Simona Kornhaas v Thomas Dithmar (Case C-594/14)

The ECJ have ruled that a director of an English company that had entered into insolvency proceedings in Germany is liable to reimburse the company under German law for payments made after the company became insolvent.

An English company with a branch in Germany entered into insolvency proceedings in Germany, which is where the company was mainly active. Under German law, directors involved in the management of a company ("Managing Directors") are required to file for insolvency at the latest three weeks after the company has become unable to pay its debts, and if they fail to do so Managing Directors are personally liable to reimburse the company for any payments made after it becomes insolvent.

The German Liquidator applied to recover €110,000 from the English director, paid out after the company had become insolvent. The German court upheld the Liquidator's claim, and after several appeals the matter was referred to the ECJ. The ECJ was asked to consider whether such an action could be brought under German law where the company had been incorporated in the UK.

The ECJ ruled that the German law provision fell within the scope of Article 4 of Regulation 1346/2000, which states that the law of the State in which proceedings were opened shall determine the conditions for the conduct of those proceedings, and in particular: "the rules relating to the voidness, voidability or unenforceability of legal acts detrimental to all the creditors".

The relevant provision relating to repayment is from German law on limited liability companies, rather than from within insolvency legislation. However, the ECJ was satisfied that an action based on that provision in the context of insolvency proceedings, "is an action deriving directly from insolvency proceedings and closely connected with them".

The ECJ also ruled Articles 49 and 54 relating to freedom of establishment in the Treaty on the Functioning of the European Union did not preclude the action brought by the German Liquidator against the managing director of a company established under the law of England and Wales.

The case will now be referred back to the German court, which had already found the claim against the director to be well founded under German law.

This case serves as a useful reminder that directors should be aware of laws in jurisdictions where they operate, and should take specialist cross-border insolvency advice should the company begin to face financial difficulty, and check whether their insurance covers breaches of local laws.

Nordic Trustee ASA and another v OGX Petróleo e Gás SA (Em Recuperação Judicial) and another [2016] EWHC 25 (Ch) (12 January 2016)

The English High Court has provided useful guidance on the requirement for full and frank disclosure in without notice applications for recognition of a foreign main proceeding under the UNCITRAL Model Law ("the Model Law") on Cross Border Insolvency. In particular, the Court considered that there should be disclosure as to the effect that recognition might have on third parties, as well as anything that might affect modification or termination of the automatic stay on proceedings.

The Applicants were a party to a charter agreement ("the Original Charter") with OGX who subsequently faced financial difficulties and sought to renegotiate the Original Charter. Whilst the renegotiation was being finalised, OGX petitioned the Brazilian Court for judicial reorganisation under Brazilian Bankruptcy Law ("BBL"). Article 49 of BBL provided that judicial reorganisation would include "all claims existing on the date of the petition… even if not due yet". In addition it was made an express condition of the reorganisation that any new charter entered into between OGX and the Applicants as a result of the renegotiation would not be subject to the reorganisation plan. As a result, the Applicants were not included as creditors.

The renegotiation concluded three months after the reorganisation plan was approved by the Court and the Original Charter was expressly substituted for a new charter. The new charter contained a provision that any disputes relating to it were to be settled by Arbitration in London. Thereafter OGX defaulted on payment of a number of invoices and a dispute arose centering on the charter rates. In an attempt to resolve the dispute, the Applicants submitted a request for Arbitration in London.

In an attempt to prevent the Arbitration taking place, OGX applied to the Court in England for an order recognising the Brazilian reorganisation plan as a foreign main proceeding under Article 15 of the Model Law. During the course of the proceedings in which the Judge, Mann J, proceeded to grant the recognition order, OGX's evidence did not draw Mann J's attention to Article 49 of the BBL, nor the fact that the Arbitration, upon which the stay would be invoked, was in relation to claims which were not subject to the reorganisation plan for which recognition was sought. This is despite the fact that Mann J explicitly asked OGX's representative whether there were any matters that the Applicants might have raised if they had been present.

The Applicants made an urgent application for the order to be set aside to allow the Arbitration to proceed. They claimed that Mann J had been misled, or at the very least there was material non-disclosure. By the time Snowden J heard the substantive application, the parties had agreed a consent order providing for a lifting of the automatic stay and payment of the Applicants' costs. Snowden J expressed reservations about approving the consent order in the circumstances as he doubted whether recognition ought to have been granted, but nonetheless respected the commercial decision of the parties. However, given the wider importance of the Court's approach to recognition and disclosure requirements, he went on to give judgment on these matters.

Upon a detailed analysis of the applicable provisions of the Model Law, Snowden J accepted that a stay under Article 20(1) should operate automatically; however, he noted that pursuant to Article 20(2) this is only to the extent it would apply if a winding up order had been made in England. Thus, he referred to s130(2) of the Insolvency Act 1986 which provided for a stay on proceedings "except by leave of the Court and subject to such terms as the Court may impose". He considered case law on the purpose of this provision, which he concluded was to prevent creditors pursuing proceedings outside the collective process of Liquidation and allowing unsecured creditors' claims to rank parri passu. He held that the stay was only designed to operate upon recognition of collective foreign proceedings under the Model Law and not to prevent persons who are not subject to the collective proceedings from pursuing their claims. He noted that OGX's aim had not been to protect the reorganisation plan, but to frustrate the Arbitration in circumstances where the contract had been entered into after the approval of the reorganisation plan. This was not only inconsistent with Model Law but also an abuse of process.

Snowden J went on to explore the Court's discretionary power to modify a stay from the outset under Article 20(6) of the Model Law, and held that a foreign representative ought to place before the Court any material relevant to the exercise of that discretion. Full and frank disclosure is required in respect of the consequences of recognition upon third parties, as well as any points in relation to the modification or termination of the automatic stay. He had "no doubt" that if Mann J had been in possession of the full facts, he would have modified the stay from the outset to allow the Arbitration to proceed. It was also "strongly arguable" that the Court had a residual discretion under Article 6 to refuse recognition if satisfied that the applicant is abusing the process for an illegitimate purpose.

Short stories:

Irish High Court recognises Swiss insolvency

For the first time, the Irish High Court has recognised and given effect to a Swiss insolvency process, commenced in Switzerland, relating to Valartis Group AG, a Swiss company. As Switzerland is not within the EU, the EU Insolvency Regulation and the Recast Insolvency Regulation do not apply to Swiss insolvencies. The company had been granted a six month moratorium by the Swiss court, and an Administrator had been appointed. The moratorium prohibited any enforcement action by creditors, and stayed any existing proceedings. Due to the company's links with Ireland, it applied to the Irish High Court to have the Swiss order recognised under Irish law, on the basis of the similarities between the Swiss process and Irish examinership, and the High Court granted the order. The company was therefore given the protection provided by the moratorium under Irish law.

Australian Insolvency Law Initiatives

The Australian government has proposed changes to insolvency laws, which currently focus on penalising and stigmatising business failure, as part of the National Innovation and Science Agenda. The reforms hope to strike a better balance between encouraging entrepreneurship and protecting creditors by:

  • Reducing the default bankruptcy period of 3 years to 1 year.
  • Introducing a ‘safe harbour’ for directors from personal liability for insolvent trading if they appoint a professional restructuring adviser to develop a plan to turnaround a company in financial difficulty.
  • Banning ‘ipso facto’ contractual clauses that allow an agreement to be terminated solely due to an insolvency event if a company is undertaking a restructure.

Update: Edgeworth Capital Luxembourg SARL [2015] EWHC 3464

Further to our December bulletin, in which we discussed the case of Edgeworth Capital Luxembourg SARL [2015] EWHC 3464, the Bankruptcy Court has heard the adjourned bankruptcy petition presented by Aabar Block SARL and Edgeworth Capital (Luxembourg) SARL against Glenn Maud. Mr Maud's main asset is his interest in a group of companies in Spain which are currently subject to Spanish insolvency proceedings. Mr Maud sought another adjournment pending the outcome of those proceedings. The judgment provides useful guidance on the distinction between a collateral purpose and an ulterior object. The petition has been adjourned until 14 April 2016 pending the conclusion of the Spanish insolvency proceedings, which should enable the realisation of a significant asset for creditors.