Vol 5 (2008) - Issue 5

Article preview

A Phoenix Syndrome in Every Sense of the Word …

A recent but as yet unreported decision of the English High Court sitting in bankruptcy has reaffirmed what many have long regarded as being a basic principle of English insolvency law and practice. This is to the effect that the English courts have a discretionary common law ability and power to recognise and assist properly appointed foreign insolvency holders.

The basic principle has recently been authoritatively reasserted by the Privy Council in Cambridge Gas Transportation Corporation v Official Committee of Unsecured Creditors of Navigator Holdings Plc [2007] 1 AC 508. At paragraph 22 of the Opinion of the Board, Lord Hoffmann dealt with the assistance that the English can give to the courts of a foreign country by stating:

' What are the limits of the assistance which the court can give? In cases in which there is statutory authority for providing assistance, the statute specifies what the court may do. For example, section 426(5) of the Insolvency Act 1986 provides that a request from a foreign court should be authority for an English court to apply “the insolvency law which is applicable by either court in relation to comparable matters falling within its jurisdiction”. At common law their Lordships think it is doubtful whether assistance can take the form of applying the provisions of foreign insolvency law which form no part of the domestic system. But the domestic court must at least be able to provide assistance by doing whatever it could have done in the case of a domestic insolvency. The purpose of recognition is to enable the foreign office holder or the creditors to avoid having to start parallel insolvency proceedings and to give them the remedies to which they would have been entitled if the equivalent proceedings had taken place in the domestic forum.'

In the matter of Phoenix KapitalDienst GmbH (Mr Registrar Jaques 8 April 2008: Case No 142 of 2008), the administrator of a German company called Phoenix had been appointed by the Frankfurt Insolvency Court on 1 July 2005 pursuant to insolvency proceedings opened on 12 March 2005. The administrator as applicant in the English proceedings sought an order that his appointment be recognised by the courts of England and Wales and that he be afforded the rights to exercise such rights and powers conferred upon insolvency practitioners under the English Insolvency Act 1986 including the power to exercise the provisions of section 236 of the Insolvency Act, namely the right to conduct private examinations and conduct other statutory investigations into the affairs of Phoenix.

Phoenix traded in the German futures market using third party funds received from individual investors. Many investors resided abroad including England. The funds which were deposited with Phoenix were paid into a single collective fund known as the Phoenix Management Account. Phoenix traded at a loss effectively from the outset in the late 1970s. The directors covered up the losses by creating a fictitious account into which what were passed off as profits were reported. This was done through the medium of another account called the MAN account. The Phoenix trading position appeared to be a profitable one and in those circumstances the company continued to attract investors who in all amounted to about 40,000, not only in Germany but in many other countries apart from England. It was significant that recovery proceedings had been issued in Austria where some investors resided as well as in the Scandinavian countries and full details of those proceedings were put before the English court.

At the heart of what was clearly a fraud was the placing into the bank via the use of the accounts mentioned above of new deposits to discharge Phoenix’s overheads and most importantly for present purposes to pay out ‘old’ investors the so called profits. These profits were, of course, fictitious. This is a well known scheme often called a Ponzi scheme.

The main individual perpetrator of the fraud was the Managing Director. He died shortly before the institution of insolvency proceedings in Germany but his principal assistant continued with the fraud. However, in due course as is perhaps inevitable in such cases the fraud was uncovered by the relevant authorities and criminal convictions followed as well as the insolvency administration of Phoenix itself. A number of old investors who received the fictitious payouts were the subject of the other overseas proceedings referred to above. Many of them reside in this country and formal demand has been made of them although no proceedings as such have as yet been instituted.