Vol 9 (2012) - Issue 6

Article preview

Phoenix Arises Again: Common Law Recognition of a Foreign Officeholder

Introduction
The recent case of Schmitt v Deichmann is significant because not only does it provide an analysis of the case law surrounding the common law recognition of an insolvency officeholder in England and Wales but it provides welcome judicial development in this area.

The facts
Phoenix Kapitaldienst GmbH ('Phoenix') was a German company which carried on business internationally by trading in the Geman futures market using third party funds received from individual investors. Its principal place of business was in Frankfurt and it was subject to the regulatory supervision of the Federal Financial Supervisory Authority in Germany.
Although Phoenix appeared to hold a profitable trading position it is alleged that the enterprise was loss-making from the start and the directors in effect operated a 'Ponzi' scheme. The directors used the majority of funds received to cover up losses and to pay out fictitious profits to investors resulting in successful criminal proceedings against the German directors who perpetrated the fraud.
Frank Schmitt was appointed insolvency administrator of Phoenix on 1 July 2005. Since his appointment Schmitt has instituted proceedings in Germany and over twenty other jurisdictions for the recovery of fictitious payments made by Phoenix. Schmitt also successfully obtained recognition to bring avoidance claims in various European jurisdictions.
In order to pursue similar clawback proceedings in England under section 423 (transactions defrauding creditors) of the Insolvency Act 1986 (as amended) ('IA 1986') Schmitt sought recognition and assistance under common law principles in this jurisdiction.

Recognition of a German administrator in England and Wales
Schmitt sought to invoke the seldom-used inherent common law jurisdiction of the court to gain recognition in England and Wales as the following routes were not open to him.

(i) EC Regulation on Insolvency Proceedings 2000 ('ECIR')
Recognition under ECIR was not possible due to the fact that Phoenix constituted an 'investment undertaking' within the meaning of Article 1(2) of ECIR and Schmitt was therefore precluded from availing of ECIR.

(ii) The Cross-Border Insolvency Regulations 2006 ('CBIR')
The CBIR, which incorporates the UNCITRAL Model Law into English law, was of no use to Schmitt as the particular transactions which were the subject of Schmitt's proposed clawback actions occurred prior to the commencement date of the CIBR.