Section 236 Of The UK Insolvency Act 1986 – Extra-Territorial Effect?

The English High Court rejects an application by the Joint Special Administrators of MF Global UK Limited ("MF Global") for an order seeking the production of documents pursuant to section 236 of the Insolvency Act 1986 (the "Act"). In doing so, Mr Justice David Richards rules that section 236 of the Act does not have extra-territorial effect.

Background

MF Global was a broker-dealer which went into Special Administration on 31 October 2011. The Respondents, LCH.Clearnet Limited ("LCH UK") and LCH.Clearnet SA ("LCH France") operate a clearing house in securities and other financial instruments. Clearing houses act as intermediaries between a buyer and seller of securities, and reduce the transactional risks involved for a party should a counterparty default on its obligations. Clearing houses have rules to deal with defaults by its members and are entitled to close out the open positions of such members.

When MF Global went into administration it had a number of very large open positions with the Respondents, particularly in European sovereign debt. The appointment of administrators constituted an event of default and the Respondents, in accordance their rules, closed-out MF Global's open positions. Losses on the close-outs totalled approximately €422 million.

While accepting the inevitability of significant losses, the applicants were concerned that, when compared with contemporary prices quoted on Bloomberg screens, the losses appeared to be exceptionally large. Had the open positions been closed at or around the prices quoted on Bloomberg the losses would have been much less at approximately €241 million.

The Application

MF Global's application was for an order pursuant to section 236 that the Respondents disclose documents and information relating to the above close-outs. Section 236 allows an office-holder to make an application to the court to summon either an officer of the company or those capable of giving information, and require them to produce papers or other records in their control. These powers are conferred by section 237 which permits the court to order any person "within the jurisdiction of the court" to appear under section 236. The administrators sought the order to help them determine whether any claim could be brought against the Respondents. The Respondents opposed the application, LCH France submitted that section 236 did not have extra-territorial effect.

In the alternative, the application also sought an order...