It has become common place in real estate transactions for Banks to lend to offshore vehicles on security of assets located in the UK. This is largely an indulgence by the Banks allowing their clients to engage in some “efficient tax planning”. Many of these offshore vehicles are based in the Channel Islands and the Isle of Man, but vehicles set up in the BVI, Cayman Islands and Luxembourg are not unusual.
Banks have been relatively relaxed about lending to offshore vehicles. This is because, in addition to the rights under their fixed charge security, Banks believed they could appoint English law administrators by relying on Section 426(4) of the Insolvency Act 1986, which allows the foreign court to request the assistance of the English court. It didn’t even matter if the foreign jurisdiction had no equivalent of administration in its insolvency law, the English insolvency regime would literally ride to the rescue.
Then, in April, the High Court threw a spanner in the works by refusing HSBC’s application to appoint English administrators over a Jersey based borrower, despite a letter from the Royal Court in Jersey requesting assistance, on the grounds that there were no insolvency proceedings in play or pending against the borrower in Jersey. The implication was that any Bank looking to enforce in this way would have to pay for two sets of proceedings (UK and foreign). The Banks who were exposed to such borrowers held their breath pending HSBC’s appeal, which was decided on Wednesday 22 May 2013.
The detail of the appeal decision is available here HSBC Bank plc v Tambrook Jersey Limited.
Thankfully, the Court of Appeal overturned the earlier decision, restoring order and telling the Banks to keep calm and carry on lending. But can the Banks breathe easy again? Section 426(4) of the Insolvency Act 1986 only applies to the Channel Islands, Isle of Man, Cayman and BVI (among other, mostly Commonwealth, countries and territories). For borrowers domiciled in other jurisdictions, lenders either have to rely exclusively on their fixed asset security or, if they require the wider powers available to administrators to realise their security, be prepared to run concurrent insolvency proceedings with all the attendant expense.
Too often, the potential pitfalls in the way a transaction is structured are considered, not at the time of the lend, but later, when enforcement is imminent or even in process. HSBC’s experience is a reminder to lenders that security taken from offshore vehicles may not provide the same exit mechanism as it does with their UK customers.