The English Court has agreed to lift the automatic stay on proceedings under the Cross Border Insolvency Regulations 2006 (“CBIR”) against STX Offshore & Shipbuilding Co Ltd (“STX”) which had entered into rehabilitation proceedings in Korea.
STX had guaranteed to Ronelp Marine Limited and others (“Claimants”) the performance of a subsidiary (Dallan) in relation to the construction of five ships that Dallan had contracted to build. The contracts were governed by English law. Dallan entered into insolvency proceedings in China, and the order was not fulfilled.
The Claimants issued proceedings in the England against STX under the unsecured guarantee. STX sought to defend these on the basis that the shipbuilding contracts were illegal and unenforceable and therefore there could be no claim under the guarantee.
Before the proceedings were concluded STX entered into rehabilitation proceedings in Korea. Under the CBIR, the English proceedings were automatically suspended.
The Korean administrator obtained recognition of the Korean rehabilitation proceedings in England as foreign main proceedings under the CBIR. The English court extended the automatic stay so that no legal process could be continued against STX except with the consent of the Korean administrator or the permission of the court. This extension of the stay is akin to the administration moratorium pursuant to paragraph 43 Schedule B1 Insolvency Act 1986 and has become a standard practice where the foreign proceedings deal with restructuring as opposed to liquation. The Claimants applied to lift the stay.
Under the Model Law (contained in schedule 1 of the CIBR which enacts the UNCITRAL Model Law), the stay can be lifted where necessary to protect a creditor’s interests. However the English courts are wary to override the legislative procedures for an unsecured monetary claim and the circumstances would have to be exceptional i.e. the Claimants had to 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 (here, in the Korean rehabilitation proceedings).
The court allowed the stay to be lifted after balancing the Claimants’ objective of obtaining verification and quantification of their claim against the interests of creditors as a whole in the Korean rehabilitation. The salient points were:
- Impact on the main proceedings– It was accepted that any judgment obtained could not be enforced against STX or alter the priorities under Korean insolvency law, so it would not undermine the equal treatment of creditors in any distribution. Rather than impede the rehabilitation plan, it might assist it, and in a more efficient manner, not least because of the complexities of the (English) legal issue in point. The English court did not consider the alternative appropriate (for the Korean court to have to decide a point of complex English law in the context of a summary review procedure aimed at the adjudication of claims in the insolvency).
- Impact on timing – The claimants wanted the adjudication and quantification of their claim to be determined more speedily than would be likely in Korea (where their claim, having been rejected by the Korean administrator, would be subject to a court confirmatory review and objections process which could have taken years) so that they could vote on the rehabilitation plan.
- Practical impact – Proceedings in England might cost a little more than in Korea but when analysing how much creditors were owed and what they would get back in the insolvency, costs were immaterial in the wider picture. Further, wherever the proceedings took place, there would have been a need for translators and travel. Therefore proceedings in England did not of themselves create additional issues.
- Risk of other creditors following suit – There was no evidence to suggest that following this action, there would be a surge of other creditors seeking to lift the stay where they had English law claims defended by STX on a similar basis. But if there were, such ruling by the English courts on this complex point would likely be an advantage.
- Different treatment of a claim- The Claimants’ foreign law claim would be treated in a way different from that in which other possible foreign law claims might be treated, but that was considered justified, most crucially, because of the nature of the dispute, but it was also relevant that there were extant proceedings where precise issues had been defined and a trial imminent. Notwithstanding that, lifting the stay would still not unduly advance the interests of the Claimants over the interest of the creditors as a whole.
This is a helpful guide for anyone involved in cross border insolvency work. However whilst the court concluded that the circumstances here carried sufficient weight to lift the stay, the judgment also 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…”
Those involved in advising creditors in similar circumstances should consider the court’s approach in detail and the sub-headings highlighted above might be considered as a starting point to the analysis of whether an English court might consider lifting the stay in their own case.