Appointing an interim receiver

Overview

In this case, the Court acknowledged that there is little authority concerning the appointment of an interim receiver and set out the test to be used in determining whether an interim receiver should be appointed. The Court must be satisfied that: (i) the debtor is unable to pay the debtor's debts, (ii) security is or will be provided, as required, (iii) the appointment is "necessary for the protection of the debtor's property", and (iv) the exercise of discretion favours an appointment.

Background

Eternity Sky Investments Limited, a BVI company ultimately owned by one of the largest state-owned corporate groups in China, sought an order appointing interim receivers over the estate of Zhang Zhenxin, a businessman who died in September 2019. Prior to his death, Mr Zhenxin had many interests worldwide, including at least 12 companies incorporated in England and Wales.

Mr Zhenxin’s debt to Eternity Sky was said to arise under a personal guarantee dated 8 May 2016, which guaranteed the liabilities of Chong Sing Holdings FinTech Group Limited – a Cayman Islands company controlled by Mr Zhenxin - under bonds issued to Eternity Sky. Chong Sing was wound up in the Cayman Islands in June 2020, and liquidators were appointed in September 2020. The liquidators admitted a proof of debt by Eternity Sky and have made distributions, but significant debt remains outstanding.

In December 2022 Eternity Sky presented a petition seeking an administration order over Mr Zhang’s estate. In August 2023 Eternity Sky discovered that two major assets in which Mr Zhang held an interest had been sold. In October 2023 Eternity Sky issued the application to appoint an interim receiver.

Mr Zhang’s wife, who claimed to be a beneficiary of his estate, opposed the application principally on the basis that the estate was not in jeopardy. She argued that the operating subsidiaries were professionally managed, the sales were approved by the boards of the operating subsidiaries and made for a proper purpose, and she was under no legal obligation to inform Eternity Sky of any dealings.

The Court’s Decision

Section 286 of the Insolvency Act 1986 provides in relevant part:

(1) The court may, if it is shown to be necessary for the protection of the debtor's property, at any time after the presentation of a bankruptcy petition and before making a bankruptcy order, appoint the official receiver or an insolvency practitioner to be interim receiver of the debtor's property.

(3) The court may by an order appointing any person to be an interim receiver direct that his powers shall be limited or restricted in any respect.

Detailed provisions regarding the application for appointment of an interim receiver, and the order of appointment, are set out in Insolvency Rules (England and Wales) 2016 rr.10.49-10.56.

Eternity Sky argued that the court should apply the approach taken to applications for interim injunctive relief, adopting the principles provided in American Cyanamid Co v Ethicon Ltd [1975] AC 396, including:

• whether the claimant has a strong or merely an arguable case;

• the adequacy of damages as a remedy;

• the balance of convenience; and

• whether the status quo should be maintained.

Mrs Zhang argued that the American Cyanamid test was not appropriate, and that the principles applicable to the appointment of a provisional liquidator should be applied, with the test being:

• whether the petitioner is "likely" to succeed on the petition;

• whether there are cogent grounds to make the appointment, namely is there a risk that the assets of the debtor may not be available at the time of the final order; and

• whether the court should exercise its discretion to make an order.

The Court rejected both of these approaches, finding that, apart from guidance given to discretion, which may be gleaned from authorities relating to the appointment of provisional liquidators, the principles related to the appointment of interim receivers are readily identified by an objective reading of the language used in section 286 of the Act and the relevant Insolvency Rules.

The Court acknowledged that adopting a statutory interpretation to section 286 of the Act and the relevant Insolvency Rules to discern the test leads to little difference between the test for the appointment of an interim receiver and the appointment of a provisional liquidator. The distinguishing feature is the reasoning for the appointment of provisional liquidator, which is often a public interest decision, and the reasoning required to reach the conclusion to appoint interim receivers: that it is "necessary for the protection of the debtor's property".

Taking this approach, the Court must be satisfied, on an application to appoint an interim receiver, that: (i) the debtor is unable to pay the debtor's debts, (ii) security is or will be provided, as required, (iii) the appointment is "necessary for the protection of the debtor's property", and (iv) the exercise of discretion favours an appointment.

The Court was satisfied that it was necessary to appoint interim receivers in this case. The Court noted that, among other things, Mr Zhang’s estate includes interests in operational businesses in more than one jurisdiction, and that the only person who has knowledge of all the businesses and corporate entities is Mrs Zhang. Recent decisions have been made by a board of directors that includes Mrs Zhang in relation to two significant assets in which the estate has an interest, and there is no visibility in relation to the dealings that may affect the estate (Mrs Zhang had refused to provide information).

Conclusion

Due to: i) the lack of visibility as to the extent and value of the estate ii) the failure to provide information and undertakings (in any form) when requested iii) post death transactions and iv) Mrs Zhang’s expressed intention to continue to deal with the assets of the estate without reference to all stakeholders, the Court drew the conclusion that it was necessary to appoint interim receivers for the protection of Mr Zhang’s estate.

Judge: CICC Judge Briggs

Counsel: Blair Leahy KC of Twenty Essex and Paul Fradley of South Square (instructed by Macfarlanes LLP) for Eternity Sky Investments

Philip Marshall KC of Serle Court and Wilson Leung of Serle Court and Temple Chambers (instructed by McDermott Will & Emery UK LLP) for Mrs Zhang