Arbitration or injunction: restraining foreign proceedings

Bannai v Erez (Trustee in Bankruptcy of Eli Reifman) [2013] EWHC 3689 (Comm)

The High Court has refused to set aside anti-suit injunctions obtained against an Israeli Trustee in Bankruptcy because a valid arbitration clause existed.

Mr Eitan Erez was the Trustee in Bankruptcy of an Israeli national in what was said to be the largest bankruptcy in Israel. Mr Boris Bannai and the Bankrupt had entered into a contract in February 2002 which provided that Bannai would contribute 35% of the assets of identified companies to a joint venture company. In an apparent breach of the agreement no contributions were made.

The Trustee commenced proceedings in Israel against Bannai for the apparent breach of contract. This was notwithstanding the fact that the contract, governed by English law, contained an arbitration clause. Bonnai sought a stay of the proceedings in Israel as the arbitration clause was in effect a negative promise not to bring foreign proceedings.

The Israeli court refused the application to stay the proceedings and an appeal was dismissed.

In the meantime Bannai had successfully obtained an anti-suit injunction in the UK which prohibited commencing and/or continuing proceedings in Israel or anywhere else. The injunction also covered Bannai's son and ten companies. The Trustee applied to have the injunction discharged.

The High Court refused the application. The general rule was that there must be a good reason to refuse an injunction to restrain foreign proceedings if the parties had agreed to arbitrate.

The Trustee argued that the existence and continuation of the proceedings in Israel, in which Bannai had participated, was a good reason to refuse the injunction. The court rejected this argument. The Trustee further argued that the clause providing for arbitration was onerous, and sought to disclaim it. The court concluded that a Trustee must disclaim the whole asset (i.e. the contract) and not pick and choose which clauses suited and which did not.

The court also rejected arguments that Arbitration in London would be more expensive compared to court proceedings in Israel and that the Bankrupt, who was imprisoned, would be unable to travel. Both arguments were rejected on the basis there was sufficient money available to fund the claim and that the physical attendance of the Bankrupt was not necessary.

Finally the court affirmed the extension of the injunction to cover Bannai's son and the ten companies because, without it, the arbitration clause would be frustrated and circumvented.

Re Magyar Telecom B.V. [2013] EWHC 3800 (Ch)

Does an English court have the power to approve a Scheme of Arrangement for a company incorporated in the Netherlands?

The English High Court has held that it is entitled to recognise a Scheme of Arrangement under Part 26 of the Companies Act 2006 for Magyar Telecom B.V. (the "Company"), a Dutch company. Although incorporated in the Netherlands, the Company operated in the telecommunications sector in Hungary.

The Company had a significant number of contingent creditors. These had been created through an indenture under which €345 million of 9.5% Loan Notes were issued and fell due for payment in 2016 (the "Note Creditors"). The relationship between the Company and the Note Creditors was governed by the law of the state of New York.

In June 2013 the Company found itself unable to meet the interest payments due to the Note Creditors. The Company proposed a Scheme of Arrangement under which it sought to reorganise its finances and provide a better return to creditors generally than if it had entered in to formal insolvency proceedings. Prior to the meeting of creditors, the Company had moved its centre of main interest ("COMI") to England.

It therefore fell to the English High Court to determine whether it was able to approve the Scheme and if so, the grounds on which it was able to do so. The court considered that, in order to approve the Scheme, the Company had to have a "sufficient connection" with England and that the Scheme was capable of achieving its purpose. The Court held the first requirement was met as the Company had its COMI in England and, should the Company later enter into formal insolvency proceedings, these would be governed by English law. Further, the court heard evidence that, under New York law, the Scheme would be formally recognised under the US Bankruptcy Code. The second requirement was met as a sufficient number of the Note Creditors had voted in favour of the Scheme for it to be able to largely achieve its purpose.

The decision serves as a useful reminder to practitioners that the governing law of the debt instrument will not necessarily determine the jurisdiction of any future Scheme of Arrangement or similar.

Around the World

United Kingsom
The Joint Insolvency Committee has opened consultation on its proposed amendments to the Statement of Insolvency Practice 3 (SIP 3) governing best practice on Company Voluntary Arrangements (CVA's). The proposed amendments are largely of a formatting nature but the SIP 3 is intended to cover England and Wales, Scotland and Northern Ireland. The consultation is open until 7 January 2014.

France's second largest courier company, Mory Ducros, recently entered Administration less than a year after it commenced trading. It is reported to be France's biggest insolvency since 2001. The company is another casualty of the economic slow down in France.

The new Insolvency Regime in Ireland has come into effect and it is hoped that it will reduce the number of 'bankruptcy tourism' cases. The automatic discharge for bankrupts has been reduced from 12 years to 3 years making it more comparable with other jurisdictions in the region but still longer than in the UK.

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