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Cross Border Restructuring and Insolvency Update - September 2015

Seawolf Tankers Inc v Pan Ocean Co Ltd [2015] EWHC 1500

The English High Court has provided useful guidance on the principles that apply in deciding whether to lift a stay of proceedings where foreign main proceedings are recognised under the Cross Border Insolvency Regulations 2006 ("CBIR").

The Respondent shipping company Pan Ocean Co Ltd ("Pan Ocean"), which was incorporated in the Republic of Korea, entered into a vessel pool agreement managed by the Second Applicant Heidmar and a time charterparty for a vessel with the First Applicant Sea Wolf Tankers Inc ("Sea Wolf") ("the Agreements"). The Agreements were governed by English law and provided that arbitration, if required, would take place in London. The Agreements also included an ipso facto clause that provided for termination if either party entered into an insolvency process, without specific reference to Administration.

Pan Ocean entered into rehabilitation proceedings in Korea which were akin to Administration in England. The parties were in dispute over the circumstances of termination and thus the quantum of damages. Whilst the Applicants contended that the Agreements had been terminated by reason of Pan Ocean's repudiatory breach, Pan Ocean sought to argue that the ipso facto clause meant that the pool agreement terminated automatically when the rehabilitation proceedings commenced, thus limiting the damages available.

The Korean proceedings were recognised by the English High Court as foreign main proceedings under the CBIR 2006 which brought an automatic stay of proceedings into effect under Article 20(6). Sea Wolf's proof of debt and their objections to the Bankruptcy Court in the Republic of Korea had been rejected. Sea Wolf therefore made an application under article 20(6) of Schedule 1 to the CBIR 2006 for the recognition order to be modified to lift the stay of proceedings and allow them to pursue an arbitration claim against Pan Ocean in London, as they contested that the matters in dispute were complex and best determined by arbitrators in London since the Agreements were governed by English law.

The English High Court had to consider, amongst other issues, whether the claims that the Applicants sought to arbitrate had merit. It considered that it was arguable that the ipso facto clause would not apply to the rehabilitation proceedings, and also considered it arguable that the clause offended the anti-deprivation principle under English law, which seeks to prevent detriment to creditors resulting from the removal of an asset from the insolvent estate.  The Court did not consider the substantive issues, but held that the English Court was the appropriate forum to hear the dispute.

In determining whether to lift the stay, the Judge considered that strict adherence to the wording of Article 20(6) would require the Court to undertake the same exercise it must undertake when considering whether to lift a liquidation stay under section 130(2) of the Insolvency Act 1986, the primary concern of which, according to Cosco Bulk Carrier Company Ltd v Armada Shipping SA, is to achieve a realisation and distribution to creditors in accordance with the statutory scheme of distribution. However, in that case the Judge recognised that the court has a "free hand to do what is right and fair according to the circumstances of each case…"  

On the facts, the Judge took a purposive approach to construction and held that, in the circumstances, it was right and fair to apply the wider test which applies in the context of lifting a stay on Administration under para 43(6 of Schedule B1 to the Insolvency Act 1986,  as established in Re Atlantic Computer Systems Plc [1992] Ch 505, thereby taking into account the interests of all creditors and other interested parties, including the debtor, in the context of the rehabilitation proceedings. Accordingly it held that the recognition order should be modified to lift the stay on proceedings and allow the claims to be brought in arbitration in London.

In The Matter Of Astra Resources Plc Sub Nom Astra Resources Plc v Credit Veritas Usa Llc (A Company Incorporated In New York) [2015] Ewhc 1830 (Ch)

A creditor was permitted to present a winding-up order over $600,000 of undisputed debts

despite arguments that the petition was an abuse of process as it was presented for a collateral purpose.

Astra Resources Plc ("Astra") applied for an injunction to restrain the presentation of a winding-up petition by Credit Veritas USA LLC ("CV"). CV had served a Statutory Demand against Astra for $1,535,000 in respect of a various aspects of a consultancy agreement.

Astra was incorporated in England as a public company but was managed by directors in Australia. CV is a limited liability company incorporated in New York. CV agreed to provide services in respect of litigation in the US, as well as a Consultancy Agreement to provide services and introduce investment opportunities.

The amounts claimed by CV broke down into $75,000 as an advisor's fee for litigation, $500,000 in respect of work on a transaction, and $960,000 in service fees which broke down into $30,000 per month.

Certain funds being due were contingent on the company raising a certain level of funding, or on the completion of a transaction, and therefore there was a genuine dispute as to whether those sums were owing. There was, however, a remaining $600,000 of service fees which were not expressed in the Consultancy Agreement to be conditional upon the closing of the transaction or upon raising funds. Astra argued that this amount being unconditional was a 'mistake' on their part and it had been intended to be conditional. Mr Justice Richards rejected this argument. There were multiple drafts of the  Consultancy Agreement and he concluded that this was a deliberate and considered choice.

Astra alleged that the winding-up petition was an abuse of process as it was presented for a collateral purpose. They argued that CV's intention was to take over the company with a creditor led restructuring, alleging that the winding up petition was not for their benefit as a creditor to obtain repayment of amounts due, but rather to obtain control of the company through the "submission of a reorganisation plan in the London Courts".

Astra relied on Re A Company (No 001573 of 1983) in which a petition was dismissed as its purpose was other than to ensure the equitable winding-up of the company and was an abuse of process, as the petitioning creditor was trying to take over a lease of property for personal benefit

Mr Justice Richards held that a reorganisation plan could only be achieved through a proper insolvency process (with a Liquidator's consent) or through a scheme of arrangement (with the Court's consent). Reorganisation would therefore only be permitted if it was beneficial to creditors as a whole, not just the petitioning creditor. He therefore found that there was no collateral purpose and the petition in respect of the $600,000 debt could be presented.

Short stories:

Policy drives move to keep debtor's bankruptcy petitions out of the English Courts

As of April 2016, applications for debtors' own bankruptcy petitions in England and Wales will be made through an online portal run by the Insolvency Service. Provision will be made in the Insolvency Rules 2016 for applications to be determined by an adjudicator, as part of a policy to keep rubber stamping exercises out of the Courts. Going forward the process should be more straightforward, less expensive and less stressful for debtors who will no longer be required to appear in Court unless their application is dismissed and they decide to appeal.

Amendments to bankruptcy and restructuring law in Poland

Poland has introduced a new restructuring law to improve the options open to debtors seeking to avoid liquidation. The new law, which will enter into force on 1 January 2016, amends the Bankruptcy and Recovery Proceedings Law of 28 February 2003 to the effect that that clauses which provide for termination or modification of agreements if a bankruptcy petition is filed will be invalid. This is subject to special provisions for master agreements. The new restructuring law will also invalidate similar clauses in the context of the commencement of restructuring procedures.

New Bankruptcy Regime in Hungary

The Hungarian parliament has introduced a new Act setting out the debt settlement procedures for private individuals, which came into force on 1 September 2015. At present the regime is only applicable to defaulting mortgage holders, but it will introduce a personal bankruptcy regime, together with debt settlement procedures. To petition for a debt settlement, debtors must satisfy certain thresholds, including but not limited to, having debts exceeding HUF 2m (≈€6,600) but not exceeding HUF 60m (≈€200,000), the debts must exceed the debtor's assets (including income for the next 5 years), with at least 80% debts being undisputed, and at least one debt exceeding HUF 500k (≈€1,650) being overdue over 90 days.

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