The English Court does not have the power under the Cross Border Insolvency Regulations to grant relief in aid of insolvency proceedings in a foreign jurisdiction which it would not have the power to grant in purely domestic proceedings. So held the Companies Court of the English High Court (Morgan J) in Re Pan Ocean Co Limited [2014] EWHC 2124 (Ch).

Shantanu Majumdar, Radcliffe Chambers, Lincoln's Inn

Article 21.1 of the UNCITRAL Model Law (as applied in the UK by the Cross-Border Insolvency Regulations 2006 “CBIR”) provides as to “Relief that may be granted upon recognition of a foreign proceeding” that

“Upon recognition of a foreign proceeding, whether main or non-main, where necessary to protect the assets of the debtor or the interests of the creditors, the court may, at the request of the foreign representative, grant any appropriate relief, including—

(a) staying the commencement or continuation of individual actions or individual proceedings concerning the debtor's assets, rights, obligations or liabilities, to the extent they have not been stayed under paragraph 1(a) of article 20;”

The question arose whether the Court had the power under Article 21.1 to restrain a party to a contract from serving a notice terminating that contract?

Fibria Celulose S/A, a Brazilian company, applied for an order allowing it to commence an arbitration seeking a declaration that it was entitled to terminate a long-term freight contract with the respondent Korean shipping company, Pan Ocean. The contract was governed by English law and was terminable on written notice by one party in the event of the insolvency of the other. Pan Ocean became insolvent (entered “rehabilitation” under Korean law) and its administrator applied to restrain Fibria from terminating the contract.

Such termination clauses – sometimes called ipso facto clauses – have long been considered valid under English law and it seems clear, not least because of the decision of the Supreme Court in Belmont Park Investments Pty Ltd v BNY Corporate Trustee Services Ltd [2012] AC 383, that they do not generally offend the “anti-deprivation” rule (to the extent that this continues to have much practical existence) and which according to Belmont focuses on terms and  transactions whose sole or dominant purpose (rather than effect) is depriving the debtor’s estate of property otherwise available for distribution. Beyond this, the rule respects party autonomy and upholds “legitimate” commercial terms such as those which terminate executory, bilateral obligations and permit the solvent party to escape from the uncertain and potentially onerous effect of having to continue to perform a contract with an insolvent counterparty.

The Court recognised the Korean insolvency proceedings as foreign main proceedings and accepted, for the purposes of argument only, that the contractual provision for termination on insolvency was void under Korean law. Did this mean that the English Court could (or should) restrain Fibria from relying on it? The answer was no.

In the first place, a contractual notice of termination is not "the commencement or continuation of individual actions or individual proceedings" under Art 21.1(a). These words are resonant of a legal or quasi-legal proceeding (see Bristol Airport plc v Powdrill [1990] Ch 744 and Re Olympia & York Canary Wharf Ltd [1993] BCC 154 on comparable wording in s 11(3)(d) Insolvency Act 1996) rather than the exercise of a contractual right. There was therefore no power to “stay” the serving of a termination notice.

Secondly, when it came to the power to grant "any appropriate relief" in Art 21.1, Reg 2 permits recourse to the documents of the working group which prepared the Model Law and the Guide to its enactment as aids to construction. These materials as well as the existence of Art 21.1(g) – which gives the Court the power to grant any “additional” relief which would be available to a British administrator – all militated against the expansive interpretation advanced by the Korean applicant. So too, did the potentially extraordinary effect of accepting that “any” meant literally any relief.

The Court indicated that even if it had the power to grant the stay sought, it would have declined to do so since this would, amongst other things, allow the provisions of foreign insolvency law to override the effect of a term which was valid under the law which the parties had chosen to govern the contract.

The Court also noted that the decision of the Supreme Court in Rubin v Eurofinance SA [2013] 1 AC 236 indicates that Art 21 of the CBIR is concerned with procedural matters whereas the contractual right to terminate was plainly one relating to the substance of the parties’ rights.

It is often appropriate for courts to take an “autonomous” rather than purely domestic approach to the interpretation of international instruments and here the Court considered a number of North American authorities. Perhaps the most relevant – since it was a decision on the CBIR – was the US Federal Court of Appeals decision in Re Condor Insurance Co Ltd (2010) 601 F 3d 319 which held that it could grant relief available under St Kitts and Nevis law but which Morgan J declined to follow not least because he disagreed with its analysis of the travaux preparatoires of the Model Law.

The Korean administrator is appealing against the decision of the Companies Court in Pan Ocean. Morgan J’s judgment contains a convincing analysis but clarity from a higher court on the rôle of foreign law under Art 21 would not be unwelcome.