Re Pan Ocean Co. Ltd; subnom Seawolf Tankers Inc and another v. Pan Ocean Co Ltd and another [2015] EWHC 1500 Ch

The English Companies Court has recently held that claimants with contractual claims against a Korean ship operator and charterer that was subject to Korean rehabilitation proceedings could nonetheless bring their claims against the Korean company in London arbitration pursuant to the English law and arbitration clause in the relevant contracts. In the context of substantive claims involving contracts governed by English law and agreeing to disputes being heard in London arbitration, the Court decided that the recognition order that recognised the Korean rehabilitation proceedings as foreign main proceedings should be modified to lift the stay that otherwise prevented the claimants from pursuing their claims in London arbitration.

Given the number of insolvencies and resulting foreign rehabilitation proceedings that have been witnessed in the international shipping community in recent years, this judgment provides further useful guidance on the English courts’ approach to cross-border insolvency issues.

The background insolvency regime

The Cross Border Insolvency Regulations 2006 (the Regulations) are based on the UNICTRAL Model Law on Cross-Border Insolvency and provide a framework for the recognition by, and cooperation of, the English courts in relation to insolvency proceedings commenced in foreign jurisdictions. Where “main” foreign insolvency proceedings are recognised by the English courts, the Regulations provide for a stay of proceedings and for appropriate relief at the request of the foreign insolvency office holder, for example to stay court or arbitration proceedings brought by a party against the foreign debtor company.

The background facts

The Claimant companies were a vessel pool operator and its management company. In April 2013, they entered into a pool agreement and time charterparty for the vessel Universal Queen with a Korean ship operator and time charterer, Pan Ocean. Both agreements were governed by English law and contained agreements to refer disputes to London arbitration.

In June 2013, Pan Ocean entered into Korean rehabilitation proceedings as a result of having become cash-flow insolvent due to the global financial crisis. It sought to terminate the charterparty and also sought redelivery of the vessel. The Claimants subsequently stated that both the pool agreement and the time charterparty had been terminated by reason of Pan Ocean’s repudiatory breach, which they accepted. The Claimants sought damages from Pan Ocean as a result of the breach.

Also in June 2013, the English Court issued a Recognition Order pursuant to the Regulations, which stayed the commencement of any actions or proceedings against Pan Ocean. In November 2014, the Claimants sought to have this Order modified to allow them to bring their contractual claims against Pan Ocean in London arbitration, while undertaking that they would not seek to enforce any arbitration award or subsequent judgment against Pan Ocean’s assets without the agreement of the appointed Korean administrator.

In response, Pan Ocean argued essentially that:

  1. there was no breach of the pool agreement because it contained an ipso facto clause, namely a clause permitting termination of the contract in certain circumstances, including the insolvency of one party.
  2. Further or alternatively, Pan Ocean had cross-claims against the Claimants that they were entitled to set-off against any damages claim and that would either extinguish one of the Claimant’s claims or reduce the quantum of both Claimants’ claims to such an extent that it would be disproportionate to have those claims heard in London arbitration, with the attendant costs.
  3. In any event, any disputes between the parties should be resolved by the Korean courts as part of the rehabilitation proceedings.

The Companies Court decision

The Court considered that the Claimants had a sufficiently arguable case that the ipso facto clause in the pool agreement did not apply to the rehabilitation proceedings. In particular, there was no reference to administration or its equivalent. However, it was not possible to determine the point conclusively without hearing substantive argument on the point.

The Court did, however, consider that under English insolvency law, there was also an arguable case that the clause offended the anti-deprivation principle and was therefore void and unenforceable. In broad terms, the Court will strike down a clause that, in the event of an insolvency, seeks to reduce the value of the insolvent estate to the detriment of creditors by withdrawing an asset (in this case, the Claimants’ cause of action against Pan Ocean for breach of contract).

As to the forum in which these issues, among others, should be decided, the Court noted that the parties had agreed to refer their disputed claims to London arbitration and that those claims were to be decided in accordance with English law.

As a matter of practicality, therefore, London arbitration was the most appropriate forum. This was not an attack on the Korean judicial system or its insolvency law. Rather, it was that the disputes in question were better determined before English arbitrators with experience of English law rather than in Korean insolvency proceedings, where the Korean Court would be at a disadvantage if it had to hear expert evidence on English law and the Korean administrator would have to consider matters that were far from straightforward under English law.

As to whether the Korean courts and rehabilitation process would recognise the English arbitration proceedings, there was not sufficient evidence before the Court to demonstrate that the London arbitration or its results would be ignored. Even if such evidence existed, it was not sufficiently good reason to interfere with the English courts’ jurisdiction under the Regulations.

On proportionality, it could not be said that the value of the claims was disproportionate to the costs of arbitration. Furthermore, Pan Ocean’s cross-claims had to be arbitrated in any event so it would be quicker and more practical to have all the disputes between the parties under the relevant contracts heard together in arbitration.

The Recognition Order was therefore modified to allow the claims in question to be brought in London arbitration.

Comment

This is a significant decision as it clarifies that the English Court will seek to uphold where appropriate the parties’ contractual agreement to arbitrate their disputes, notwithstanding foreign rehabilitation proceedings and a Recognition Order pursuant to the Regulations.