High court grants a stay of proceedings in a claim relating to avoidance of property dispositions brought by the Liquidator of a Cayman Islands company against a Saudi Arabian bank - Cross Border Restructuring and Insolvency Update - March 2014

Fondazione Enasarco v Lehman Brothers Finance SA [2014] EWHC 34 (Ch)

The High Court has held that, where there is an exclusive jurisdiction clause, a stay of proceedings will not be granted unless there are substantial grounds to satisfy the Court that it is appropriate to do so.

The Swiss-incorporated Lehman Brothers Finance SA ("Lehman") failed to satisfy the Court that the action brought by the Italian Fondazione Enasarco ("Enasarco") to recover sums due under a derivative agreement (the "Agreement") ought to have been stayed.

Enasarco's claim arose from its investments in 2007 of €780,470.000 in notes, issued by Anthracite Rated Investments Cayman Limited ("ARIC") and marketed by the Lehman Group. Lehman and ARIC agreed to protect the investment by entering into the Agreement which was governed by English Law.

In 2008 the Agreement terminated automatically when Lehman's holding company filed for protection under Chapter II of the US Bankruptcy Code. Lehman itself subsequently filed bankruptcy proceedings. ARIC filed a claim (which was ultimately assigned to Enasarco) in the Swiss bankruptcy proceedings for the losses caused by the early termination of the Agreement. In November 2009 the Swiss bankruptcy proceedings were recognised in England as foreign main proceedings under the CBIR. In December 2009 the Liquidators of Lehman rejected ARIC's claim, on the basis the losses ought to be calculated in a different way which had the net effect of ARIC owing Lehman substantial sums.

Having obtained permission to lift the automatic stay imposed by Article 20 of CBIR, Enasarco issued proceedings in England which determined the correct method for calculating losses but not the sums due. Despite this, Lehman's Liquidators still did not accept that ARIC's claim was valid.

Enasarco filed a claim in the Swiss proceedings challenging the rejection and also commenced separate proceedings in England seeking recovery of the sum under the Agreement.

Lehman applied for a stay of the English proceedings. The issues on the stay application were a) whether the Swiss proceedings were insolvency proceedings and therefore excluded from Article 27 of the Lugano Convention, and b) should a stay be granted under Article 28 or the Courts' case management powers in any event.

After accepting Enasarco's submission that, the Swiss proceedings were clearly insolvency proceedings and therefore there could be no automatic stay pursuant to Article 27, the Court considered whether there were substantial case management grounds justifying a stay.

The exclusive jurisdiction clause was a powerful factor in support of a refusal of the stay. The English Courts were the natural venue to determine the contractual issues raised.

In his judgment, Mr Justice Richards emphasised that stays will not be granted on the basis of theoretical grounds and probable consequences; the Court will have to be satisfied that there are concrete and substantial reasons for halting English proceedings.

Akers v Samba Financial Group [2014] EWHC 540 (Ch)
Court grants a stay on the ground of Forum Non Conveniens

In the case of Akers v Samba Financial Group [2014] EWHC 540 Ch the High Court recently granted a stay of proceedings in a claim in relation to avoidance of property dispositions brought by the Liquidator of a Cayman Islands company against a Saudi Arabian bank.

In 2009 Saad Investments Co Ltd ("SICL") was wound up by the Grand Court of the Cayman Islands and the Joint Liquidators applied to the English court for recognition of the Liquidation as foreign main proceedings.

SICL and Samba Financial Group ("Samba") had entered into a facility agreement in which Samba advanced $60 million. The facility agreement was governed by English law. Prior to the liquidation of SICL, Mr Al Sanea was the registered owner of a share portfolio ("the Disputed Shares"). He transferred them to Samba, to whom he had given a personal guarantee for SICL's liabilities.

The Joint Liquidators claimed the shares were held by Mr Al Sanea for SICL on trusts governed by the law of the Cayman Islands. Samba disputed this. The Liquidators therefore wished to make a claim against Samba for the return of the Disputed Shares under s.127 Insolvency Act 1986. They issued proceedings and served them on Samba at its London address.

An application was subsequently made by Samba on the grounds of forum non conveniens. That is to say it would be more appropriate for the matters in dispute to be dealt with in a different jurisdiction - in this case Saudi Arabia.

To determine whether it was appropriate to stay the proceedings, the Court had to determine which law governed the relationship between the parties. The claim centred around whether SICL had a proprietary interest in the Disputed Shares

Samba argued the relevant law was Saudi Arabian both under common law principles and under the Recognition of Trusts Act 1987. Under common law principles, the ownership of the shares is determined by the place where the company is incorporated - in this case, Saudi Arabia.

Under Article 7 of the Recognition of Trusts Act, the governing law of a trust, if not determined on creation, is that with which the trust is "most closely associated". The court concluded on the facts that this was also Saudi Arabia.

Accordingly, as the governing law of the trust was Saudi Arabia, the court granted a stay of the English proceedings. This case demonstrates the importance of analysing the governing law of relevant agreements prior to starting litigation to ensure that the correct forum is chosen to resolve the dispute.

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Trouble ahead for the Chinese Corporate debt market? Last week the world witnessed China's first onshore corporate bond default caused by a missed interest payment on a debt owed by the publicly-traded solar equipment producer Shanghai Chaori Solar Energy Science & Technology Co. China is now trying to reassure investors that its debt market is controllable in an attempt to alleviate recent fears of a domino effect across the Chinese Republic.

25 percent of Listed Korean Companies Facing Insolvency Risk
Alix Partners held a press conference on 4 March at the Westin Chosun Hotel in Seoul. It used its Corporate Distress Index of data such as the financial and stock-price date of companies to create an overall risk profile. Its data showed about 17 percent of the 1,600 or so companies it examined corresponded to On-Alert or a worse condition as of the end of the third quarter of 2013. 9% of the 1,600 companies were listed as High Risk, which implies that they are likely to become insolvent within the next three quarters. The ship building, maritime and financial industries were regarded as particularly badly affected.

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