An important decision for cross-border insolvency practitioners was handed down by the High Court on 22 March 2019 in the case of Bundeszentralamt Für Steuern (being the Federal Central Tax Office of the Federal Republic of Germany) v Heis & Ors .
This case relates to proofs of debts submitted in respect of MF Global UK Limited by the German Federal Tax Office (for circa €52 million in respect of refunds of German withholding tax refunds) and Deutsche Bank AG (in respect of a contingent claim for circa €127 million of withholding tax refunds, and for indemnification of €52 million in the event that they were pursued by the German Federal Tax Office (the latter to be referred to as “the Mirror Proof”)).
The proofs of debt were rejected by the Joint Special Administrators in their entirety, and both the General Federal Tax Office, and Deutsche Bank AG appealed the rejection of their proofs of debt, and sought a stay of the appeals. The reason for the applications to stay was to allow for determination of underlying matters by the Courts in Germany. The German Federal Tax Office had already commenced a process for determination of the issues in the German Fiscal Courts, which would proceed (subject to preliminary matters) if a stay of the appeals were granted by the High Court in England. It was common ground between the parties that if the stays were not granted, the appeals would proceed in England, and the German Courts would defer to that decision and automatically stay any proceedings in the German Courts regarding the entitlement to the withholding tax refunds which had already been paid to MF Global UK Limited.
The issues before the High Court in England were:
- The interaction between the principles applied in (a) deciding whether to stay proceedings in favour of a foreign forum, and (b) the ordinary presumption and preference in a liquidation process in that all matters of proof are to be dealt with in this jurisdiction; and
- The rule against double proof.
Stay of Proceedings
The Court decided that it would grant a stay in respect of the German Federal Tax Offices’ appeal on the basis of three factors, which amounted to sufficiently rare and compelling reasons for granting a stay. The three reasons given by the Court were:
- There were claims which were to be adjudicated in Germany in any event, and if no stay was granted in England, broadly the same issues would fall to be considered by the English Court and the Court in Germany at broadly the same time and between the same parties. There was therefore an obvious risk of inconsistent and conflicting Judgments. The Court’s view was that this is always capable of amounting to a very strong reason for granting a stay;
- There would be considerable factual enquiry, and a factual determination of the particular circumstances may determine the result. The legal issues were not only matters of German law, but controversial and complex issues of statutory construction of systemic importance and substantial public interest in terms of the legitimate interests of the public in the protection of its taxation system; and
- A later refund claim was to be determined in Germany in any event, and the administration could not be finally be brought to an end until that and other matters were concluded. As a result, it appeared that the administration was likely to kept open for a number of years, even if a stay were granted by the English Court. Further, the Court’s concern as to the potential prejudice in consequence of delay had been attenuated by the fact that creditors had received distributions of 90p in the £, and all client money and asset entitlements had been dealt with.
The Court did however require assurances, possibly by undertakings, to seek to ensure the resolution of matters as expeditiously as possible.
The Court refused however to stay Deutsche Bank AG’s appeal relating to its proof of debt for €127 million, as the Court did not think that there was, at that stage, sufficient reason to displace or delay the proof process and appeal to which Deutche Bank AG had submitted. It was considered that there was some prospect of enabling a determination in England without recourse to the intricacies of German tax law. The Court did not however preclude a subsequent stay if it becomes apparent that the appeal could not be fairly adjudicated upon.
Rule of Double Proof
The Court helpfully reminded parties that the rule preventing more than one proof being submitted in respect of the same debt (the double proof rule) has always been accepted to be an overarching principle of insolvency law. It is a rule to prevent an insolvent estate against paying two dividends for the same debt (for example to principal debtor and their surety).
The Court identified two scenarios, namely:
- The Paradigm scenario, in which the rule against double proof prevents a surety from submitting a proof until it has paid the principal debt in full. In this scenario, the admissibility of the surety’s proof is to be determined at the point that the proof is submitted; and
- The Barclays Bank –v- TOSG Trust Fund line of authorities, in which the situation was not clear as the Paradigm scenario, and in which it may not be possible to determine the admissibility or value of a proof until the point of distribution.
The questions to be considered were (a) whether the claims arose in respect of substantially the same debt and, if so, (b) the priority of the claims.
The Court refrained from giving a definitive decision that the rule of double proof applied, but gave its view that it was plainly arguable that it did. Accordingly, the Court declined to grant a stay in respect of Deutsche Bank AG’s appeal on the Mirror Proof.
In conclusion, it remains to be seen whether this decision is to be appealed and whether Deutsche Bank AG will apply again for a stay, but what is clear, is that the Court will consider each application on its own merits and will keep the interests of the creditors in mind.
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