Varying the stay of proceedings against a foreign insolvent company (Re Pan Ocean Ltd)

What should creditors do in the event they are forced into foreign insolvency proceedings?

Tony Beswetherick, junior counsel at 20 Essex Street who acted for the applicants in Re Pan Ocean Co Ltd, considers this case and urges creditors in this position to act quickly to stay the foreign adjudication proceedings if possible and to apply to vary any stay imposed by the Cross-Border Insolvency Regulations 2006 sooner rather than later.

Re Pan Ocean Co Ltd [2015] EWHC 1500 (Ch), [2015] All ER (D) 102 (Jun)

The applicants sought a variation of a recognition order insofar as it stayed the commencement of actions or proceedings against the first respondent company to permit them to pursue contractual claims against the company in arbitration proceedings. The Companies Court, in allowing the application, held that extant proceedings in the Republic of Korea did not prevent determination of the application and the claims had merit. In the context of substantive claims involving contracts governed by English law and agreeing to disputes being heard in arbitration in London, the order would be modified by lifting the stay preventing that arbitration.

What is the background to this case?

The case involved the question whether and in what circumstances the English court will permit arbitration proceedings to be brought within the jurisdiction against a company which has entered insolvency proceedings in another jurisdiction and where those foreign insolvency proceedings have been recognised by the English courts under the Cross-Border Insolvency Regulations 2006, SI 2006/1030 (the 2006 Regulations).

 How did the issue arise?

Pan Ocean Co Ltd (a company incorporated in Korea) carried on business in the shipping industry and had entered into an agreement and charter party with the applicants under which it was to provide the services of a vessel. Both of the contracts contained English governing law clauses and agreements to refer any disputes to a panel of arbitrators in London.

Performance of the contracts ceased after Pan Ocean entered 'rehabilitation proceeding' and an administrator was appointed over its affairs in Korea as a consequence of the contraction of the world wide shipping industry. Pan Ocean's administrator applied to the English court under the 2006 Regulations for recognition of his appointment, and the English court made an order which recognised his appointment and which imposed a stay upon any proceedings being brought against Pan Ocean in England and Wales without either the English court's permission or the consent of the foreign administrator.

The applicants claimed that they were owed monies by Pan Ocean due to its repudiatory breach of the agreements. They were required under Korean insolvency law to submit their claims in writing to the Korean bankruptcy court. The Korean bankruptcy court rejected their claims following a summary adjudication process in which they participated.

The applicants were able to (and did) commence fresh proceedings in Korea in a different division of the Korean court, the effect of which was that the judgments in the original Korean proceedings were deemed to be superseded. However, as it was now the case that there would be a further (more detailed) adjudication of their claims the applicants invited the administrator to agree to a stay of the new Korean proceedings in favour of arbitration in London. When the administrator refused to give his consent to arbitration or to a stay of the Korean proceedings the applicants applied to the English court for permission to commence arbitration in London.

It was argued by Pan Ocean's administrator that the court should not give permission for the arbitrations to be commenced. It was said that, given that the applicants had participated in the original proceedings in Korea and then issued new proceedings in Korea, it was too late for the applicants to now switch horses and start arbitrations. It was said:

  • this would offend established principles of comity (since the Korean court was already considering the applicants' claims and so would amount to an attack upon its integrity)
  • the Korean court would refuse to recognise any arbitration award, and
  • the applicants had elected to utilise the Korean insolvency machinery to the exclusion of the arbitration clauses

Was it too late to make this application and/or the order sought because of the extant proceedings in Korea?

The registrar rejected Pan Ocean's administrator's arguments and permitted the arbitrations to be commenced. The fact that there were proceedings on foot in Korea was relevant but not determinative. The administrator had not established any basis for saying that the applicants had waived or were estopped from relying upon the arbitration agreements and the applicants were not precluded from arbitrating in circumstances where they had been required to submit claims in Korea to avoid the risk of being unable to participate in any distribution of Pan Ocean's assets.

The applicants were seeking an order that they be permitted to arbitrate their claims specifically on the basis that they would not seek to use any award that they obtained to circumvent the Korean insolvency process. They were therefore seeking to use arbitration as a means of adjudication only and there was no attempt to undermine the Korean insolvency process to which they had submitted.

The application did not involve any attack upon the Korean courts at all. Such an argument, if correct, would mean that the English court would never lift the stay on proceedings where the alternative was adjudication via a foreign insolvency regime. It was appropriate for the English court to decide whether to lift the stay upon proceedings because the 2006 Regulations (and the recognition order) placed responsibility for that issue upon it.

What did the Registrar decide?

It was a question of deciding where, as a matter of broad justice, the disputes should be adjudicated, taking into account:

  • the objectives of the rehabilitation proceedings, and
  • the interests of Pan Ocean, the applicants and Pan Ocean's creditors generally

In the circumstances, arbitration in London was the appropriate forum:

  • there was no evidence that the adjudication of the disputes in London would impede the objectives being pursued by the administrator or that it would otherwise be prejudicial to Pan Ocean's creditors as a whole
  • there was no suggestion that the administrator would be unable to arbitrate in London or that the applicants would be unable to pay any costs that might be awarded against them
  • although proceedings had been commenced in Korea, the issues in dispute were mostly (if not entirely) issues of English law and were issues of some complexity meaning that their resolution was more suitable for an English law qualified and a native English-speaking tribunal, rather than being dealt with by way of expert evidence before a Korean tribunal
  • the parties had agreed upon arbitration and the arbitration clauses did not provide that they would cease to apply in the event of the insolvency of one of the parties
  • the evidence did not justify a submission that the Korean court would ignore an arbitration award (and it was doubtful that a party could properly argue that the English court should decline to permit arbitration because of difficulties of recognition that would only be created if that party were to oppose recognition of the award in Korea)
  • the value of the applicants' claims was sufficient to make arbitration proportionate, and
  • Pan Ocean claimed to have a cross-claim which would have to be arbitrated in any event, should it wish to pursue it, and it had declined to give an undertaking not to do so

What does this mean in practice for companies seeking variation of the automatic stay imposed by the 2006 Regulations?

Where creditors are forced to participate in foreign insolvency proceedings to preserve their rights against the insolvent company, they should make it clear that they are not waiving their rights to rely upon a relevant dispute resolution clause. They should seek to stay the foreign adjudication proceedings if possible (and certainly avoid any final and conclusive adjudication which might give rise to issue estoppel) and ought to apply to vary any stay imposed by the 2006 Regulations sooner rather than later. The more momentum that proceedings have obtained abroad, the more difficult it may be to persuade the English court to lift the stay.

The court will be alive to the risk of prejudice to the interests of the insolvent company and its creditors and so, if the ability to pay costs at the conclusion of the proposed proceedings might be in doubt, the creditor should consider putting forward proposals for security for costs (or similar).

Junior counsel at 20 Essex Street, Tony Beswetherick regularly acts for receivers as well as liquidators, administrators, and trustees in bankruptcy in contentious and non-contentious insolvency matters. He has a busy commercial law practice and recent cases include a claim in the Commercial Court for rectification of two bank guarantees (guaranteeing £40m each) and a claim for fraudulent trading brought in the Chancery Division arising out of alleged VAT 'carousel' fraud.

Interviewed by Barbara Bergin.

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

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First published on LexisPSL Restructuring and Insolvency

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