Carving out irreconcilable judgments under the Insolvency Regulation

Richard Bunce, partner and James Matthews, associate, at Simmons & Simmons LLP, examine in detail the judgment in the Marme Inversiones 2007 SL case and assess whether the decision clarifies the relationship between the Insolvency Regulation and Brussels I.

Original news

Marme Inversiones 2007 SL v The Royal Bank of Scotland plc and others The Royal Bank of Scotland plc v Marme Inversiones 2007 SL [2016] EWHC 1570 (Comm), [2016] All ER (D) 182 (Jun)

The Commercial Court dismissed the claimant company’s application to stay the defendant banks’ counterclaims and declaration claim in a dispute concerning the failed development of a building in Spain. The court held that the claims had different issues and objectives to related proceedings in Spain, and that the risk of irreconcilable judgments was not so great as to justify allowing the application. Further, the court would not exercise its discretion to order that the English proceedings should be stayed.

How did the issue arise?

Marme Inversiones 2007 SL (Marme), a Spanish special purpose vehicle incorporated for the acquisition of Santander’s headquarters in Spain, was advanced a senior loan of €1.575bn by a syndicate of banks led by the Royal Bank of Scotland plc (RBS), HSH Nordbank AG and Bayerische Landesbank as joint lead arrangers. Interest on the senior loan was payable by reference to Euro Interbank Offered Rate (EURIBOR) and Marme entered into interest rate swap agreements with five of the syndicate banks to hedge its interest payment liabilities. The five swap counterparties were the joint lead arrangers, together with ING Bank NV and Caixa Bank SA (the banks). Each of the swap agreements was governed by English law and subject to an exclusive jurisdiction clause in favour of the English courts.

In 2014, Marme went into voluntary insolvency proceedings in Spain and went into liquidation in 2015. Following Marme’s failure to pay sums due under the terms of the swap agreements, the banks each served International Swaps and Derivatives Association (ISDA) swap termination notices on Marme, between 11 and 25 November 2014.

On 10 September 2014, Marme issued its claim form in the English courts against the banks (the defendants), for the rescission of the swap agreements on the basis of alleged misrepresentations in relation to the setting of EURIBOR by the first defendant. Marme alleged that the first defendant had made misrepresentations (on its own account and on behalf of the other defendants) in relation to EURIBOR the remaining defendants were said to be responsible on an agency basis. RBS issued a separate declaratory claim and the banks other than RBS then issued counterclaims in these proceedings, in each case seeking declaratory relief to the effect that the swap agreements had been validly terminated and confirmation of the close-out amounts payable to the banks, as a matter of English law, according to the swap termination notices.

Marme applied to the English court for a stay of the declaratory claim and the banks’ counterclaims pending the conclusion of the Spanish insolvency proceedings and the determination of the effect of Marme’s insolvency on the swaps. The application was heard before Blair J in the Commercial Court.

What were the claimant’s arguments?

Marme’s primary arguments were that the banks’ declaration claim and counterclaims were related actions, under article 28 of Regulation (EC) 44/2001 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (Brussels I), to Marme’s own counterclaim in the Spanish insolvency proceedings, which requested termination of the swap agreements pursuant to article 61.2 of the Spanish Insolvency Law (the Spanish counterclaim).Brussels I, art 28 provides that where ‘related actions are pending in the courts of different Member States, any court other than the court first seised may stay its proceedings’. Marme argued in the alternative that the English court should use its inherent case management powers to stay the banks’ claim and counterclaims, pending the determination of the Spanish counterclaim in the Spanish courts.

What were the defendants’ arguments?

The banks argued that while it would be correct to say that the Spanish counterclaim falls within the insolvency carve-out of Brussels I and therefore comes within the ambit of Regulation (EC) 1346/2000 on Insolvency proceedings (the Insolvency Regulation), the English court must, pursuant to Brussels I, art 23, take jurisdiction to determine the banks’ declaration claim and counterclaims, due to the exclusive jurisdiction clause in the swap agreements in favour of the English court. The banks were clear that Brussels I and the Insolvency Regulation provide mutually exclusive codes. If a claim falls under Brussels I, it will by definition not also be within the insolvency carve-out. By the same token, if proceedings fall within the insolvency carve-out, they will not come under the purview of Brussels I. The banks also advanced the argument that the court should not use its inherent case management powers to grant a stay because where there is an exclusive jurisdiction clause, discretion will normally be exercised against a stay, absent exceptionally strong grounds for exercising such discretion (following the approach Mazur Media Ltd v Mazur Media GmbH [2004] EWHC 1566, [2004] All ER (D) 110 (Jul) and Jefferies International v Landsbanki [2009] EWHC 894 (Comm), [2009] All ER (D) 222 (Apr)).

What did the court decide?

Blair J found that the actions proceeding in England and in Spain were not related for the purposes of Brussels I, art 28 and that the actions were concerned with different issues. The declaration claim and counterclaims were concerned with the banks’ contractual rights and obligations as a matter of English law, whereas the Spanish counterclaim was concerned with whether the Spanish judge should exercise her discretion under Spanish law to terminate the swap agreements for the good of the insolvent estate. Blair J also agreed with the banks that the English and Spanish proceedings had different objectives the banks sought declarations as to their contractual entitlement as a matter of English law, whereas the Spanish counterclaim sought to invoke a specific power of a Spanish judge in insolvency proceedings in Spain. Blair J said that these were inherently different exercises for the purposes of Brussels I, art 28 even if both sets of proceedings arose out of the same factual nexus.

Blair J accepted that the banks had agreed not to contest matters before the English court that would trespass on the insolvency jurisdiction of the Spanish court (as provided by the Insolvency Regulation). Therefore, he noted that the English court would be exclusively concerned with the parties’ contractual positions and the question of whether as a matter of Spanish insolvency law there could have been a breach of the contractual obligations owed under the swaps would be for the Spanish court, which answered that part of Marme’s arguments as to relatedness under the Judgment Regulation, art 28.

Applying the principles in C-157/13: Nickel & Goeldner Spedition GmbH v ‘Kintra’ UAB [2014] All ER (D) 129 (Sep), Blair J noted that there is a conceptual difference between ‘contractual claims and claims directly deriving from the insolvency proceedings and closely linked to them: only the latter fall within the insolvency carve-out’. Blair J found that there was no conceptual overlap between the two sets of proceedings therefore Brussels I must apply to the proceedings afoot in England and Wales while the Insolvency Regulation determines the jurisdiction of the Spanish counterclaim.

Blair J held that the risk of inconsistent judgments could not be excluded entirely but that (following the approach in Research in Motion UK Ltd v Visto Corpn [2008] EWCA Civ 153, [2008] All ER (D) 72 (Mar)) such a risk was fairly limited and that it was not sufficiently great to make the matters related for the purposes of the Judgment Regulation, art 28.

Considering his discretion to grant a stay, Blair J took into account the Advocate General’s opinion in Owens Bank Ltd v Bracco [1992] 2 AC 443, [1992] 2 All ER 193. He noted that:

  • even if the banks’ declaratory claims and the insolvency counterclaim were related, it was ‘only in the relatively distant sense that both claims relate to the swaps’—this was the first factor against the grant of a stay
  • neither set of proceedings were far advanced, so the stage of the proceedings was a neutral issue
  • the third factor against the grant of stay was the proximity of each court to the subject matter of the case: (a) the existence of the exclusive jurisdiction clause was a powerful factor, notwithstanding that the banks had made submissions as to their contractual entitlement in the Spanish proceedings and (b) Marme intended to pursue its claim against the banks for rescission in any event and it sought a stay only in respect of the banks’ declaratory claim and counterclaims—the fact that there would be a trial in the English courts anyway was a strong additional factor

Blair J left the door open as to the possibility that the English court might use its inherent jurisdiction to make case management orders to minimise the risk of conflicting judgments, according to how the Spanish and English proceedings developed. Blair J did not determine whether the English court was first seized because it was not necessary to do so, given his foregoing findings.

Does this case clarify the relationship between the Insolvency Regulation and Brussels I?

Yes. This case follows the line of authorities, including Nickel & Goeldner Spedition GmbH v ‘Kintra’ UBA as cited by Blair J, which delineate the conceptual differentiation between claims falling within either the Insolvency Regulation or Brussels I. It is clear that the Insolvency Regulation and n are Brussels I are intended to dovetail and not to overlap—Brussels I, art 1(2)(b) expressly carves out ‘bankruptcy proceedings relating to the winding up of insolvent companies or other legal persons, judicial arrangement, composition and analogous proceedings’.

Proceedings falling within this carve-out are therefore governed by the Insolvency Regulation instead. Re Rodenstock GmbH [2011] EWHC 1104 (Ch), [2011] All ER (D) 62 (May) clarified that the insolvency carve-out concerns nothing more and nothing less than what it is in the Insolvency Regulation.

Fondazione Ensarco v Lehman Bros Finance SA [2015] EWHC 1307 (Ch), [2015] All ER (D) 106 (May) draws the distinction between:

  • a claim which exists independently of the liquidation and which could have been brought whether or not there was a liquidation, and
  • a claim made in the liquidation and which arises out of the liquidation

What are practical implications to take away from this case?

This case is a useful reminder that insolvency proceedings in one EU jurisdiction do not prevent the commencement or continuation of litigation elsewhere in the EU, provided the claims do not directly derive from the insolvency proceedings, and are not closely related to them. It also reinforces the utility of exclusive jurisdiction clauses in English law governed contracts.

Interviewed by Susan Ghaiwal.

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

 

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