Recoveries in cross-border insolvencies—Edgeworth Capital Luxembourg SARL and another v Maud

William Willson, barrister at South Square Chambers, analyses the judgment in Edgeworth Capital and considers the consequences for creditors seeking recoveries under guarantees in cross-border insolvency cases.

Original news

Edgeworth Capital Luxembourg SARL and another v Maud [2015] EWHC 3464 (Comm), [2015] All ER (D) 04 (Dec)

The Commercial Court interpreted the effect of art 97.2 of the Spanish Act on Insolvency 22/2003 dated 9 July 2003 (the Spanish Insolvency Code). It held that the Spanish Insolvency Code did not operate to extinguish a guarantee as a guarantee granted by a third party and that the claimants were entitled to judgment on the claim.

How did the issue arise?

The claimants had sought to enforce a guarantee pursuant to which they said the defendant owed them €40m (the defendant having agreed to guarantee a €200m loan facility by the claimants to a Dutch company of which he was a shareholder and which owns one of the largest pieces of real estate in Europe, ‘the Santander Asset’).

The defendant admitted the monies were owed. However, he claimed the guarantee was extinguished by virtue of art 97.2 of the Spanish Insolvency Code which provides that, where a creditor becomes subordinated as a result of being ‘specially related’ to the debtor company, then the Spanish Insolvency Court will order that ‘guarantees of all kinds’ held by the creditor are extinguished.

The defendant argued that this extended to third party guarantees. The claimants argued that although art 97.2 could extinguish a guarantee granted by an insolvent debtor who was the subject of Spanish insolvency proceedings, it did not extinguish a third party guarantee.

Did the Spanish insolvency proceedings extinguish the guarantee of a third party?

The English Commercial Court held that the claimants’ construction of art 97.2 was preferable and that it did not extend to third party guarantees.

Therefore art 97.2 could not have the effect contended by the defendant, and the guarantee could not be extinguished.

Was the debt arising under English law capable of being discharged at common law by insolvency proceedings in a foreign jurisdiction (the proper law doctrine)?

The judge did not offer a conclusive view on this, having found for the claimants on the basis of the construction of art 97.2.

However, he indicated that he found it very difficult to see how the claimants could be said to have submitted to the Spanish insolvency which would mean that, as a matter of common law, the English law debt could not be discharged by the insolvency (following the decision in Gibbs (Antony) & Sons v La Société Industrielle et Commerciale des Métaux (1890) 25 Q.B.D. 399 (CA)).

Did the EC Regulation on Insolvency or Brussels I apply?

The judge again did not have to offer a conclusive view on this. But he struggled to see how a decision by the Spanish insolvency court made under art 97.2 was one that could be said to be within an insolvency and therefore falling under the Insolvency Regulation (EC) 1346/2000. Similarly, he was unimpressed by the defendant’s argument that that meant it had to fall under the Judgments Regulation (EC) 44/2001 (Brussels I). But, more importantly, he assumed, as a matter of comity, that the Spanish court would see that this was ultimately an English law matter so that the issue of recognition would not actually arise.

What are the practical consequences for creditors seeking recoveries under guarantees in cross-border insolvency cases?

Creditors can continue to see recoveries under cross-border insolvency claims. The judgment recognises that rights against the debtor company and rights against a third party guarantee are parallel sets of rights.

William Willson practises in insolvency/restructuring and commercial litigation. He appears regularly in the courts of England as well as the courts of several offshore jurisdictions. In Edgeworth Capital, William was counsel for the claimants, led by Mark Phillips QC.

Interviewed by Kate Beaumont.

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

Further Reading

If you are a LexisPSL subscriber, click the links below for further information:

The effect of insolvency on guarantees

Main proceedings, secondary and territorial proceedings under the EC Regulation on Insolvency

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First published on LexisPSL Restructuring and Insolvency

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