Competing jurisdictions under cross-border insolvency regulations and arbitration proceedings (High Court)

Practical Law UK Legal Update Case Report 0-504-8006 (Approx. 7 pages)

Competing jurisdictions under cross-border insolvency regulations and arbitration proceedings (High Court)

by PLC Restructuring and Insolvency

Background

Cross-Border Insolvency Regulations 2006

The UNCITRAL Model Law on Cross-Border Insolvency (Model Law) provides a framework for the courts of one country to recognise insolvency proceedings commenced in another. The Model Law was adopted in Great Britain by the Cross-Border Insolvency Regulations 2006 (SI 2006/1030) (CBIR). The CBIR apply in relation to insolvency proceedings commenced in all countries, not just those that have implemented the Model Law (which Switzerland has not done).

The CBIR apply to "foreign proceedings", which are any collective insolvency proceedings in a foreign state for the purpose of the reorganisation or liquidation of the assets or affairs of a debtor (article 2, Schedule 1, CBIR). If foreign proceedings are recognised as foreign main proceedings (that is, proceedings commenced in the jurisdiction in which the debtor has its centre of main interests), an automatic stay will prevent the following from occurring in Britain:

The commencement or continuation of actions or proceedings concerning the debtor's assets, rights, obligations or liabilities.
Execution against the debtor's assets.
The transfer, encumbering or other disposal of the debtor's assets.

(Article 20(1), Schedule 1, CBIR.)

This stay is broadly equivalent to the stay that applies in an English liquidation under section 130(2) of the Insolvency Act 1986. The stay will not affect a right to enforce security over the debtor's property or to exercise set-off, so long as such rights could be exercised in a British liquidation (articles 20(3) and 28, Schedule 1, CBIR). The stay will also not prevent the commencement of British insolvency proceedings, although any proceedings will be limited to assets in Britain (article 20(5), Schedule 1, CBIR).

For foreign non-main proceedings, no automatic stay applies, but appropriate discretionary relief may be granted to protect the assets of the debtor or the interests of creditors. The same discretionary relief may be granted in respect of foreign main proceedings, in addition to the automatic stay (article 21, Schedule 1, CBIR).

For more information on the Model Law, the CBIR, and the characteristics of main and non-main proceedings, see Practice note, Cross-border insolvencies: Cross-Border Regulations.

For a case that considered the effect of the EC Regulation on Insolvency Proceedings (not applicable in this case) on English arbitration proceedings, see Legal update, Court of Appeal determines effect of party's insolvency in one EU jurisdiction on arbitral proceedings in another.

Arbitration

Parties to commercial contracts may choose to refer any disputes arising under the contract to arbitration. Arbitration is only available where parties have agreed to it, and in respect of disputes that fall within the scope of the arbitration provisions in the contract. Because arbitration is a contractually-agreed method of dispute resolution, third parties cannot generally be joined to arbitral proceedings, unless all the parties (including the third party) agree.

For further discussion of arbitration, see Practice note, Arbitration: a ten-minute guide: The arbitration agreement.

Facts

In September 2009, a Swiss company, Swissco, chartered a ship from another company, Cosco under a time charter. Swissco then sub-chartered the ship to a third company, STX under a sub-charter. Both the time charter and the sub-charter were governed by English law and contained London arbitration clauses concerning any disputes arising under the relevant charter. The time charter between Cosco and Swissco provided that Cosco had a lien on sums due to Swissco under any sub-charter. This was to protect Cosco's rights to payment under the time charter. However, the sub-charter contained a clause that prevented Swissco from assigning the benefit of the sub-charter without STX's prior written consent.

In December 2009, Swissco filed for liquidation in Switzerland, which was confirmed by a Swiss court order in January 2010. At around the time Swissco filed for liquidation, the chartered ship was arrested in Suez for non-payment of certain fees. Cosco paid the fees to release the ship, and demanded that STX should pay the sub-hire directly to itself, pursuant to its lien on sums due under the sub-charter.

In February 2010, Cosco and STX agreed that STX should pay the relevant amount into an escrow account, to be paid out as determined in arbitration proceedings between them. It was common ground between Cosco and STX that any dispute over Cosco's claim to amounts relating to the sub-hire of the ship due under the sub-charter fell to be determined by arbitration. Cosco accordingly commenced arbitration proceedings against STX, and both parties appointed arbitrators.

In March 2010, the Swissco's Swiss insolvency office holder requested STX to pay the amount owing under the sub-charter for the benefit of Swissco's bankruptcy.

In May 2010, the Swiss insolvency office holder obtained an order from the High Court recognising the Swiss bankruptcy proceedings as main proceedings under the CBIR (the recognition order), but the recognition order was silent as to its effect on the arbitration proceedings between Cosco and STX.

The parties asked the court to decide whether the recognition order had stayed the arbitration proceedings. If they had not been stayed, Swissco requested a stay be imposed, and if they had, Cosco requested the stay be lifted.

Decision

Undecided issue: whether lien an equitable charge or a personal right

The court identified that the application before it concerned substantive legal questions as to the nature of the parties' respective interests in the sums owed by Swissco, centring on whether Cosco's lien over these sums constituted an equitable charge or a personal right. The court considered these issues, but confined its decision to the procedural issue of whether London arbitration proceedings, or Swiss bankruptcy proceedings, should adjudicate the substantive legal questions.

Jurisdiction and venue

The court did not decide whether the arbitration proceedings had been automatically stayed under the CBIR, but held that, irrespective of whether the recognition order had automatically stayed the arbitration proceedings, the court now had discretion whether to allow those proceedings to continue. This discretion had to be exercised according to what was just, and this meant deciding whether London arbitration or Swiss insolvency proceedings were more likely to produce an outcome that was right and fair in all the circumstances. The court found that these criteria clearly pointed towards allowing the arbitration to continue, provided Swissco could be made party to the arbitration proceedings by its insolvency office holder.

The court reasoned that:

The underlying dispute essentially involved two competing proprietary or contractual claims by Cosco and Swissco in relation to the same asset (being STX's obligation to pay sums under the sub-charter). It therefore made sense for Swissco to be joined in the dispute between Cosco and STX.
The relevant charter contracts required such disputes to be resolved by London arbitration, under English law, and the relevant issues were largely English law issues.
The case was not a typical claim against a company in liquidation, and, as it did not involve questions of Swiss insolvency law, the Swiss bankruptcy court did not have the expertise to deal with the issues without receiving additional expert evidence. Meanwhile, the Swiss insolvency office holder had sufficient funds to pursue the London arbitration proceedings on behalf of Swissco, and the balance of fairness, convenience and justice therefore lay strongly in favour of arbitration.
The slight uncertainty over whether Swissco could be joined to the arbitration proceedings could be dealt with by permitting it to apply to court if it could not be joined, and by staying the enforcement of any arbitral award to allow Swissco to make a further application to court. This discharged the court's duty to ensure that the interests of Swissco, its creditors and all other interested persons were adequately protected under its order (article 22(1), Schedule 1, CBIR).

Comment

The application in this case raised a substantive issue in relation to the scope of the stay imposed under article 20(1) of Schedule 1 to the CBIR (effects of recognition of a foreign main proceeding). This issue is whether a company, subject to recognised foreign main proceedings, needs to be party to separate proceedings, for those separate proceedings to constitute an action "against the company or its property" that is automatically stayed by the recognition order (article 20(1), Schedule 1, CBIR, incorporating section 130(2), Insolvency Act 1986).

The court was unwilling to decide this issue, although any ruling on this would have been obiter in any case, as the court had discretion to impose a new stay or lift an existing stay in either case. The court was also keen that issues related to the scope of the CBIR were kept separate from the issues in the underlying dispute, and clearly wished to prevent the CBIR issues from clouding and extending the dispute. Accordingly, the court spent time unpacking the legal issues between the parties that would need to be decided during the underlying dispute, although it did not rule on them itself.

Although the court drew a distinction between the underlying dispute and its decision whether to permit the arbitration proceedings to continue under the CBIR, its decision took into account the nature of the underlying dispute. For example, the court commented that the dispute did not involve any issues of insolvency law, and this was one reason why it did not consider the Swiss bankruptcy court to be the appropriate jurisdiction to decide that dispute.

Although this seems a common-sense approach, the court's comment appears to draw the scope of (Swiss) insolvency law fairly narrowly, which arguably encompasses all types of actions that determine what assets fall within an insolvent estate. The court's decision is also a move away from the more universalist approach, of which Rubin and Lan v Eurofinance SA and others [2010] EWCA Civ 895 is a recent example. (For more information on the Rubin case, see Legal update, Court of Appeal enforces a foreign judgment given without jurisdiction as "bankruptcy proceedings". For more information on the principle of universalism, see Practice note, Cross-border insolvencies: Common law.)

Note, further, that because of the consensual nature of arbitration, the court had no power to require Swissco to join the London arbitration. Accordingly, the judge concluded that the underlying dispute should be determined in arbitration "provided that [Swissco] by its office-holder can without delay or significant risk as to its effectiveness, be joined as a party to that reference", and granted liberty to reapply to court if this could not be achieved.

Case

Cosco Bulk Carrier Co Ltd v Armada Shipping SA and another [2011] EWHC 216 (Ch) (11 February 2011).

End of Document

Also Found In

Resource ID 0-504-8006

Published on 16-Feb-2011

Resource Type Legal update: case report

Jurisdictions

England
International
Wales