Deemster Gough’s recent judgment in HSBC Bank Middle East Limited and Others v Allana International Limited (“the AIL case”) lays bare a lacuna in the Isle of Man’s corporate insolvency framework. In what was said to be a close result, the High Court concluded it lacked the statutory muscle to appoint provisional liquidators primarily for a restructuring but, rather than closing a door, the ruling potentially hands the Isle of Man a blueprint for much needed modernisation and for managing similar situations in the meantime.

The decision in the AIL makes it clear that to compete as an international business centre and a creditor friendly jurisdiction, the Island needs a dedicated corporate rescue regime. For many years a redrafting of the Island’s insolvency legislation has been on the cards and under discussion, but the will to bring about effective change by the Island’s legislature seems weak.

Commercial Reality vs. Statutory Brakes

The circumstances of the AIL Case were not necessarily uncommon, but the figures involved were staggering. Multiple creditors, including a syndicate of major international banks, were owed sums in excess of $1.6bn. The debtor company, an Isle of Man non-operating holding company which sat at the top of a massive (predominantly) middle eastern food group spanning 83 subsidiaries, 22 jurisdictions, and over 14,000 employees, was said to be insolvent and it was claimed that its board was paralysed by shareholder divisions. Rather than pushing for an immediate winding up of the company, which would have dire consequences for it, the petitioning creditors sought a pragmatic solution and asked that a winding up be stayed for 6 months and meantime, Joint Provisional Liquidators (JPLs) be appointed to try to piece together a rescue package and maximise returns for creditors. This, they argued, could be achieved per s.178 Companies Act 1931.

AIL’s position was that s.177 operated with s.178 such that PLs could only be appointed for the purposes of winding up; i.e. not for the predominant purpose of effecting a rescue package. Those sections read:

177. Power of Court to Appoint Liquidators

For the purpose of conducting the proceedings in winding up a company and performing such duties in reference thereto as the court may impose, the court may appoint a liquidator or liquidators.

178. Appointment and Powers of Provisional Liquidator

(1) Subject to the provisions of this section, the court may appoint a liquidator provisionally at any time after the presentation of the winding up petition.

(2) The appointment of a provisional liquidator may be made at any time before the making of a winding up order and either the official receiver or any other fit person may be appointed.

(3) Where a liquidator is provisionally appointed by the court, the court may limit and restrict his powers by the order appointing him.

The court was therefore asked to determine this difference of opinion as a preliminary issue. The Court found for AIL.

Why the court had to say no to a rescue

Whilst his Honour Deemster Gough praised the Claimant’s “commendable candour” in their proposed approach to the problem they faced, ultimately that was not enough. He concluded:

“…—by a narrow margin—that the Court does not have the jurisdiction contended for. Sections 177 and 178 form part of a statutory winding-up code. The office of provisional liquidator exists as an incident of a pending winding-up proceeding and for purposes connected with that proceeding. It cannot be used to create a creditor-driven rescue or administration process which Tynwald has not enacted.”

Because the proposed restructuring was the main event, rather than a by-product of a liquidation, the Court felt it simply lacked the jurisdiction to make the appointment. Deemster Gough offered some hope though and went on to say:

That conclusion is narrower than saying that a provisional liquidator may never assist with a scheme or restructuring. A provisional liquidator validly appointed for a winding-up purpose may, if the order and the applicable statutory powers permit, undertake incidental or additional work directed towards a compromise. But a hoped-for rescue cannot itself supply the statutory purpose for the appointment. In the present case the claimants’ proposed scheme is not incidental. It is the substantive object of the appointment and would entail the proposed transfer of management, extensive powers being granted to the JPLs and an initial six-month adjournment of the winding-up claim. The purpose of the statutory provisions is to conduct the proceedings in a winding-up not to avoid a winding-up. The preliminary issue must therefore be answered in the negative. The Court does not have jurisdiction to grant the relief the claimants seek

What This Means for Creditors and Advocates

While the jurisdictional door was shut on this specific route, the judgment potentially hands creditors plenty of tactical ammunition for future cross-border insolvencies:

• Common Sense: The Court made no bones about validating the "powerful pragmatic and commercial arguments" put forward by the creditors, the inference being that modern jurisdictions should ideally use, or make available, provisional liquidation flexibly to drive rescues rather than route march a company to insolvency.
• An open door: Crucially, the ruling leaves room to manoeuvre. If a provisional liquidator is legitimately brought in as part of a winding up for traditional asset preservation, the door is potentially open for them to do work which paves the way for a compromise or rescue plan. The door is only closed when the entire point of the appointment is to bypass a winding up.
• Wake up Tynwald: The message to Manx policymakers is loud and clear (again). As the Court pointed out, judges can't just invent a UK-style administration process out of thin air. Tynwald has to pass appropriate law. As Deemster Gough said:

An administration regime ordinarily defines objectives, duties, creditor participation, reporting, treatment of security, management powers and termination. The very breadth of the present proposed order exposes the choices which would have to be made judicially in the absence of legislation.

The Road Ahead

For international creditors, the AIL case feels like it should be a watershed moment. It again highlights a Manx judiciary with acute understanding of the commercial realities of insolvency and corporate rescue, but stuck wearing handcuffs forged in 1931 when the world, and the Isle of Man in particular, was a very different place.

The need for insolvency reform has been present and clear for many years and only gets more urgent. As Deemster Gough highlighted in the 2014 case of Munin Navigation Limited v Petrodel Resources Limited (12 September 2014):

“63. Finally, I proffer a general comment on the archaic statutory provisions and rules which govern insolvency in the Isle of Man. These provisions are out of date, confusing and much in need of revision to accommodate the type of business the Island presently conducts and hopes to attract as it moves forward in the 21^st century. It has been said before, and bears repeating, that all those who have to deal with insolvency and winding up of companies in the Isle of Man, not least the Courts, would benefit greatly from an up-to-date revision of the law in these areas, such that the Island can better cater for modern commercial practice.”

Having already spent many years discussing change to the insolvency regime, the Isle of Man Government published details of a consultation on the matter in February 2023 with the intention of introducing a bill for insolvency reform in the 2024/25 parliamentary year. That did not happen and, in what is an election year, we can expect the insolvency reform can to be kicked further down the road.

So it seems that creditors and practitioners will need to keep pushing the limits of incidental powers within “conventional” liquidations. That is though a potentially unnecessary and expensive business which does nothing to support the creditor friendly jurisdiction status the Isle of Man would portray. The judgment should serve as yet another warning to force Tynwald's hand on legislative change. Until that happens, international business will continue to have to deal with a statutory framework which seems intent only on bringing the end to companies in similar situations, not to save them.

Damian Molyneux acted for the Creditors in the AIL case. He is a Director and Advocate at M&P Legal and specialises in insolvency. This article is not legal advice, always seek specific advice on the facts of each case.

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