Croatian company’s application recognised as ‘foreign proceeding’ in UK (Re Agrokor)

In Re Agrokor DD and in the matter of the Cross-Border Insolvency Regulations 2006 [2017] EWHC 2791 (Ch)[2017] All ER (D) 83 (Nov), the Companies Court had to decide whether to recognise a Croatian extraordinary administration proceeding as a ‘foreign proceeding’ despite, for the first time in an English court, the recognition application being contested by a creditor.

The Companies Court granted a Croatian company’s application for an extraordinary administration proceeding in Croatia to be recognised in Great Britain as a ‘foreign proceeding’, as defined by Article 2(i) of Schedule 1 to the Cross-Border Insolvency Regulations 2006, SI 2006/1030, notwithstanding the objections of the respondent bank, which was a creditor of the applicant.

What was the background to the case and the issues arising within it that were pertinent to insolvency professionals?

The applicant is the largest private company in Croatia. When it encountered financial difficulties, the Croatian Parliament passed the Law on extraordinary administration proceedings in companies of systemic importance for the Republic of Croatia (the Law), which was intended to facilitate the restructuring of the applicant and its subsidiaries and affiliates, and to preserve their businesses as going concerns.Very shortly afterwards, the applicant and several of its controlled and affiliated companies entered into an extraordinary administration proceeding under the Law.

The applicant then initiated proceedings in the High Court in London seeking, under SI 2006/1030, recognition in Great Britain of the extraordinary administration proceeding. The application was opposed by the respondent, a creditor of the applicant.

This was the first time that a recognition application had been opposed in the English courts. However, the respondent’s challenge was unsuccessful and the Companies Court granted recognition of the extraordinary administration proceeding.

What were the main legal arguments raised?

The respondent opposed the recognition application on two main grounds:

  • the extraordinary administration proceeding was not a ‘foreign proceeding’ within the meaning of SI 2006/1030, Sch 1art 2(i)
  • even if it were a ‘foreign proceeding’, it would be ‘manifestly contrary’ to English public policy, within the meaning of SI 2006/1030, Sch 1art 6

The respondent submitted five arguments why the extraordinary administration proceeding was not a ‘foreign proceeding’:

  • it was not undertaken pursuant to a ‘law relating to insolvency’, within the meaning of SI 2006/1030, Sch 1art 2(i), because, among other things, there was no requirement to demonstrate insolvency in respect of the applicant’s controlled or affiliated companies, and the tests for insolvency were not consistent with Croatian bankruptcy law
  • its purpose was not ‘reorganisation or liquidation’, within the same provision, because the sole purpose was to protect systemically important companies and it did not respect the principle of minimum protection of creditors which was a fundamental principle of reorganisation
  • it was not a ‘collective proceeding’ because it affected the assets and liabilities of all the companies in the applicant’s group, whereas ‘collective’ meant relating to the individual debtor and its own creditors
  • it was not ‘subject to control or supervision by a foreign court’ because the process was controlled by the Croatian government and there was no substantive control that could be asserted by the Croatian courts despite certain provisions of the Law
  • it was a group proceeding in respect of the applicant and all its controlled and affiliated companies, whereas SI 2006/1030 only dealt with proceedings applicable to individual debtors

The respondent argued that even if the extraordinary administration proceeding was a ‘foreign proceeding’, it would be manifestly contrary to English public policy because it would be contrary to fundamental principles designed to ensure a fair insolvency proceeding, including the right to practical and effective access to legal remedy and the right to private property.

What did the court decide, and why?

Foreign proceeding

The court dismissed all five of the respondent’s objections to the extraordinary administration proceeding being a ‘foreign proceeding’.

On the first objection, the court held that a proceeding could be conducted pursuant to a ‘law relating to insolvency’ where insolvency was just one of the grounds on which the proceeding could be commenced, even if insolvency did not actually need to be demonstrated and there was another basis for initiating the proceeding. The extraordinary administration proceeding was initiated under Article 4 of the Law on the basis either of insolvency or impending insolvency and therefore fell within this definition. The court also noted that the fact that a subsidiary or affiliate which was not insolvent might be joined to the proceeding did not mean that the proceeding was not brought under a ‘law relating to insolvency’, nor did the fact that the test for proving insolvency might easily be met mean that the law was not a ‘law relating to insolvency’.

On the second objection, the court held that the extraordinary administration proceeding was clearly intended to facilitate a restructuring of the applicant and disagreed with the respondent that the proceeding did not respect the principle of minimum protection of creditors.

On the third objection, the court held that it could not be said that it was not a ‘collective proceeding’ and went on to say that the respondent’s objection was not that the proceeding was not collective enough, but too collective because it allowed persons who were creditors of another entity to claim a share in the assets of the debtor.

On the fourth objection, the court held that the extraordinary administration proceeding was under the control and supervision of the Croatian court through its direct authority to make certain orders in the proceeding, and its authority to supervise the extraordinary commissioner. The court also noted here that the test was whether the proceeding was subject to the control and supervision of the court and not whether another body had influence over the proceeding, such as the Croatian government in this case.

On the fifth objection, the court held that there was nothing in SI 2006/1030 to prevent recognition of a foreign proceeding which was initiated in respect of a group of companies but where the recognition was sought in relation only to a particular individual debtor.

Public policy

The court also dismissed the respondent’s objection on the ground of public policy. The court found that there was no violation of English public policy, let alone a manifest violation, in merely recognising the extraordinary administration proceeding as a foreign main proceeding within SI 2006/1030. The court noted, in particular, that the fact that the priorities of the extraordinary administration proceeding in reorganising or liquidating a company were different from those which would apply under English law was not enough to make this finding.

What are the practical implications of this case for insolvency lawyers advising their clients?

Typically, foreign insolvency proceedings of EU Member States are automatically recognised by virtue of their inclusion in Annex A of the Insolvency Regulation (EC) 1346/2000 and the recast Insolvency Regulation (EU) 2015/848. The Law was only passed a few days before the extraordinary administration proceeding was initiated and so is not included in Annex A, which meant that to achieve similar effects the application had to be brought under SI 2006/1030.

As this is the first case of its kind in England and Wales, it is instructive of the approach that the English courts will take to applications under SI 2006/1030. Particularly, it highlights the fact that the English courts will take an independent view of the applications, diverging from decisions in other jurisdictions that have adopted the United Nations Commission on International Trade Law where necessary. The judgment also emphasises that the international foundation of SI 2006/1030 must be considered when applying principles of English insolvency law to such applications.

For practitioners, it highlights the viability of an application under SI 2006/1030 for recognition of procedures commenced under the law of non-Member States, although it also provides a reminder that recognition is not always desirable from the perspective of certain creditors.

To what extent is the judgment helpful in clarifying the law in this area?

The judgment provides helpful clarification on how the key tests for recognition of a foreign insolvency proceeding should be applied under SI 2006/1030, Sch 1art 2(i), and how the court should approach the exercise of interpreting the effect of foreign insolvency proceedings when viewed through the eyes of an English insolvency practitioner.

To what extent is the judgment unhelpful, and what practical lessons are there to be learned?

The court comprehensively addressed each point in dispute and was expansive on the question of the approach the English courts should take in considering applications under SI 2006/1030, and to that extent the judgment is helpful. It does, however, provide a reminder for practitioners that creditors will not always consider themselves better off with the protection of the process in other jurisdictions.

The case also indicates that, where recognition of a foreign insolvency process is not automatic, there are other tools available to debtors to seek to obtain recognition of the relevant proceeding in England. SI 2006/1030 is one of those tools, although not without its own challenges.

Interviewed by Robert Matthews.

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

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