Cambridge Gas Transport Corporation v Official Committee of Unsecured Creditors of Navigator Holdings Plc and Others
| Jurisdiction | UK Non-devolved |
| Judge | Lord Hoffmann |
| Judgment Date | 16 May 2006 |
| Neutral Citation | [2006] UKPC 26 |
| Court | Privy Council |
| Docket Number | Appeal No 46 of 2005 |
| Date | 16 May 2006 |
[2006] UKPC 26
Present at the hearing:-
Lord Bingham of Cornhill
Lord Hoffmann
Lord Hutton
Lord Rodger of Earlsferry
Lord Carswell
Privy Council
[Delivered by Lord Hoffmann]
In 1997 four European businessmen decided to invest in a shipping business. The lead appears to have been taken by a Mr Giovanni Mahler, a Swiss resident who had about 10% of the equity. The investors borrowed some US$300m on the New York bond market and ordered five gas transport vessels with which they commenced trading at the beginning of 2001. Unfortunately the venture was a failure. Freight rates were lower than expected and the ships never earned enough to cover even the interest on the loans. At the end of 2003 the investors ran out of credit. The business was heavily insolvent. They petitioned for relief in New York under Chapter 11 of the US Bankruptcy Code, which allows insolvent companies, under supervision of the court and cover of a moratorium, to negotiate a plan of reorganisation with their creditors. In March 2004 the Federal Bankruptcy Court for the Southern District of New York confirmed a plan approved by virtually all the outside creditors and ordered that it be carried into effect. Essentially, the plan was for the assets to be taken over by the creditors.
This is a simple enough story, though unhappy, and the only complications arise out of the corporate structure adopted by the investors. The business was, as is frequently the case, held through offshore companies incorporated in various jurisdictions. The ships, registered in Liberia, were owned and managed by a group of Isle of Man companies, each ship owned by a separate subsidiary of a management company and all the shares in the management company held by a holding company, Navigator Holdings plc. It will be convenient to refer to the group as "Navigator" and the shares in the holding company as the shares in Navigator.
Navigator was in turn held through a web of companies incorporated in other off-shore jurisdictions, of which it is for present purposes necessary to mention only two: Cambridge Gas Transport Corporation ("Cambridge"), a Cayman company which owns, directly or indirectly, at least 70% of the issued share capital of Navigator, and Vela Energy Holdings Ltd ("Vela"), a Bahamian company which (through an intermediate wholly owned Bahamian subsidiary) owns all the issued share capital in Cambridge. Mr Mahler is a director of Vela, Cambridge, the Navigator companies and various other associated off-shore companies.
The use of a scheme of arrangement agreed by a statutory majority of creditors to replace what would otherwise be the liquidation of an insolvent company has existed in England (in somewhat rudimentary form) since the Joint Stock Companies Arrangement Act 1870. The 1870 Act is reproduced in the Isle of Man as section 152 of the Companies Act 1931 and remains the only form of arrangement between a company and its creditors available in that jurisdiction. Chapter 11 is considerably more sophisticated and will ordinarily allow the management of the insolvent company to remain in control (as "debtor in possession") until a plan of reorganisation has been approved by the court. The debtor has a priority right to propose a plan; if this is rejected or the priority period expires, other parties in interest may put forward a different plan. In this case, the debtor put forward a plan under which the assets of the business, that is to say the ships, would be sold, nominally by auction but in fact to Mr Mahler and his associates, who were referred to as "the Vela interests". This plan did not appeal to the bond holders, who put forward their own plan under which the assets of Navigator would be vested in the creditors and the equity interests of the previous investors extinguished. The judge rejected the Vela plan and approved the creditors' plan.
The mechanism which the plan used to vest the assets in the creditors was to vest the shares in Navigator in their representatives. That would enable the creditors to control the shipping companies and implement the plan. So clause 22 provided:
"Immediately upon entry of this confirmation order, title to the old common stock [of Navigator] shall automatically vest in the interim shareholders [the creditors' committee] without any further act by any person or under any applicable law, regulation, order or rule. The Interim shareholders shall then, in their capacities as shareholders of [Navigator], take all necessary steps under the laws of the Isle of Man or otherwise to implement [the plan]"
The New York court was of course aware that such a provision could not automatically have effect under the law of the Isle of Man. The order confirming the plan therefore recorded the intention of the court to send a Letter of Request to the High Court of Justice of the Isle of Man, asking for assistance in giving effect to "the plan and the confirmation order". Such a letter was duly sent.
The Committee of Creditors then petitioned the High Court for an order vesting the shares in their representative. They were met by a cross-petition by Cambridge, the wholly owned Cayman subsidiary of Vela in which, it will be remembered, most of the shares in Navigator were vested, asking the court not to recognise or enforce the terms of the plan. The basis of the cross-application was that Cambridge, as a separate legal entity registered in the Cayman Islands, had never submitted to the jurisdiction of the New York court. An order of that court could therefore not affect its rights of property in shares in the Isle of Man.
This submission bore little relation to economic reality. The New York proceedings had been conducted on the basis that the contest was between rival plans put forward by the shareholders and the creditors. Vela, the parent company of Cambridge, participated in the Chapter 11 proceedings and arranged the finance which was to have been the cornerstone of the shareholders' plan. It is therefore not surprising that the New York court did not trouble to ask whether the voluntary petition presented by Navigator had the formal consent of its own stockholder company when that company was the creature of the real parties in interest who were actively participating in the proceedings. For Cambridge, which was no doubt administered by lawyers in Cayman on the instructions of Mr Mahler, the claim that it had not submitted to the jurisdiction was technical in the highest degree. Mr Mahler was, it appears, a director of Cambridge as well as Vela and the Navigator companies, although he himself was not entirely sure about the full extent of his directorships. Given the intricate corporate structure of the Vela interests, this is quite understandable. He was, as he explained in a deposition "not a person who goes into details."
The other remarkable feature about the position which Cambridge has taken and persisted in before the High Court, the Court of Appeal and now the Privy Council, is that the shares in Navigator which it complains have been confiscated by the exorbitant extra-territorial reach of the US Bankruptcy Court are completely and utterly worthless. Navigator's petition disclosed debts of some US$390m and assets of $197m. The Board is therefore left to wonder about the purpose of this litigation. Mr Howe, in his brave and able submissions for Cambridge, said that drawing attention to these matters was a jury point. The shares might be worthless now, perhaps in the foreseeable future, but some day freight rates might rise sufficiently to float the business and make the shares valuable property. An alterative possibility is that the purpose is to wreck or delay implementation of the confirmed plan in an attempt to drive the creditors back to the negotiating table and secure better terms.
Before the High Court, Cambridge's objection succeeded. The Deemster found as a fact that although Vela had participated in the bankruptcy proceedings in New York, its subsidiary Cambridge had not submitted to the New York jurisdiction. This finding is somewhat surprising but was upheld by the Court of Appeal and the creditors' committee, faced with concurrent findings of fact, have not appealed against it. So the New York court had no personal jurisdiction over Cambridge. The Deemster then held that clause 22 of the plan, as confirmed by the court's order, was a judgment in rem purporting to change the title to property outside the jurisdiction. According to general principles of private international law, judgments in rem can affect only property within the court's territorial jurisdiction. The judgment could therefore not be recognised.
The Court of Appeal, reversing the Deemster, held that upon its true construction, the New York order was not a judgment in rem. It was a judgment in personam in proceedings in which Navigator, by its voluntary petition, had submitted to jurisdiction of the New York court. At common law, the Manx court has a broad discretionary jurisdiction to assist a foreign court dealing with the bankruptcy of a company over which that court had jurisdiction. It could and should assist by vesting the Navigator shares in the creditors' committee to enable the implementation of the plan.
Mr Howe's argument for Cambridge was straightforward. The New York order was either a judgment in rem o...
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