The Isle of Man Appeal Court (the Staff of Government Division) judgment in Spirit of Montpelier v Lombard Manx [2015] has addressed important issues in relation to company and insolvency laws and the powers of judges to create and develop principles of common law in order to serve the interests of justice.
The case involved a special purpose corporate vehicle which had been incorporated for the sole purpose of holding a specific asset – a luxury yacht. The appellant company had entered into finance arrangements with the respondent finance company and subsequently defaulted on its obligations. Relying on the event of default, the finance company successfully obtained a winding-up order. In making the winding-up order, the court concluded that, in regard to all the circumstances, including the likely realisation value of the asset, the company was in a state of insolvency.
The appellant company appealed the winding-up order. The appeal was founded largely on events which occurred subsequently to the making of the winding-up order being the emergence of further asset valuation evidence. This cast doubt on the valuation which had informed the court's decision to make the winding-up order.
At the directions stage of the appeal, the appeal court suggested that the case be referred back to the lower court to reconsider whether the subsequent events would have any impact on the decision to make the winding-up order. An application was then made to the first-instance court seeking revocation of the winding-up order in light of the new evidence.
One of the arguments submitted to the first-instance court was that there was a general power of revocation in the Isle of Man's court rules which provides that "[a] power of the Court under these Rules to make an Order includes a power to vary or revoke the Order".
This argument was rejected since it was considered that, on the true construction of the rules, such power of revocation must be confined to orders made under the rules themselves, and a winding-up order is made pursuant to a statutory power conferred by the Companies Acts. The appeal court later agreed with such analysis. The first-instance court found only that there was power to stay a winding-up pursuant to Section 94(1) of the Companies Act 1931.
However, a second argument was put to the first-instance court contending that it had jurisdiction to revoke the order as a matter of common law. This argument was also rejected; in so doing, the court noted that in England and Wales a power to revoke a winding-up order was introduced expressly by Rule 7.47(1) of the English Insolvency Rules 1986. However, before that, the English authorities supported the proposition that no such power of revocation had existed at common law. No rule or statutory provision equivalent to Rule 7.47(1) has been introduced or enacted in the Isle of Man and the court therefore determined that the position under Manx common law was equivalent to the pre-1986 position under English law; consequently, the court had no jurisdiction to revoke a winding-up order. However, this conclusion was reached with "considerable reluctance" and the court regarded it as unfortunate that there was no provision under Manx law equivalent to Rule 7.47(1). The court observed that:
"If it is to be declared that Manx common law incorporates a provision similar to rule 7.47(1) of the English (Insolvency) 1986 Rules then it is more appropriate that such be declared by the Appeal Division or the Judicial Committee of the Privy Council."
In considering the position at common law, the appeal court faced a thorny question regarding the extent to which a court can determine and define the existence of a particular principle of common law while balancing the need to refrain from interfering with what ought to fall within the function of the legislature. In this context, the words of Lord Denning were remembered in disinguishing between the "timorous souls" who left it to Parliament to determine the law and those "bold spirits" who developed the common law according to the needs of the times.
The starting point for the appeal court's deliberations was the well-known and often-cited decision of the Privy Council (on appeal from the Isle of Man) in Frankland v R [1987] and Lord Ackner's dicta that the decisions of English courts, particularly those of the House of Lords and the Court of Appeal, while not binding on Manx courts, are of high persuasive authority and:
"generally should be followed unless there is some provision to the contrary in a Manx statute, or there is some clear decision of the Manx Court to the contrary or exceptionally there is some local condition which would give good reason for not following the particular English decision."
The appeal court noted that these dicta are now approaching 30 years old and subsequent cases have resulted in some erosion of these principles. In particular, the appeal court's decision in Dominator Limited v Gilbertson SL [2009] was noted, which had stated that:
"For the purposes of this appeal it is unnecessary for this Court to express any view as to whether or not (the dicta of Lord Ackner) have the same force today as they had over twenty years ago. However even without the benefit of full argument on such issue, we are bound to express some doubt as to whether they do so in the context of a jurisdiction which is becoming increasingly independent of English statutes and procedures and is frequently choosing to be informed by and to adopt the common law and practices found in jurisdictions other than England."
The appeal court further noted the dicta of Deemster Doyle in Howell v Department of Health and Social Security [2009], stating that:
"Manx law has developed significantly since Lord Ackner uttered those words over twenty years ago now.
It is to be hoped that Manx common law will develop independently in accordance with the needs, requirements and interests of the inhabitants of the Isle of Man and indeed the international community of which the Island is a part. It is to be hoped that Deemsters will not slavishly follow English decisions, which in certain cases may not be in the best interests of the Island, in areas where it would be more appropriate to develop Manx law in a different way to the way in which English law has developed and is developing."
However, the appeal court was further reminded of the need for courts to be astute so as not to trespass on the proper role of the legislature and the dicta of Lord Collins in Singularis Holdings Limited v PricewaterhouseCoopers [2014] UK PC. In Singularis the court had been urged to develop common law by adopting a principle that, where local legislation does not provide for relevant assistance to a foreign office holder, the legislation should be applied by analogy as if the foreign office holder were a local office holder. In this case Lord Collins described it as "impermissible legislation from the Bench" and "profoundly contrary to the established relationship between the judiciary and the legislature", and therefore "profoundly unconstitutional".
Having considered the position, the appeal court accepted that while judicial development of common law is both inevitable and desirable, certainty should not be sacrificed for flexibility or vague notions of where the interests of justice may lie. Litigants need to know what the law is and judges must recognise that their role is to determine the law and not to assume the mantle of the legislature. However, the court equally accepted that its inherent jurisdiction under Manx common law must provide a remedy for a company which has been wound up, where such winding-up is not in the interests of justice. The court took account of the wholly unsatisfactory nature of the stay of a winding-up order and concluded that it was satisfied that it was entitled to determine whether, in such circumstances, its own inherent jurisdiction at Manx common law could provide a more appropriate remedy. It was further satisfied that the requirements of the case required it to do so. The appeal court considered that Re Frankland did not require it to regard decisions of the English courts before Rule 7.47(1) was made binding on the Manx courts, and held that even on the terms of that decision, such decisions are only of high persuasive authority and generally should be followed in the absence of a Manx statute. The appeal court further determined that it has the ability to formulate its own law in a way which is considered most appropriate for the needs, requirements and interests of the inhabitants of the island and the wider international community of which the island is a part. It considered that it was insufficient to conclude that the matter was solely for the island's legislature, and that it was appropriate to address the issue of inherent jurisdiction in that context where the legislature had taken no opportunity to amend or re-enact new legislation or rules which would otherwise address the issue.
Accordingly, the appeal court concluded that it has an inherent jurisdiction at common law to review, rescind or vary a winding-up order where such an order is necessary in the interests of justice. It further held that such jurisdiction should be exercised only where there has been a material change in circumstances since the making of the order, where the facts on which the original order had been made were mistaken - innocently or otherwise - or where there was a manifest mistake on the part of the judge in formulating the order.
In a small offshore jurisdiction, it is probable that legal practitioners may encounter situations where definitive local judicial precedent may be absent. This is not reflective of any lack of sophistication, but is merely a consequence of the generally lower volume of cases passing through a smaller jurisdiction when compared to the relatively larger volumes which pass through the courts of larger onshore states. Consequently, legal practitioners and the Isle of Man courts have often looked beyond their own shores for legal authority, most typically to the courts of England and Wales. The close connection and many common characteristics between the Isle of Man and the United Kingdom lead naturally to close alignment of statute law and common law principles across many areas. For a number of years, the courts of the Isle of Man have not confined themselves to a consideration of English case law and have sought to draw jurisprudence and authority from cases decided in a number of other common law jurisdictions. It is important that where there may be some lacuna in local law, the courts have the courage to develop the common law in a way which serves both the ever-changing needs and circumstances of the community and the interests of justice. The Spirit of Montpelier case confirms that Manx courts are not afraid to develop and apply principles of common law in appropriate circumstances. This is to be welcomed, since while Isle of Man legislature can and does on occasion move with surprising agility, the ability of the courts to develop common law principles in appropriate circumstances will continue to play a crucial role in filling any gaps which might otherwise lead to injustice.
For further information on this topic please contact Christopher J Murphy at M&P Legal by telephone (+44 1624 695800) or email ([email protected]). The M&P Legal website can be accessed at www.mplegal.im. The M&P Legal website can be accessed at www.mplegal.im.
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