Abuse of process and recognition under the UNCITRAL Model Law on Insolvency—Re OGX Petróleo e Gás SA Nordic Trustee A.S.A

Abuse of process and recognition under the UNCITRAL Model Law on Insolvency—Re OGX Petróleo e Gás SA Nordic Trustee A.S.A

When will an application for recognition under the UNCITRAL Model Law be treated as an abuse of process? Stefan Ramel of Guildhall Chambers comments on a ruling that clarifies the duties on an applicant for a recognition order under the Model Law.

Original news

Re OGX Petróleo e Gás SA Nordic Trustee A.S.A. and another v Ogx Petroleo E Gas S.A. (Em Recuperação Judicial) and others [2016] EWHC 25 (Ch), [2016] All ER (D) 62 (Jan)

The Chancery Division held that foreign representatives and their advisers had to ensure that the valuable process for recognition under the UNCITRAL Model Law on Cross-Border Insolvency (the Model Law), as incorporated into English law by the Cross-Border Insolvency Regulations 2006, SI 2006/1030 (CBIR 2006), was not misused. When seeking recognition, full and frank disclosure had to be made to the court in relation to the consequences that recognition of the foreign proceeding might have upon third parties who were not before the court.

How did the issue arise?

OSX 3 is a floating production, storage, and offloading vessel owned by OSX3 Leasing B.V. (Leasing) a Dutch company. OSX 3 was constructed with the aid of finance supplied by Nordic Trustee S.A. (Nordic) in respect of which Nordic held a $500m secured bond from Leasing.

Leasing chartered OSX 3 to OGX Petroleo GAS S.A. (OGX), a Brazilian company, on 6 March 2012. All Leasing’s rights under the charter were then assigned to Nordic on 26 March 2012. The charter was for 20 years. In October 2013, OGX found itself in financial difficulties. In June 2014, OGX’s creditors and the Brazilian Bankruptcy Court approved a reorganisation plan. Article 49 of the Brazilian bankruptcy law (No. 11,101/05), which was relevant to determining which creditors were affected and bound by the plan, provides that the relevant debts are ‘all claims existing on the date of the petition are subject to the judicial reorganization, even if not yet due’.

In the meantime, OGX and Nordic were engaged in parallel negotiations to vary the daily hire rate under the charter. A new charter agreement was concluded on 12 September 2014—ie after the plan. By its terms, the new (and second) charter replaced the first charter. It also contained an arbitration clause in favour of London. The new charter was assigned to Nordic on 12 September 2014. The plan expressly provided that Nordic and Leasing were not ‘plan creditors’ and in fact ratified in advance any new charter agreement entered into by OGX and Leasing.

OGX had difficulties making payment under the second charter. By August 2015, Leasing was owed $78.8m on unpaid invoices. Prior to that, OGX had made a without notice application to the Brazilian courts, relying on the unforeseen fall in oil prices, seeking an order that the court reduce the daily hire rate under the second charter. OGX was successful at first instance in December 2014. Upon finding out, Nordic and Leasing successfully appealed on 28 May 2015—the Brazilian appellate court noted that, by virtue of article 49, the second charter was not caught by the plan and so the Brazilian court had no jurisdiction to vary the hire rates under the second charter. OGX then appealed to the Brazilian Supreme Court.

On 22 June 2015, Leasing made a request for an arbitration under the second charter, and also sought immediate interim relief in the arbitration to compel OGX to withdraw the proceedings in Brazil. OGX and its board of directors reacted by applying to the English courts on 24 July 2015 for orders recognising them as, respectively, a company in a foreign proceeding and the relevant foreign representatives under the Model Law as incorporated into English law by the CBIR 2006. The avowed aim of OGX and its board was to achieve a stay on proceedings (including an arbitration) which follows a successful recognition application as a result of article 20(1) of the Model Law. OGX’s application to the English court was made without notice to Nordic and Leasing. Mann J was persuaded to grant the application. As soon as Nordic and Leasing found out, they applied to set aside the order.

What is the purpose of the automatic stay under the Model Law?

In the course of his judgment, it became necessary for Snowden J to consider the scope and purpose of the automatic stay under the Model Law. He noted that article 20(2) of the Model Law provided that the stay imposed by the Model Law would only operate to the same extent as if there had been a stay in an English winding-up. That sort of stay is governed by section 130 of the Insolvency Act 1986 (IA 1986). Having referred to the decisions in Re David Lloyd & Co (1877) 6 Ch D 339 and Re Aro Co Ltd [1980] Ch 196, [1980] 1 All ER 1067, Snowden J reminded himself that the purpose of an IA 1986, s 130 stay was to preserve the pari passu ranking of unsecured creditors—ie preventing one diligent creditor from gaining a march on other creditors by suing the company outside the liquidation.

In order to be recognised under the Model Law, it is necessary for the foreign proceeding to be a ‘collective proceeding’. That is because, according to the Guide to Enactment of the Model Law, it is intended to be a ‘tool for achieving a coordinated, global solution for all stakeholders of an insolvency proceeding’. Snowden J was implicitly of the view that the Model Law stay was included for the same purposes as an IA 1986, s 130 stay—to preserve the pari passu position of unsecured creditors in a cross-border insolvency. Snowden J expressly concluded that the stay was not intended to affect creditors who were outside the scope of the foreign proceedings.

What matters should OGX have brought to Mann J's attention when seeking a recognition order under the Model Law?

Before Mann J, the evidence on behalf of OGX was given by its Chief Executive Officer, Mr Paulo Amaral. He set out verbatim a number of provisions of the Brazilian insolvency law, in particular articles 47–53. However, without any explanation in the witness statement, article 49 was omitted in its entirety and, moreover, there was nothing in the witness statement to flag up the omission of article 49. He also referred to the first charter agreement and the second charter agreement. Mr Amaral alleged that Leasing was a creditor of OGX, but he didn’t make clear that it was a post-plan creditor. Also, while he specifically referred to the first instance Brazilian proceedings in which OGX had been successful, he omitted to refer to the subsequent reversal of that decision by the Brazilian appellate court.

During the hearing, no doubt because of the fact that the application had been made without notice to Leasing and Nordic, Mann J invited OGX’s counsel to specify, in accordance with counsel’s ‘usual duties to the court’ whether there were any matters adverse to OGX which should be brought to the court’s attention. OGX’s counsel did not at that time identify article 49 and the fact that the Brazilian appellate court had concluded that Nordic and Leasing were not plan creditors.

By the time Nordic and Leasing’s application to set aside Mann J’s order came before Snowden J, the parties had compromised the application on terms that the automatic stay imposed by article 20(1) was lifted to allow the arbitration to continue, and OGX would pay Nordic and Leasing’s costs. That ought to have been the end of the matter, and no doubt Nordic and Leasing hoped that it would be. It was not, however, the end of the matter.

Although Snowden J was prepared to make the consent order which would have the effect of leaving the recognition order in place, he was deeply concerned in relation to the allegations which had been made by Nordic and Leasing in relation to whether Mann J had been misled, and whether there were any material non-disclosures. That caused Snowden J to ask what ought to have been disclosed at the hearing before Mann J.

OXG’s approach to the preparation of its evidence for the application before Mann J and at the hearing before Mann J was to confine itself to matters which were relevant to whether OXG ticked the boxes for recognition under the Model Law. OXG’s evidence deliberately did not address the question of whether the stay which came into force automatically upon recognition was susceptible to subsequent challenge by Nordic and Leasing, and if so, on what grounds. Snowden J concluded that such an approach was ‘wrong’ and that the disclosure made to Mann J was ‘wholly inadequate’.

By article 20(6) of the Model Law, it is possible for the court to modify, extend or terminate any stay which would come into force on recognition. Snowden J evidently concluded that that power was available not just on an application made after recognition of a foreign proceeding, but was also in play at the hearing of a recognition application. On that basis, Snowden J concluded that an applicant for recognition of foreign main proceedings was required to address not just the criteria for recognition, but was also required to address any relevant matters in relation to the automatic stay which would follow upon recognition. Any such matters going to the court’s discretion to vary the stay ought to be drawn to the court’s attention on a without notice application for recognition.

Was there an abuse of process by OGX?

Snowden J concluded there was. That was because OGX’s only purpose in seeking recognition under the Model Law was to obtain a stay of the arbitration. However, Nordic and Leasing were not plan creditors, and so therefore did not fall to be considered pari passu with OGX’s other creditors. In those circumstances, the application for recognition was abusive.

Does the court have discretion when deciding an application for recognition?

It does. It is important to be clear on which part of the decision-making process the discretion affects though. If the criteria for a recognition order are made out, the court must recognise the foreign proceedings. However, the court does have a discretion to modify the automatic stay which applies automatically upon recognition. For example, if a secured creditor has intimated an intention to enforce their security, it would be pointless allowing recognition to take effect with a full stay since all which would happen is that the secured creditor would then incur further costs seeking to set aside the stay. Those costs are unnecessary and could be avoided by the court modifying the stay from the start.

Did the public policy exception apply?

The judge was more cautious on this point. Article 6 of the Model Law provides that where recognition is ‘manifestly contrary to the public policy’ of the recognising state, it can decline to recognise the foreign proceedings. Snowden J thought that, notwithstanding the fact that article 6 is to be interpreted restrictively, this might have been a case where the abuse of process was such as to engage article 6 and enable the court to decline recognition on public policy grounds.

What are the practical consequences for practitioners advising on recognition of foreign main proceedings under the Model Law?

This decision has clarified the duties on an applicant for a recognition order under the Model Law. It is not sufficient to only deal in the supporting evidence with whether the criteria for recognition are met. It is also necessary to consider the consequences which follow from recognition. This means that the evidence will need to be more comprehensive. In turn that is likely to mean that an applicant is likely to incur higher legal fees in preparing a recognition application. Further the hearing of the application will involve more court time and scrutiny. The process of obtaining a recognition order will thus be more complex. However, as this case illustrates, that is not necessarily a bad thing.

Interviewed by Nicola Laver.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

Further Reading

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Recognition and other applications under the Cross-Border Insolvency Regulations

Relief applications under article 21 of the Cross-Border Insolvency Regulations 2006

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First published on LexisPSL Restructuring and Insolvency

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About the author:

Stephen qualified as a solicitor in 2005 and joined the Restructuring and Insolvency team at Lexis®PSL in September 2014 from Shoosmiths LLP, where he was a senior associate in the restructuring and insolvency team.

Primarily focused on contentious and advisory corporate and personal insolvency work, Stephen’s experience includes acting for office-holders on a wide range of issues, including appointments, investigations and the recovery and realisation of assets (including antecedent transaction claims), and for creditors in respect of the impact on them of the insolvency of debtors and counterparties.