On 9 November 2017, in a rare example of a contested recognition hearing, His Honour Judge Paul Matthews granted recognition of Agrokor’s extraordinary administration (EA) as a foreign main proceeding under the Cross-Border Insolvency Regulations 2006 (CBIR).
Agrokor d.d. is the holding company for a group of companies specialising in agriculture, food production and related activities in Croatia. Before its financial difficulties, the group’s annual revenue was estimated to amount to around 15% of Croatia’s GDP. On 6 April 2017, the Law on Extraordinary Administration Proceeding of Companies of Systemic Importance for the Republic of Croatia (the Law, also known as Lex Agrokor) became effective. On 10 April 2017, following an application by Agrokor, an order for extraordinary administration (EA) was made in respect of Agrokor itself and 50 of its affiliates. In July 2017, Agrokor applied to the English court for recognition of the EA as a foreign proceeding under the CBIR. A proceeding will be a foreign proceeding if it is “…a collective judicial or administrative proceeding in a foreign State…pursuant to a law relating to insolvency in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganisation or liquidation” The recognition application was challenged by one of Agrokor’s largest creditors, who had also brought arbitration proceedings in the English courts, on a number of grounds, all of which were dismissed by the court.
A Hogan Lovells team led by partner Tom Astle is acting for an adhoc committee of bondholders, and providers of a c€1bn super senior DIP facility to the Agrokor Group.
The arguments and the judge’s decisions are summarised below (in each case the argument raised by the challenging creditor is in bold):
1. Group proceedings fall outside the CBIR: the challenging creditor’s argument was that the EA was a group proceeding and so fell outside the CBIR. The argument failed. Although group proceedings are not expressly covered by the Model Law or the CBIR, there is nothing which would indicate that a group proceeding could not be recognised in respect of a particular debtor, if the proceeding otherwise met the relevant criteria. It would leave a significant hole in the range of possible options for international recognition if such recognition were not allowed.
2. Lex Agrokor a not a law relating to insolvency: the challenging creditor argued that as the EA covered both solvent and insolvent entities in the group, the Law could not be a law relating to insolvency. The court disagreed To be a law relating to insolvency, It was sufficient if insolvency was one of the grounds on which the proceeding could be commenced; it didn’t have to be the sole ground. The fact that the EA applied to a number of solvent affiliates as well as the insolvent Agrokor did not mean that the Law was not a law relating to insolvency. Finally, the fact that insolvency was perhaps easier for the company to show under the Law than in other jurisdictions did not meant that the law was not one relating to insolvency.
3. The proceeding was not a collective proceeding: the challenging creditor argued that as any settlement in the proceedings would be a collective one between all of the debtors under the EA and all of their creditors, the proceeding was not a collective proceeding. Matthews HHJ disagreed. The fact that under any settlement agreement the creditors of all of the companies subject to the EA could look to share in all of the assets of those companies, rather than each creditor looking only to the assets of its own debtor company, did not mean the proceeding was not a collective proceeding.
4. The Law was not for the purpose of reorganisation or liquidation: the challenging creditor argued that as the Law could be used to protect a company and did not inevitably result in the liquidation of the company, the Law was not for the purpose of reorganisation or liquidation. The court disagreed. Although it would be possible under the Law to protect the sustainability of the operations of companies of systemic importance without a reorganisation or liquidation, the Law also expressly contemplated situations where a reorganisation or liquidation was required and that was sufficient to make it a law for the purposes of reorganisation or liquidation.
5. The EA was not under the supervision of the court: the court disagreed. Although the Croatian government did have certain powers in relation to the EA, it was clear from the Law that once the EA commenced it was under the supervision of the court acting through the extraordinary administrator.
6. The court should not grant recognition as to do so would be manifestly contrary to public policy: again, the court disagreed. The fact that a distribution might be made other than on the pari passu principle was not sufficient to make recognition manifestly contrary to public policy.
The case is the first recognition by the English courts of an application by a single company which is party to a group proceeding. The case is also of interest because:
- The CBIR brings into English law the UNCITRAL model law relating to cross-border insolvency. The Model Law has also been adopted in Serbia and Montenegro. However, courts in Serbia and Montenegro have both refused recognition of the EA, finding that the Lex Agrokor was not a law relating to insolvency.
- The Recast Insolvency Regulation applies to Croatia; however, as the Lex Agrokor is not included in Annex A, the EA was not a “main proceeding” and did not benefit from automatic recognition in other EU Member States. For that reason, recognition had to be sought under the CBIR. Time will tell whether Croatia seeks to include the Lex Agrokor in Annex A of the Recast Insolvency Regulation to avoid having to apply for multiple recognition orders across the EU in any future extraordinary administrations.