First published on LexisPSL Restructuring and Insolvency

Barristers Stephen Atherton QC and Charlotte Tan of 20 Essex Street review Ronelp Marine Ltd and other companies v STX Offshore & Shipbuilding Co Ltd—in which the High Court considers whether, and the circumstances where, it should lift a stay made under the Cross-Border Insolvency Regulations SI 2006/1030 to allow litigation proceedings to be continued in England by a creditor with an unsecured monetary claim.

Ronelp Marine Ltd and other companies v STX Offshore & Shipbuilding Co Ltd [2016] EWHC 2228 (Ch), [2016] All ER (D) 77 (Oct)

The Chancery Division granted the claimant Liberian companies, which were buyers under shipbuilding contracts, permission to continue an action brought by them against the first defendant Korean shipbuilding company (STX), under a guarantee. STX had entered into a Chinese insolvency process and Korean rehabilitation proceedings concerning STX had been recognised in the English court as the ‘foreign main proceeding’, under the Cross Border Insolvency Regulations 2006 (CBIR 2006), SI 2006/1030. The court held that granting permission for the continuation of the Commercial Court action would not impede the achievement of the rehabilitation plan.

What are the key takeaways?

The judgment sets out a framework for considering applications to lift stays imposed under the CBIR 2006. Where a stay is imposed in the terms which would be applied in a domestic administration, and where the creditor pursues an unsecured money claim, it will only be in ‘exceptional’ cases that the stay may be lifted (as would be the case in a purely domestic scenario). Sufficiently exceptional circumstances may be found to exist where the case in question raised particularly difficult and/or unsettled questions of English law which could be more suitably determined by an English court. Other relevant factors might include (as they did in this case) how advanced the English proceedings were and whether determination in England would be achieved more quickly than in the foreign insolvency and at what cost.

How did the issue arise?

The applicants were the buyers of five vessels from a Chinese shipbuilder in the STX Group, under five shipbuilding contracts governed by English law. In each case, there was a separate side agreement which had the effect of reducing the price by US$6 m for each vessel. The shipbuilder’s Korean parent company, STX had provided performance bonds guaranteeing the shipbuilder’s performance, which were also governed by English law.
Turmoil in the global shipbuilding market meant that, before steel cutting had taken place for any of the hulls and before the buyers had paid any installments, the shipbuilder entered into a Chinese insolvency process. In the course of that insolvency, the Chinese office-holder elected to rescind the shipbuilding contracts. The buyers treated the office-holder’s election as a repudiatory breach of the shipbuilding contracts which the buyers accepted, thereby bringing the contracts to an end. The buyers claimed damages in excess of US$90 m from the shipbuilder, but the Chinese office-holder rejected their claims.

As a consequence, in January 2015, the buyers commenced proceedings in the English Commercial Court seeking an indemnity from STX under the guarantees. Pleadings were exchanged and the parties provided disclosure. The matter was set down for trial in December 2016, which the parties were working towards. The parties were weeks away from exchanging witness statements when, in May 2016, STX entered into Korean rehabilitation proceedings (a form of ‘turnaround’ or ‘rescue’ proceeding akin to US Chapter 11 ). In due course, the Korean administrator obtained an order of the English court under the CBIR 2006 recognising the Korean insolvency. The English court also made an order (on the application of the Korean administrator) modifying the automatic stay which usually arises upon recognition of a foreign insolvency, to replace it with relief in line with the moratorium which comes into existence in the case of an English administration (under paragraph 43 of Schedule BI to the Insolvency Act 1986). In due course, the buyers applied to lift the stay so as to permit their Commercial Court claim against STX to proceed to trial.

What were the main legal arguments?

The buyers argued that the stay should be lifted for a variety of reasons. They relied on the fact that the case raised complex questions of English law. In particular, STX had denied liability on the grounds that the shipbuilding contracts were unenforceable on grounds of illegality (it was said that the inference from the side agreements was that the parties intended to mislead third parties as to the true price payable under the relevant shipbuilding contract) STX had also said that the buyers were, in any event, not entitled to recover damages but were instead limited to recover any installments (and since no installments had been paid, nothing was recoverable). They also pointed to the fact that the Commercial Court action was well advanced: the proceedings had been commenced more than 18 months earlier and the parties had been working towards a trial date in just a few months’ time. They also relied on the absence of prejudice to STX or other creditors, the fact that the Korean court would probably stay its proceedings pending any English judgment and the absence of any risk of the ‘floodgates’ opening in respect of other claims against STX in the event that the stay was lifted in respect of buyers’ claims.

STX emphasised that the stay should only be lifted in exceptional cases. They said that the factors relied on by the buyers were not sufficient to take this case out of the ordinary. In particular, STX sought to argue that the questions of law raised were not particularly complex and said that the mere fact that time and money had been spent on proceedings in England, or that the Korean proceedings might take longer, were insufficient to justify the grant of permission.

Did Norris J decide to lift the stay imposed under the CBIR 2006?

Norris J held that the modified stay should be lifted such that the Commercial Court action should be permitted to proceed to trial.
The judge held that the burden lay on the affected creditor to persuade the court that the stay should be lifted. The creditor should first identify the nature of the interest that he wished to promote by obtaining that relief. He must, secondly, address the question whether the grant of such relief is likely to impede the achievement of the purpose of the insolvency proceeding. He must, thirdly, enable the court to balance the applicant’s legitimate interests against the interests of other creditors, having regard to the nature and the probability of occurrence of prejudice on either side.

Given the type of stay imposed, the judge applied the approach taken in domestic administration cases and held that, since the Buyers were seeking to pursue unsecured money claims, it would only be in ‘exceptional’ case that the court would allow the claim to proceed, further holding that, ‘The term ‘exceptional’ is protean: but in this context I think it means that the applicant creditor must demonstrate a circumstance or combination of circumstances of sufficient weight to overcome the strong imperative to have all the claims dealt with in the same way (and in the instant case by the insolvency court). That said, a domestic court, recognising the general desirability of having one insolvency estate under the management of one insolvency court, should not be too ready to find the factors of ‘sufficient’ weight …’

Applying the above approach, the judge held that this was an appropriate case to lift the stay.

One important factor was that, after the Supreme Court’s recent judgment in Patel v Mirza [2016] UKSC 42, [2016] All ER (D) 91 (Jul), the law on illegality was (apart from in relation to the specific situation considered in Patel i.e. restitution where an illegal purpose is not carried through) in a state of flux. The applicability of the law of illegality to these Shipbuilding Contracts was ‘uncertain to an exceptional degree’ and the question of such application, through the medium of expert evidence and in the course of the (initial) summary review procedure should not be visited upon the Korean rehabilitation court. The judge found himself essentially in the same position as Briggs J in Cosco Bulk Carrier: Ltd v Armada Shipping SA [2011] EWHC 216, [2011] 2 All ER (Comm) 481 where another vexed question of English law arose on the claim, and the court held that there was an air of unreality in the submission that it will be either fair, just or convenient to visit upon a Swiss bankruptcy court the adjudication of such a dispute. Moreover, the question of exclusion of damages was also a matter of intricacy and complexity requiring extensive argument and citation of authority.

Further important factors were that:

  • the Commercial Court proceedings were reasonably well advanced and the parties had spent considerable sums preparing for trial the mere existence of proceedings was not of itself sufficient to justify lifting a stay, the fact that proceedings have been commenced is a relevant factor, and the nearer the outcome of the proceedings the greater the weight to be attached to that factor
  • the buyers’ claims would be adjudicated and quantified more quickly in London than in the Korean insolvency moreover, the buyers wished to have their claim determined in order to be enfranchised when the rehabilitation plan was to be put to creditors

As to whether permitting the Commercial Court action to continue would interfere with the rehabilitation, the judge held that it would not—instead, it would have the potential greatly to assist in enabling the Korean court to suspend the buyers’ action there and await a more speedy adjudication of the English court, which the Korean court could adopt or promote (or, if dissatisfied, ignore).

Finally, in balancing the interests of the buyers and the other creditors, the interests of the creditors as a whole would be served by lifting the stay. Resolving a genuinely difficult issue of foreign law would assist rather than impede the insolvency process. This was especially so given the advanced state of the English proceedings and the fact that the claim would be adjudicated upon more quickly in London than in Korea. The English costs appeared slightly higher but that was of no materiality given the size of the insolvency. There would be no disorder caused to the administration and no basis for anticipating any floodgates. In all the circumstances, the judge therefore granted permission to continue the Commercial Court action.

What are the practical implications for creditors seeking to lift a stay under the CBIR 2006?

The judgment provides a useful framework for the resolution of disputes regarding the lifting of stays imposed under the CBIR 2006. The judge approached the applicable threshold for lifting the stay bearing in mind the precise nature of the stay imposed (here, it was the administration moratorium rather than the automatic (liquidation) stay, and so the judge applied the relevant test which would be applied in domestic cases). Creditors seeking to lift CBIR 2006 stays in future have now been given helpful guidance as to kind of balancing exercise which the Court will perform in such cases particularly important factors will include the complexity of any English law issues raised and how well advanced the English proceedings are.

Stephen Atherton QC and Charlotte Tan, instructed by Holman Fenwick Willan LLP, represented the applicants, Ronelp Marine Ltd and other companies.