insolvency proceeding only. This is perhaps most clearly epitomised in a paragraph of the “Findings and Determinations” preceding the variation order:

 

“The interests of efficiency, minimising costs of administration and fairness to all creditors of United States Lines wherever located, required that all property of the U.S.L. bankruptcy estate be administered subject to the jurisdiction of this court in a single judicial proceeding.”

 

However, evidence recently uncovered by F.D.R., and, rather surprisingly, not disclosed by U.S.L. until prompted, shows that there are already separate insolvency proceedings either under way or pending in France, the Netherlands, Belgium, and perhaps West Germany.

 

The French proceedings are particularly striking. On 5 December 1986 two U.S.L. vessels then situated at a shipyard at St. Nazaire were placed under provisional arrest by the French courts on the petition of two French creditors of U.S.L. Since then detailed negotiations have taken place between U.S.L. and representatives of the general body of French creditors. As a result, on 11 February 1987, U.S.L. petitioned the United States bankruptcy court for leave to sell the two vessels, and to pay off the [*388] French creditors, both secured and unsecured out of the proceeds. The petition is supported by an affidavit sworn on 11 February 1987 by Mr. Greggory B. Mendenhall, a vice-president of U.S.L.

 

Mr. Mendenhall testifies that the cost of placing the vessels in a condition in which they could be returned to an operating function is considerably in excess of their value, and that substantial charges are accruing for laying them up in France. The total sale price is approximately U.S. $3.2 million, of which about U.S. $1.8 million will be repatriated to the United States after payment of all French creditors secured and unsecured together with all expenses, if leave is granted. U.S.L.’s evidential position on this aspect of the case is far from satisfactory. Mr. Mendenhall’s affidavit was obtained by F.D.R. from their French correspondents, and produced in evidence here by F.D.R.’s solicitors. When asked specifically by F.D.R.’s solicitors to explain this aspect of the case, Milbank Tweed replied somewhat blandly that “United States Lines is negotiating with counsel for French creditors for the sale of two vessels … to satisfy the claims of priority creditors,” (25 February) and “the sale of property of United States Lines in France … has not been consummated” (26 February). Mr. Brice submits that this in no way constitutes a departure from U.S.L.’s general position, but is the only way they can sell valuable ships, which the French authorities will not release on any other terms.

 

Even if I assume that this explanation is correct (and it could and should have been given in evidence rather than forensically), it seems to me that Mr. Steel is fully justified in pointing out that this settlement in France, if approved, involves not only a serious breach of the “single proceedings” theory, but also a preference (in the interests no doubt of expediency) of one particular group of creditors. Thus one central plank of U.S.L.’s case is significantly weakened. A further difficulty seems to me to be posed by the combination under the variation order of a recognition that England is the forum conveniens for the determination of the plaintiffs’ claims with the insistence that it is improper for this court to exercise its power to grant conventional ancillary relief by way of Mareva injunction. This attitude is graphically and perhaps not entirely unfairly categorised by Mr. Steel as “tit-for-tat.” I find it difficult to see why it is right for the claims themselves to continue in England, but wrong for the English courts to exercise their normal powers to grant ancillary relief, particularly since it is common ground that the Mareva injunction gives the plaintiff no proprietary interest or secured status.

 

I should refer briefly to one final point affecting F.D.R. only. Under various statutory provisions, which I need not recite, and which are agreed, they have preferential status to arrest vessels to enforce stevedore charges and dock dues. The evidence shows that they had the opportunity to arrest a U.S.L. vessel in Felixstowe, and did not do so; looking at the evidence, however, it seems to me that their prime motive in not so doing was to avoid rocking the boat, rather than because they relied on the protection of the Mareva injunction. Mr. Steel also submits that, since it is open to F.D.R. to take in rem proceedings against vessels already detained in foreign ports, the discharge of the Mareva here would be a pointless exercise; however I accept Mr. Brice’s argument that, since the Mareva [*389] provides no security, this is not a material consideration; it follows that I place no weight on F.D.R.’s special preferential position in this respect.

 

Conclusions

 

As already noted, Mr. Brice invited me to view this case from the point of view of the whole body of creditors rather from that of the plaintiffs, and to consider the interests of international trade. In my judgment my task is not to view the matter (to use Mr. Brice’s metaphor) from either one end of the telescope or the other, but to endeavour, as I have done, to balance in the equation all relevant factors of which the chapter 11 proceedings and international trade are but two, albeit very important ones, giving every one due weight. I have already concluded that the doctrine in Travers v. Holley [1953] P. 246 is not applicable. Moreover, the normal English procedure in the present circumstances is, I find, for any winding up proceedings to be conducted here ancillary to the principal United States proceedings, and under our rules, in which respect we seem to be in line with the United States view on section 304 as expressed in the Cunard case, 773 F. 2d 452 and the Victrix case, 65 B.R. 466. Having regard to those cases I am by no means convinced by Mr. Brice’s concluding submission that, if the boot were on the other leg, the United States court would inevitably release the assets to allow repatriation here.

 

So far as prejudice is concerned, I am satisfied that U.S.L. will suffer no material prejudice if the Mareva injunctions continue, since the assets will remain safely here, and there is no prospect of their being distributed without the intervention of ancillary winding up proceedings. Moreover, while a desire to concentrate proceedings in the United States is fully understandable, the experience in France and elsewhere in Europe shows that this aspiration must and does yield to the exigencies of the local situation. Once it is conceded, as it has been, albeit conditionally, that England is the appropriate forum for the resolution of the claims themselves, any objection in principle to the acknowledged forum conveniens continuing a conventional ancillary order seems to me extremely weak.

 

On the other hand, if the Mareva orders are discharged, I consider that the present plaintiffs will suffer very substantial prejudice, seeing that the funds will be used to keep U.S.L. alive as a going concern in a manner from which the plaintiffs cannot possibly derive any benefit, because of U.S.L.’s withdrawal from Europe.

 

Taking all these aspects into account, bearing in mind the test in American Cyanamid Co. v. Ethicon Ltd. [1975] A.C. 396, I have concluded that U.S.L. will suffer no prejudice if the Mareva injunctions are continued, whereas the plaintiffs will suffer irreparable prejudice if they are not, and that the overall balance of convenience strongly favours their continuance. It follows that, in the exercise of my discretion, I shall continue the Marevainjunctions in all three cases.

 

Order accordingly.